The question of who owns the unfinished business after Howrey LLP’s insolvency rests with the D.C. Court of Appeals, which will hear a bankruptcy trustee’s arguments Dec. 17 that the former law firm’s estate should get a cut of that work.
Eight law firms are fighting the estate’s push to claw back millions in business that lawyers took with them after Howrey failed in 2011. The estate argues it owns the proceeds from business left over from from its demise.
In a world of mergers and lateral hires where firms and partners can come and go, the legal field is closely watching how this plays out. Courts in New York and California, where many Big Law firms operate, have already sided with the firms, which include Morrison & Foerster, Hogan Lovells, and Jones Day.
D.C.-based Howrey once had 17 offices, including San Francisco and Silicon Valley, specializing in intellectual property, antitrust, and complex commercial litigation and arbitration. Weighed down by debt and defections, it ultimately imploded. Three creditors filed an involuntary bankruptcy petition.
The trustee sued ex-Howrey lawyers, arguing they owed the estate for money received while the firm was failing. He sued the law firms where those attorneys landed, seeking a cut from proceeds of pending business.
Law firms that took on attorneys argue a defunct firm shouldn’t get a pay day for work it can’t do. The district court in June 2016 agreed and held Howrey had no right to future hourly fees from partners who took client business to their new firms.
Trustee Allan Diamond appealed. The U.S. Court of Appeals for the Ninth Circuit last February asked the District of Columbia court to answer how much interest the first partnership has in client matters, or business, started at one firm that later dissolves and completed at another.
The Ninth Circuit also asked to what extent the new firm has to account for profits to the dissolved firm’s estate. Howrey was incorporated in D.C. and filed for bankruptcy in San Francisco.
Two decided cases loom large.
The California Supreme Court last spring held the Heller Ehrman LLP estate has no claim on the unfinished business in that firm’s bankruptcy. New York’s highest court in 2014 agreed, disavowing the unfinished business rule in the Thelen LLP bankruptcy.
“I think in today’s commercial environment where law firms look to merge, partners move laterally, I think these decisions have played a vital role in protecting an attorney’s ability to move from firm to firm without worry” about fees being clawed back, Leslie D. Corwin, Eisner APC managing partner in New York, told Bloomberg Law.
“Without decisions like this, new law firms might not want to engage a former client or partner or group of partners with the law firms. And that would be unfortunate because the whole cornerstone of all this is law firms don’t own a client or an engagement,” said Corwin, co-author with Arthur J. Ciampi of Law Firm Partnership Agreements.
Most observers expect the D.C. Court of Appeals to follow New York and California and conclude that law firms don’t have a recognizable interest in future fees generated in matters billed on an hourly basis, said Robert Hillman, a University of California Davis law professor and expert on lawyer mobility.
The conclusion has implications well beyond the bankruptcy setting, Hillman told Bloomberg Law.
The Jewel doctrine stems from a 34-year-old California appellate decision that absent an agreement, partners must share in profits from active business at the time the firm ceases operating.
“It is not the end of Jewel, but it certainly limits the case. These decisions involve hourly matters, so Jewel and unfinished business disputes are alive and well (for the moment) as to contingent fee cases taken from a firm,” Hillman said in an email.
Morrison & Foerster; Hogan Lovells; Jones Day; Sheppard, Mullin, Richter & Hampton; Seyfarth Shaw; Perkins Coie; Pillsbury Winthrop Shaw Pittman; and Kasowitz, Benson, Torres & Friedman argue clients have the right to choose their counsel.
The ABA backs the law firms in the D.C. case, as it did in the Heller and Thelen cases. The trustee’s arguments are counter to fundamental ethical obligations imposed on lawyers in D.C. and elsewhere, ABA said in a brief supporting the firms.
“That is because the trustee’s theory effectively treats clients’ hourly-rate matters as the property of a law firm,” lawyers with ABA, Reed Smith, and Orrick, Herrington & Sutcliffe wrote in the ABA’s brief.
“Put simply, clients own their matters, so a client may hire and fire its attorney at any time,”
Neither Shay Dvoretzky, with Jones Day in Washington, who will argue for the firms, nor Christopher Sullivan, Diamond McCarthy partner in San Francisco who will argue for the trustee, were available for comment.
Case is Diamond v. Hogan Lovells US, LLP,, D.C., No. 18-SP-0218, oral arguments scheduled 12/17/18.
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