New York law does not recognize an expansion of the unfinished business doctrine to include pending hourly fee matters of a bankrupt law firm, a Southern District judge ruled yesterday.

Judge William Pauley (See Profile) held that the former partners of bankrupt Thelen do not retain a property interest in hourly fee matters that former Thelen lawyers took with them to new firms.

“Unlike in the contingency fee context, applying the unfinished business doctrine to pending hourly fee matters would result in an unjust windfall for the Thelen estate, as ‘compensating a former partner out of that fee would reduce the compensation of the attorneys performing the work,’” Pauley said, citing the only New York case to consider the issue, Sheresky v. Sheresky Aronson Mayefsky & Sloan, 2011 WL 7574999 (N.Y. Sup. Ct. Sept. 13, 2011).

“Such an expansion of the doctrine would violate New York’s public policy restrictions on the practice of law,” Pauley said as he issued rulings in two related cases, Geron v. Robinson & Cole, 11 Civ. 8967, and Geron v. Seyfarth Shaw, 12 Civ. 1364.

The decision sets up a conflict for the U.S. Court of Appeals for the Second Circuit to resolve, possibly by way of a certified question to the New York Court of Appeals. Pauley’s decision is at odds with a May decision by Judge Colleen McMahon (See Profile) in the Coudert Brothers bankruptcy. In DSI v. Akin Gump Strauss Hauer & Feld, 11 Civ. 5994, McMahon said Coudert continued to have a property interest in client matters after dissolution (NYLJ, May 25).

Pauley said an interlocutory appeal was warranted because the issues “impact a large number of cases, and they present substantial grounds for difference of opinion.” McMahon also certified her decision for an interlocutory appeal in Coudert Brothers.

Thelen’s partners voted to dissolve the firm during the 2008 financial crisis and they adopted an amended and restated limited liability partnership agreement that incorporated a waiver disavowing “any claim or entitlement to clients, cases or matters” that are ongoing and expressly waiving or opting out of any rights to “unfinished business” as defined in Jewel v. Boxer, 156 Cal. App. 3d 171 (Cal. App. 1 Dist. 1984).

In 2009, the Thelen bankruptcy trustee, Yann Geron of Fox Rothschild, launched these adversary proceedings against Robinson & Cole and Seyfarth Shaw claiming that the adoption of the “Jewel Waiver” was a fraudulent transfer of Thelen’s unfinished business.

Yesterday, in a decision that turned on the differences between California and New York law, Pauley granted Seyfarth Shaw’s motion for judgment on the pleadings, but denied Robinson & Cole’s motion to dismiss, saying the Robinson & Cole case was fact-intensive and further proceedings were necessary.

In the case of Seyfarth Shaw, where 11 Thelen lawyers moved as the firm fell apart, Pauley found that New York law applied because the majority of significant contacts occurred in New York and Thelen filed its Chapter 7 petition in the Southern District.

Under New York law, he said, it is “well settled” that, “‘absent agreement to the contrary, pending contingent fee cases of dissolved partnerships are assets subject to distribution,’ Santalucia v. Sebright Transp., 232 F.3d 293 (2d Cir. 2000).”

But New York courts have not expanded that doctrine to hourly fee matters and Pauley said “recognizing a property interest in pending hourly fee matters would clash directly with New York’s Rules of Professional Conduct.”

Specifically 22 NYCRR 1200.0, DR 1.5(g), prevents lawyers from dividing a fee for services with a lawyer from another firm unless each attorney assumes joint responsibility for the matter or the division is proportional, the client agrees after full disclosure of the arrangement and “the total fee is not excessive.”

“Further, recognizing a property interest in pending hourly fee matters would contravene New York law’s treatment of post-dissolution contingency fee matters,” Pauley said. “Although New York cases deem pending contingency fee matters to be ‘assets’ of a dissolved firm, they hold that a dissolved firm has ‘no cognizable property interest in [a] fee’ where the ‘successful settlement of a pending contingent fee case post-dissolution is due to a surviving partner’s post-dissolution efforts, skill and diligence.”

And in an hourly fee case, he said, “fees that a lawyer earns are due to that lawyer’s ‘post-dissolution efforts, skill and diligence.’”

The judge said that a contrary holding would impair the attorney-client relationship, for “a pending client matter is not an ordinary article of commerce” and “the client, not the attorney, moves the matter to a new firm.”

In the case of Robinson & Cole, where nine Thelen lawyers moved, the parties agreed that California law defined any property interest Robinson & Cole had received.

Pauley said the old “no compensation” rule in Jewel has been undermined by the Revised Uniform Partnership Act in 1994, which provided instead that a partner is entitled to “reasonable compensation for services rendered in winding up the business of the partnership.”

“Thus, Robinson & Cole’s liability turns on the extent to which the former Thelen partners received remuneration beyond ‘reasonable compensation’,” he said.

In certifying an interlocutory appeal, Pauley also said that certification of these issues to the New York Court of Appeals and the California Supreme Court “may be warranted because those high courts have ‘not squarely addressed’ the issues, and the scope of the unfinished business doctrine is of great importance to both the legal profession and clients.”

Robert Dremluk of Seyfarth Shaw in New York and Thomas Feher of Thompson Hine in Cleveland represent Seyfarth Shaw.

Christopher Major of Meister Seelig & Fein represents Robinson & Cole.

Howard Magaliff and Jeffrey Traurig of DiConza Traurig Magaliff are special litigation counsel for Geron.

“As it applies to California law, we are pleased with the decision,” Geron said in a statement. “As to the New York law aspect of the decision, on behalf of the creditors of the Thelen estate, we are disappointed. We recognize the differences noted by Judge Pauley between New York and California law, and differences in viewpoints even between judges in the Southern District of New York in recent decisions. These differences will need to be resolved on appeals, as specifically encouraged by Judge Pauley’s decision.”