From left, Shay Dvoretzky of Jones Day, Michael Levinson of Seyfarth Shaw, and Joel Miller of Miller & Wrubel. (Photo by Tim Roske)
Correction, 7/29/14, 9:38 a.m. EST: An earlier version of this story misstated the name of the federal district judge handling the Howrey adversary proceeding. The correct name is U.S. District Judge Saundra Armstrong. The story has been updated accordingly. We regret the error.
After California and New York courts in June and July tossed out so-called unfinished business claims by trustees of failed firms against former partners and the firms they fled to, all eyes are now fixed on the outcome of a hearing on Tuesday in the one remaining large firm bankruptcy where such claims are still being fought: the Howrey Chapter 11 proceeding in San Francisco.
A decision by U.S. Bankruptcy Judge Dennis Montali on a motion to dismiss could go one of two ways: provide trustees outside New York with a new path forward to press such suits, or put the last nail in the coffin on such litigation nationally.
Unfinished business claims have cropped up in every major law firm bankruptcy over the past decade, from Coudert Brothers to Dewey & LeBoeuf. Most are based on precedent established in 1984 in the California case Jewel v. Boxer, which allowed trustees to claw back profits owed from unfinished matters that former partners took with them when they joined other firms.
A 2008 decision by Montali in the liquidation of Brobeck in 2003 affirming the applicability of Jewel v. Boxer emboldened trustees nationally to go after those firms. Montali held that at the time of Brobeck’s dissolution, partners owed the estate profits from unfinished matters, even though they had signed a waiver of that duty. Montali found that the waiver constituted a fraudulent transfer of Brobeck property under bankruptcy laws. In New York in 2012, one federal district judge also sided with trustees that unfinished business belongs to the liquidated firm.
Ever since the 2008 decision, millions of dollars have been collected from a myriad of firms by trustees in the Brobeck, Heller Ehrman and Howrey bankruptcies in California and in the Coudert and Thelen bankruptcies in New York. More than $8.6 million had been collected in the Heller bankruptcy, for example, from the 46 firms facing claims (see here for a recent settlement). The Brobeck and Coudert trustees have also collected multiple millions of dollars in settlements on the claims.
Indeed, most firms choose to settle, reasoning that the financial and reputational risk of protracted litigation and of having their billing records and profits from ongoing matters aired in court is far higher than the settlement value. No Jewel v. Boxer-type lawsuit has yet gone to trial in those five cases.
But the Jewel v. Boxer apple cart has been overturned by two recent rulings: a June 11 decision by U.S. District Judge Charles Breyer related to the Heller bankruptcy, and a unanimous July 1 decision by the New York Court of Appeals stemming from the Coudert and the Thelen bankruptcies. Both courts found that dissolved firms don’t have a claim on profits on past matters.
“For lawyers in New York, the issue’s gone,” says Arent Fox partner Allen Reiter, one of the 10 law firms that participated in the Coudert appeal.
Among the dozen or so firms that have fought the clawback claims, Jones Day has stood out, filing its own briefs in Howrey, Heller and Coudert and offering its own arguments while others have filed and argued jointly. And in both recent decisions, a 39-year-old appellate partner, Shay Dvoretzky, played a crucial role in pushing Jones Day’s core argument against the estates that clients cannot be considered property.
The Jewel v. Boxer precedent, Jones Day has consistently argued, is pernicious to attorney-client relations. When firms implode, “clients have to go elsewhere. Individual partners are not taking clients for themselves,” says Dvoretzky. “They’re helping clients who are forced to find new homes. To fail to do so could constitute malpractice.”
Dvoretzky will face off against the Howrey estate on behalf of Jones Day on Tuesday. In that case, Dvoretzky faces perhaps his toughest challenge yet in attempting to persuade Montali to overturn his own past decisions in the Brobeck, Heller and Howrey bankruptcies. (See some of Montali’s rulings in Heller here and here, and this story on his decision the following month in the Howrey proceedings.)
Since Howrey filed for bankruptcy in May 2013, the trustee has gone after 71 firms and has already settled a number of claims, as we described here. Diamond McCarthy’s Andrew Ryan, counsel to the trustee Allan Diamond, said in an email that “while we will not discuss prehearing arguments, we note that Howrey LLP is a D.C. partnership and D.C. law unequivocally supports unfinished business claims. Although we disagree with the recent decisions under California and New York law, those decisions are not precedent in the trustee’s pending lawsuits.”
In briefs filed in opposing the summary judgment motion, the trustee argues that it still has a plausible claim for unjust enrichment by former partners and their subsequent employers under the partnership law of the District of Columbia, where Howrey was based and under which its partnership was governed.
