Law Firms

Defunct Heller firm not entitled to claw back fees from exiting partners, California high court says

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The dissolved Heller Ehrman law firm isn’t entitled to claw back hourly fees charged in pending cases after departing partners jumped to new law firms, according to the California Supreme Court.

The high court ruled on Monday at the request of the San Francisco-based 9th U.S. Circuit Court of Appeals.

In its unanimous opinion, the California Supreme Court said the Heller estate was claiming an interest “for work that someone else now must undertake.” Any expectation of compensation for future work is speculative, given the client’s right to terminate representation at any time, according to the opinion by Justice Mariano-Florentino Cuéllar. Those expectations don’t amount to a property interest, he said.

“What we hold is that under California law, a dissolved law firm has no property interest in legal matters handled on an hourly basis, and therefore, no property interest in the profits generated by its former partners’ work on hourly fee matters pending at the time of the firm’s dissolution,” Cuéllar said.

“The partnership has no more than an expectation that it may continue to work on such matters, and that expectation may be dashed at any time by a client’s choice to remove its business. As such, the firm’s expectation—a mere possibility of unearned, prospective fees—cannot constitute a property interest.”

Heller Ehrman’s partners voted in 2008 to dissolve the firm, and the firm notified its clients in October of that year that it would no longer provide legal services. The dissolution plan included a provision purporting to waive any claim to legal fees generated in hourly fee cases after lawyers leave the firm.

The bankruptcy administrator sought to set aside the wavier, claiming it was a fraudulent transfer of Heller’s right to post-dissolution fees. The administrator contended that law firms hiring the departing lawyers had to pay profits generated by the pending hourly fee cases.

A federal judge had ruled that Heller had no property interest in pending hourly fees cases, so there could be no fraudulent transfer.

The California Supreme Court agreed with that resolution. Any property interest in the pending hourly fee cases “is quite narrow,” the opinion said. The firm is limited to payment for “winding up activities” associated with transferring pending legal matters and for collecting on work already performed, the court said.

The bankruptcy trustee had initially sued 16 law firms for profits in ongoing cases, the National Law Journal reports. Only four firms refused to settle: Orrick, Herrington & Sutcliffe; Jones Day; Davis Wright Tremaine; and Foley & Lardner

The case is Heller Ehrman v. Davis Wright Tremaine.

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