Nice discussion of what does a law partnership “own”?

Diamond v. Hogan Lovells US LLP (In re Howrey), 950 F.3d 1200 (9th Cir. Feb 2020)  

Issue:   Does a “dissolved [law]firm have a property interest in the profits earned from ongoing client matters billed on an hourly basis,” under District of Columbia law? 

Holding:   No. 

Appeal from the district court. 

Gould, Murguia, Freudenthal

The law firm Howrey LLP, organized under District of Columbia law, decided to dissolve in 2011.  The partners then amended the partnership agreement “to include a ‘Jewell waiver’ which would free any departing partner from any obligation to account for profits related to the winding up of unfinished business.”  This meant that partners that left the firm could take their existing cases and not have to account for the profits of those cases to the partnership.  A month later, creditors filed an involuntary petition.  The trustee sued several firms for “work done on client matters that had been started at Howrey, attempting to recover portions of payments made by former Howrey clients for work done on those ongoing matters.”

“[T]he Trustee argues that partners who dissociated pre-dissolution had a duty to account for profits earned on ongoing client matters, and that Howrey can recover those profits from the defendant firms under an unjust enrichment theory.  The Trustee argues that partners who left after the March 15, 2011 dissolution had a duty to account to Howrey for any profits earned on ongoing client matters, that the Jewel waiver constituted a fraudulent transfer of that interest from Howrey to the partners under 11 U.S.C. § 548, and that the Trustee can recover from the defendant firms as subsequent transferees under 11 U.S.C. § 550.”    

The bankruptcy court ruled for the trustee.  The district court reversed. 

The 9th Circuit asked the District of Columbia advise it on the issue.  That court issued its ruling on February 13, 2020.  As to contingency fee matters, if a firm is half way through a contingency fee matter and the partner leaves and takes the case with him, does the firm he left have a right to some of the ultimate profit?  Yes.  Although the Jewell waiver says that the partners can agree when dissolving, that the old firm has no further interest in matters each takes with him.

But these are hourly cases.  The billing done before leaving is property of the firm that he left.  Does the firm he left own a property interest in the case he took with him?  That, at least here, depends on District of Columbia law.  It is an important issue because, “On the one hand, if a firm goes into bankruptcy all of its suppliers become creditors and will be impacted by the scope of a partner’s duty to account for profits.”  On the other hand, “If, when a firm is failing, a lawyer cannot complete any pending client work for the benefit of his or her new firm, that will make it harder for lawyers to find a new home if their firm fails.”

The District of Columbia court ruled succinctly (all ruling are according to DC law):

We answer the above questions as follows:

(1) We hold that hourly-billed client matters are not “property” of the law firm.  A client has an almost “unfettered right” to choose or to discharge counsel. … Therefore, a law firm has no more than a “unilateral expectation,” rather than a “legitimate claim or entitlement,” to future fees earned from continued work on hourly-billed client matters. Bd. of Regents of State Colleges v. Roth, 408 U.S. 564, 577 (1972).

(2) After a partner leaves the law firm (disassociates), the partner owes no continued duty to the former law firm to account for new profits earned on hourly-billed client matters that started at the former firm.  A dissociated partner has a limited duty of loyalty to the former firm only “with regard to matters arising and events occurring before the partner’s dissociation.” …. This limited duty requires a dissociated partner to remit profits earned on work performed prior to the partner’s dissociation, but does not include profits earned from work performed subsequent to the partner’s dissociation.

(3) Since a dissociated partner has no duty to account for profits earned after the partner leaves the firm, we need not address this question.

(4) A dissolved law firm has no interest in profits earned on hourly-billed client matters following dissolution.  A dissolved law firm is only entitled to proceeds earned as part of the firm’s “winding up” process, which include acts that preserve partnership rights and property, prosecute and defend actions, settle or transfer partnership business, or distribute assets. “Winding up” does not encompass new business or work done on former client matters after dissolution by former partners. The dissolved partnership can no longer undertake work on these matters after dissolution. …

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