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. …

Interesting new case in California

Hooked Media Group, Inc. v Apple, Inc. (May 2020) 55 Cal.App.5th 323

2.  Who is the plaintiff or movant?  Who is the defendant or respondent?

            Plaintiff is Hooked Media “a startup company.”

            Defendant is Apple, Inc.   

3.  Exactly what relief has the plaintiff requested?

            Damages.    

4.  What is the legal basis for the request?

            “fraud; misappropriation of trade secrets; interference with contract and prospective economic advantage; aiding and abetting breach of fiduciary duty; unfair business practices; and unjust enrichment.”

5.   What facts does the plaintiff provide that support the request?

            Hooked Media approached Apple to see if Apple would acquire it.  Apple expressed interest.  After a few meetings in which Hooked Media disclosed trade secrets, Apple said it wasn’t interested in acquisition but was interested in certain employees.  Shortly thereafter Apple hired the company’s Chief Technical Officer and two other key engineers.  Apparently that was the guts of the company.                     

6.   How did the case end at the trial court level?

            The trial court granted summary judgment for Apple.  Court of Appeals affirmed. 


7.  What standard did the court use to resolve the issue?

            No material facts at issue.  Apple has a right to judgment as a matter of law.          

8.   What is the defendant’s opposition? 

            Apple said it refused to sign a non-disclosure agreement at the outset.  It did not lie about anything especially about its intent to buy Hooked.  The employees it hired were “at will” so it did not interfere with anything.   The people it hired did not owe fiduciary duties to Hooked.  Hooked voluntarily disclosed what it disclosed.  Apple did not actually use the “secrets” and the employees did not actually take anything from Hooked.                   

9.   Who won and Why?  What is the court’s reasoning for giving the plaintiff what she requested or denying the request. 

            The trial court said that the statements made alleged to be false were about things to happen in the future so Hooked must show evidence that Apple did not intend to perform from the outset.  The court commented that California has many laws about employees being able to freely move from one employer to another.  Covenants not to compete are generally unenforceable.  It said much of Hooked’s arguments were really trying to create a covenant not to compete.   As to aiding and abetting and unfair business practices, there were no “bad acts,” therefore those causes of action failed.  Unjust enrichment is not a cause of action; it’s a remedy.    

            Note, there may still be claims against the individuals who left.

            Note 2, the California Supreme Court has agreed to review this (I think).

            Note 3, the parties apparently did a ton of discovery before the summary judgment motion.  Apple alleged it spent $360,000 just in costs during discovery, i.e., not including attys fees.    

Apple stock to split

A student last week mentioned that he heard that Apple stock was going to “split.”  The LA Times confirmed that a day or two ago.  The split will be 4 to 1.  That means the board of directors has decided to “give” each shareholder three more shares for every share the shareholder already has.  So there is about 4 billion shares outstanding as of last Tuesday, there will suddenly be 16 billion.  Since the total value of the company does not go up, the cap value will still be $1.9 trillion.  The value of each share therefore should drop from $451 to $113.  Why would the company do that, the board of directors do that?  It brings smaller investors to the table.  Shares are generally sold on the NY Stock exchange in lots of 100.  There are more people who can afford $11,300 for 100 shares than $45,100.  What good does that do Apple?  Does it help them sell more iPhones?  No, but if Apple decides to sell new shares, there will be more interested buyers which will make the new shares easier to sell.  If Apple wants to raise $100 million, i.e., the board of directors decides to raise $100 million by selling new shares (885,000 new shares), they are easier to sell if there are more interested buyers.

Is there a partnership here?

This is a brief (case summary) I wrote in 2013.  Bankruptcy case.

Utnehmer v. Crull (In re Utnehmer), 499 B.R. 705 (9th Cir. B.A.P. 2013)
Issue:   Was a partnership actually formed here such that the debtor owed fiduciary duties to the creditor which may be non-dischargeable under Section 523(a)(4)?

Holding:   No.

