A Welcome Ruling for the New Law Firms of Refugees from Bankrupt Firms
A decision just handed down by a judge of the Southern District of New York has important implications for law firm dissolutions.
Isn’t Jewel v. Boxer a great case name? Doesn’t it sound like one of the classics of the 1L curriculum, right up there with Pierson v. Post, Hawkins v. McGee, and International Shoe?
It is definitely a case that lawyers ought to know. This appellate decision, handed down by a California court in 1984, remains the leading case on how to divvy up attorneys’ fees generated by cases that were still in progress at the time of a law firm’s dissolution. Dewey care about this case? Absolutely.
But Jewel might not maintain its status as the key precedent on so-called “unfinished business,” at least if one judge has anything to say about it. Check out an interesting ruling that just came down from the Southern District of New York, arising out of one of the biggest Biglaw bankruptcies of recent years….
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Judge William H. Pauley III (S.D.N.Y.) just issued an opinion in two cases: Geron v. Robinson & Cole LLP and Geron v. Seyfarth Shaw LLP. Yann Geron is the chapter 7 trustee of the now-defunct Thelen law firm; Robinson & Cole and Seyfarth Shaw are two law firms that picked up partners from Thelen.
Geron, as trustee, brought fraudulent transfer and accounting and turnover claims against the two firms, seeking to recover profits from cases that ex-Thelen partners took to Robinson & Cole and Seyfarth Shaw. Both firms moved to dismiss the claims of the trustee. Judge Pauley granted Seyfarth Shaw’s motion, decided under New York law, but denied Robinson & Cole’s motion, decided under California law (which Robinson & Cole conceded to be controlling). And then he sua sponte certified his order for interlocutory appeal, i.e., teed this up for immediate appellate review by the Second Circuit, noting that “the scope of the unfinished business doctrine is of great importance to both the legal profession and clients.”
Let’s take a quick spin through the opinion. Here’s the opening paragraph:
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These actions arise from an alarming phenomenon — the bankruptcy of a major law firm. The pursuit of pending hourly fee matters as assets of the estate has become a recurring feature of such bankruptcies. But this concept of law firm “property” collides with the essence of the attorney-client relationship. That relationship springs from agency law, not property law. The client is the principal, the attorney is the agent, and the relationship is terminable at will. The question presented is whether a dissolved law firm’s pending hourly fee matters are nevertheless its property.
That’s a big shout-out — to Dewey, Howrey, Thelen, and so many other firms that have gone under in the past few years. Note also Judge Pauley’s framing of the issue: “whether a dissolved law firm’s pending hourly fee matters are nevertheless its property” (emphasis added).
So, some quick and dirty (and oversimplified) background. Under Jewel v. Boxer, “unfinished business” of a defunct law partnership generally belongs to the partnership. As the Jewel court put it, “attorneys’ fees received on cases in progress upon dissolution of a law partnership are to be shared by the former partners according to their right to fees in the former partnership.” If a firm goes bankrupt, then the firm’s estate can try to use Jewel to go after fees generated by cases taken by ex-partners to new firms; the money recovered under these “Jewel claims” then goes into the estate and can be paid out to creditors.
In Thelen’s final partnership agreement before the firm dissolved, the partners tried to implement a so-called “Jewel Waiver.” This provision in the agreement purported to override Jewel:
Neither the Partners nor the Partnership shall have any claim or entitlement to clients, cases or matters ongoing at the time of dissolution of the Partnership other than the entitlement for collection of amounts due for work performed by the Partners and other Partnership personnel prior to their departure from the Partnership.
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Yann Geron, the Thelen bankruptcy trustee, claims that this Jewel Waiver constituted a fraudulent transfer and should not be given effect.
