Insolvent Law Firms' Issues and Options

THE STATE BAR OF CALIFORNIA

85th Annual Meeting

Program 11

Insolvent Law Firms’ Issues and Options

Thursday, October 11, 2012 2:15 p.m.-3:45 p.m.

Sponsored by the Business Law Section

The State Bar of California and the Sections of the State Bar of California are approved State Bar of California MCLE providers.

Points of view or opinions expressed in these pages are those of the speaker(s) and/or author(s). They have not been adopted or endorsed by the State Bar of California’s Board of Trustees and do not constitute the official position or policy of the State Bar of California. Nothing contained herein is intended to address any specific legal inquiry, nor is it a substitute for independent legal research to original sources or obtaining separate legal advice regarding specific legal situations. ©2012 State Bar of California All Rights Reserved LAW FIRM INSOLVENCIES (AKA BROBECK . .COUDERT BROS. .HELLER . THELEN . .HOWREY . . . and now DEWEY--- How might These Bankruptcy Cases Impact You?)

Presented by

Thomas A. Willoughby, Esq. Felderstein Fitzgerald Willoughby & Pascuzzi LLP David M. Stern Klee Tuchin Bogdanoff & Stern LLP Christopher D. Sullivan Trepel Greenfield Sullivan & Draa LLP David Pauker Executive Managing Director Goldin Associates, LLC

October 11, 2012 State Bar Annual Meeting Monterey, California PROGRAM OUTLINE 1. Basic causes of major law firm insolvencies. 2. Discussion of claims against partners in law firm failure cases:

a. Description of various types claw back claims v. partners; b. Typical damages sought against partners; c. Historical Negotiated Settlements with Groups of Partners in Am Law 100 Cases; d. Potential claims for breach of fiduciary duty against management. e. Jewel v. Boxer claims against departing partners and successor firms

3. Other law firm dissolution issues:

a. Best practices in law firm collections; b. Major creditors and claims in case c. Ethical obligations of partners during dissolution

4. The positives and negatives of the two basic models for law firm bankruptcies (the Coudart Bros./Heller law firm models (Chapter 11 plan with consensual payments of claw back claim amounts by partners as part of case) verses the Brobeck/Thelen model (Chapter 7 with no plan settlement process); MATERIALS

SPEAKER BIOS LAW FIRM BANKRUPTCIES By David M. Stern USE OF CONSTRUCTIVE FRAUDULENT CONVEYANCE LAW IN CALIFORNIA AND UNDER BANKRUPCY CODE TO “CLAW BACK” DISTRIBUTIONS TO PARTNERS IN A LAW FIRM INSOLVENCY CASE By Thomas A. Willoughby POTENTIAL CLAIMS FOR BREACH OF FIDUCIARY DUTY AGAINST LAW FIRM MANAGERS By Christopher D. Sullivan JEWEL v. BOXER By Christopher D. Sullivan THE ETHICAL RESPONSIBILITIES OF PARTNERS OF A LAW FIRM IN DISSOLUTION By Christopher D. Sullivan PROPOSED PARTNER CONTRIBUTION PLAN AND EXPLANATORY REPORT OF HARRISON J. GOLDIN, COURT-APPOINTED EXAMINER OF COUDERT BROTHERS LLP

400 Capitol Mall, Suite 1450 Sacramento, CA 95814 916/329-7400 [email protected] www.ffwplaw.com Thomas A. Willoughby is a partner in the law firm of Felderstein Fitzgerald Willoughby & Pascuzzi LLP, a Sacramento, California boutique law firm specializing in business insolvencies. During his 24-year legal career Tom has represented chapter 11 debtors, creditors and trustees, and has assisted many businesses in successful reorganizations. He has also represented bankruptcy trustees, creditors, and official committees in a wide variety of industries, including skilled nursing facilities, auto dealerships, restaurants, contractors, real estate developers, agriculture, and, most recently, law firms. Over the past four years, Tom has been the lead attorney for the Official Committee of Unsecured Creditors in the Heller Ehrman LLP chapter 11 case. In 2011, Tom served as counsel to the Howrey LLP Official Committee of Unsecured Creditors through the appointment of its Chapter 11 Trustee. Tom had also previously served for over nine years as the “bankruptcy partner” member of the dissolution committee of Diepenbrock, Wulff, Plant & Hannegan, LLP (“DWPH”), one of the large Sacramento-based full service business firms, after its dissolution in 1999. Tom also recently assisted a Sacramento firm in its dissolution, including dealing with successor business claim issues under Jewel v. Boxer. In the Heller case, the Committee and the Debtor jointly proposed a liquidation plan that included a shareholder contribution plan, which, along with other litigation recoveries, has resulted in a 38.5% distribution to the general unsecured creditors, after paying all priority claims. The distributions to unsecured creditors exceed all similar distributions to unsecured creditors in any of the other Am Law 100 law firm bankruptcy filings over the past ten years. Tom earned his B.A. in Economics from the University of California, Los Angeles, in 1985, and received his J.D. in 1988 from the University of California, Davis. While at U.C. Davis, Tom received American Jurisprudence Awards in Federal Tax I and in Law & Economics. He also served as an Associate Editor of the U.C. Davis Law Review. Tom is a member of the National Association of Bankruptcy Trustees, and the Bankruptcy Dispute Resolution Panel for the United States Bankruptcy Court for the Eastern District of California. Tom served on the Debtor/Creditor Committee of the State Bar of California’s Business Law Section from 1996 to 1999 and the Board of Directors of the Sacramento Valley Bankruptcy Forum from 1996 to 1998. He has also served on the Attorney Advisory Committee to the United States Bankruptcy Court Clerk’s Office for the Eastern District of California, and the Chapter 11 Liaison Committee to the Office of the U.S. Trustee.

DAVID M. STERN

Professional Activities Publications Association of Business Trial Note Recent Developments in Truth in Lending Lawyers, President (1997-98) Class Actions and Proposed Alternatives, 27 Stanford Law Review 101 (1974) Ninth Circuit Judicial Conference (1987-91; 2011-14) California Civil Discovery Practice (1987) Fellow, American College of California Civil Discovery Practice 3d (1998) Bankruptcy (2012) Mediation: An Old Dog with Some New Tricks, Lawdragon 500 (2012) 24 LITIGATION 31 (1998) ABI, Fraudulent Transfer Litigation: The Shape of Things to Come (2010) Law Firm Bankruptcies, 37 LITIGATION 8 (Spring 2011) Significant Cases Adelphia Communications Corp.; Barry’s Jewelers, Inc.; Brobeck Phleger & Harrison LLP; Crescent Jewelers, Inc.; Dewey & LeBoeuf LLP; Enron Corp.; Heller Ehrman LLP; Howrey LLP; IndyMac Bancorp, Inc.; Iridium Operating LLC; Jefferson County, Alabama; Lake at Las Vegas Joint Venture LLC; Mahalo Energy (USA), Inc.; National Century Financial Enterprises, Inc.; National Energy Gas & Transmission, Inc.; Pliant Corp.; Washington Group, Inc. Reported cases In re Dominguez, 51 F.3d 1502 (9th Cir. 1995); In re Dominguez, 995 F.2d 883 (9th Cir. 1993); In re Recticel Foam Corp., 859 F.2d 1000 (1st Cir. 1988); Computer Communications, Inc. v. Codex Corp., 824 F.2d 725 (9th Cir. 1987); In re Shaw, 16 B.R. 875 (Bankr. 9th Cir. 1982); Siegel v. F.D.I.C., 2011 WL 2883012 (C.D. Cal. 2011); Enron Corp. v. Citigroup, Inc., (In re Enron Creditors Recovery Corp.), 410 B.R. 374 (S.D.N.Y. 2008); In re Enron Creditors Recovery Corp., 388 B.R. 489 (S.D.N.Y. 2008); In re Enron Corp., 379 B.R. 425 (S.D.N.Y. 2007); Canada Life Assur. Co. v. Bank of America, 2006 WL 45427 (N.D. Ill. 2006); In re Jefferson County, Ala., 465 B.R. 243 (Bkcy. N.D. Ala. 2012); In re IndyMac Bancorp, Inc., 2012 WL 103748 (Bkcy. C.D. Cal. 2012); In re Balas, 449 B.R. 567 (Bkcy. C.D. Cal. 2011); In re Adelphia Comm. Corp., 368 B.R. 348 (Bankr. S.D.N.Y. 2007); In re Adelphia Comm. Corp., 365 B.R. 24 (Bankr. S.D.N.Y. 2007); In re Adelphia Comm. Corp., 330 B.R. 364 (Bankr. S.D.N.Y. 2005).

Christopher D. Sullivan Trepel Greenfield Sullivan & Draa LLP

Named as one of the Top 100 California Lawyers by the Daily Journal, Chris Sullivan specializes in high stakes, complex commercial litigation. Chris has successfully represented a wide variety of clients in major litigation, including both plaintiffs in business litigation and large corporate defendants. He has represented bankruptcy estates and unsecured creditors’ committees, major corporations (American Honda, American Express, and Southland, the 7-11 franchisor), real estate developers, a financial institution, and a famous underwater photographer. Chris is a former President of the Federal Bar Association for the Northern District of California and frequently practices in federal district and bankruptcy courts. He has a broad range of experience in all phases of trial and litigation, including a substantial amount of appellate work. He also serves as a mediator appointed by the court for the Northern District of California.

Chris had a great deal of success in bringing a series of large cases that grew out of the bankruptcy of Tri Valley Growers (TVG), recovering more than $34.5 million for the estate and the unsecured creditors. For example, $17.5 million was recovered for the creditors from TVG’s D&O insurance carrier (after the insurer initially denied coverage and TVG settled with the individual D&Os through a stipulated judgment with an assignment of rights against the carrier). Another suit was successfully settled resulting in a multi-million payment by a big four accounting firm. Chris currently represents the estate of the Heller Ehrman law firm in a variety of actions and has recovered more than $34 million to date. This includes more than $20 million from Bank of America and Citibank in a large preference case, $7.5 million from a major law firm and a former client of Heller Ehrman, and more than $3.5 million from a number of law firms in Jewel v. Boxer actions. Education -- Bachelor of Arts degree from the University of Massachusetts, Amherst in 1985 Juris Doctorate from the University of California, Hastings School of Law in 1990, magna cum laude Editor-in-Chief, Hastings Law Journal (1989-90) Clerkships -- Clerked for the Honorable Melvin J. Brunetti of the Ninth Circuit Court of Appeals

Memberships Executive Committee, Federal Bar Association for the Northern District of California; Mediator, Northern District of California, ADR Panel

Awards and Honors Top 100 California Lawyers, California Daily Journal Northern California Super Lawyer Order-of-the-Coif, Hastings Law School Top Ten Award, Hastings Law School

