U.S. District Judge Charles Breyer, Northern District of California (Hillary Jones-Mixon / The Recorder)
SAN FRANCISCO — A federal judge in San Francisco seems ready to tear down a controversial bankruptcy doctrine wielded against law firms that hire partners away from collapsing competitors.
At a lively hearing Thursday morning, U.S. District Judge Charles Breyer appeared to side with a swarm of law firms arguing that they should not have to pay the Heller Ehrman estate for the partners they hired away after its 2008 demise. As in other law firm bankruptcies, lawyers for Heller Ehrman are pursuing clawback actions under Jewel v. Boxer, a decades-old case permitting a failed firm to recover profits from business that partners take with them to new employers.
Though the principle has been endorsed by other courts, and upheld in Heller’s case by U.S. Bankruptcy Judge Dennis Montali, it did not compute for Breyer. He tasked lawyers at the outset of the hearing with showing whether law firms have a property interest in pending matters.
“If I go to the client Wells Fargo and say, ‘You’re my property,’ that would be an odd conversation to have because it doesn’t make much sense in the context of the law,” he said.
The hearing featured a throng of Big Law advocates, with Arnold & Porter partner Jonathan Hughes appearing for Orrick, Herrington & Sutcliffe; Jones Day partners Robert Mittelstaedt and Shay Dvoretzky appearing for their firm; and Keker & Van Nest partner Steven Hirsch and Snyder Miller & Orton of counsel Luther Orton for Davis Wright Tremaine. Orton also appeared on behalf of Foley & Lardner.
With the Jewel doctrine prevailing in bankruptcy court, the four firms have long been angling for a shot in district court, though others struck quick settlements with the Heller estate. Breyer finally granted a motion to withdraw the reference from bankruptcy court in March after Montali found that the firms were liable. Breyer expressed respect for Montali at the hearing but did not appear afraid to reach a different result.
“This is not a bankruptcy matter,” Breyer said. “The decision I’m prepared to make is a question of what law firms are about.”
Federal and state judges in New York have been examining that state’s “unfinished business” doctrine in litigation stemming from the bankruptcies of Thelan and Coudert Brothers. The state court of appeals heard arguments Wednesday.
Representing the Heller estate, Chris Sullivan of Diamond McCarthy struggled to defend the Jewel doctrine. He recounted the history of the case, which emerged from the breakup of a four-lawyer firm in Alameda County. The partners wrestled over how to share fees from pending matters after they parted ways in 1977.
“By the way, I know all the parties,” Breyer piped up.
Breyer noted that the story of the Jewel firm stands in stark contrast to that of Heller Ehrman, a global firm that unraveled after its creditors withdrew their support.
Sullivan maintained that the Jewel doctrine should hold regardless of the forces that lead to a firm’s demise. Sullivan warned against downplaying the duty that law firm partners owe to one another, and to the business at large.
“Partners in a partnership should approach the departure responsibly and make every effort not to devastate the partnership,” Sullivan said.
But lawyers sitting around the defense table professed to be more concerned about fairness to clients. Jones Day’s Dvoretzky noted that a Heller lawyer would have been unable to complete work for clients without moving on after the firm’s collapse.
“There’s no partnership duty for him to do any more than help the client make a smooth transition to a new home,” Dvoretzky said.
Breyer took the opportunity to indulge his curiosity about modern-day law firm practices, happily noting that he had gone at least 16 years without reviewing a balance sheet. He urged Sullivan to slow down as he traced back one lateral partner’s journey from firm to firm.
“I’m just trying to keep track of where everybody is,” Breyer said. “It’s like a carousel out there.”
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