Law Firm “Clawback” Suit Goes to Ninth Circuit
Bankruptcy Judge Dennis Montali in San Francisco said last week that he will allow a direct appeal to the Ninth Circuit from one of his rulings in the bankruptcy of Howrey LLP, skipping an intermediate appeal to the U.S. District Court. The judge relied on Jewel v. Boxer — a California state law case which holds that profit earned on unfinished business after dissolution belongs to the “old” firm, not to a newly-formed firm that completed the work.
The case is of intense interest to attorneys who move to other firms when their existing firms go out of business. Judge Montali had allowed the Howrey trustee to sue several law firms including Jones Day and Seyfarth Shaw LLP for profits they made on work that began at the now-defunct firm.
The New York Court of Appeals recently ruled to the contrary in response to a question by the New York-based Second Circuit Court of Appeals in litigation involving the failed law firms Thelen and Coudert Brothers. The New York Court of Appeals stated: “We hold that pending hourly fee matters are not partnership ‘property’ or ‘unfinished business’ within the meaning of New York’s Partnership Law. A law firm does not own a client or an engagement, and is only entitled to be paid for services actually rendered.”
Judge Montali was nevertheless not persuaded to dismiss the lawsuits brought by the Howrey trustee. The judge said: “The matter is of significant public importance to the legal community,” given the “ever-present possibility of the failure of other law firms in the future.” Whether refugees from failed firms are entitled to keep what they earn in completing unfinished business is an “unsettled and serious question affecting those law firms and the attorneys who seek to join them,” the judge said. Montali also said he was unaware of any controlling decision from the Ninth Circuit Court of Appeals or the U.S. Supreme Court definitively saying who keeps the profit on unfinished business. For that reason, he allowed the firms to skip an intermediate appeal to a U.S. District Court.
The ruling by Judge Montali in the Heller Ehrman LLP bankruptcy case has already been appealed to the Ninth Circuit from the dismissal by U.S. District Judge Charles R. Breyer of suits against Jones Day and three other firms who made profits on unfinished business. In the Heller case, Judge Breyer had reversed Judge Montali and said that Jewel v. Boxer isn’t good law and is unlikely to be followed by the California Supreme Court.
It remains to be seen what the Ninth Circuit Court of Appeals will say in both the Heller Ehrman and Howrey cases.