Judge Alan Jaroslovsky, Northern District California

Pappas, Dunn, Jury

Opinion by Pappas

The debtors decided, in 2005, to build a large “spec home” in Venice Ca which would be sold then for a profit.  They borrowed $100,000 from Crull giving Crull a promissory note which was due on sale of the property but no longer than 12 months.  “The Parties agreed that $50,000 of the initial $100,000 loan was intended to be super[s]eded by execution of a formal operating agreement which would recharacterize this $50,000 of the lenders’ interest as an investors’ equity interest in a limited liability company to be formed, with a 10% annual preferred return, and 35% participation in profits on a prorated basis.  The documents for formation of the limited liability company, and the operating agreement, were supposedly being drafted.”  The lender received interest payments for about two years.  The property was finally finished and sold but the loan was not repaid since there were insufficient funds available.  The debtors filed chapter 7 and the lenders filed a non-dischargeability complaint alleging fraud and willful and malicious injury.  The court commented that there was no fraud or willful injury but there appeared to be defalcation by a fiduciary “if a partnership arrangement is shown.”  After trial, the court stated, “If your client was a fiduciary in relation to the venture and cannot account for the proceeds, I think that that’s enough to establish defalcation.”  He entered judgment against the debtor. Continue reading

Nice case on Implied Actual Authority and Ratification

This is a class action against debt collectors for violation of the Telephone Consumer Protection Act.  The lender hired a loan servicing company.  It hired debt collectors.  The lender said “We didn’t make any improper calls!  Our agents did.”  Very nice summary of agency law.

“Henderson advances two agency principles that she believes makes USA Funds liable for the debt collectors’ TCPA violations—ratification and implied actual authority.”

My summary of the case.

Henderson v. United Student Aid Funds, Inc., 918 F.3d 1068 (9th Cir. March 2019)

Issue:   Did the court err in granting summary judgment here on the issue of whether the lender here was liable for the conduct of its agents?

Holding:   Yes.  “[A] reasonable jury could find that USA Funds ratified the debt collectors’ calling practices by remaining silent and continuing to accept the benefits of the collectors’ tortious conduct despite knowing what the collectors were doing or, at the very least, knowing of facts that would have led a reasonable person to investigate further.”

Appeal from district court, Southern District California Continue reading

Selling securities to your employees

We looked at the Ralston Purina case last semester (and every fall semester for the past 16 years) where the SEC slapped Ralston Purina around for selling unregistered securities to its own employees.  Here is a nice summary of how to accomplish that goal and keep the SEC happy.

https://www.lexology.com/library/detail.aspx?g=cb1ccb8e-62cf-495c-883a-18ad40cebcd4&utm_source=lexology+daily+newsfeed&utm_medium=html+email+-+body+-+general+section&utm_campaign=calbar+business+section+subscriber+daily+feed&utm_content=lexology+daily+newsfeed+2019-03-06&utm_term=

Can a corp file a chapter 7 bankruptcy petition without approval of the shareholders?

This is an update to the prior post.  My bankruptcy colleague posted:

Dear Colleagues,

A corporation filed for Chapter 7 protection.  However, the 80% shareholder, who is neither an officer, nor a director, did not sign anything authorizing the filing.  Can the case be dismissed based on the failure of the Board to have the 80% shareholder sign the corporate resolution authorizing the filing?

I suspect that the answer to my question is, “Look at the articles of incorporation and the by-laws,” but I thought I’d see if there is a general principle I can use here.

All the best, Nick

Someone asked him for more details and he responded: Continue reading

Question from a bankruptcy list serve

See how much you have learned?  Each of you can answer this question I’m sure.  The question was posted by a very knowledgeable and good bankruptcy lawyer.

Dear Colleagues,

A corporation filed for Chapter 7 protection.  However, the 80% shareholder, who is neither an officer, nor a director, did not sign anything authorizing the filing.  Can the case be dismissed based on the failure of the Board to have the 80% shareholder sign the corporate resolution authorizing the filing?

I suspect that the answer to my question is, “Look at the articles of incorporation and the by-laws,” but I thought I’d see if there is a general principle I can use here.

All the best,

Nick