Daily News: September 19, 2014

Bankruptcy Court Decisions to Impact Unfinished Business Claims

Recent decisions in the bankruptcy cases of defunct law firms Courdet Brothers, Thelen and Heller Ehrman may serve as the fatal blow for the “unfinished business” claims, says an ABI Journal article.

Intersecting partnership and business law, unfinished business claims have generally been asserted by trustees for bankrupt law firms, which argue that pending hourly matters and the profits generated by those matters are partnership property and belong to the estate. Unfinished business claims often pit “a law firm’s bankruptcy estate against the lawyers that often served as the firm’s lifeblood prior to their bankruptcy filing,” write Paul R. Hage of Jaffe Raitt Heuer & Weiss PC and Patrick R. Mohan of Reorg Research in their article, “Is the Unfinished-Business Rule Finished.”

The unfinished-business rule is rooted in the basic concepts of partnership law, and unfinished-business claims in the context of a dissolved law firm owe their genesis to the 1984 case of Jewel v. Boxer. In this case, the California Court of Appeals ruled that the unfinished-business rule “discourages former partners from scrambling to take physical possession of files and seeking personal gain by soliciting a firm’s existing clients upon dissolution.” In recent high-profile law firm bankruptcies, bankruptcy trustees have sought to extend the Jewel ruling to include pending hourly-fee matters that attorneys bring with them to their new firms post-dissolution, according to Hage and Mohan. “Such recovery efforts often come in the form of lawsuits against both the former lawyer and hisher new firm under a variety of theories, including accounting turnover, preference and fraudulent transfer,” they write.

While lower courts have been split on the application of the unfinished-business rule in recent cases, appeals of some of these cases have seen more unfinished business claims being rejected. The New York Court of Appeals in both Thelen and Courdet found that “a law firm does not own a client or an engagement, and is only entitled to be paid for services [that were] actually rendered.” In the Heller Ehrman case, the U.S. District Court for the Northern District of California held that “the firms that did the work should keep the fees.”

Hage and Mohan write that while there is a possibility of the Heller Ehrman decision being appealed, unfinished business claims under New York Law “appear … to be sealed with decisions in the Thelen and Courdet” cases. While a number of recent decisions have swayed against unfinished-business claims, the authors write that the issue is currently being litigated in other law firm bankruptcy cases, including Dewey & LeBoeuf and Howrey.