Law Firms

Heller isn't entitled to unfinished-business profits in hourly fee cases, federal judge rules

A federal judge in California has ruled that the bankruptcy estate of failed law firm Heller Ehrman isn’t entitled to recover profits from unfinished hourly fee cases taken to new law firms.

U.S. District Judge Charles Breyer ruled Wednesday in a de novo review of a contrary ruling by a bankruptcy court judge. The Wall Street Journal Law Blog and the Wall Street Journal (sub. req.) noted Breyer’s decision.

“Considering the policies favoring the primacy of the rights of clients over those of lawyers,” Breyer wrote in his decision (PDF), “it is essential to provide a market for legal services that is unencumbered by quarrelsome claims of disgruntled attorneys and their creditors.”

Breyer ruled in consolidated cases in which the trustee in Heller Ehrman’s bankruptcy sought to claw back unfinished business profits in hourly cases taken to Davis, Wright, Tremaine; Orrick, Herrington & Sutcliffe; Foley & Lardner; and Jones Day. Several other law firms settled.

Breyer distinguished a 1984 clawback case decided by a California appeals court, Jewel v. Boxer, which found a dissolved law firm’s estate had a property interest in pending hourly matters. Among the differences cited: The four partners in Jewel v. Boxer formed new law firms consisting entirely of partners from their old dissolved firm, and the law firm was dissolved voluntarily.

“In essence,” Breyer said, the Jewel court “found that the new firms had earned profits which, in equity, belonged to the dissolving partnership because the departing partners had appropriated work for themselves that could have been performed on behalf of the dissolved firm.”

In the Heller case, however, “Heller lacked the financial ability to continue providing legal services to its clients, leaving clients with ongoing matters no choice but to seek new counsel and Heller shareholders no choice but to seek new employment.”

Breyer also said the Jewel case was decided under old partnership law that has since been revised.

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