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In New York “Unfinished Business” of Dissolved Law Firms Stands Finished by NY Court of Appeals Opinion

07/02/14

In New York "Unfinished Business" of Dissolved Law Firms Stands Finished by NY Court of Appeals Opinion


Trustees of law firms are finding their positions tenuous on clawback claims as courts across the country in succession keep opining that trustees of dissolved or bankrupt law firms do not have any claim on "unfinished business" in hourly fee matters.

In a recent case in California in June, U.S. District Judge Charles Breyer had held hourly fee matters in case of bankrupt law firm Heller was not "unfinished business" subject to clawback claims. In a similar opinion, this Tuesday, the New York Court of Appeals has ruled in the Thelen and Coudert Brothers cases that 'hourly fee' matters do not constitute 'unfinished business' of law firms. The cases had been referred to the New York Court of Appeals for opinion by the U.S. Court of Appeals for the Second Circuit.

The New York Court of Appeals observed in the matter: "In New York, clients have always enjoyed the "unqualified right to terminate the attorney-client relationship at any time" without any obligation other than to compensate the attorney for "the fair and reasonable value of the completed services" (In re Cooperman, 83 NY2d 465, 473 [1994] [emphasis added])."

The court observed further: "In short, 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" (Verizon New England , 21 NY3d at 72), given the client's unfettered right to hire and fire counsel. Because client matters are not partnership property, the trustees' reliance on Partnership Law § 4 (4) is misplaced. As the District Court Judge in Geron pointed out, "[t]he purpose of [the] UPA is to harmonize partners' duties regarding partnership property, not to delineate the scope of such property " (Geron, 476 BR at 742 [emphasis added])."

The court refuted the contentions of the trustees, and observed that in the case of contingency fees, "contrary to the Trustees contentions, New York Courts have never suggested that a law firm owns anything with respect to a client matter other than yet-unpaid compensation for legal services already provided. Appellate Division decisions dealing with unfinished business claims in the context of contingency fee arrangements uniformly conclude that the dissolved partnership is entitled only to the "value" of its services."

The court admitted that in matters of contingency fee cases sometimes the Appellate Division has referred to such a case as an "asset" subject to distribution, "but as then Justice Levine stressed in Kirsch - A former partner "is only entitled to 'the value of his interest at the date of dissolution … with interest.'"

The court also observed that the trustees of the law firms had failed to cite any New York case in which the law firm was awarded the client matter itself, or any fee not earned by the law firm's own work.

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