350 Fifth Avenue New York, New York 10118 Tel: 212 593 2255 www.goldinassociates.com

David Pauker David Pauker is executive managing director of Goldin Associates, LLC, a restructuring advisor to underperforming companies or their creditors or lenders. He has more than 20 years of experience as a financial advisor and turnaround manager in a broad array of industries. He is a Fellow of the American College of Bankruptcy and a member of the Board of Directors of Lehman Brothers, appointed pursuant to the Lehman bankruptcy plan. He is frequently ranked among leading U.S. restructuring advisors. David was retained as special consultant to Dewey & LeBoeuf to assist the debtor to develop and implement a settlement of claims against former partners of the firm. During the bankruptcy of Coudert Brothers, he oversaw the investigation and preparation of examiner’s reports evaluating claims against partners. He was one of the principal architects and authors of the examiner’s Proposed Partner Contribution Plan (a term he coined), which was ultimately incorporated into the Coudert bankruptcy plan. He acted as CRO and staff director to the trustee during the bankruptcy of Gaston & Snow, at the time the second largest law firm bankruptcy in U.S. history. He has advised clients in other professional services bankruptcies as well. He was CRO of Refco, Inc., a multi-billion dollar financial services company that was one of the largest-ever U.S. bankruptcy filings and that was named among the most successful bankruptcy filings of 2006. He has acted as CRO, CEO or COO in numerous bankruptcies or restructurings, including Young Broadcasting, Vlasic Foods/Swanson Frozen Foods, Pharmacy Fund, Grand Court Lifestyles, PSINet Consulting, Monarch Capital and First Interregional Advisors. David has advised companies, creditors, lenders, investors and others during the bankruptcies or restructurings of Airborne, Bearing Point, Boston Generating, Bruno’s, Carlton Cove, Coudert Brothers, Crystal Brands, DiLorenzo Properties, District 65 UAW Retirement Trust, Drexel Burnham Lambert, Enzymatic Therapy, First Capital Holdings, Hudson Valley Financial Services, Intermedia Communications (WorldCom), Granite Partners, International Equine, Lehman Brothers Inc., Loral Space and Communications, Magnatrax, Metromedia Fiber, National Amusements, Northwestern Corp., Point Blank, Primus Telecom, Qimonda, R.A.B. Holdings, Redding Life Care, Residential Capital, River Ranch, Rockefeller Center Properties, Salerno Plastics, SeaSpecialties, SemGroup, Student Finance Corp., Syncora, Taylor Bean & Whitaker, Thornburg Mortgage, Tribune Companies, Trump City/Penn Yards, Trump Taj Mahal, United Merchants & Manufacturers and Wood River Capital Management. David has frequently been called on to investigate the financial affairs of troubled companies and has been appointed by the Department of Justice or the Bankruptcy Court to act as trustee, examiner and mediator in Federal bankruptcy proceedings. Before joining Goldin Associates he was a senior aide to Harrison J. Goldin, then Comptroller of The City of New York. He is a graduate of Cornell University (1981) and the Columbia University School of Law (1984).

Law Firm Bankruptcies David M. Stern

Law firm bankruptcies. Not long ago, that phrase would have been an oxymoron. Law firms didn’t go bankrupt. They may have disappeared or gone out of business, but because law firms – like accounting firms and investment banks – were organized as general partnerships, the firm’s many partners, generally well-healed, were personally liable for the firm’s debts. And law firm debts were generally quite few, other than leases and malpractice claims (also quite rare) because traditional law firms seldom had credit lines, certainly not substantial ones. At least until the 1980’s, when a law firm went out of business, it did so with a whimper, not a thud.

In the last three decades, the landscape has changed. By the 1960’s and 1970’s, a few states began permitting law firms to incorporate. But the general partnership structure persisted because, as the Ohio Supreme Court colorfully noted “so far as members of the bar are concerned the idea of practicing law within a corporate structure is an emotional thing. It is much like ‘cats, olives and Roosevelt;’ it is either enthusiastically embraced or resolutely rejected.” State ex rel. Green v. Brown, 180 N.E.2d 157, 158 (Ohio. 1962) (refusing to order the Secretary of State to accept articles of incorporation for a law firm notwithstanding the legislature’s adoption a year earlier of a statute authorizing professional corporations). Additionally, “the primary reason for creating the professional corporation was to permit professionals to take advantage of various federal tax provisions available to a corporation and its employees but not available to self-employed persons or partnerships, “ Vinall v. Hoffman, 651 P.2d 850, 851-52 (Ariz. 1982). There was, to be sure, a liability avoidance component, but at least for traditional law firms, the most significant liability – relating to professional malpractice – could be avoided only imperfectly and in limited fashion by incorporating. Olson v. Cohen, 131 Cal. Rptr. 2d 620, 625 (Cal. App. 2003) (“The protections for clients mandated by laws governing incorporation of law corporations, such as restrictions on who may be a shareholder and requirements for security for claims against the corporation, protect against abuses which might otherwise occur from the use of the corporate structure.”). Even these limited protections did not apply to the attorney actually guilty of malpractice, as “a professional person cannot avoid personal liability for his or her own malpractice or tortious conduct through incorporation . . . since a tortfeasor is always liable for his or her own acts.” T & R Foods, Inc. v. Rose, 56 Cal. Rptr. 2d 41, 46 (Cal. App. Dep’t Super. Ct. 1996).

The tax rationale for incorporating largely ended as the result of the passage of the Economic Recovery Tax Act of 1981 and the Tax Equity and Fiscal Responsibility Act of 1982 that accorded partnership and corporate retirement plans similar treatment. Conference Report No. 97-760 (97th Cong., 2d Sess.), 1982-2 C.B. 600, 607 (July 1982). However, the move away from the general partnership did not end, and indeed picked up steam, driven not by tax considerations, but by the changing nature of law firm practice.

Much lamentation has accompanied the expansion of law firms, and lawyer incomes, over the past several decades, but there is little question that both revenues and incomes have increased dramatically, and far more than the cost of living or the incomes of average Americans. As a May 2010 retrospective in the American Lawyer noted, in 1985, Baker & McKenzie was the 1

largest U.S. law firm with 702 lawyers and the largest grossing law firm was Skadden Arps with revenues of $129 million. By 2009, a recent acute recession notwithstanding, Baker & McKenzie had grown to 3,949 lawyers and also was the highest grossing law firm with revenues of $2.112 billion. Notably, in 1985 the total revenue of all top 50 firms was only slightly higher, at $3.4 billion, than were Baker & McKenzie’s revenues in 2009. (The AmLaw top 50 grossed $45.9 billion in 2009, i.e., an average of almost $1 billion per firm.)

As prodigious as was the growth in head count and revenues of the largest law firms – with 20 law firms topping 1,000 lawyers and 13 topping $1 billion in revenues in 2009 – the growth in profits per partner (a notoriously slippery, but still revealing statistic) was even more impressive. In 1985, only five firms had profits per partner of $500,000 or more. By 2009, again the recession notwithstanding, “[a]ll but seven of this year’s top 50 firms have profits per partner of $1 million or higher; in 1985, none did. The average profits per partner for this year’s top 50 is $1.5 million, a fivefold increase from $309,314 in 1985 (that’s $623,057 in today’s dollars).” Not surprisingly, leverage (the ratio of salaried lawyers to profit participants) more than doubled during the last quarter century.

This growth was more than quantitative. For good or ill, law has evolved from single city law firms with seldom more than 100 lawyers – and that size only in the largest firms in a few large cities as recently as 1980 – to multistate and multinational firms with complex legal structures, transnational practices, many hundreds or thousands of lawyers, thousands more employees and information and other infrastructures that have made law firms big businesses. Your partner stopped being the fellow (and it almost always was a fellow) you saw almost every day, who lived in your neighborhood, went to your church and golfed at the same country club, and began being someone you not only didn’t know, but who, if you recognized their name, you probably couldn’t pick out of a line-up.

Just as the growth in industrial and manufacturing business in the 19th century led to legislation permitting private – rather than state-chartered – corporations, so did the growth in service businesses, not only law firms, but also accounting and investment banking firms, in the late 20th century and into the 21st century generate structural innovations designed to limit personal liability. Being legally responsible with a member of your local community had been a necessary evil. Being financially at risk for the errors of men and women you never met, and would never care to meet, half way around the country or the world was simply not reasonable, and the understandable response was to change the form in which the legal business – and it had clearly become a business – was conducted.

The professional corporation was always an imperfect solution, given the potential for double taxation. Enter the limited liability partnership (“LLP”), devised by Texas attorneys in the early 1990’s in response to litigation that “grew out of the collapse of real estate and energy prices in the late 1980s and the resultant collapse of Texas financial institutions,” as the result of which “banking regulators pursued actions against the institutions’ officers, directors, and professional advisers, including the institutions’ former counsel.” S. Fortney, Seeking Shelter in the Minefield of Unintended Consequences – The Traps of Limited Liability Law Firms, 54 WASH & LEE L. REV. 717, 724 (1997). By the turn of the 21st century, most states had followed Texas and a large number of law firms had become LLPs to take advantage of the liability benefits of corporations while retaining the tax benefits of a partnership. D. Kleinberger, Closely-Held

Business Symposium: The Uniform Limited Partnership Act: A User’s Guide to the New Uniform Limited Partnership Act, 37 SUFFOLK U. L. REV. 583, 619 (2004).

The LLP did not come a moment too soon, as the growth of the mega-firm – not all that different from the growth of railroads and other large businesses during the Industrial Revolution – had a predictable outcome. There were winners, to be sure, but there were also losers. Your author was involved in two of the larger failures: Brobeck Phleger & Harrison (“Brobeck”) in 2003 and Heller Ehrman (“Heller”) in 2008. In each of these cases the results did not quite pan out as the drafters of Revised Uniform Partnership Act had hoped.

A great part of the reason for the divergence between plan and reality lay in the rational response of the marketplace. Law firm creditors are aware that, unlike industrial businesses, law firms distribute most of their earnings rapidly and that a firm’s physical equipment, in the event of a law firm failure, is of minimal value. As David Ogilvy, sometimes known as the father of modern advertising, observed about his business, “the assets go up and down the elevator every night.” As a result the most significant assets are not on a balance sheet and the most important physical assets – office space, computer systems, infrastructure – are valuable only if key personnel remain and valueless, or even liabilities, if they do not.

Law firms’ largest creditors – banks and landlords – initially insisted on guaranties from partners (sometimes expressly or sometimes via the waiver by the LLP of its shield) or the posting of letters of credit. The firm may have limited liability, but the partners may not. Those demands lessened amidst a growing perception that large law firms were stable institutions. Additionally, a healthy real estate market fueled the illusion that were there a vacancy, it would be easy to fill in desirable markets such as New York, San Francisco, Boston, Miami and Seattle, with the result that at least some landlords no longer required partners at megafirms to guaranty leases. Banks, amidst a general relaxation of credit standards, similarly felt comfortable that large law firms would service their debts and that receivables would remain valuable – given the quality of the client base – even if the unthinkable occurred and the law firm collapsed. As discussed below, when the unexpected did occur, the reality was much uglier than the expectation and the result was that banks and landlords led the charge in seeking other ways to realize on loans that proved less collectible than hoped and leases for premises that could be rented, if at all, for a fraction of their prior rates.

Additional complexity arises from the fact that law firms often raise capital incrementally from partners, with newly admitted equity participants required initially to pay only a small percentage of their capital while signing notes or otherwise agreeing to pay more over time. These obligations are seldom structured with firm insolvency in mind; however, if the firm fails, it or its bankruptcy trustee may well be able to enforce those buy-in obligations against former partners.

Also making walking away impractical is that law firms, unlike most other businesses, deal primarily in confidential information. The defunct law firm, even in today’s electronic age, frequently has warehouses full of documents, mostly of dubious value, but some of which may be consequential. The firms, their legal successors (such as bankruptcy trustees) and the lawyers who obtained or created this documentation, continue to have obligations to maintain it and preserve its confidentiality. Someone needs to pay to determine what records the firm has and

assure that it is handled properly. This cost is often borne at least in part by lawyers who practiced at the firm and successor firms that employ those lawyers.

