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. …

Case to read for tomorrow

City of Chicago, Illinois v. Fulton,  926 F.3d 916  (7th Cir 2019)

Issue:   Does the City of Chicago violate the automatic stay when it continues to “hold” a debtor’s vehicle after the filing of a chapter 13 petition?

Holding:   Yes.

According to the 7th Circuit, “In this consolidated appeal of four Chapter 13 bankruptcies, we consider whether the City of Chicago may ignore the Bankruptcy Code’s automatic stay and continue to hold a debtor’s vehicle until the debtor pays her outstanding parking tickets.”  A previous 7th Circuit case called Thompson required turnover on these same basic facts and the 7th Circuit refused to overturn it.  The Thompson case ruled that holding onto an asset is exercising control which is an “act” which violates the stay.  It held that turnover is compulsory “under a plain reading of §§ 363(e) and 542(a) and the Supreme Court’s decision in Whiting Pools.”  363(e) requires the court to “prohibit or condition such use . . . [of property of the estate] as is necessary to provide adequate protection of such interest” (meaning turnover is required?).    542(a) says “a creditor in possession of property of the estate ‘shall deliver [it] to the trustee.'”

The City argued that it needed to retain possession “to prevent the loss or destruction of the vehicles” but it apparently offered no evidence that giving the vehicle back would result in loss or destruction.  Further it could and should “seek protection on an expedited basis” under 363(e).  The City argued that it had a lien perfected by possession and that § 362(b)(3) excepted it from compliance, i.e., the stay does not apply to acts “to continue the perfection of” its lien.  The court responded that there are other ways to perfect liens and in any event, “the City’s possessory lien is not destroyed by its involuntary loss of possession due to forced compliance with the Bankruptcy Code’s automatic stay.”  The City also argued that this is an act to enforce its “police or regulatory power.”  The court chided the City saying this is “an exercise of “revenue collection” rather than police power.

The court concluded, “the City needs to satisfy the debts owed to it through the bankruptcy process, as do all other creditors.”

Note:  The court says that this ruling is in line with the 9th Circuit in California Employment Development Department v. Taxel 98 F.3d 1147 (9th Cir. 1996).

The City argued to the Supreme Court that this ruling ignores its ruling in Citizens Bank of Maryland v. Strumpf, 516 U.S. 16 (1995)(bank may put a “temporary” administrative freeze on the debtor’s bank account upon learning of the bankruptcy filing without violating the automatic stay under Section 362(a)).  But this case is not discussed anywhere in the 7th Circuit opinion.

Need a volunteer to defend a bankruptcy debtor in a non-dischargeability action

I have agreed to represent a debtor – pro bono – who has been sued to have the debt declared non-dischargeable.  The guy was in an altercation and was arrested.  The “victim’s” finger was broken.  My guy has his side of the story.  The “victim” has demanded $5 million.

Anyway I took the case as part of the UWLA Bankruptcy Litigation Clinic.  This is a great case for a student or new atty to get involved in.  You will work side by side with me.  You will be “second chair” at trial.  The legal issues are not complex but it will likely go to trial downtown – several months from now.  In the meantime there will be discovery, depositions etc.  If you have taken a bankruptcy course, but are not yet an attorney, you can be certified by the bankruptcy court and actually argue some portion of the case.

If you are interested send me an email at jhayes@rhmfirm.com.

You must be prepared to spend a few hours a week on the case for the next several months.  There will likely be weeks of no work.  This will go to trial.    Let me know.

Bankruptcy Class this Friday – March 15

This coming Friday is Class 10.  We will discuss preferences and fraudulent conveyances.  The cases are pretty short.

Class 10 – March 15, 2019

Preferences 281

Cunningham v. Brown         281

Fraudulent Conveyances 286

BFP v. Resolution Trust Corporation        287

Dean v. Davis, Jr.     292

In re Beverly 294

Shapiro v. Wilgus     304

Bailey v. Glover       306

 

Last Add: Judge Donovan Tomorrow

In 2011, Judge Donovan ruled on a Motion to Dismiss in a chapter 13 case filed jointly by two men.  Federal law – Defense Against Marriage Act (DOMA) – decreed that if federal law said “spouses,” that meant a man and a woman.  Judge Donovan ruled that DOMA was unconstitutional and refused to dismiss the case.  You should read his written opinion, it is very poignant.   We can discuss this with him tomorrow.  My brief follows.