For the Seyfarth case, Judge Pauley conducted a choice-of-law analysis and found New York law to be controlling. He drew a distinction under New York law between pending contingent fee cases and pending hourly fee cases of a defunct law firm, then noted that “the only New York court to consider whether a debtor law firm possesses a property interest in its unfinished hourly fee matters concluded that it does not.” Although this decision, by a trial court, is not binding, Judge Pauley deemed it persuasive (citations omitted):
Unlike in the contingency fee context, applying the unfinished business doctrine to pending hourly fee matters would result in an unjust windfall for the Thelen estate, as “compensating a former partner out of that fee would reduce the compensation ofthe attorneys performing the work.” Such an expansion of the doctrine would violate New York’s public policy against restrictions on the practice of law. Indeed, recognizing a property interest in pending hourly fee matters would clash directly with New York’s Rules of Professional Conduct [governing fee splitting].
Adopting the contrary view would lead to absurd results, according to Judge Pauley (again, citations omitted)
[Recognizing a debtor law firm’s property interest in pending hourly fee matters] would have bizarre consequences. If such an interest exists, it becomes property of the estate upon the filing of a bankruptcy petition. It would appear, then, that the Bankruptcy Code empowers a debtor law firm to sell its pending hourly fee matters to the highest bidder. When this Court asked the Trustee whether a debtor firm could auction off its pending matters, the Trustee was unable to answer definitively.
Indeed, at the hearing, lawyers for Seyfarth Shaw made this very point. From Thomson Reuters:
“This isn’t a Jackson Pollack [sic],” said Thomas Feher, a lawyer representing Seyfarth Shaw, which hired 11 partners from Thelen, which dissolved in 2008. “It isn’t a piece of furniture.”
Actually, law firm bankruptcies like Thelen and Dewey have some similarities to Jackson Pollock canvases: they are big, expensive, and ugly.
(Just kidding — I actually really like Jackson Pollock’s work. I just couldn’t resist the quip.)
Accordingly, Judge Pauley dismissed the trustee’s complaint against Seyfarth, because Geron’s complaint “fails to distinguish between pending contingency fee matters and hourly fee matters.” The judge left open the possibility of Geron amending the complaint.
The Seyfarth Shaw part of the opinion is the more interesting part. With respect to the Robinson & Cole section, the firm conceded that California law controls. The firm then argued that developments in California law since Jewel, including the 1994 enactment of the Revised Uniform Partnership Act (RUPA), have superseded the case. Judge Pauley agreed with this, but then concluded that under RUPA, a fact-bound “reasonable compensation” analysis must be conducted, in order to figure out who should get what in terms of profits and fees. So he denied Robinson & Cole’s motion for dismissal of all claims.
Judge Pauley concluded by certifying his order for interlocutory appeal. He took note of a conflicting S.D.N.Y. opinion by Judge Colleen McMahon — Development Specialists Inc. v. Akin Gump (“DSI”), arising out of the Coudert Brothers law firm bankruptcy — that was handed down as recently as July. He wrote:
These issues impact a large number of cases, and they present substantial grounds for difference of opinion. The DSI court recently certified its decision for interlocutory appeal, and that decision implicates many of the controlling issues in this Memorandum & Order. Further, certification of these questions to the New York Court of Appeals and the California Supreme Court may be warranted because those high courts have “not squarely addressed” the issues, and the scope of the unfinished business doctrine is of great importance to both the legal profession and clients. Notwithstanding its humble beginnings, some lower courts have applied the Jewel doctrine expansively, with untoward consequences for the bar and clients. In this Court’s view, there is good reason to believe that the highest courts of New York and California would decline to follow suit. In these circumstances, “the prompt resolution” ofthese issues on appeal will promote judicial economy and doctrinal clarity. Accordingly, this Court sua sponte certifies this order for interlocutory appeal.
Translation: Judge Pauley is not a fan of Jewel v. Boxer. He’s kicking this up to the Second Circuit ASAP, so they can certify the questions over to the California Supreme Court and the New York Court of Appeals, which will hopefully smash the Jewel test (or knock out the Boxer test, if you prefer).
If you’re really interested in this stuff, flip ahead to the next page for additional analysis, a copy of the full opinion, and links to further reading.