Other liabilities are more prosaic. Like most organizations, there are often a variety of obligations owed to employees which are accrued but unpaid at any time. The most obvious are vacation and sick time, as well as stub payroll (as wages are generally paid in arrears) for the period between the last payroll date and the firm’s failure. Additionally, there are frequently issues with respect to overtime (e.g., salaried workers who are not properly classified), severance including up to 60 days of termination pay under the Worker Adjustment and Retraining Notification (“WARN”) Act and state law analogues, and claims for discrimination, harassment and the like. Some of these trigger liability for firm management and for those lawyers guilty of tortious conduct. Notably, the definition of management may sweep broadly to those not only expressly designated as a managing partners, but also to the many committees that assist management or those in charge of local offices, practice groups and the like. Further, in most states the failure to pay wages is criminal and those responsible include any agent acting on behalf of the employer. For a useful listing of the laws of 48 states imposing criminal liability for the non-payment of wages and benefits, see Massachusetts v. Morash, 490 U.S. 107, 109-10 & n.2 (1989).

Malpractice, as noted, is often separately regulated by state law permitting lawyers to practice in the corporate or LLP form. Although the liability of those partners who are not themselves responsible for malpractice is generally covered by insurance, there are two notable exceptions. First, large law firms often have policies that contain substantial deductibles. Second, almost all current insurance policies cover claims made during their term. If a claim is made after the last reporting period has expired and the firm has not purchased “tail coverage,” because it is out of business, such a claim may not be covered at all and may thus be the responsibility, at least to some extent (usually set by state law or state bar regulation), of all the partners or shareholders.

However, the real acrimony, and the focus of most of the litigation in the Brobeck and Heller bankruptcy cases was on the liability of former partners for (1) money received from the firms in their final months and years and (2) the revenues generated from clients that had once been served by the now defunct firms.

Brobeck and Heller were both based in San Francisco. Brobeck died in its 80th year, Heller in its 118th. Like most legacy firms, both Brobeck and Heller had been general partnerships for most of their existence, adopting the LLP form only in the 1990’s. There the similarities end or, to paraphrase Tolstoy, “successful law firms are all alike; every failed law firm fails in its own way.”

For most of the 20th century, Brobeck was one of the handful of blue chip law firms serving the banks and other businesses that had grown up in northern California. It, and its lawyers, were highly regarded and with good reason. For those wanting to work in San Francisco – not unreasonably, as San Francisco is on almost every list of the world’s most beautiful and livable cities – Brobeck was a great choice. As Brobeck expanded, it took the cultural values that it had nurtured in San Francisco to other cities across the country and ultimately around the globe. By the end of the 20th century, Brobeck was on the short list of elite firms, enjoying a national reputation for quality and profitability to match.

Although global, Brobeck retained its Northern California focus, a distinct advantage as the business base of San Francisco changed in the 1990’s. Starting with companies like Hewlett Packard, Apple, Cisco and Intel, computer-oriented businesses prospered in the area around Stanford University (about 40 miles south of San Francisco). By the early to mid-1990’s, however, technology companies began springing up throughout the San Francisco Bay Area at a furious pace. What had once been known merely as the Peninsula became Silicon Valley and what had once been a sleepy, if intellectually rich, suburb became the center of the digital revolution. Hewlett Packard may have taken decades to grow; Apple, Cisco and Intel took years. But starting in the mid-1990’s, technology start-ups went from ideas to public companies with multi-billion dollar valuations with lightning speed. Earnings, revenue and even employees were beside the point.

Some entrepreneurial law firms, rather than taking fees (cash being scarce or non-existent in start-ups) instead took small equity stakes in the businesses they served. They were not alone. Employees, landlords and vendors often did likewise, sometimes by choice, often by necessity. Those small stakes turned into small fortunes, at least on paper, making very wealthy men and women of the lawyers and others with the “foresight” to take stock rather than cash. Sensing an opportunity, Brobeck sought to take advantage of this new gold rush and decided to build an office in the heart of Silicon Valley that became later known, disparagingly, as the “Taj Mahal.” It also grew its other offices, around the country and the world, to accommodate the explosion of web-based businesses. Brobeck’s leaders also reoriented the firm to replace traditional and boring banking and insurance clients with an ever-larger coterie of new ventures from whom the firm could obtain stock rather than or in addition to cash. If investment bankers could do it was the thought, why not lawyers?

It seemed a good idea and it was, for a while. Brobeck lawyers did extraordinarily well in the late 1990’s and the early part of this century. But then, almost as quickly as it arrived, the tech boom ended and became the tech bust. Brobeck’s fortunes rapidly faded. By early 2003 a firm that had been wildly profitable just a year or two earlier unraveled and filed bankruptcy. Creditors, principally landlords (including the owners of the “Taj Mahal”), owed tens of millions of dollars organized. Exercising a long-standing, if seldom used, power, the creditors elected Brobeck’s bankruptcy trustee, who aggressively targeted both the lawyers who had received large compensation in the years preceding the Brobeck bankruptcy and the law firms who hired Brobeck lawyers and, with them, serviced the blue-chip clients Brobeck had once served.

The primary claims which Brobeck’s former partners had to defend – and the Brobeck bankruptcy was probably the first law firm bankruptcy (certainly of an LLP) in which such claims came to the fore – were premised on the fraudulent transfer laws. Originally designed in Elizabethan England to prevent debtors from hiding or giving away assets, the fraudulent transfer laws evolved over the centuries to enable creditors to avoid transfers made “for less than reasonably equivalent value” by business that were insolvent or undercapitalized. As the result of a prior boom and bust, in leveraged buyouts (“LBOs”) in the 1980’s, there was a substantial body of law that helped define how courts should determine whether businesses were insolvent or undercapitalized and when they crossed the critical lines. However, that case law dealt primarily with industrial firms, not service businesses, and the application of those principles to law firms was uncertain and problematic.

Brobeck provided a test case for applying the principles developed in the LBO cases to a modern law firm. In Brobeck, the bankruptcy trustee argued that the firm was either insolvent or undercapitalized (or both) for several years prior to its demise and further that all amounts the firm paid to partners were akin to corporate dividends or distributions rather than salary. If successful, this contention would have devastating consequences for the partners as long standing law establishes that payments on account of equity, whether dividends, distributions, redemptions or other forms of profit sharing are not transfers for reasonably equivalent value. Both of these arguments were essential to any recovery from working partners. As a matter of hornbook law, if Brobeck were both solvent and adequately capitalized, it was free to pay its partners what it chose. Additionally, even if insolvent and inadequately capitalized, lawyers – like other employees – can receive and retain fair compensation for their work.

Critical to the trustee’s claims in Brobeck was a novel argument that critically depended on the firm’s status as an LLP. He contended that under California’s LLP statutes, partners were entitled only to profits (and then only if paying them did not leave Brobeck with insufficient capital to meet future obligations), not to wages, and that because Brobeck had been unprofitable, at least in retrospect, amounts paid to partners for at least two years preceding the bankruptcy were recoverable. In the alternative, the trustee argued that partners had been overpaid, primarily because profits were miscalculated (evidenced by ballooning borrowing and the accrual of other debts that were never paid) and thus had to be paid back in whole or in part.

The woes of the 200+ former Brobeck partners did not end with a demand for the return of all monies paid for at least two years before bankruptcy. The trustee additionally argued that based on a 1984 case, Jewel v. Boxer, 203 Cal. Rptr. 13 (Cal. App. 1984), involving a dissolved (not bankrupt) law firm with four partners in which two of the partners successfully pursued the other two partners for contingent fees collected post-dissolution, the firms that Brobeck lawyers had joined were also liable to the trustee for Brobeck clients they serviced. The theory, still being litigated seven years later, is that Brobeck’s clients and pending business represented firm assets and that future collections from those clients – including, but not necessarily limited to, matters on which Brobeck was working at the time of its bankruptcy – should be used, at least in part, to pay Brobeck’s creditors.

Suddenly 200+ Brobeck partners, and the law firms they joined, needed lawyers themselves, to represent them in the often bizarre world of bankruptcy. I wound up with more than 100 of Brobeck’s refugees. Other lawyers represented other former Brobeck lawyers and the firms they joined.

Representing a lawyer is never easy. Multiply that by 100 and it isn’t any easier. Lawyers who have defended legal malpractice cases know that a lawyer-client is a challenge. Lawyers, even non-litigators, have a reasonable understanding and appreciation of the legal process. Whether or not familiar with bankruptcy or litigation – in this instance both – they will happily and frequently offer their views as to what the law should be and how or why the claims against them are ludicrous, even sanctionable. As bankruptcy counsel representing these bright and capable lawyers, it was a challenge to bring them to earth and reconcile them with the reality that the claims might prevail or not – for both factual and legal reasons – but that they were not frivolous and that the trustee, elected by angry creditors and armed with a substantial war chest was not going away.

Having previously represented lawyers sued for malpractice, I thought I was prepared to manage the group. In fact, the dynamics of representing lawyers of a defunct firm are very different. In the malpractice context, the law firm, including its management, will have a modulating and moderating effect upon the lawyer defendants, generally just a small subset of the firm. The lawyer accused of malpractice will, therefore, generally be somewhat constrained by his or her firm’s politics and economics to be cooperative and respectful to the lawyer chosen by the firm to defend it. That governor is, however, absent in bankrupt law firms. On the contrary, the opposite impulse is often present as resentments, kept under wrap in good times, bubble up as lawyers who felt underpaid, underappreciated, or excluded from firm management express their resentment over slights and injustices going back years or decades. Add to the mix that each of the lawyers has lost his or her often sizable equity stake in the old firm, had not been paid for the last few months of work, had a pending unpaid bonus, had to raise fresh capital to join a new firm and then integrate into it and is now being sued for money earned and spent years earlier. Couple that with explaining to the new firm that it too is going to be sued for having hired you and the atmosphere can quickly become toxic. But, as in most multi-defendant cases, the clients and lawyers have to figure out a way to coordinate defenses and tactics to minimize loss.

At first blush, particularly to those unfamiliar with bankruptcy, it may seem more than ludicrous that lawyers, any more than other employees of a defunct law firm, are being asked to pay back money when they have lost so much. However, bankruptcy has never been particularly kind to equity holders, whether or not they are also working in the enterprise. From the birth of limited liability vehicles, corporations being the most obvious, it has always been true that “shareholders … are not the first in line to receive earnings that are not retained; debt service has the first priority. And in case of insolvency, it is the shareholders who again line up last; the debt obligations will be paid first out of whatever assets can be garnered.” Communications Satellite Corp. v. Federal Communications Comm., 611 F.2d 883, 901 (D.C. Cir. 1977). That axiom applies to lawyers, unsurprisingly in retrospect, because law firm partners, whether in LLPs, general partnerships or even as shareholders in professional corporations, are supposed to prosper in good times in exchange for suffering in bad times. Given the prosperity of the past decades, that seemed like a good trade-off to the lawyers at Brobeck, and later at Heller. Of course, in their cases, it didn’t turn out that way.

Because the Brobeck bankruptcy trustee took the position that partners were entitled only to profit and that Brobeck was not profitable during at least the last two years of its life – as well as being insolvent or undercapitalized for that same period of time – partners faced the threat of losses ranging from many hundreds of thousands to several million dollars. The magnitude of the threat had one salutary effect. It tended to suppress resentments among former partners – over management decisions, compensation and other slights – to the necessity of a coordinated defense.

