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The Uncertain Future of the Unfinished Business Doctrine

By: Daniel Teplin

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, a federal district court in California issued a decision in Heller Ehrman LLP v. Davis, Wright, Tremaine, LLP[1], which is of great importance to former partners of dissolved law firms, holding that under California law, the unfinished business doctrine does not apply to hourly fee matters.[2]  Therefore, the court concluded that the bankruptcy estate of a dissolved law firm did not retain a property interest in the hourly fee matters that were pending at the time the firm dissolved.[3]  Heller Ehrman LLP (“Heller”) was a large global law firm before it dissolved in 2008.[4]  After Heller defaulted on its revolving line of credit, the partners were unable to continue operating the firm and therefore voted to dissolve the firm.[5]  Their dissolution plan included a “Jewel Waiver,” which waived unfinished-business claims for the profits generated by former Heller attorneys from any pending hourly fee matters.[6]  After it filed for bankruptcy, the bankruptcy trustee sought to avoid the “Jewel Waiver” as a fraudulent transfer and recover the profits from the firm’s former members’ new firms for the pending hourly fee matters on two grounds.  First, pursuant to California law, the trustee argued that the bankruptcy estate had a property interest in pending hourly matters, citing Jewel v. Boxer,[7] because the former members of the dissolved law firm violated their fiduciary duty “with respect to unfinished partnership business for personal gain.”[8]  Second, the trustee asserted that two separate public policy considerations supported his claim.[9]  The first consideration asserted by trustee was that “preventing extra compensation to law partnerships ‘prevents partners from competing for the most remunerative cases during the life of the partnership in anticipation that they might retain those cases should the partnership dissolve.’”[10]  The idea being, that this would allow the firm to operate as one entity, and dissuade its individual members to act purely with their own interest in mind.  The trustee argued that the second consideration was that holding that Heller had a property interest in the hourly matters would prevent former partners of firms from “seeking personal gain” by soliciting the firm’s former clients after its dissolution.[11]  Ultimately, the court rejected the trustee’s arguments and granted summary judgment in favor of the defendant law firms and against the trustee.[12]

 The Heller court initially distinguished the facts from Jewel from the facts from Heller on five different grounds.[13]  First, the Heller court decided that Heller’s dissolution was forced by Heller’s lender, compared to the firm in the Jewel case, where the dissolution was voluntary.[14]  This meant that Heller’s former employees were left with no choice but to seek out new employment, just as their clients were forced to seek new counsel.[15]  Second, in Jewel, the clients were represented using the old agreements, which were agreed upon between the client and the dissolved firm.[16]  However, in Heller, the clients of the dissolved firm signed new agreements with the new firms who were representing them.[17]  Third, in Jewel, the new firms were made up entirely of the partners of the dissolved firm, where in Heller, the defendants were preexisting law firms that hired some, but not all, of Heller’s partners.[18]  As such, the defendant law firms in the Heller never owed any form of fiduciary duty to the dissolved firm.[19]  Fourth, in Jewel, there were both contingency fee and hourly fee matters at issue.[20]  In Heller, there were no contingency fee matters at issue.[21]  Lastly, Jewel applied the Uniform Partnership Act, which has since been superseded by the Revised Uniform Partnership Act.[22]  Unlike UPA, which prohibited most partners from earning extra compensation for completing unfinished business post-dissolution, RUPA a partner is allowed to receive “reasonable compensation” for helping wind-up partnership business.  Moreover, while RUPA provides that partners have a duty not to compete with the partnership prior to dissolution, such a duty does not apply post-dissolution, and “[t]hus, a partner is free to compete immediately upon an event of dissolution . . . .”[23]  The Heller court noted that while dozens of cases from California and beyond “have cited Jewel reflexively and uncritically,” neither the California Supreme Court had ruled on the issue nor had any reported California cases decided under RUPA cited Jewel for its unfinished business rule. 

Next, the Heller court turned to the equities of the case.  The Heller court determined that “[b]alancing the equities, it [wa]s simple enough to conclude that the firms that did the work should keep the fees.”[24]  In particular, the fees the trustees sought to recover were “generated by [the d]efendants’ labor, not Heller’s.”[25]  The court emphasized, “A law firm never owns its clients matters.”[26]   The law firm may only have an expectation of future business with its clients instead of a property right in such business.  Nevertheless, Heller could not assert a claim for loss of expected future business with its clients because the client can discharge an attorney at will and the firm was unable to continue servicing those clients once it dissolved.[27]

Last, the Heller court turned to the trustee’s assertion that two public policy considerations supported the recovery of the hourly fees by the trustee.  The court rejected both public policy arguments finding that:

