Strategist ®

The Bankruptcy LAW JOURNAL ® NEWSLETTERS Strategist Volume 31, Number 11 • September 2014 Law Firm Clients Defeat Bankruptcy Trustees in New York Court of Appeals By Michael L. Cook represent them, a major inconvenience for the ness.” 2014 U.S. Dist. LEXIS 81087, at *18. clients and a practical restriction on a client’s A law firm only owns unpaid compensa- The New York Court of Appeals, on July right to choose counsel.” Id. at *20. In addi- tion for legal services already provided with 1, 2014, in response to questions certified by tion, “clients might worry that their hourly fee respect to a client matter. In the words of the the U.S. Court of Appeals for the Second Cir- matters are not getting as much attention as New York court, “a client’s legal matter be- cuit, held that “pending hourly fee matters are they deserve if the [new] law firm is prevent- longs to the client, not the lawyer.” Id. at *15. not [a dissolved law firm’s] ‘property’ or ‘un- ed from profiting from its work on them.” Id. The Thelen and Coudert trustees’ litigation finished business’” under New York’s Partner- More important, New York has a “strong pub- will now return to the Second Circuit for dis- ship Law. In re Thelen LLP, _________ N.Y.3d lic policy encouraging client choice and, con- position. Because of this final ruling on appli- _________, 2014 N.Y. LEXIS 1577, *1 (July 1, comitantly, attorney mobility.” Id. at *21. Quot- cable New York Law, the court should direct 2014). See In re Thelen LLP, 213 F.3d 213, 216 ing from a 1943 New York County Lawyers’ the dismissal of the trustees’ complaints. In (2d Cir. 2013). A federal district court had ap- Association opinion, the court stressed that New York, at least, the unfinished business plied California law to reach the same conclu- “[c]lients are not merchandise. Lawyers are doctrine is finished — and may be on its way sion in a similar case three weeks earlier. In re not tradesmen. They have nothing to sell but out in California, too, given the strong Hell- Heller Ehrman, 2014 U.S. Dist. LEXIS 81087, personal service.” Id. at 17. er decision handed down two weeks before *2 (N.D. Cal. June 11, 2014) (“A law firm — Thelen, but not cited by the New York court. and its attorneys — do not own the matters THE UNFINISHED BUSINESS DOCTRINE The trustee in Heller will reportedly appeal to on which they perform their legal services. The Thelen and Coudert trustees relied on the Ninth Circuit. Other trustees around the Their clients do.”) the so-called “unfinished business doctrine” country will also try to salvage their unfin- The bankruptcy trustees of two dissolved that had originated with an intermediate ished business claims in courts not bound by law firms (Thelen LLP and Coudert Broth- California appellate court. Jewel v. Boxer, 156 Thelen and Heller. ers) raised the issue when they sought to Cal. App. 3d 171 (Cal. Ct. App. 1984) (held, recover profits that other law firms had absent an agreement to the contrary, profits CONCLUSION earned on hourly fee matters brought to derived from a law firm’s unfinished busi- Thelen is not based on any unique feature those firms by departing Thelen and Cou- ness are owed to former partners in propor- of New York Law. Other appellate courts may dert partners. According to the trustees: tion to their partnership interests). As the find the New York court’s pragmatic, sensible 1) pending hourly fee matters that were tak- N.Y. Court of Appeals noted, according to reasoning persuasive. It is based on sound en to the new firms were Thelen and Cou- Jewel and other courts that have followed it, policy considerations, particularly clients’ dert property; and 2) the new firms had to “departing partners owe a fiduciary duty to right to counsel and lawyer mobility. Any account for their earnings on those matters. the dissolved firm and their former partners other business-minded states should follow As The Wall Street Journal noted on July 7, to account for benefits obtained from use of New York’s lead in grasping the legal “profes- 2014, the trustees were trying to “claw back partnership property in winding up the part- sion’s traditions and commercial realities of money earned on pending matters for the nership’s business. …” Id. at *1. But nothing the practice of law today.” Id. at *23. benefit of [the dissolved firms’] creditors.” in New York’s Partnership Law, continued the New York court, says anything “about RELEVANCE TO CLIENTS whether a law firm’s ‘client matters’ are part- The court stressed that the trustees’ position nership property.” Id. In rejecting the unfin- Reprinted with permission from the September 2014 edition of “would have numerous perverse effects,” and ished business doctrine, the court reasoned the LAW JOURNAL NEWSLETTERS. © 2014 ALM Media would conflict “with basic principles that gov- that “no law firm has a property interest in Properties, LLC. All rights reserved. Further duplication without permission is prohibited. For information, contact 877.257.3382 ern the attorney-client relationship under New future hourly legal fees because they are ‘too or [email protected]. #081-09-14-03 York law and the Rules of Professional Con- contingent in nature and speculative to cre- duct.” 2014 N.Y. LEXIS 1577 at *1. Among oth- ate a present or future property interest’… er things, the departing lawyers “might advise , given the client’s unfettered right to hire their clients that they can no longer afford to and fire counsel. Because client matters are not partnership property, the trustees’ reli- ance on [New York] Partnership Law … is misplaced.” Id. at *13. As the Heller court in Michael L. Cook, a member of this news- California stressed, “[t]he client always owns letter’s Board of Editors, is a partner at the matter, and the most the law firm can be Schulte Roth & Zabel LLP in New York. said to have is an expectation of future busi-.

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