Like most litigation, the Brobeck case presented legal issues, factual issues and mixed issues of law and fact. The most significant legal issue was whether lawyer partners were entitled, in the absence of express employment agreements, to any compensation or were simply profit participants. The significant factual questions, and the subject of expert testimony, were when did Brobeck become insolvent or undercapitalized. A subsidiary question – relevant only if the partners were entitled to some level of compensation – was determining what constituted reasonably equivalent value for the services of Brobeck’s partners.

Slender case authority, ultimately endorsed by the bankruptcy judge presiding over the Brobeck bankruptcy case (albeit only via an unreported transcript of a hearing), supported the argument that lawyers, even partners, were entitled to some compensation for their work even in the absence of firm profits and notwithstanding the lack of an employment agreement. That, however, did not end the case. There still remained the question of whether partners had been overcompensated, which would be a basis for recovering at least the excess compensation (and potentially, in the absence of good faith, all the compensation) for any period during which Brobeck was insolvent or inadequately capitalized.

Although a body of case law had developed in the 1980’s and 1990’s clarifying the forensics of both solvency and capitalization analysis, that case law was developed in the context of failed LBOs. Analogizing primarily industrial companies (often ones that either publicly reported their finances or were in an industry in which competitors did) to law firms who report, if at all, in inconsistent and private ways, was an imperfect fit, at best.

At least as to one of the variables, solvency, the quantification of assets is highly speculative. A law firm’s most valuable capital – people and their relationships – are both mortal and mobile. The physical assets are seldom worth much, if anything, if the lawyers who used those assets to generate fees have left. As a result, the key to valuation is determining whether a law firm is likely to survive (at least for a reasonable time) such that its assets can be valued on a going concern rather than a liquidation basis. Moreover, in hindsight what might have seemed like a minor perturbation at the time (the loss of a client; the failure of an IPO; the end of particularly profitable litigation) was in fact a foreshock to a cataclysmic event. Even more problematic is determining the adequacy of capital of a service organization. Law firms do not typically have significant cash. What capital they have is tied up in receivables, leasehold improvements, furniture, information systems and the like. That capital has vastly different value and its ability to generate cash – including as collateral for loans – depends upon the perception of the law firm’s future prospects. Notably, when law firms (and in this sense they are like other businesses) most need to borrow is when they are least likely to be able to do so. In short, the questions of solvency and capital adequacy are ones on which even neutral experts will likely disagree; as such, the chance that the key threshold issue in claims against shareholders will be resolved by summary judgment is very small.

The secondary question – the reasonableness of individual lawyers’ compensation – is equally subject to good faith dispute. Law firms are composed of finders, minders, grinders and binders. Those in the first (and generally most highly compensated) category, also known as rainmakers, are valuable, but their value is dependent on other lawyers who either supervise or do the work for the client, as well as on those who keep the organization running. In a sense, allocating value among lawyers in a firm is akin to deciding which wheel on the car is the most important. Without all of them the car, and the law firm, goes nowhere. Moreover, there is a good argument that once landed, the client and its future business are part of the firm’s capital. If that is the case, then the rainmaker may well be entitled to be compensated, but a portion of the compensation would be, if examined critically, a return of or dividend on capital rather than payment for work. Notably, this conceptual issue is one that, unsurprisingly, has never been explored because, as noted at the beginning of the article, law firm bankruptcies are a very recent phenomenon.

The interesting issues were, in Brobeck, largely resolved by settlement, as lawyers, even more than most litigants, are painfully aware of the costs of litigation, the time invested in defense by the client (especially, as that time is otherwise sold) and the risks of an adverse outcome. The combination of a trustee and creditors desirous of getting prompt payment on one side and hundreds of lawyers with busy practices aware of the cost of litigating, on the other side, makes settlement rational and may well result in these questions never being resolved.

Brobeck was, as noted, something of a path breaker. Heller, necessarily, was not. By the time Heller failed – amidst the financial collapse of 2008 – not only was Brobeck part of history, but other firms were joining them. Thacher Proffitt & Wood (founded 1848), Wolf Block (founded 1903), Thelen (founded 1924) all failed in 2008 and eventually filed bankruptcy. And, like Tolstoy’s unhappy families, each died for a different reason. Heller was particularly a story of being in the wrong place at the wrong time.

Founded in 1890, Heller was a San Francisco fixture. It also exemplified all the best of the law profession. The firm had always been public spirited. Its pro bono efforts were legendary. It not only talked the talk, it walked the walk, taking the lead in promoting to partnership lawyers of color, women, gays and lesbians and heading up bar and civic organizations. However, those values also made it prone to raiding. A firm that is public spirited and that seeks to advance non- financial goals often is, and in Heller’s case was, less profitable than its peers. Many Heller lawyers considered the trade-off worthwhile, but some inevitably did not. Over time, that led to the departure of some excellent but more economically motivated lawyers.

Heller also had an odd corporate structure. Historically, Heller had gone through an evolution from general partnership to PC to LLP. As a result of this history, the umbrella organization, Heller Ehrman LLP, was a limited liability partnership, but the partners of the LLP were a series of professional corporations organized under the laws of the states where its largest offices were located (e.g., New York, DC, California). The equity holders were, in turn, shareholders of their respective PCs. Nonetheless, the firm was run primarily at the LLP level such that the PCs were primarily vestigial, with client money going to the LLP and passing only briefly through the PCs on the way to compensation the shareholders.

In terms of its business, Heller’s economic structure was almost as unique as its legal structure. Although the disparity between the highest and lowest paid partners can be extreme in larger firms, Heller had a comparatively narrow spread among shareholders. The result of that egalitarianism – combined with a substantial amount of uncompensated work – was that Heller lawyers were in high demand at other firms which could often offer substantially higher compensation than could Heller. This resulted in some attrition which by 2007 led the firm to examine how best to position Heller for future growth. Perceiving the need to become a more solidly based national and international firm, Heller management began exploring merger options. The enormous collapse of the world economy over the following year made those efforts challenging. They were also destabilizing (as merger talk often is), such that many lawyers decided to go elsewhere. Heller had, as most law firms of similar size (700+ lawyers), bank lines and those lines had covenants, including one that could be tripped by an excessive number of shareholder departures in any calendar quarter. Heller had the misfortune to trip a covenant on the eve of the collapse of Lehman Brothers (and the near collapse of the world economy). Unsurprisingly, Heller’s banks – although they probably would have been

accommodating at almost any other time in history – decided not to waive the covenant default in the halcyon days of September 2008. On the cusp of merger at the beginning of September, by month’s end, Heller had dissolved and by year’s end it was in bankruptcy.

Heller filed bankruptcy in San Francisco and drew the same bankruptcy judge as had handled Brobeck. So what was novel in Brobeck was not so for Heller. However, because many of the cutting edge issues were never resolved in Brobeck, Heller’s bankruptcy was almost equally acrimonious.

Once again questions were raised about whether and when Heller became insolvent, whether Heller was undercapitalized, and whether Heller’s shareholders were entitled to compensation and if so, in what amount. And once again, those questions largely went unanswered as Heller’s alumni and its creditors settled, without there ever being litigation. The issues were even more interesting in Heller than in Brobeck because Heller was not the victim of over-expansion or over-compensation. It had failed because of economic factors that affected the entire U.S. economy and much of the world. Proving insolvency or undercapitalization, let alone showing that the Heller shareholders had not, through their services, given reasonably equivalent value would have been a monumental task. Nonetheless, because the targets were busy and talented lawyers, they chose to settle rather than bear the cost, time, aggravation and (probably small) risk of fighting.

One major issue remains in both cases: to what extent, if at all, will lawyers who took clients to successor firms as well as those successor firms have to compensate creditors of Brobeck and Heller for those clients? (A macabre side note: some Brobeck lawyers decamped to Heller, so they have the double misery of being sued by the legal representatives of both firms.) Good arguments exist on both sides. The bankruptcy judge presiding over both the Brobeck and Heller cases has indicated he is inclined to permit recovery at least for matters brought from the bankrupt to the successor firm, albeit not for new matters for those same clients taken in by the new firm after the bankruptcy of the predecessor firm. His is not likely to be the last or only word on the subject.

The liability of successor firms at least for non-contingent fee matters, appeared, initially, to be a peculiar California issue, arising out of the aforementioned Jewel v. Boxer decision. Alas, like other movements that started in California (surfing, Proposition 13), the continuing business doctrine has surfaced on the east coast as well and is also being litigated in the Coudert Brothers bankruptcy. Relying on a Second Circuit case, Santalucia v. Sebright Transp., Inc., 232 F.3d 293, 300-01 (2d Cir. 2000), which held that “when a professional corporation of lawyers dissolves and a lawyer leaves with a contingent fee case, . . . that case remains a firm asset,” Coudert’s Plan Administrator (legally akin to a bankruptcy trustee) sued Akin Gump, Arent Fox, Dorsey & Whitney, Duane Morris, Jones Day, K&L Gates, Morrison & Foerster, Sheppard Mullin, DLA Piper and Dechert, all of which had hired Coudert lawyers. Those ten firms moved to dismiss on the basis that no New York case had ever held that the continuing business doctrine applied to non-contingent matters. The Bankruptcy Court agreed on the state of New York law, but denied the motion to dismiss relying upon out-of-jurisdiction authority including not only a decision in the Brobeck bankruptcy, but also a non-bankruptcy decision from the District of Columbia district court, Robinson v. Nussbaum, 11 F. Supp. 2d 1 (D.D.C. 1997). The firms sought to appeal, but District Judge Marrero, in March 2011, declined to entertain the appeal. As

such, the issue will be reviewed in Coudert’s bankruptcy only if some of the defendant firms defy precedent and decline to settle, lose and appeal.

At some point, undoubtedly, a continuing business case involving a bankrupt firm will be litigated and appealed, prompting a more in depth look by an appellate tribunal. In this author’s opinion, if and when that occurs, the result should be the rejection of continuing business claims for non-contingency cases, i.e., for all business that involves only hourly fees with no bonus or similar component. The root of the doctrine that enables firms to recover when lawyers leave a firm with a client is the corporate opportunity doctrine. Because a failed firm has no opportunity to exploit, courts ought to conclude that successor firms, and the lawyers who join them, are not liable to bankrupt predecessors for non-contingent fee cases. In addition, bankrupt firms actually do get value from a new firm’s taking on the old firm’s clients. There are continuing obligations – the most notable being to see cases and transactions to conclusion and to preserve client records – that the old firm can no longer discharge. The client relationship, much like a lease, is a valuable asset for a firm in business, but valueless or worse to a defunct entity. If that reality is properly presented to a court, the case for imposing a tax on a firm that takes on lawyers and hourly matters from a defunct predecessor vanishes, or should. Such a result would also comport with public policy that favors clients not being impeded in choosing counsel. Whether and when that will occur is unknowable.

