New York Courts Split on Jewel Unfinished Business Claims

By:  Guillermo Martinez

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Two recent New York District Court cases disagree whether the principle established in the famous California Jewel v. Boxer[1] case applies to hourly matters upon the dissolution of New York law firms.

In Development Specialists, Inc. v. Akin Gump Strauss Hauer & Feld, LLP, et al.,[2] the United States District Court for the Southern District of New York held that unfinished client matters pending on the date of law firm’s, Coudert Brothers LLP (the “Firm”), dissolution remain property of the estate.[3] The Firm dissolved on August 16, 2005 and the remaining equity partners authorized the Firm’s executive board to sell all of its assets.[4] A number of the Firm’s partners were hired by other law firms, and subsequently took their unfinished hourly matters with them.[5] Development Specialists, Inc., the administrator of the Firm’s bankruptcy estate (the “Administrator”), sued a number of firms that had hired ex-Coudert Brothers partners in an attempt to recover the profits those firms made on unfinished Coudert client matters.[6] The court agreed with the Administrator and ordered the defendant law firms to turnover profits earned on old Firm matters.

The court reasoned that under the Uniform Partnership Act (“UPA”), partners owe each other fiduciary duties, including the duty to account for any benefit a partner derives from partnership property.[7] Section 541 of the Bankruptcy Code defines estate property, including partnership property, as “any interest in property preserved for the benefit of … the estate.”[8] Here, the court held that unfinished hourly client matters were property of the Coudert estate.[9] Although the defendant firms argued to the contrary, the court held that dissolution of a partnership is not equivalent to termination because the partnership continues in its existence until its affairs have been wound up.[10] Despite finding little precedential authority in New York cases, the court agreed with “every other court in a UPA jurisdiction” that has found billable hour matters to be partnership assets.[11]

In direct contrast to Development Specialists, Inc., another Southern District court has since held that “a dissolved law firm’s pending hourly fee matters are not partnership assets.”[12] In Geron v. Robinson & Cole LLP, the court distinguished Development Specialists, Inc. by stating that “contrary to a Jackson Pollack painting,” a pending client matter is not an ordinary article of commerce.[13] The Geron court relied on the public policy of allowing clients to freely move their matters as they please. That policy would be directly contravened by allowing law firms to treat hourly matters as partnership property.[14] Due to the split between the Geron and Development Specialists, Inc. courts, the issue of unfinished hourly business has been certified to the Court of Appeals.[15] The Second Circuit has agreed to decide the issue and the ruling will have far-ranging effects on law firms who have recently dissolved and on how law firms operate when dissolution is imminent.