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Bankrupt Firm Can’t Recover Fees From Lawyers

June 5, 2015, 1:28 PM

Eight firms which added lawyers from the defunct Howrey LLP won’t have to relinquish the fees earned from work that was started when Howrey was still in business.

A federal court in California ruled that the Howrey bankruptcy trustee couldn’t claw back profits from matters that were begun at the firm but wound up elsewhere once it dissolved in 2011.

The June 3 decision by federal judge James Donato is the third to reject the 31-year-old rule that fees from so-called unfinished business could be collected by the trustee for a bankrupt firm.

Inroads emerged last year when the New York Court of Appeals, the state’s highest court, rejected the rule in a case involving Thelen LLP under New York state law. A federal court in California reached the same conclusion in the litigation arising from the bankruptcy of Heller Ehrman LLP under California law.

This week, Donato reached the same conclusion under Washington partnership law, which governs Howrey’s bankruptcy.

In the June 3 ruling, the court phrased the question this way: “When a client decides to discharge a firm and hire a competing firm, does the old firm have a right to profit from the new firm’s work?”

The court said that a defunct partnership can claim a firm’s profits in only “the limited circumstance where the matters are performed pursuant to the same retention agreements by firms that came into existence directly out of the dissolution of the former partnership.” Apart from this situation, “the dissolved firm does not own” the client matters.

Donato, acknowledging that vague standards would spur litigation in future law firm dissolutions, attempted to set a bright-line test. He suggested that client matters, when performed by law firms already in existence when the troubled firm dissolved, should be viewed as “at least presumptively new matters.”

Clients sign new retention agreements with the firm that takes over its works and clients have an “unqualified right to hire and fire counsel whenever” they choose.

The ruling affects the eight firms who had taken over Howrey matters by hiring lawyers from the firm: Hogan Lovells US LLP, Jones Day, Kasowitz, Benson, Torres & Friedman LLP, Neal, Gerber & Eisenberg LLP, Perkins Coie LLP, Pillsbury Winthrop Shaw Pittman LLP, Seyfarth Shaw LLP, and Sheppard Mullin Richter & Hampton LLP.

Howrey’s trustee, Allan Diamond of Diamond McCarthy LLP, didn’t immediately return a call seeking comment.

The case is Hogan Lovells US LLP v. Howrey LLP, 3:14- cv-04889, U.S. District Court, Northern District of California (San Francisco).

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