Bankruptcy Law

ABA urges 9th Circuit to nix profits clawback from insolvent law firm's unfinished business

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After an hourly rates client of an insolvent law firm terminates the relationship, can a bankruptcy trustee later claw back some of the future profits earned by the client’s new counsel?

After Howrey LLP dissolved in 2011, Chapter 7 trustee Allan Diamond brought this question to court and sued eight firms which effectively took over Howrey clients when they hired former Howrey lawyers.

Last year, U.S. District Judge James Donato of the Northern District of California ruled that the answer to that question was no, under the Washington state law governing partnerships. As far as former Howrey clients are concerned, work taken on by law firms already in existence is generally considered a new matter, the judge ruled, especially if a new retention agreement is signed, as the Big Law Business page of Bloomberg/BNA reported at the time. In at least two other law firm bankruptcy cases, in New York and California, judges came to the same conclusion.

Now, the 9th U.S. Circuit Court of Appeals must answer the same question, in an appeal filed by the trustee.

In an amicus brief (PDF) filed Monday, the American Bar Association argues that the district judge got it right, pointing to client autonomy and rules of legal ethics.

Under the District of Columbia Rules of Professional Conduct, and the ABA Rules of Model Conduct on which they are largely based, “clients own their matters, so a client may hire and fire its attorney at any time,” says the ABA in the amicus brief.

“The importance of client choice underpins multiple black-letter ethical rules, including the rules protecting a client’s right to terminate her lawyer, the rules limiting the use of restrictive covenants, and the rules specifying the permissible methods of fee splitting,” the brief states. “Any rule that would entitle a terminated law firm—much less the estate of a defunct law firm—to claim a property interest over the fees earned by another law firm, after a former client fired the old firm and hired the new one, cannot be reconciled with these ethical requirements.”

An ABA news release provides more details.

Related coverage: “Trustee for Howrey files first clawback claims against 6 of 71 law firms from which $200M is sought” “Howrey trustee sues seven more law firms” “Howrey trustee reaches two ‘monumental’ settlements; ex-employees may now recover some cash”

Wall Street Journal (sub. req.): “More Ex-Howrey Partners Reach Accord With Trustee”

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