Given the current state of the world economy and the legal economy, unfortunately, the issues that arose in Brobeck, Heller and Coudert are likely to be explored for other firms and other jurisdictions in the years ahead. Howrey has recently closed and is now the subject of an involuntary bankruptcy petition in the Northern District of California before the same judge as handled the Brobeck and Heller bankruptcies. The Howrey bankruptcy case may well retest questions raised in earlier cases or pose a few of its own. For those who wind up dealing with these issues, the keys to a successful outcome remain the same as in Brobeck and Heller. First, organize and coordinate the representation of the partners. Second, convey quickly the unfortunate news that in law firm bankruptcies, partners – although they have lost their capital accounts and been paid only a fraction of what they were entitled to during the final months of the firm’s existence – should not think of themselves as claimants but as defendants. Third, pick fights carefully. The goal should be minimizing loss and nothing else. Fourth, engage the likely counterparty to litigation, whether a creditors’ committee, bankruptcy trustee or other adverse party, early and often. Everyone saves if there is dialogue that fosters early resolution. Lawyers who litigate spend not only money but time which they are better advised to use generating new income and clients rather than fighting over the past. Fifth and finally, be ready but not anxious to litigate. It has been true at least since classical times that, as Pliny the Elder advised, “Qui desiderat pacem, praeparet bellum.” (“He who desires peace should prepare for war.”). But, if you cannot attain peace at a reasonable price, you should litigate. Businesses, including law firms, fail for countless reasons and just because equity holders have lost only some but not all of their fortunes, it does not mean they should be involuntary guarantors for creditors who dealt with an organization that expressly and lawfully limited liability.

USE OF CONSTRUCTIVE FRAUDULENT CONVEYANCE LAW IN CALIFORNIA AND UNDER BANKRUPCY CODE TO “CLAW BACK” DISTRIBUTIONS TO PARTNERS IN A LAW FIRM INSOLVENCY CASE

By Thomas A. Willoughby Felderstein Fitzgerald Willoughby & Pascuzzi, LLP

Introduction

When a law firm fails, inevitably some party will seek an investigation into whether the partners of the law firm should disgorge or return distributions made by the law firm partnership in the months or years leading up to a firm’s final demise. The partners will immediately express outrage at this prospect, and assert strongly that they are not liable to any of the creditors because their firm was a validly formed Limited Liability Partnership (“LLP”), which supposedly shields the partners from creditor claims (generally excepting individual malpractice).

Unfortunately for the partners, LLP status will not shield them from many of the potential avenues creditors may use to recover distributions that the partners received in the months and even years prior to the actual point where the law firm failed.

Though the partnership agreement itself may provide a contractual claim by which the partnership seeks the return of distributions to partners in excess of profits in the months or years preceding the dissolution, this paper examines the most likely non-contract/tort or statutory clawback claim in the creditor’s (and subsequent bankruptcy estate’s) arsenal, a constructive fraudulent conveyance action under the California state and/or bankruptcy law.

General Overview of Applicable Constructive Fraudulent Conveyance Law and Elements

The Bankruptcy Code provides two avenues to set aside a debtor’s transfer of property under “constructive fraudulent transfer” theories. First, the Bankruptcy Code authorizes the trustee to use state fraudulent transfer laws to void the transfer.1 Second, it provides an independent remedy under the Bankruptcy Code.2 Because of the common language and common origin, courts have found that interpretations of parallel provisions of the Bankruptcy Code and the

1 11 U.S.C.§ 544(b)(1) provides that the trustee [or debtor in possession (11 U.S.C. § 1107(a))] “may avoid any transfer of an interest of the debtor in property. . . that is voidable under applicable [state] law by a creditor holding an [allowable] unsecured claim.” Fortunately, the state and federal provisions for the insolvency or unreasonably small capital tests do not need to be discussed separately. California has adopted the Uniform Fraudulent Transfer Act (UFTA, 1986), which is the successor to the Uniform Fraudulent Conveyance Act (UFCA, 1938). The Bankruptcy Code provisions were adapted to the UFCA, and, in turn, the UFTA made changes to adapt to the Bankruptcy Code.

2 11 U.S.C. § 548(a). - 1 -

applicable California law from the cognate acts can be used to interpret the particular provision under review.3

To prevail in its case in chief, a plaintiff must only prove that the distressed law firm:

1. made a transfer of property of the dissolved law firm to the partners of such firm (the “Transfer”);

2. “received less than a reasonably equivalent value in exchange for such” Transfer.4 (“Reasonably Equivalent Value” or “REV”); and

3. was in significant business distress pursuant to one of the following three tests (“Sufficient Business Distress”):

(i) “was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation” (“Balance Sheet Insolvency”),5

(ii) “intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured” (“Inability to Pay Debts As they Come Due” or “Equitable Insolvency”),6 or

(iii)“was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital” (“Unreasonably Small Capital”).7

These three straightforward elements eliminate the need for a creditor, trustee, or unsecured creditor committee to make any showing of an actual intent to hinder, delay or defraud a creditor by the partner or the law firm. See, e.g., Patterson v. Missler, 238 Cal. App. 2d 759, 764 (1965).

3 The California UFTA provides that it “shall be applied and construed to effectuate its general purpose to make uniform the law with respect to the subject of this chapter among states enacting it.” Cal. Civ. Code § 3439.11. See Tri-Continental Leasing Corp. v. Zimmerman, 485 F. Supp. 495, 500 (N.D. Cal. 1980) (“The Act . . . authorizes the Court to look to decisions in other jurisdictions in order to effectuate the purpose of making the law uniform,” citing Neumeyer v. Crown Funding Corp., 56 Cal. App. 3d 176, 187 (1976). Neumeyer was disapproved on another ground (that it required clear and convincing evidence rather than a preponderance of the evidence on the issue of fraud) in Liodas v. Sahadi, 19 Cal. 3d 278, 287 (1977).)

4 11 U.S.C. § 548(a)(1)(B)(i); see also Cal. Civ. Code §§ 3439.04(a)(2) and 3439.05.

5 11 U.S.C. § 548(a)(1)(B)(ii)(I); see also Cal. Civ. Code § 3439.05 (with insolvency defined in Cal Civ. Code § 3439.02).

6 11 U.S.C. § 548(a)(1)(B)(ii)(III); see also Cal. Civ. Code § 3439.04(a)(2)(B) (also specifically imposes a subjective test by including “. . . or reasonably should have believed. . . “).

7 11 U.S.C. § 548(a)(1)(B)(ii)(II); see also Cal. Civ. Code § 3439.04(a)(2)(A). - 2 -

I. A Transfer

Section 101(54) of the Bankruptcy Code defines the term “transfer” as:

(A) the creation of a lien;

(B) the retention of title as a security interest;

(D) each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with –

(i) property; or

(ii) an interest in property.

Law firm partnership distributions to partners of cash are “transfers” for fraudulent conveyance purposes. Successor law firms, where the partners have landed new partnerships, have asserted that there is no “transfer” of the unfinished business under the Jewel v. Boxer and Revised Uniform Limited Partnership Act purposes.8 This issue is currently being litigated in the Heller Ehrman Chapter 11 case in the Northern District of California in front of the Honorable Judge Montali.

II. Reasonably Equivalent Value Element

The term “reasonably equivalent value” (frequently, REV) “directs attention away from what is fair as between the parties and instead measures consideration in terms of its objective worth to all the transferor’s creditors.” Maddox v. Robertson (In re Prejean), 994 F.2d 706, 708 (9th Cir. 1993).9

There are no clear formulas. BFP v. Resolution Trust Corp., 511 U.S. 531 (1994), while confining its ruling to carving out a special rule for the forced sale circumstances of a foreclosure, it disapproved an earlier circuit holding that “reasonably equivalent value” could be no less than 70% of fair market value.10 The Court provided limited guidance for the other-than-

8 156 Cal. App. 3d 171 (1984), and Section 1604(b)(1) of the Revised Uniform Partnership Act.

9 See Legislative Committee Comment that attended California’s adoption of the UFTA in 1986 noting that this newly codified definition of value “is in accord with California cases which hold that fairness of consideration is to be judged from the standpoint of the creditors of the debtor.” See note 2 to Cal. Civ. Code section 3439.03, quoted in Prejean 994 F.2d at 709, n.6.

10 Durrett v. Washington National Insurance, 621 F.2d 201, 203-04 (5th Cir. 1980). BFP reasoned that the restrictive conditions of a foreclosure rendered the price received per se reasonable, as long as the sale was non-collusive and conducted in accordance with state requirements. - 3 -

foreclosure context. It said that “reasonably equivalent value” (a) will “ordinarily [have] a meaning similar to fair market value.” 511 U.S. at 546. In a footnote it further explained, “[o]ur discussion assumes that the phrase ‘reasonably equivalent’ means ‘approximately equivalent,’ or ‘roughly equivalent[,]’ but (b) it does not mean “‘as close to equivalent as can reasonably be expected’ – in which event even a vast divergence from equivalent value would be permissible so long as there is a good reason for it.” 511 U.S. at 540 n.4 (citations omitted). In passing, BFP characterized as “arbitrary” the Durrett selection of 70% of market value as a standard. 511 U.S. at 540.

So, (1) market price is the touchstone for REV, (2) REV can be something less than market price, but (3) REV is not infinitely malleable.

The failed law firm’s partners will argue that they did provide reasonably equivalent value in return for the distributions of profits and they will cite the California case, Annod Corp. v. Hamilton & Samuels, 100 Cal. App. 4th 1286 (2002). In Annod, the trial court found that:

[M]oving partners provided ‘reasonably equivalent value’ for the draws which they received by continuing to work substantial hours after [sic] H&S [Hamilton & Samuels] during the entire period from August 1995 through February 1996, by generating receivables in excess of the modest draws which they received and by leaving substantial assets, including cash income, in the firm which were then available to satisfy the claims of its creditors. The efforts of the [moving partners] during this period resulted in an increase in the amount of cash which was available to creditors over the amount which would have been available if they had ceased working on behalf of the firm in September 1995.

100 Cal. App. 4th at 1296. In the Heller Ehrman Chapter 11 case, the settlement model negotiated with shareholders gave the shareholders credit for their actual billings during the dissolution period. Below is a table from Heller’s approved Disclosure Statement that summarizes the REV analysis:

Shareholder X Annod REV Model

2007 2008 Profits Distributed

Actual Billings $1,320,000 $820,000

Less Cost of Attorney Overhead ($320,000) ($220,000)

“Annod Measure of REV” $1,000,000 $600,000

Less Compensation Paid: ($1,600,000) ($500,000)

“Annod REV Model Damages” ($600,000) 0 $600,000 (assumes good faith defense applies)

- 4 -

In the above example, in 2007, Shareholder X is presumed by the Annod REV Model to have received $600,000 in excess of the value provided to Heller. In 2008, under this model, it is presumed that Shareholder X did not receive any excess value. If Shareholder X can establish a good faith defense, his/her liability will be limited to $600,000.11 In other words, in 2007 the distribution to Shareholder X was $1,600,000 but the amount received was only a net of $1,000,000 after Shareholder X’s costs were deducted from his billings, and thus the firm received approximately $600,000 less than the value of what the firm had distributed to Shareholder X.

The Annod case focused solely on billings or additional cash produced that would be available to creditors during the wind up period of the firm, and did not give credit for management time performed by partners, or sales services. As such, the model in Heller tended to lower the potential liability owed by the more junior or “service” partners as opposed to the more senior management partners and/or rainmaker partners who faced the highest liability.

III. Business Distress Element

The following analyzes the three alternative options for a plaintiff to satisfy the Business Distress element:

A. Balance Sheet Insolvency

California law provides that a “debtor is insolvent if, at fair valuations,12 the sum of the debtor’s debts is greater than all of the debtor’s assets.” Cal. Civ. Code §3439.02(a).13 The Bankruptcy

11 The settlement model used in Heller did not take into account an additional deduction from billings for the “platform profit” that all major firms typically generate. For example, solely by practicing in a major firm with all the resources, reputation, and goodwill that such a firm possesses, a partner or shareholder will likely be able to bill a significantly higher hourly rate to clients than if s/he were in a smaller firm or sole practice. Conceptually, in calculating REV such a differential should be attributed to the firm as a whole and not to the individual shareholder, and as such, the example of $600,000 above value given was conservative.

