Law Firms

Defunct law firms aren't entitled to claw back unfinished-business profits, New York high court says

New York’s top court has ruled that dissolved law firms in bankruptcy court aren’t entitled to claw back unfinished-business profits in hourly fee matters when lawyers take cases to new law firms.

The New York Court of Appeals ruled (PDF) in response to a question by the New York-based 2nd U.S. Circuit Court of Appeals in litigation involving the failed law firms Thelen and Coudert Brothers, report the Wall Street Journal Law Blog and the Legal Profession Blog.

‘“We hold that pending hourly fee matters are not partnership ‘property’ or ‘unfinished business’ within the meaning of New York’s Partnership Law,” the New York Court of Appeals said. “A law firm does not own a client or an engagement, and is only entitled to be paid for services actually rendered.”

An ABA amicus brief had urged such a result, citing the principle that clients have the right to counsel of choice. Bankruptcy trustees had sought the unfinished-business profits for law firm creditors.

The New York court noted “numerous perverse effects” of a contrary holding. Bankruptcy trustees for Thelen and Coudert Brothers had sought profits only for client matters when lawyers move on after a law firm’s dissolution. But that approach “would encourage partners to get out the door, with clients in tow, before it is too late, rather than remain and work to bolster the firm’s prospects,” the court said. And lawyers who stayed with the struggling firm until the end could find it difficult to find work at a firm that has to give up profits on transferred matters. Similarly, clients might fear that their hourly fee matters will be neglected at a new firm if it can’t profit from the work.

A federal judge in California has also found no right to claw back unfinished-business profits in a case involving the failed law firm Heller Ehrman.

William Brandt, the plan administrator in the Coudert case, saw the New York ruling as “a political and policy decision” in an interview with the Wall Street Journal Law Blog. “They wanted to put a stake in the heart of unfinished-business claims around the country, and that’s what has been accomplished,” he said.

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