In re Balas and Morales, 449 B.R. 567 (Bankr. C.D. Cal. 2011) (Donovan, J.)
Issue: Are two men, properly married under the laws of California, eligible to file a joint bankruptcy case?
Holding:  Yes.   Note: Nineteen Central District judges concurred and signed this opinion.
Counsel for the debtors: Peter Lively and Rob Pfister.

U.S. Bankruptcy Judge: Hon. Thomas Donovan

The debtors, two men, filed a joint chapter 13 petition. They were married “to each other” under California law in 2008 “and remain married today.”  The US Trustee filed a Motion to Dismiss for “cause.”  It cited the Defense of Marriage Act, “DOMA,” 1 U.S.C. section 7, which “defines the term ‘spouse’ for the purpose of applying federal law, as ‘a person of the opposite sex who is a husband or a wife.’”

Judge Donovan wrote: “The issue presented to this court is whether the Debtors, who are legally married and were living in California at the time of the filing of their joint petition, are eligible to file a ‘joint petition’ as defined by § 302(a).” “In this court’s judgment, no legally married couple should be entitled to fewer bankruptcy rights than any other legally married couple.” Continue reading

Last Class This Friday – Guest Speaker

We will have our final class this Friday.   I am going to skip the section on chapter 13 so you do not need to read the cases previously assigned.

Bankruptcy Judge Thomas Donovan (Ret.) is going to come by and visit.  Judge Donovan was the trial judge in the Beverly case so we can discuss that with him.  Remember he ruled in favor of the debtor but was reversed by the court of appeals.

Judge Donovan also argued (as a young lawyer) a case (on behalf of the trustee!) at the Supreme Court in 1966 called Bank of Marin v. EnglandI would like you to read the opinion in that case which is here.   Especially the dissent by Justice Harlan which agreed with Judge Donovan.

Judge Donovan was recently overruled by the Supreme Court in Law v. SiegelThe opinion in that case is here.  It deals with taking away a homestead exemption based on the debtor being a really bad guy.

Finally, Judge Donovan recently ruled on a case involving Section 727, whether the discharge should be denied.  We can talk to him about that.  My brief is below.    Continue reading

Classes for Remaining of the Semester

It looks like tomorrow, April 6, is our 12th class.  So four more left including tomorrow.  Here is what we will do for the last four weeks:

April 6:  Class 12. Trustee’s Ability to Expand the Estate 292
A. Preferences 292
Cunningham v. Brown 292
B. Fraudulent Conveyances 297
BFP v. Resolution Trust Corporation 298
Dean v. Davis, Jr. 303
In re Beverly 305
Shapiro v. Wilgus 315

April 13:  Class 13. The Discharge 320
A. Denial of the Discharge Based on Prepetition Transfers 320
In re Adeeb 321
In re Beverly 327
B. Non-Dischargeability Based on Fraud 329
Overview of 523(a):  19 subsections
When is a complaint required?
In Re Ronald Kirsh 329
C. Credit Card Debts 334
In re Dorsey 334
In re Eashai 339

April 20:  Class 14:  Prof. Gorginian
C. Non-Dischargeability Based on Willful and Malicious Injury 347
Kawaauhau v. Geiger 347
D. Debts Arising From Criminal Proceedings 350
Kelly v. Robinson 350
E. Student Loans 356
In re Carnduff 358
Roth v. Educational Management Corp (In re Roth) 364

April 27:  Class 15. Consumer Reorganization – Chapter 13   374
Overview of chapter 13
A. Computing Net Disposable Income 374
In re Greer 374
B. (skip)
C. Good Faith After BAPCPA 392
In re Welsh 392
D. (Skip)

Review