“[I]t is not in the public interest to make it more difficult for partners leaving a struggling firm to find new employment, or to limit the representation choices a client has available, by establishing a rule that prevents third-party firms from earning a profit off labor and capital investments they make in a matter previously handled by a dissolved firm . . . . Here, the Trustee asks this Court to deprive Defendants of profits earned off of Defendants’ labor and capital investment.  Public policy weights strongly against such an outcome.”[28]

           

Following Heller, courts have continued to split as to whether the unfinished business doctrine applies to hourly fee matters.  On one hand, the New York Court of Appeals held that the former members of a dissolved law firm could take hourly fee matters along with them to their new respective law firms.  In In re Thelen LLP, the Second Circuit was faced with a similar fraudulent conveyance action brought by a trustee on behalf of the dissolved firm, against the former partners’ new firms, to recover pending hourly fee matters that the attorneys took with them to their new law firms in In re Thelen LLP.[29]  Specifically, the Thelen court, after certifying the question to the Court of Appeals, in applying the law, held that “no law firm has a property interest in future hourly legal fees because they are too contingent in nature and speculative to create a present or future property interest.”[30]  However, the United States Bankruptcy Court in the Northern District of California held that, under District of Columbia law, “unfinished business” rule applies to both a law firm’s hourly and to its contingency fee matters, to require the sharing of fees under which other law firms earned by successfully completing unfinished business of the dissolved firm that they acquired post-dissolution.[31]  Additionally, the court in Diamond v. Jones Day LLP, declined to extend the Heller and Thelen ruling to unfinished business claims under the law of the District of Columbia.[32]  Accordingly, such claims may still yet be viable in certain jurisdictions.    

The Heller and Thelen rulings are a major victory for those partners of a failed or failing law firm because those partners will be less likely to viewed as unemployable since a bankruptcy trustee will be less likely to be able to recover from their new firms.  Indeed, as the Heller court noted, “it is not in the public interest to make it more difficult for partners leaving a struggling law firm to find new employment.”[33]  These decisions are also positive for the former clients of a dissolved law firm, in that this enables them to seek new representation from their current lawyers’ new firms.  In particular, this allows the same attorneys to continue working on the hourly fee matters that were pending at the time the failed law firm collapsed, which eliminates the costs and time associated with bringing new attorneys up to speed on the matter.  Moreover, it permits the clients to dictate which attorney represents them.  As the Heller court emphasized, “a law firm and its attorneys do not own the matters on which they perform their legal services. Their clients do.”[34]  At the end of the day, however, it is important to remember that unfinished business claims are not completely dead.  Indeed, at least two courts have declined to extend Heller and Thelen to unfinished business claims brought under the law of the District of Columbia.[35]  Therefore, a Washington, D.C. based partner will likely have concerns that are not shared by his fellow partners in California and New York if their firm becomes financially unstable and dissolves.     

             



[1] Heller Ehrman LLP v. Davis, Wright, Tremaine, LLP, C 14-01236 CRB, 2014 WL 2609743 (N.D. Cal. June 11, 2014).

[2] Id.

[3] Id.

[4] Id.

[5] Id.

[6] Id.; see generally, Jewel v. Boxer, 156 Cal. App. 3d 171, 174 (Ct. App. 1984).

[7] Heller Eherman LLP, 2014 WL 2609743 at *4.

[8] Jewel, 156 Cal. App. 3d at 175.

[9] Heller Eherman LLP, 2014 WL 2609743 at *6.

[10] Id.

[11] Id.

[12] Id. at 7.

[13] Id.

[14] Id.

[15] Heller Eherman LLP, 2014 WL 2609743, at *4.

[16] Id.

[17] Id.

[18] Id.

[19] Id.

[20] Heller Eherman LLP, 2014 WL 2609743 at *4.

[21] Id.

[22] Id.

[23] Id.; see also Unif. Ltd. Part. Act § 404 cmt. 2.

[24] Heller Eherman LLP, 2014 WL 2609743 at *5.

[25] Id.

[26] Id.

[27] Id. at 6.

[28] Id. at 7.

[29] In re Thelen LLP, 2014 WL 2931526 (N.Y. Ct. App. July 1, 2014).

[30] Id.

[31] In re Howrey LLP, 515 B.R. 624 (Bankr. N.D. Cal. 2014).

[32] Id.

[33] Heller Eherman LLP, 2014 WL 2609743 at *7.

[34] Id. at 1.

[35] In re Thelen LLP, 2014 WL 2931526; Heller Eherman LLP, 2014 WL 2609743 at *7.