12 The fair valuation of property is also generally defined as “the sale price a willing and prudent seller would accept from a willing and prudent buyer if the assets were offered in a fair market for a reasonable period of time.” Lids Corp.v. Marathon Inv. Partners (In re Lids Corp.), 281 B.R. 535, 541 (Bankr. D. Del. 2002), or the amount that would be received from the liquidation of the assets over a reasonable period of time. Devan v. CIT Group/Commercial Servs. Inc. (In re Merry-Go-Round Enters., Inc.), 229 B.R. 337, 341-42 (Bankr. D. Del. 2002).

13 Both the California UFTA and the Bankruptcy Code separately define “insolvent” as to individuals and partnerships. However, California law provides that a partner in a limited liability partnership, as most law firm partnerships are,

is not liable or accountable, directly or indirectly, including by way of indemnification, contribution, assessment, or otherwise, for debts, obligations, or liabilities of or chargeable to the partnership or another partner in the partnership, - 5 -

Code defines “insolvent” as the “financial condition such that the sum of the entity’s debt is greater than all of such entity’s property, at fair value . . .” (11 U.S.C. § 101(32)(A) & (B)). The law presumes solvency, so the burden of proof is typically14 on the creditor to prove insolvency. See, e.g., Tri-Continental Leasing Corp. v. Zimmerman, 485 F. Supp. 495, 499 (N.D. Cal. 1980).

In carrying out the test for Balance Sheet Insolvency, the question arises whether the entity should be assessed as a going concern or assessed for its liquidation value. In re DAK Indus. Inc., 170 F.3d 1197, 1199-1200 (9th Cir. 1999). Going concern valuation is typically the proper measure unless the “. . . business is on its deathbed.” Kupetz v. Continental Ill. Nat’l Bank & Trust Co., 77 B.R. 754, 763 (C.D. Cal. 1987) (valuing assets on going concern basis under UFCA), aff’d sub nom. Kupetz v. Wolf, 845 F.2d 842 (9th Cir. 1988.) See also Diamond v. Osborne, 102 Fed. Appx. 544, 548 (9th Cir. 2004) (entity was going concern where it continued to operate for 5 months after the last transfer and had substantial cash flow and over 100 employees.)

For assessing the liquidation value, the courts assume a reasonable time for disposal. Travelers Int’l AG v. TransWorld Airlines, Inc. (In re Trans World Airlines, Inc.), 134 F.3d 188, 195 (3d Cir.), cert. denied, 523 U.S. 1138 (1998), upheld 12 to 18 months as a reasonable time over which to sell the assets of an airline.

In analyzing Balance Sheet Insolvency, whether under the going concern or liquidation assumption, debts are evaluated at face value. Id. at 197, n.7.

whether arising in tort, contract, or otherwise, that are incurred, created, or assumed by the partnership while the partnership is a registered limited liability partnership, by reason of being a partner or acting in the conduct of the business or activities of the partnership.

Cal. Corp. Code § 16306(c). The Bankruptcy Code does not usually preempt state law regarding what assets or debts are considered in evaluating avoiding powers. Wolkowitz v. Beverly (In re Beverly), 374 B.R. 221, 239 (9th Cir. BAP 2007), affirmed in part and appeal dismissed in part by Beverly v. Wolkowitz (In re Beverly), 2008 U.S. App. LEXIS 26386 (9th Cir. 2008).

14 Though an inability to pay debts as they come due shifts the presumption of Balance Sheet Insolvency under the Balance Sheet Test in Cal. Civ. Code § 3439.02(c), there is also a completely independent test of business distress arising out of the post-transfer anticipated failure to pay debts as they come due under Cal. Civ. Code § 3439.04(a)(2)(B) and 11 U.S.C. § 548(a)(1)(B)(ii)(III). Additionally, under California law, “[o]nce the burden to show that the transferor did not receive reasonably equivalent value is met, a transfer is presumptively fraudulent and the burden shifts.” Cal. Serv. Emples. Health & Welfare Trust Fund v. Advance Bldg. Maint., Inc., 2010 U.S. Dist. LEXIS 90529, at *14-15 (N.D. Cal. Sept. 1, 2010) (citing Whitehouse v. Six Corp., 40 Cal. App. 4th 527, 534 (1995); Pajaro Dunes Rental Agency, Inc. v. Spitters (In re Pajaro Dunes Rental Agency, Inc.), 174 B.R. 557, 589-90 (Bankr. N.D. Cal. 1994)). “The transferee must show that (1) the debtor’s remaining assets were not unreasonably small in relation to the business in which it was engaged and (2) the debtor should not have reasonably believed that it would incur debts beyond its ability to pay as they became due.” Id. (citing Cal. Civ. Code § 3439.04(a)(2); Pajaro Dunes, 174 B.R. at 590). - 6 -

In the law firm context, the landlords will likely hold the bulk of the creditor claims for defaults under a firm’s long term lease or leases. If the court determines at the time of a transfer sought to be avoided that the law firm was still a going concern, the partners of the law firm will argue that the long term lease damages should not be included in the Balance Sheet Insolvency analysis, whereas once the firm is clearly no longer a going concern (e.g., closer to or at the time of dissolution), such long term lease obligations will be included in the Balance Sheet Insolvency analysis.

Though not binding in California, and especially not well supported in a commercial rental market where landlords cannot be expected to mitigate their damages within one year, one case did hold that the entire sum of future rents that will come due under a lease cannot be considered current debts. Official Comm. of Former Partners v. Brennan (In re Labrum & Doak, LLP), 227 B.R. 383, 388-89 (Bankr. E.D. Pa. 1998). Labrum & Doak characterized as “instructive” that the debtor’s counsel had directed his accountant to use one year’s rent as the measure of lease debt when analyzing solvency. Id. at 390.15

Brandt v. nVidia Corp. (In re 3dfx Interactive, Inc), 389 B.R. 842 (Bankr. N.D. Cal. 2008 (Efremsky, J.)) cautions through the “wise and instructive” words of an earlier case both (a) that reasonable minds can differ on evaluation, and (b) that hindsight is not the proper vantage point:

First, it is clear that experts and industry analysts often disagree on the appropriate valuation of corporate properties, even when employing the same analytical tools such as a [discounted cash flow] analysis or a comparable sales method. Simply put, when it comes to valuation issues, reasonable minds can and often do disagree. This is because the output of financial valuation models are driven by their inputs, many of which are subjective in nature. . . . Second, in determining whether a value is objectively “reasonable” the court gives significant deference to marketplace values. When sophisticated parties make reasoned judgments about the value of assets that are supported by then prevailing marketplace values and by the reasonable perceptions about growth, risks, and the market at the time, it is not the place of fraudulent transfer law to reevaluate or question those transactions with the benefit of hindsight.

Id. at 865, quoting Peltz v. Hatten, 279 B.R. 710, 737-738 (D. Del. 2002), aff’d sub nom., In re USN Comm., Inc., 60 Fed. Appx. 401 (3d Cir. 2003).

The Tenth Circuit, though, has adopted a different approach. Gillman v. Scientific Research Products, 55 F.3d 552, 556 (10th Cir. 1995) (“we may consider information originating subsequent to the transfer date if it tends to shed light on a fair and accurate assessment of the asset or liability as of the pertinent date. . . . it is not improper hindsight for a court to attribute current circumstances which may be more correctly defined as current awareness or current

15 The court noted one case, In re Davis, 120 B.R. 823-26 (Bankr. W.D. Pa. 1990), which did not consider the imposition of greater liability for this purpose, and counted only one additional month’s future rent against the debtor. Labrum & Doak, 227 B.R. at 389.

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discovery of the existence of a previous set of circumstances.”) (internal quotations and citations omitted).

The accounting principles in GAAP can be helpful in solvency determination, but are not determinative. See 3DFX interactive, Inc., 389 B.R. at 866.16 For example, GAAP looks at goodwill, but goodwill cannot be sold to satisfy a creditor’s claim. Kendall v. Sorani (In re Richmond Produce Co., Inc.), 151 B.R. 1012, 1019 (Bankr. N.D. Cal. 1993), aff’d, 195 B.R. 455 (N.D. Cal. 1996).17

In a law firm dissolution, the recoverable assets are almost exclusively accounts receivable and work in progress. The value of such assets is assessed in light of the prospect of their being collected. Constructora Maza, Inc., v. Banco de Ponce, 616 F.2d 573, 577 (1st Cir. 1980) (the actual amount of insolvency was much greater than books showed where certain accounts receivable were either disputed or uncollectable); Thompson v. Jonovich (In re Food & Fibre Prot., Ltd.), 168 B.R. 408, 417 (Bankr. D. Ariz. 1994) (“no independent investigation of the collectability of the receivables was made by the accountant”); Bernstein v. Alpha Associates, Inc. (In re Frigitemp Corp.), 34 B.R. 1000, 1005 (S.D.N.Y. 1983) (stale claims and overbilling must be assessed in determining insolvency); Carlson v. Rose (In re Rose), 86 B.R. 193, 195 (Bankr. W.D. Mo. 1988) (“Accounts receivable need not be taken at face value when circumstances cast doubt on their collectability.”). The plaintiff must establish through expert testimony of an accountant or other financial expert that the “book value” of the assets listed on the balance sheets is not its value at a fair valuation. Killips v. Schropp (In re Prime Realty, Inc.) 380 B.R. 529, 535 (8th Cir. BAP 2007). Qualified opinion testimony must be provided on their fairly realizable value. Constructora Maza, 616 F.2d at 577 (citing Irving Trust Co. v. Jacob Weckstein & Sons, Inc., 64 F.2d 333 (2d Cir. 1933); Mack v. Bank of Lansing, 396 F. Supp. 935 (W.D. Mich. 1975)). This can entail inquiry into the obligor’s resources, or looking at similar businesses or the debtor’s transactions. 2 Collier on Bankruptcy ¶ 101.32[4], p. 101-152, ns. 69 and 70 (16th ed. 2012). Evidence could be adduced by looking into the obligor’s resources or through witnesses experienced in similar businesses or acquainted with the debtor’s business. Id.

B. Inability to Pay Debts As they Come Due

A transfer of an interest in property may also be avoided where, inter alia, the debtor made the transfer under circumstances in which it was unable to pay its debts as they became due. See 11 U.S.C. § 548(a)(1)(B)(ii)(III) (applicable where the transferor “intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts

16 Citing Arrow Electronic, Inc. v. Justus (In re Kaypro), 230 B.R. 400, 413 (9th Cir. BAP 1999), aff’d in part, rev’d in part, 218 F.3d 1070 (9th Cir. 2000) (GAAP relevant but not controlling in determining insolvency); Sierra Steel, Inc. v. Totten Tubes, Inc. (In re Sierra Steel, Inc.), 96 B.R. 275, 278 (9th Cir. BAP 1989) (it is the role of the court, not accountants and GAAP board, to determine solvency).

17 Accord Bay Plastics, Inc. v. BT Commercial Corp. (In re Bay Plastics, Inc.), 187 B.R. 315, 330-31 (Bankr. C.D. Cal. 1995).