Dvoretzky, who is based in Washington, D.C., was tapped in early 2012 on a directive from Jones Day’s managing partner Stephen Brogan to litigate aggressively in every case where the firm was sued against what he considered bad law.
“The notion that clients are ‘owned’ by lawyers or the law firm they’re in is outrageous,” says Joe Sims, an antitrust partner and member of Jones Day’s senior management who has advised Dvoretzky on the cases.
Second, Sims says, “litigations between bankruptcy trustees and former lawyers or the new firm they went to over revenues they earned at the new firm struck us as bad for the profession,” and creates an impediment both to clients’ freedom to choose counsel and to lawyers in their development of client relationships.
Third is a practical consideration: Jones Day would face this issue again and again, as it is active in the lateral market, and there would likely be more firm failures in the future.
As in the Coudert and Heller trustee litigation against it, Jones Day has chosen to file its own briefs and argue its own appeals in the Howrey case. Seven other firms filed a joint brief. It was not yet clear at press time who would argue for the group on Tuesday.
“We concluded that it wasn’t working for us” to be part of the joint defense, says Sims, adding that the firm has “very strong views of what to emphasize, and other firms don’t always agree with us.”
In arguments June 4 before New York State’s top court in Albany in the Coudert appeal, Dvoretzky’s main mission was this: to show judges why New York partnership law that says that partners have a duty to wind up matters for the benefit of their old partnerships did not apply to Coudert’s situation. In one previous ruling that the trustee cited, for example, the dispute involved a dissolution where there was an obvious firm to which one former partner tried to take client work for himself. Where law firms implode, notes Dvoretzky, there is no obvious firm for clients to take their business to.
Dvoretzky’s oral argument prompted Arent Fox’s Reiter, one of the 10 firms that had stuck out the fight to the end, to call Dvoretzky to thank him personally, even though his firm’s outside counsel at Miller & Wrubel had made some of the same points. Dvoretzky’s argument “was brilliant. It was precise, strong and persuasive.”
The next morning, Dvoretzky, after flying on a firm-chartered flight from Albany to San Francisco because there wasn’t another practical way to ensure his arrival the next morning, and running on adrenaline and four hours’ sleep, gave oral arguments at a hearing before U.S. District Judge Breyer on a summary judgment motion on the unfinished business claims in the Heller case. Three other firms—Foley & Lardner; Orrick, Herrington & Sutcliffe; and Davis, Wright, Tremaine—opposed the claims in briefs filed alongside Jones Day’s.
A close reading shows that decisions in both the Coudert and Thelen suit and the Heller suit closely track Dvoretzky’s written and oral arguments. “A law firm—and its attorneys—do not own the matters on which they perform their legal services. Their clients do. A client, for whatever reason, may summarily discharge counsel and hire someone else. At that point, the client owes fees only for services performed to the date of discharge,” wrote Breyer in his 13-page decision on Heller.
Jones Day and the other seven firms—including Pillsbury Winthrop Shaw Pittman, Ropes & Gray and Shearman & Sterling—did not win the district court over on all points. On July 15 U.S. District Judge Saundra Armstrong declined their request that she take the clawback claims out of Montali’s hands on the Howrey case, saying that Montali’s expertise in the matter would allow for the least delay in resolving the issue. Now the motion to dismiss is back before Montali, who will be reevaluating his earlier decision rejecting the firms’ motions to dismiss in light of Breyer’s Heller ruling; he is likely to rule on the matter in the next three months, given his general past practice of issuing written decisions.
Diamond, the trustee for Howrey, will likely look to Montali’s own words in his February decision rejecting a motion to dismiss in Howrey. In that decision, Montali found, among other reasons, that two D.C. state appellate court precedents in similar disputes supported the Howrey trustee’s claims, and that D.C. professional ethics rules also don’t preclude the claims.
Diamond, who is also the trustee in the Dewey & LeBoeuf bankruptcy, in 2012 struck a $71.5 million settlement with about 450 Dewey partners that closed out potential liability for those individuals, including any unfinished business claims. The decision in the Coudert and Thelen case ensures that the rest of the former Dewey partners, who include at least three dozen others who have been sued by Diamond, will not face any Jewel v. Boxer-type claims. But Diamond continues to assert fraudulent transfer and unjust enrichment claims against the nonsettling partners; in each lawsuit, he is demanding that they fork over two years’ worth of compensation paid to them after Dewey technically became insolvent. Those claims aren’t affected by the New York decision.