Thelen’s old office space in Washington, D.C. after the partners voted to dissolve in December 2008. The firm’s bankruptcy estate is continuing to pursue profits from cases that partners brought with them to their new firms. (NLJ/Diego M. Radzinschi)
ALBANY – A dozen prominent law firms are urging the Court of Appeals to declare as impractical the practice of allowing bankruptcy trustees to pursue profits from matters that partners carry from defunct firms to their new firms, and to find it contrary to nearly a thousand years of legal principle.
In an amicus brief submitted in (Matter of Thelen) Geron v. Seyfarth Shaw, 136, the firms contend that the “unfinished business” rule cannot be applied to require that the bankruptcy estate of Thelen LLC share in profits earned at Seyfarth Shaw and Robinson & Cole from cases that started at Thelen before it dissolved.
Thelen, one of two cases that raise the validity of the unfinished business doctrine, arrived at the Court of Appeals through certified questions from the U.S. Court of Appeals to the Second Circuit (NYLJ, Jan. 15).
In the other case, Matter of Coudert Brothers, 137, Dechert, Jones Day and Akin Gump Strauss Hauer & Feld are among the firms seeking to avoid sharing hourly fees with the Coudert bankruptcy estate.
The two cases will be argued on June 4.
In their amicus brief, the 12 New York firms argued that the question of profits from unfinished business is of intense interest as attorneys move to other firms from Thelen, Coudert, Dewey & LeBoeuf or others that have gone into bankruptcy.
If the Court of Appeals were to agree that hourly fees are due to the Thelen and Coudert bankruptcy estates for work done by their former attorneys, “It would impose a monetary penalty on firms agreeing to represent clients who, through no fault of their own, happened to be represented at one time by attorneys whose former law firm failed,” the brief said.
“This cannot be,” continued the brief, which was chiefly prepared by James Catterson, special counsel to Kaye Scholer and Margaret Rogers, an associate. “The effect on the legal market would be to completely discourage any law firm from accepting lawyers and client matters from dissolving firms.”
Catterson, a former Appellate Division, First Department, justice who lost a reelection bid for his Supreme Court seat on Long Island in 2012, also argued that Thelen trustee Yann Geron’s approach would violate common law traditions of clients being free to hire and fire their attorneys that dates back to England circa 1200.
“The Trustee’s application must fail because it runs afoul of nearly a thousand years of jurisprudence honoring the right of clients to retain the counsel of their choice from the days of Edward Longshanks to the present,” the brief argues.
Joining the amicus brief are DLA Piper; Drinker Biddle & Reath; Hogan Lovels; Holland & Knight; Mayer Brown; Proskauer Rose; Schulte Roth & Zabel; Sutherland Asbill & Brennan; Venable; Weil, Gotshal & Manges, and Wilkie Farr & Gallagher.
Southern District Judge William Pauley had ruled in Thelen that the unfinished business doctrine does not apply to the hourly fees earned by former Thelen attorneys who took work to other firms.
But Southern District Judge Colleen McMahon ruled that Coudert’s bankruptcy estate does have a valid interest in the hourly fees generated by unfinished business matters taken to other firms.
Firms that are being pursued by the Coudert trustee are appealing McMahon’s decision to the Second Circuit. In seeking guidance from the state court, Circuit Judge Gerald Lynch wrote that “bankruptcy of major law firms is, sadly, a phenomenon that has occurred with distressing frequency in recent years” (NYLJ, Nov. 18, 2013).
On May 8, the Court of Appeals also accepted three other amici briefs in the Thelen-Coudert cases: the administrators of three law firm bankruptcies, the New York State Bar Association and the Attorneys’ Liability Assurance Society.
The bankruptcy administrators’ brief was filed on behalf of Michael Burkhart of the Heller Ehrman LLP Liquidation Trust; Allan Diamond, the Chapter 11 trustee at Howrey LLP, and Alan Jacobs, trustee of the Dewey & LeBoeuf LLP Liquidation Trust.
The administrators urged the court to adopt McMahon’s reasoning and reject Pauley’s. They said several other top state courts, including those in California, Florida, Illinois, Maryland, Massachusetts and Pennsylvania, recognize that hourly fee arrangements are subject to a lawyer’s duty to account for law firm assets when the business of firms is being concluded.
Burkhart, Diamond and Jacobs also argued that if attorneys knew their hourly matters would not be free and clear if they left struggling firms, they might work harder to save their firms from financial ruin.
“If a partner understands that his fiduciary duty to his or her dying law firm does not end by him simply walking out the door, the partner will be incentivized to address the underlying problems at his firm rather than flee at the first sign of trouble,” the administrators said. “The partnership would be strengthened, orderly dissolution would be promoted, and law firm creditors would be repaid in whole or in greater part.”
The trustees’ brief was prepared by Diamond McCarthy of Manhattan and Greenfield Sullivan of San Francisco.
The bar association amici supported the arguments of the 12 law firms. The state bar’s brief was also filed on behalf of the New York City Bar Association and the New York County Lawyers’ Association.
The bar groups argued that the “cardinal principle” of clients being able to freely choose their attorneys is at stake.
“Applying the [unfinished business] doctrine to hourly fee matters improperly treats the clients of a dissolving law firm as the property of the firm, devalues the attorney-client relationship, and subordinates the interests of its clients to those of its creditors,” the bar associations said.
That argument is also supported by the Attorneys’ Liability Assurance Society, a group that aids professionals like attorneys in defending professional liability claims, which said hourly legal matters are not for firms to share.
“Fundamentally, legal matters billed on an hourly basis cannot be considered ‘property’ of a law firm—regardless of whether that firm has dissolved or remains active,” the group said. “Lawyers possess no indicia of ownership over their cases, as their clients are always free to take their business elsewhere.”
Also on May 8, the Court of Appeals denied permission to the American Bar Association to join the amici. The court does not explain its reasoning when it declines to accept an amicus brief nor details the vote by which it makes its decisions.
The ABA brief, however, argued that its Model Rule of Professional Conduct 5.6(a)—the provision corresponding to the identical Model Rule 5.6(a) of the New York Rules of Professional Conduct—prohibits lawyers from entering into partnership agreements that restrict “the right of a lawyer to practice after termination of the relationship.”
“When a clients moves its hourly fee matter to a new firm, that decision should terminate the dissolved firm’s unfinished business as to that matter and convert it into new business to be handled by the lawyer or law firm selected by the client,” the ABA said.
Howard Magaliff, attorney Geron, the Chapter 7 trustee in the Thelen case, will argue before the Court of Appeals that Stem v. Warren, 227 NY 538 (1920), provides that the “uncompleted contract for services is an asset of the dissolved service provider partnership, which is entitled to the profits from its completion.”
Magaliff, of Magaliff Moser, will also argue that under Partnership Law §§40(6) and 43(1), lawyers have a duty to account to the dissolved firm for unfinished business without compensation.
The briefs filed by Development Specialists, the administrator of the Coudert bankruptcy plan, indicate that its attorney, David Adler of McCarter & English, will base his arguments on June 4 on many of the points that Magaliff will also raise.
Shay Dvoretzky,a partner with Jones Day, Joel Miller, a partner with Miller & Wrubel and Thomas Feher, a partner with Thompson Hine, are scheduled to present arguments on behalf of the law firms.