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06/13/14

The Heller Case Finishes Questions of "Unfinished Business" for Bankrupt Law Firms

U.S. District Judge Charles Breyer ruled this week in the United States District Court for the Northern District of California over "unfinished business" claims raised by the trustee of the bankrupt law firm Heller Ehrman LLP. Put simply, the federal court decided that the trustee of a bankrupt law firm has no claims to profits of unfinished business carried away by partners leaving the firm.

While the 13-page decision is definite to influence future litigation, the way the court distinguished the instant matter from the previous precedent of Jewel v. Boxer, which had held "unfinished business" of the dissolving law firm was partnership property, is what makes Breyer's order truly interesting.

The court distinguished Heller from Jewel, primarily over five key points:

• The dissolution of the law firm in Jewel was voluntary, whereas in the case of Heller dissolution was forced upon the law firm upon Bank of America withdrawing its line of credit. The court held this issue to be significant as in Jewel, the partners leaving the firm "could have, but chose not to, finish representing their clients as or on behalf of the old firm." In Heller, however, the law firm lacked the financial ability to continue providing legal services "leaving clients with ongoing matters no choice but to seek new counsel and Heller Shareholders no choice but to seek new employment."
  
  
• While in Jewel the new firms represented the clients from "unfinished business" under fee agreements entered into between the client and the old firm, in Heller the clients signed new retainer agreements with their new firms.
  
  
• In Jewel the new law firms were made up entirely or mostly of partners who left the old firm. In Heller the defendants are pre-existing third-party firms who provided, the court observed, "substantively new representation, requiring significant resources, personnel, capital, and services well beyond the capacity of either Heller or its individual Shareholders." Further, the court clarified that in Jewel the partners who left the old firm continued to have fiduciary duties to each other and the old firm, but in the case of Heller the third-party firms who are defendants had "never owed any duty, fiduciary or otherwise, to the dissolved firm."
  
  
• In Jewel hourly fee matters and contingency fee matters were indistinguishable. In Heller, however, no contingency fees are at issue.
  
  
• In Jewel the Uniform Partnership Act was applicable, but in Heller RUPA or the Revised Uniform Partnership Act, which is substantially different than the earlier UPA, is applicable. RUPA allows partners to obtain "reasonable compensation" for helping to wind up partnership businesses and undermines the legal foundation upon which Jewel was decided.

Discussing the matter on principles of equity, the court observed, "A bedrock of the commercial legal profession is that lawyers expect to be paid for services they provide to their clients, and clients expect to pay the firm that employs the lawyers who provide their services. Balancing the equities, it is simple enough to conclude that the firms that did the work should keep the fees. And, of course, the fees that Heller earned through its labor prior to dissolution have been paid or are not at issue here. The fees at issue here were generated by Defendant's labor, not Heller's. So in terms of fairness, the Trustee cannot argue that the Defendants have received a windfall - they did the work."

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