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matured”); Cal. Civ. Code § 3439.04(a)(2)(B) (applicable where the transferor “[i]ntended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due”). Courts, in interpreting these provisions, look to the law of other states that have adopted the UFTA, as well as courts’ application of 11 U.S.C. § 303(h)(1). See generally Ash v. Moldo (In re Thomas), 2006 Bankr. LEXIS 4855, at *17-21 (9th Cir. BAP July 25, 2006); Asarco LLC v. Ams. Mining Corp., 396 B.R. 278, 399 n.140 (S.D. Tex. 2008).

The test for whether a debtor believed that it would incur debt that would be beyond the debtor’s ability to pay as such debts matured “has an objective and subjective prong, and the test is satisfied if either prong is met.” Asarco LLC, 396 B.R. at 399. “The objective prong measures whether [the debtor], as a going concern, would reasonably have been able to pay its debts after making the challenged transfer.” Id. at 400.

1. Objective Test:

This “objective” test is met when it is established that the debtor was, as a factual matter, unable to pay its debts at the time of the transfers in question. Thus, where, at the time of the transfer, a debtor is already in default on loans which are due, the debtor is deemed to not be paying debts as they become due. See, e.g., Official Employment-Related Issues Committee of Enron Corp. v. Arnold (In re Enron Corp.), 2005 Bankr. LEXIS 3261, at *65-67 (Bankr. S.D. Tex. Dec. 9, 2005) (debtors deemed insolvent and “unable to pay their debts as they became due” where lowered credit ratings resulted in a “note trigger event” requiring Enron to repay, refinance or cash collateralize additional facilities totaling $3.9 billion and debtors immediately stopped operations thereafter); In re Vitreous Steel Products Co., 911 F.2d 1223, 1238 (7th Cir. 1990) (reversing bankruptcy court’s finding that debtor was solvent on grounds that debtor, while paying certain “new bills as they became due,” had been “in default to the bank” and to other creditors at the time of the transfer). See also Collins v. Kutz (In re Kutz), 1979 Bankr. LEXIS 768, at *5 (Bankr. W.D. Ky. Nov. 9, 1979) (“The mere fact of default should have given her reasonable cause to question Kutz’ ability to orderly retire his debts as they became due.”); Nelson v. Walnut Inv. Partners, L.P., 2011 U.S. Dist. LEXIS 75534, at *23 & *27 (S.D. Ohio July 13, 2011) (granting summary judgment where plaintiff established that prior to the transaction at issue, defendant “was out of covenant on two loans [and] had extended the aging of its accounts payable” thus demonstrating its inability to service “its debts as they came due.”).

2. Subjective Test:

Partners in dissolved law firms will likely rely on the subjective or intent element in an attempt to dispute Equitable Insolvency. See Pajaro Dunes Rental Agency, Inc. v. Spitters (In re Pajaro Dunes Rental Agency, Inc.), 174 B.R. 557, 593 (Bankr. N.D. Cal. 1994) (“‘Reasonableness’ is often measured through the use of cash flow projections and other forward-looking sources of evidence available to the debtor and its creditors at the time of the transfer.”); Asarco LLC, 396 B.R. at 400 (“the subjective prong emphasizes ‘subsequent creditors’ and their future claims”).

In the law firm context, once a firm is dissolved, however, it may be difficult for the partners to prove at summary judgment or trial that in a situation where a law firm is unable to pay its

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current obligations, it entertains a reasonable belief that it will be able to entertain future obligations, such as the fully accelerated amounts due on terminated or abandoned lease locations, or if a secured creditor is controlling the dissolved law firm’s funds, that it will be able to obtain the consent of the secured creditor to pay unsecured claims from its cash collateral before the secured creditor is paid in full. Those beliefs will likely be attacked by the creditor as unreasonable beliefs. See, e.g., Pajaro Dunes, 174 B.R. at 593 (analyzing requirements of Cal. Civ. Code § 3439.04(a)(2)(B)). If the sources the debtor relied upon were “flawed and overly optimistic from the beginning,” then they are unreasonable. Id.

C. Unreasonably Small Capital (“USC”)

There is no definition of the USC test in the Code. Pajaro Dunes, 174 B.R. at 591. Pajaro Dunes quotes from one court that “the USA [USC] test is triggered even when the debtor is solvent, but the transfer has placed in motion ‘difficulties’ that have already led, or will likely lead to insolvency.” Id., quoting Vadnais Lumber Supply, Inc. v. Byrne (In re Vadnais Lumber Supply, Inc.), 100 B.R. 127, 128 (Bankr. D. Mass. 1989). As one author has stated “Capital- adequacy tests ask simply whether a firm can withstand some perturbation to the bad side and still remain solvent.” J.B. Heaton, “Solvency Tests,” THE BUSINESS LAWYER, Vol. 62, No. 3, May 2007, at 996. Another court noted that its finding that the entity was insolvent was “ipso facto a finding that the debtor was left with unreasonably small capital.” United States v. Gleneagles Investment Co., 565 F. Supp. 556 (M.D. Pa. 1983), aff’d in relevant part sub nom. United States v. Tabor Court Realty Corp., 803 F.2d 1288 (3d Cir. 1986), cert. denied, 483 U.S. 1005 (1987). Patterson v. Missler, 238 Cal. App. 2d 759 (1965), also held that upholding a finding of insolvency obviated the need to examine the evidence for USC.

A debtor can be considered to have “unreasonably small” capital if, inter alia, as an objective matter, it is not reasonably likely to be able to “generate enough cash from operations and sale of assets to pay its debts and remain financially stable” for a year following the transfer at issue. Dahar v. Jackson (In re Jackson), 459 F.3d 117, 124 (1st Cir. N.H. 2006). In other words, “unreasonably small capital” is a condition short of balance sheet insolvency or “equitable” insolvency (unable to pay debts as they become due) but which is likely to lead to insolvency within a year of the Transfer Date.

One case on USC assessments uses Equitable Insolvency as the yardstick from which to judge a reasonable margin of safety, saying “unreasonably small capital would seem to encompass financial difficulties short of [E]quitable [I]nsolvency.” Moody v. Security Pacific Business Credit, 971 F.2d 1056, 1070 (3d Cir. 1992). However, other cases hold that USC can be found where there is risk of either Equitable Insolvency or Balance Sheet Insolvency.18

18 Cases decided by a bankruptcy judge who has written scholarly articles on the issue hold that USC encompasses difficulties that are short of either Equitable Insolvency or Bankruptcy Insolvency. Murphy v. Meritor Sav. Bank (In re The O’Day Corp.), 126 B.R. 370, 407 (Bankr. D. Mass. 1991); Vadnais Lumber Supply, Inc. v. Byrne (In re Vadnais Lumber Supply, Inc.), 100 B.R. 127, 137 (Bankr. D. Mass. 1989) (Queenan, J.). See also Brandt v. Hicks, Muse & Co. (In re Healthco Int’l, Inc.), 202 B.R. 288, 302 (Bankr. D. Mass. 1996). See James F. Queenan, Jr., - 10 -

The Northern District Bankruptcy Court in Pajaro Dunes reasoned that the Moody test, which “focuses on the debtor’s future ability to generate cash and pay its debts as they come due . . . tends to blur the lines between the USA [USC] and ‘reasonable ability’ tests.” 174 B.R. at 591 (citations omitted).19 The court concluded that the problem could be solved by measuring USC from the base of Balance Sheet Insolvency. Id.

However, a California case approved use of a cash flow analysis to gauge adequacy of capitalization and cautioned that the appropriate gauge is the reasonableness of the projection, not the eventual historical outcome. Credit Managers Ass’n of S. California v. Federal Co., 629 F. Supp. 175, 186-87 (C.D. Cal. 1985) (“[T]he court’s task in determining whether [a company] had sufficient working capital as evidenced by cash flow projections is not to examine what happened to [the company] but whether the [lender’s] projections [employed prior to the transaction] were prudent.”). Courts using the cash flow projection method differ on whether future borrowing should be counted as a basis for projecting cash flow.20

Other California courts have found USC based not upon a particularly identified method, but on particular facts. It will be noted that they provide different takes on the role played by credit availability. Kendall v. Sorani, supra, found the debtor was undercapitalized based upon (a) reasonable foreseeability the debtor would have its credit cut off and ultimately fail, and (b) the adverse effect of its downgrading by the industry credit rating publication. Wells Fargo Bank v. Desert View Bldg. Supplies, Inc. (In re Desert View Bldg. Supplies, Inc.), 475 F. Supp. 693, 697 (D. Nev 1978), aff’d, 633 F.2d 221 (9th Cir. 1980), held that a significant reduction in working capital left the entity with USC even though it was contended that the debtor could still obtain trade credit and continue operations at the same yearly gross.

Forecasting capital adequacy for USC assessment requires “account[ing] for difficulties that are likely to arise, including interest rate fluctuations and general economic downturns, and otherwise incorporate some margin for error.” Moody, 971 F.2d at 1073. Moody further warns that because of the tendency of projections to be optimistic, they must be tested against actual historical data. Id. at 1072. Pajaro Dunes found that the information used for forecasts was “flawed and overly optimistic.” 174 B.R. at 593.

The time between the questioned transaction and the point of insolvency has also been looked at in the USC analysis. So if a business lasts for a year after the transaction, some courts have held that capitalization was not unreasonably small. Daley v. Chang (In re Joy Recovery Tech.

“The Collapsed Leveraged Buyout and the Trustee in Bankruptcy,” 11 CARDOZO L. REV. 1 (1989).

19 Inability to pay goes to a different test for fraudulent transfer, where the debtor incurs debt it believes, or should believe, it will be unable to pay as it comes due. Cal. Civ. Code § 3439.04(a)(2)(B); 11 U.S.C. § 548(a)(1)(B)(III).

20 Cf. Moody, 971 F.2d at 1072-73 (proper to consider availability of credit), and Peltz v. Hatten (found no USC in part because of ability to raise additional debt) with Murphy v. Meritor Sav. Bank (In re The O’Day Corp.), 126 B.R. 370, 408 (Bankr. D. Mass. 1991) (ability to borrow should not be considered).

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Corp.), 286 B.R. 54, 76 (Bankr. N.D. Ill. 2002) (noting other cases where courts did not find unreasonably small capital when creditors were paid eight to twelve months after asset transfers). On the other hand, the Ninth Circuit has approved the finding of USC where the debtor became clearly insolvent within about a year. Wells Fargo Bank v. Desert View Bldg. Supplies, Inc., supra. A recent bankruptcy court decision found that the company’s survival for 28 months after the transfer did not defeat a finding of USC, because during that time it was “cannibalizing itself . . . ., limping along . . . and not paying many of its creditors.” Asarco LLC, 396 B.R. at 398.

In the law firm insolvency context, the USC test is crucial because it is the test that will likely be asserted to reach back to the typical year-end distributions of the remaining profits for that year to partners, that include not only profit but often involve in distressed situations excess distributions above profits. These distributions may have been made at a time when the firm may still technically be a going concern, and as such the long term lease debt may not yet be added to the Balance Sheet Insolvency test, but the distribution/over distribution strips the firm of cash necessary to survive another year into the future.

A major destroyer of law firms involves over distributions of profits to partners in a prior calendar year. The partners who received the over distribution essentially receive a return of their capital and pay no income tax on the case received. But, the firm must in the future ultimately repay the lenders in post tax funds (i.e., the later year partners who may not have been the ones receiving the over distribution essentially pays the taxes for the distributions made to the prior year partners). For example, the firm borrows to fund an over distribution of $10,000,000.00 in year 1, the partners in some future year who must repay that loan, must earn $20,000,000.00 in profits to pay the loan and the tax due on that loan (given approx.. 50% federal and state tax rate in California). Borrowing to fund over distributions is a very bad sign in a law firm.

