Law Firms

Leaving a downward-spiraling law firm could be more difficult as a result of clawback ruling

A ruling in a Howrey clawback case could make the exit more difficult for lawyers at struggling law firms.

The Feb. 7 ruling says dissolved firms may claw back profits for unfinished business taken to new firms even when partners leave before the dissolution, the Wall Street Journal (sub. req.) reports. U.S. Bankruptcy Judge Dennis Montali ruled in a case involving the collapsed Howrey law firm.

Firms that hire lawyers from a law firm at the time of or after its dissolution have long been subject to unfinished business claims by the bankruptcy trustee, but Montali’s ruling says the claim can also be made when firms hire lawyers before a firm’s collapse, according to the Wall Street Journal.

The ruling has “rattled some in the industry,” the story says. “The result could constrict a key escape hatch for law-firm partners at a time when many firms, caught between frugal clients and a dearth of business, are struggling to boost revenue,” according to the story.

Howrey bankruptcy trustee Allan Diamond told the Wall Street Journal that the decision is consistent with the idea that partners should put their law firm’s interests ahead of their own. “Otherwise,” he said, “at the first sign of a partnership in trouble, every partner, clients permitting, would leave with his or her unfinished business, to the likely detriment of one’s partnership.”

Montali made a similar ruling last month in a case involving the dissolved law firm Heller Ehrman, the story says.

Meanwhile New York’s top court will consider whether failed law firms are entitled to profits from legal work billed on an hourly basis. The court will rule in response to questions posed by the New York City-based 2nd U.S. Circuit Court of Appeals in cases involving Coudert Brothers and Thelen. Law360 (sub. req.) has a story.

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