Heller’s Unfinished Business Belongs to Living, Not Dead Law Firm

The Heller Ehrman LLP estate has no claim on profits from unfinished hourly business remaining after the firm failed, the California Supreme Court unanimously ruled March 5.

The closely watched decision is another strike for the 34-year-old Jewel doctrine that absent an agreement, partners must share in profits from active business at the time the firm ceases operating.

The court held “a mere possibility of unearned, prospective fees” can’t constitute a property interest for a firm incapable of handling unfinished hourly client matters and would impinge on clients’ right to fire an attorney at will.

“The firm never owned such matters, and upon dissolution, cannot claim a property interest in the income streams that they generate. This is true even when it is the dissolved firm’s former partners who continue to work on these matters and earn the income-as is consistent with our partnership law,” the court said.

“To find otherwise would trigger or exacerbate a host of difficulties. The more fees a former partnership can claim, the less remain available to compensate the people who actually perform the work.”

Lawyers fled to at least 16 firms when Heller filed for bankruptcy in 2010. The trustee filed adversary proceedings against the former Heller lawyers and their new firms seeking a cut of the active hourly cases. Four firms fought Heller in bankruptcy court, which found for the trustee, and then in the district court, which found for the firms.

“Today’s ruling is a huge win for clients and for the legal profession. It deals a death blow to claims by bankruptcy trustees that dissolved law firms are entitled to feed parasitically off of the hourly earnings of the law firms that their former clients chose to complete their cases,” Steven A. Hirsch, a partner with Keker, Van Nest & Peters representing Davis Wright Tremaine LLP, told Bloomberg Law.

‘Landmark’ Decision

The ruling sends the case back to the U.S. Court of Appeals for the Ninth Circuit, which asked the state high court to rule on the unfinished business question under California partnership law.

The appeals court Feb. 27 sent the same question to the D.C. Court of Appeals in the Howrey LLP bankruptcy. New York’s highest court, ruling in the Thelen LLP bankruptcy, disavowed the unfinished business rule.

The California Supreme Court “has held that neither law, equity nor public policy recognizes a law firm’s property interest in hourly fee matters sounding a death knell to the ‘unfinished business doctrine,’” Leslie D. Corwin, with Blank Rome, told Bloomberg Law March 5.

Corwin, co-author with Arthur J. Ciampi of Law Firm Partnership Agreements (2014), called the opinion “a landmark decision for the legal industry.”

The opinion “reaffirms what we though along was an important principle, that clients and not their law firms own their matters,” Shay Dvoretzky of Jones Day in Washington, who argued for the firms in the California Supreme Court and the Ninth Circuit, told Bloomberg Law March 5.

Yet Christopher Sullivan, with Diamond McCarthy LLP who represents trustee Allan Diamond, said the issue isn’t done.

“I think that future law firm bankruptcies, contingency and mixed fees cases will continue to be areas of uncertainty regarding unfinished business in cases governed by New York and California law,” Sullivan said in an email to Bloomberg Law.

“In other states, and the District of Columbia, the law remains unsettled,” Sullivan said March 5.

Who’s Interest?

The court agreed with the arguments of four law firms that permitting the Heller trustee to reach into the pockets of the former partners and their new firms clips clients’ rights and increases the possibility that ex-partners would have problems securing new positions because fees must be shared.

A shared interest that lawyers have with business other partners in the firm isn’t the same as a property interest, “which under California law must reflect more than a mere contingency or probably that an outcome-such as further hourly fees remitted to the firm-may materialize,” Justice Mariano-Florentino Cuéllar wrote for the court.

The opinion focuses, “to the point of redundancy, on clients’ rights to choose their lawyers, but it essentially ignores the interests of other third parties such as creditors as employees of failed firms,” said Robert Hillman, a University of California Davis law professor and expert on lawyer mobility.

“Although the opinion correctly observed we should not have special rules for law firms, a fair criticism is that this is exactly what the court is doing with a rather strained interpretation of property rights designed to rebut the status of hourly work as unfinished business,” Hillman said.

With the exception of fees paid for work fitting the narrow category of winding up activities that a former partner might perform after a firm’s dissolution, the court said, a dissolved law firm’s property interest in hourly fee matters is limited to the right to be paid for the work it performs before dissolution.

The case is Heller Ehrman LLP v. Davis Wright Tremaine LLP, Cal., No. S236208, opinion 3/5/18.