Tuesday, March 6, 2018
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California Supreme Court:
Dissolved Law Firm Has No Property Interest in Its Cases
Advises Ninth Circuit That Under California Law, Hourly Fees Earned on Cases Former Partners Take With Them to New Firms Need Not Be Shared With Bankruptcy Estate of Former Firm
By a MetNews Staff Writer
A dissolved law partnership has no property interest in fees earned on hourly bases by its former partners on cases they took with them to their new firms, the California Supreme Court declared yesterday.
The opinion, by Justice Mariano-Florentino Cuéllar, comes in response to an inquiry from the Ninth U.S. Circuit Court of Appeals. The administrator of the bankruptcy estate of Heller Ehrman—once a global law firm with more than 730 attorneys—is insisting that that Heller is entitled to a share of fees earned in cases that were in progress when it dissolved in 2008.
In Heller’s name, the administrator brought suit against 16 firms to which its former partners relocated. All entered into settlements except four: Davis Wright Tremaine LLP; Jones Day; Orrick, Herrington & Sutcliffe LLP; and Foley & Lardner LLP.
Under the 1984 Court of Appeal decision in Jewel v. Boxer, a former law firm retains an interest in cases it had been handling absent a waiver. The administrator sought to invalidate a Jewel waiver by Heller’s partners on the ground that it created a fraudulent transfer of estate assets to the new firms.
The bankruptcy court agreed with that contention. U.S. District Judge Charles Breyer of the Northern District of California did not.
District Court Opinion
He declared on June 11, 2014, that “neither law, equity, nor policy recognizes a law firms property interest in hourly fee matters.” He observed that the California Supreme Court “would likely hold that hourly fee matters are not partnership property and therefore are not ‘unfinished business’ subject to any duty to account.”
The administrator appealed and the Ninth Circuit in 2016 certified to the California Supreme Court this question: “Under California law, does a dissolved law firm have a property interest in legal matters that are in progress but not completed at the time the law firm is dissolved, when the dissolved law firm had been retained to handle the matters on an hourly basis?”
The state high court—which on Aug. 31, 2016 granted the request that it decide the question—yesterday answered it in the negative.
Supreme Court Decision
Cuéllar wrote:
“What we conclude is that a dissolved law partnership is not entitled to profits derived from its former partners’ work on unfinished hourly fee matters. Any expectation the law firm had in continuing the legal matters cannot be deemed sufficiently strong to constitute a property interest allowing it to have an ownership stake in fees earned by its former partners, now situated at new firms, working on what was formerly the dissolved firm’s cases.”
He went on to say:
“What Heller claims here is not merely that a firm has a legitimate interest in the hourly matters on which it is working. Rather, Heller claims a legitimate interest in the hourly matters on which it is not working—and on which it cannot work, because it is a firm in dissolution that has ceased operations. In doing so, it seeks remuneration for work that someone else now must undertake. Because such a view is unlikely to be shared by either reasonable clients or lawyers seeking to continue working on these legal matters at a client’s behest, Heller’s expectation is best understood as essentially unilateral.”
Jewel Is Inapposite
With respect to Jewel, Cuéllar noted:
“…Jewel dealt with contingency fee matters, and whether our conclusion in this case extends to such matters is a question we need not address here. Suffice to say that we find nothing in Jewel to advance Heller’s position regarding hourly fee cases.”
The jurist quoted, with approval, Breyer’s statement that “Heller should bill and be paid for the time its lawyers spent filing motions for continuances, noticing parties and courts that it was withdrawing as counsel, packing up and shipping client files back to the clients or to new counsel, and getting new counsel up to speed on pending matters.” He said the erstwhile firm should also be able to collect sums due for work performed before the dissolution though not yet billed.
But, he said, it cannot seek recompense for “substantive legal work done on hourly fee matters” in cases that had previously been handled by the firm.
“Winding up implies the conclusion of a firm’s business, not its indefinite continuation,” he remarked.
The case is Heller Ehrman LLP v. Davis Wright Tremaine LLP, 2018 S.O.S. 1071.
Copyright 2018, Metropolitan News Company