United States: Bankrupt Law Firm Unfinished Business Question To California Supreme Court

Reproduced with permission from BNA's Bankruptcy Law Reporter, 28 BBLR 980 (Aug. 4, 2016). Copyright 2016 by The Bureau of National Affairs, Inc. (800-372-1033) [http://www.bna.com]

  • 9th Circuit sends question to California Supreme Court for answers
  • Who owns what in clawback action hanging in Heller Ehrman, Howrey estate fights?

By Joyce E. Cutler

July 29 –The multimillion-dollar answer of who owns the rights to unfinished business when law firms fail rests with the California Supreme Court ( Heller Ehrman LLP v. Davis Wright Tremaine LLP (In re Heller Ehrman LLP), 2016 BL 241328, 9th Cir., No. 14-16318, 7/27/16).

The U.S. Court of Appeals for the Ninth Circuit certified July 27 to the state court the question of whether a dissolved law firm has a property interest in uncompleted hourly legal matters at the time the firm is dissolved.

"This issue is significant for California lawyers and law firms, as well as for their clients. Partners in California law firms need clarity regarding their obligations after a law firm dissolves. Absent guidance from the California Supreme Court, law firms will have difficulty predicting their entitlement to revenue from completing the unfinished business of dissolving law firms," the panel said.

Clients also may be "disadvantaged by this ambiguity, as it may be unclear how their matters will be handled at a new law firm, if the hourly fees from their matters must be shared with a dissolved law firm," the appeals court said. And lawyers in dissolving firms may have difficulty advising on the effect on client matters.

Quick Turnaround.

The Ninth Circuit's request comes six weeks after oral arguments in the Heller Ehrman LLP estate fight with three law firms. The firms argue clients' interest in their business and counsel of choice outweigh a shuttered law firm's interest in billing.

Under Jewel v. Boxer, 156 Cal. App. 3d 171 (1984), absent a partnership agreement, attorneys' fees received on cases in progress upon dissolution must be shared by the former partners. The California appellate ruling hasn't until now reached the California Supreme Court.

Foley & Lardner LLP, Jones Day and Orrick Herrington & Sutcliffe LLP, which the estate sued for fraudulent transfer, contend Heller shouldn't get a pay day for not representing clients already harmed when Heller failed.

"This whole dispute is not really over whether the firm has a property interest in the legal matter. That's a red herring. The question is not really there's a property interest in the legal matter. That is under the client's control," said Thomas Rutledge, Stoll Kennon Ogden PLLC in Louisville, Ky., and former chairman of American Bar Association Section on Business Law Committee on LLCs, Partnerships and Unincorporated Entities.

"The real question is who has the right to the fruits of the work done," Rutledge told Bloomberg BNA July 28.

Howrey in the Wings.

The California court hasn't yet responded to the question, which is under state partnership law for the San Francisco-based Heller.

It's a question the Howrey LLP estate needs answered. Howrey's winding down its Chapter 7, and a chunk of the money coming in depends on unfinished business, trustee Allan Diamond told Judge Dennis Montali, U.S. Bankruptcy Court for the Northern District of California at a July 15 hearing (In re Howrey LLP,, Bankr. N. Cal., No. 11-31376, fee application order filed 7/25/16.

Yet the answer to Howrey's unfinished business may lie in the District of Columbia Court of Appeals. Attorneys representing eight law firms and the Howrey estate suggested the Ninth Circuit ask the D.C. court to determine who owns the proceeds from business left over when a law firm goes belly up ( Diamond v. Jones Day , 9th Cir. , No. 15-16333 , reply brief 4/4/16).

The California Supreme Court decision will be controlling in Heller and influential in the Howrey case, which will be decided under D.C. law, said Christopher Sullivan, a partner with Diamond McCarthy LLP in San Francisco representing the trustee in Diamond in in Heller and the estate in Howrey.

"But the D.C. law followed the California law, so what the California Supreme Court says will be at the very least will be persuasive in deciding D.C. law," Sullivan told Bloomberg BNA.

"Every time I dig myself into these briefs I become more convinced that [Bankruptcy] Judge[Dennis] Montali got it right," Sullivan said July 29.

"This is what we're waiting for. And I think the certification to the California Supreme Court was inevitable," Robert Hillman, University of California Davis law professor who has extensively written about lawyer mobility, said July 27. "People who were expecting the Ninth Circuit to resolve this issue were pretty naive, especially after Thelen in New York."

New York and RUPA.

The New York Court of Appeals, ruling on a question from the Second Circuit in the Thelen LLP bankruptcy, held profits from completing pending matters belong to the lawyers and successor firms and aren't the "property" of the defunct firm creditors can claim ( In re Thelen LLP, 2014 BL 183428, 24 N.Y.3d 16 ( N.Y. 2014)).

"Are law firms special? They are in New York because the New York Court of Appeals ran roughshod over the partnership statute in its efforts to develop special new rules over just for law firms," Hillman told Bloomberg BNA.

Thelen was decided under the Uniform Partnership Act, which said firms are not entitled to compensation, while California adopted the Revised Uniform Partnership Act. "Under RUPA you're entitled to reasonable compensation for the work you do. Now I doubt reasonable will ever be 100 percent," Rutledge said.

Partnerships or limited liability partnerships are widely used forms for doctors, dentists, architects and all forms of organizations. "And the rule that they're going to dictate is going to govern all of them, so it's of crucial importance. It isn't just about a couple of thousand law firms," Rutledge said. "RUPA governs everybody. There's no separate law that governs law firm partnerships versus other partnerships."

Rutledge and Hillman signed on to an amicus in the Howrey fight arguing the Ninth Circuit reverse the trial court, reject law firm and ABA arguments and find unfinished business has no material effect on client choice law firms.

Howrey, like Heller, "relates to the obligation of partners, whether or not they are in law firm, to satisfy the obligations they have undertaken to one another and their creditors."

'Price of Admission.'

"The California Supreme Court could establish a classy precedent if it held that part of the price of admission to operate as a 'partnership' was a commitment among the partners to provide for the debts of the partnership," said Scott McNutt, McNutt Law Group LLC, San Francisco, who represented Brobeck, Phleger & Harrison LLP employees.

"Lawyers love the idea of partnership, but only as to one aspect of partnership, the sharing of profits. As to all other aspects of partnership, they want to be employees, because employees have no obligations to the enterprise and can pick up and leave at will," McNutt said in a July 27 e-mail to Bloomberg BNA.

The appeals court's reference "makes clear that all the Ninth Circuit is worried about is that defecting lawyers are free to tell their clients that there will be no headaches associated with changing firms," McNutt said.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.