Ghost of Heller Ehrman: Who Owns Unfinished Work at a Failed Law Firm?

Nov. 29, 2016, 4:00 PM

It’s a question that’s been nagging the legal profession for years: Does the work belong to the law firm or the lawyers?

The question arises as the California Supreme Court takes a case connected to Heller Ehrman LLP’s 2008 bankruptcy and specifically looks at who owns the unfinished work of a failed firm — meaning all revenue generated by client matters that were pending at the time the firm went bankrupt. Is it the partners who jumped ship, or the estate of Heller as it aims to pay back creditors?

On Tuesday, lawyers will file the opening brief to address that question in the California Supreme Court. Heller went bankrupt in 2008 and the estate has sought to clawback millions of dollars it argues is owed, which business lawyers took with them before, during and after the firm was melting down. The former Heller attorneys and their new firms say the defunct firm shouldn’t get a pay day.

The Heller estate is represented by lawyers from Diamond McCarthy LLP, Valle Makoff LLP and Schnader Harrison Segal & Lewis LLP.

The matter is expected to be resolved next year, with a ruling due 90 days after currently unscheduled oral arguments.

Blank Rome’s Leslie D. Corwin, who drew up the dissolution plan for Heller and represents principals and partners at LLPs, provided an early prediction on the matter.

He said he didn’t expect the result to differ from a New York ruling two years ago: In 2014, a New York Court of Appeals ruled that partners may take work from them when they leave a failed firm, and still reap the associated profits.

“I would be shocked if the California Supreme Court did anything different (than New York),” said Corwin.

One argument in the case pertains to how the property right to the unfinished work affects clients. Presumably, if the failed firm’s estate were able to claim profits on unfinished work, then the partners may not be able to represent their clients at their new firm, lawyers have argued.

Corwin said: “As a matter of public policy, clients have a right in choosing their counsel. To do otherwise threatens the orderly management and doesn’t understand the realities of the marketplace. Add to that the ethical standard that a client always has a choice of counsel.”

The case is Heller Ehrman LLP v. Davis Wright Tremaine, Cal. No. S236208, pro hac vice application filed Nov. 18, 2016.

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