This story originally appeared in sister publication New York Law Journal.
ALBANY – State Court of Appeals judges appeared skeptical Wednesday about concluding that lawyers are responsible to their former bankrupt firms for fees earned on uncompleted matters they take to their new firms.
The court heard arguments over the state’s “unfinished business” doctrine and its application to the work performed by lawyers who left Thelen and Coudert Brothers when the firms filed for bankruptcy. The lawyers then joined Jones Day, Seyfarth Shaw and other firms.
Howard Magaliff of Magaliff Moser insisted on behalf of the Thelen bankruptcy trustee that the lawyers have a duty to account to the dissolved firm for unfinished business without compensation under Partnership Law §§40(6) and 43(1).
But Chief Judge Jonathan Lippman (See Profile) and Judges Robert Smith (See Profile), Eugene Pigott Jr. (See Profile) and Jenny Rivera (See Profile) shared doubts over how realistic it is to expect lawyers to keep working for the benefit of firms they left months or years before, and how their clients would benefit.
“I’m having trouble seeing what good this does anyone to say that the ex-partner is essentially working for his former partners instead of himself,” Smith said. “The problem is, in that situation, he’s not going to do it. He’s not a slave. You can’t make him do it. The former partners are going to get nothing. They’re going to get worse than nothing, because they [the clients] are not going to pay their bills.”
Soon after, Lippman told Magaliff that saying firms retain an interest in their former partners’ hourly work is “not doing any good for the new law firm, it’s not doing any good for the partner who is at the new law firm, and I am not sure what good it is doing for the client.”
“What’s the benefit from a policy perspective of arbitrarily saying everything going forward still has to go back to the partnership?” Lippman continued. “Isn’t this an anachronism in the world today where we value mobility for lawyers?”
“Your honor, it is good for partnerships across the board,” Magaliff responded.
To find the ex-partners owe no duty to their former firms would run counter to generations of Partnership Law interpretation in New York and the obligations that partners in law firms, architectural firms and a host of other professions have been found to owe each other, Magaliff said.
Pigott suggested that clients are likely to find themselves abandoned by their attorneys because their current firms would have little interest in seeing lawyers work to help their former firms.
Rivera observed that only the creditors of dissolved firms would benefit.
Judge Victoria Graffeo (See Profile) said she was worried that applying the unfinished business rule Magaliff argued would hasten the demise of firms as they encounter financial difficulties.
“Isn’t your rule going to result in an incentive for some of those partners to jump ship before the dissolution so that way they are not locked in to having future work go back to the previous firm?” Graffeo asked. “Isn’t that going to destabilize a lot of law firms that are trying to rectify their financial situation?”
“The problem, judge, is that when [lawyers] think they can just pick up and leave with no obligations under the Partnership Law to their former partners, that’s what makes for the instability,” Magaliff replied.
Shay Dvoretzky, a Jones Day partner arguing that former Coudert partners do not owe Coudert a share of hourly fees earned at Jones Day, said Coudert’s business wound up for purposes of the Partnership Law when it dissolved in bankruptcy.
Unfinished hourly matters can never be considered an “asset” for purposes of the Partnership Law, he said.
“The old firm never has a proprietary interest in the matter itself,” he said. “You can’t have a future interest in being paid for somebody else’s work.”
David Adler of McCarter & English, who is representing Development Specialists, the administrator of the Coudert Bankruptcy plan, also asked the court to uphold the former attorneys’ obligations to the bankrupt firms’ estates.
Joel Miller of Miller & Wrubel and Michael Levinson of Seyfarth Shaw argued against the application of the unfinished business rule to work by former Thelen and Coudert partners.
The two cases, (Matter of Thelen) Geron v. Seyfarth Shaw, 136, and Matter of Coudert Brothers, 137, have come before the court through certified questions from the U.S. Court of Appeals for the Second Circuit.
When asking the state court for guidance, Circuit Judge Gerald Lynch (See Profile) said the fee question is especially timely because “bankruptcy of major law firms is, sadly, a phenomenon that has occurred with distressing frequency in recent years” (NYLJ, Nov. 18, 2013).
The cases landed before the circuit after a conflict that arose from contradictory rulings in two Southern District courtrooms.
In Thelen, Judge William Pauley (See Profile) ruled that the unfinished business doctrine does not apply to the hourly fees earned by former Thelen attorneys who took work to other firms.
But in Coudert, Judge Colleen McMahon (See Profile) ruled that Coudert’s bankruptcy estate does have a valid interest in the hourly fees generated by matters that are now at other firms.
Seyfarth Shaw and Robinson & Cole are opposing the attempt by Yann Geron, the Thelen bankruptcy trustee, to assert a claim on behalf of the Thelen estate for fees earned by former Thelen attorneys.
In Coudert, Dechert, Jones Day and Akin Gump Strauss Hauer & Feld are among the firms seeking to avoid sharing hourly fees with the Coudert estate.
The circuit specifically asked for guidance on two questions: “Under New York law, is a client matter that is billed on an hourly basis the property of a law firm, such that, upon dissolution and in related bankruptcy proceedings, the law firm is entitled to the profit earned on such matters as the ‘unfinished business’ of the firm? If so, how does New York law define a ‘client matter’ for purposes of the unfinished business doctrine and what proportion of the profit derived from an ongoing hourly matter may the new law firm retain?”
The state court is expected to hand down its ruling by early July.