IV. Good Faith Defense

BANKRUPTCY CODE: Section 550(a) provides generally that the trustee may recover from [1] “the initial transferee” or [2] the “entity for whose benefit the transfer was made,” or from a subsequent transferee. Under subsection (b), a trustee may not recover from a [1] “subsequent transferee” that takes [2] for value, including satisfaction of a debt, [3] in good faith, and [4] without knowledge of the voidability of the transfer avoided; or from any transferee of such good faith transferee.

Section 550(b)(1) provides a safe harbor defense to some transferees who have acted in good faith. Schafer v. Las Vegas Hilton Corp. (In re Video Depot, Ltd.), 127 F.3d 1195, 1199 (9th Cir. 1997) (initial transferees are subject to strict liability while subsequent transferees may assert the good faith defense). The elements of the “good faith” defense are (1) good faith, (2) for value, and (3) without knowledge of the voidability of the transfer. Mosier v. Goodwin (In re Goodwin), 115 B.R. 674, 676 (Bankr. C.D. Cal. 1990). The burden of proving the defense is upon [the transferee]. Hayes v. Palm Seedlings Partners-A (In re Agric. Research & Tech. Group, Inc.), 916 F.2d 528, 535 (9th Cir. 1990).

Woods & Erickson, LLP v. Leonard (In re AVI, Inc.), 389 B.R. 721, 736 (9th Cir. BAP 2008).

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CALIFORNIA UFTA: A creditor can generally recover to the extent the transfer is voidable, as necessary to satisfy its claim, as against (1) the [1] first transferee or [2] the person for whose benefit the transfer was made, and (2) any subsequent transferee. Cal. Civ. Code § 3439.08(b)(1) & (2). On the other hand, as parallel to the Bankruptcy Code, the creditor may not recover from a [1] good faith transferee who [2] took for “value,” or from any transferee subsequent to such good faith transferee. Cal. Civ. Code § 3439.08(d).

Note, however, that the discussion of California law on recovery appears to be academic since, although § 544 incorporates the California UFTA as a cause of action, recovery is provided under § 550. See Brun v. Madray (In re Brun), 360 B.R. 669, 672-73 (Bankr. C.D. Cal. 2007 (Ryan, J.)), applying the Ninth Circuit rule that California’s limit on recovery to the amount necessary to satisfy the creditor’s claim does not limit recovery under § 550, even where a § 544 cause of action invokes the California UFTA. Brun says that the courts have not always been consistent in their treatment of the relationship between the Code and the UFTA. Id. at 673.

The Bankruptcy Code provides “good faith” defenses to a constructive fraudulent conveyance both as to “avoidance” and as to “recovery.”

As provided above, 11 U.S.C § 544 (a) permits the trustee to “avoid” fraudulent transfers under state law (California Uniform Fraudulent Transfer Act (UFTA)), and 11 U.S.C. § 548 provides the bases to “avoid” fraudulent transfers under the Bankruptcy Code itself.

Section 550 of the Bankruptcy Code then provides the basis for “recovery” of transfers that are voidable. “Recovery” is necessary under 550, as opposed to mere avoidance under 544 or 548, where the transferee has possession of the actual property, as opposed to merely a legal right vis- a-vis the property. See Suhar v. Burns (In re Burns), 322 F.3d 421, 424 (6th Cir. 2003) (declaration of trustee’s superior position); Belford v. Cantavero (In re Bassett), 221 B.R. 49 (Bankr. D. Conn. 1998) (invalidating a mortgage). Although a trustee can bring an avoidance proceeding followed by a recovery proceeding, the two can be combined in one proceeding. Woods & Erickson, supra.

Thus, in the example set forth in the table above in page 4 regarding Shareholder X, if Shareholder X was the initial transferee, gave value by billing $1,000,000 net of costs during the applicable period, and did prove the good faith defense, s/he would only be obligated to return the amount in excess of the value s/he gave, which in the example was $600,000, but if Shareholder X was a subsequent or mediate transferee, s/he would owe nothing back.

If, on the other hand, the Shareholder X knew of the financial condition of the failing law firm, and received the $1,600,000 in distributions, it is likely that the good faith defense would not apply, and s/he would be responsible to repay the entire $1,600,000 in distributions whether or not s/he was an initial transferee or a subsequent transferee notwithstanding that h/she provided $1,000,000 in value in return for the $1,600,000 distributed.

V. Standing

The LLP structure does not protect partners at law firms from a multitude of claims by creditors of the law firm upon dissolution. Though the first avenue for recovery (a contract action on a partnership agreement), is an action controlled by the partnership (or its successor receiver or - 13 -

bankruptcy trustee), creditors independently have standing to pursue the intentional and/or constructive fraudulent conveyance actions until such time as an insolvency proceeding is filed. See Mejia v. Reed, 31 Cal. 4th 657, 663 (2003) (noting that “[t]he UFTA permits defrauded creditors to reach property in the hands of a transferee.”).

Upon the filing of a bankruptcy petition, the bankruptcy estate generally takes over fraudulent conveyance actions. 11 U.S.C. § 544(b); In re Kimmel, 367 B.R. 174, 175 n.5 (Bankr. N.D. Cal. 2007) (“The right to maintain a UFTA action belongs to individual creditors prior to bankruptcy. Once the bankruptcy case is commenced the automatic stay prevents those creditors from interfering with the right that has passed to the trustee as the representative of all creditors.”) (citing In re MortgageAmerica Corp., 714 F.2d 1266, 1275-78 (5th Cir. 1983).

VI. Conclusion

When a law firm fails, creditors possess a simple and straightforward cause of action, a constructive fraudulent conveyance to recover excess distributions to partners, which action does not require a showing of any wrongdoing on the part of the partner or the law firm. The creditor (or successor bankruptcy trustee) only has to prove: (1) a transfer (virtually certain if any distributions were made); (2) less than reasonably equivalent value (the Annod case makes this an interesting factor in California); and (3) sufficient business distress under three different tests (likely a given at the time of dissolution, but final date to which a creditor can claw back will likely hinge on when a Judge determines that the firm had insufficient capital to survive – i.e., a finding of unreasonably small capital).

If the creditor proves the foregoing three elements, the partner will need to prove his own good faith defense, or he has to repay all the distributions during the clawback period. If he proves good faith, he will only have to pay back the distributions over and above the reasonable value he provided to the firm during the clawback period under the Annod case (assuming it remains good law).

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POTENTIAL CLAIMS FOR BREACH OF FIDUCIARY DUTY AGAINST LAW FIRM MANAGERS

CHRISTOPHER D. SULLIVAN Trepel Greenfield Sullivan & Draa LLP

The Duties of Law Firm Managers.

One area of potential claims is certain to get more attention – claims against partners that were managing the dissolving firm (the “law firm managers”) for breach of fiduciary duty based on their alleged mismanagement of the firm or other misconduct related to the dissolution. In fact, Henry Bunsow, a well-known former partner of Dewey & LeBouef LLP, recently filed such a complaint against the firm’s former chairman, head of global litigation, chief financial officer, chief operations officer, and a member of the executive committee. Bunsow v. Davis, et al., Case No. CGC-12-521540 (San Francisco County Superior Court, filed June 12, 2012). The complaint states claims for fraud, negligent misrepresentation, breach of fiduciary duties, conversion, unjust enrichment, interference with economic advantage, and unfair competition. The defendants are alleged to have orchestrated a scheme to drive the Dewey firm deeper into debt, while recklessly misrepresenting its financial performance, and intending to use borrowed money and capital contributions from new partners “to pay [defendants] and other select partners.” See id. at ¶ 29. In the Howrey LLP bankruptcy case, as well, the trustee filed a recent status report suggesting that claims are being investigated that involve actions leading up to the involuntary filing in the case and during the gap period. In re Howrey LLP, Case No. 11-31376, Docket NO. 765 (Bankr. N.D. Cal.).

Law “partners owe each other and the partnership a fiduciary duty.” Heller v. Pillsbury, Madison & Sutro, 50 Cal. App. 1367, 1368 (1996). When law firm partners are managing the firm it is likely that it will be found to have assumed fiduciary duties very similar to those that apply to corporate directors and officers.1 In fact, in California, the Revised Uniform Partnership Act (“RUPA”), Corporations Code §16404, specifically provides that partners in a limited liability partnership owe duties of loyalty and care to the partnership.2 Interestingly, in

1 Non-lawyer law firm managers almost certainly will be charged with such duties as well. See, e.g., GAB, 83 Cal. App. 4th at 420-21 (holding officer who “participate[d] in management of the corporation, exercising some discretionary authority” owed fiduciary duty of loyalty); Sequoia Vacuum Systems v. Stransky, 229 Cal. App. 2d 281, 287 (1967) (holding that a fiduciary duty existed where the defendant was a “managerial employee and director of the . . . corporation”); IDX Techs. v. Aspen Elecs., Inc., 2001 Cal. App. Unpub. LEXIS 1873, at *3 (Cal. Ct. App. Nov. 7, 2001) (holding that non-officer who supervised two employees owed fiduciary duty to employer). 2 These standards should be equally applicable to law firms that operate as professional corporations. “[A]ttorneys practicing law together in a law corporation owe each other fiduciary duties similar to those owed by law partners.” Stein & Beato, The Law of Law Firms §1:2

California a partner must also “discharge the duties to the partnership and the other partners . . . and exercise any rights consistently with the obligation of good faith and fair dealing.” Corporations Code §16405(d).3 Moreover, the duties of care and loyalty cannot be unreasonably reduced in the partnership agreement. Duty of Loyalty.

The duty of loyalty is the most familiar fiduciary duty in the partnership context. The duty prohibits a partner from usurping any partnership opportunity, competing with the partnership, and deriving any advantage from the use of partnership property or information. “There is an obvious and essential unfairness in one partner’s exploitation of a partnership opportunity for his own personal benefit and to the resulting detriment of his copartners.” Leff v. Gunter, 33 Cal. 3d 508, 514 (1983).

If law firm managers covertly act to maximize their own opportunities for employment with different law firms (or their own and those of a small group of favored attorneys), while their current firm is suffering financially, such conduct could give rise to serious claims. Courts repeatedly find that the fiduciary duty of loyalty is violated when attorneys secretly plan and execute a mass defection of their own firm’s attorneys to a competitor. See, e.g., Dickson, Carlson & Campillo v. Pole, 83 Cal. App. 4th 436, 448-49 (2000) (holding attorneys’ recruitment of client prior to dissolution through secret communications with client, competitor, and attorneys gave rise to tort and contract claims); GAB Business Servs., Inc., 83 Cal. App. 4th at 424 (holding attorney’s secret communications with competitor and solicitations of 17 employees resulting in mass, simultaneous defection gave rise to breach of fiduciary duty claims). See also Bancroft-Whitney Co. v. Glen, 64 Cal. 2d 327, 347-48 (1966) (holding corporate officer’s “consistent course of conduct” to obtain for a competitor his company’s valuable employees resulting in “the simultaneous defection of 16 employees and defendant to the competitor” breached the officer’s fiduciary duties).

Three examples should suffice. In Thomas Weisel Partners LLC v. BNP Paribas, No. C 07-6198, 2010 U.S. Dist. LEXIS 32332 (N.D. Cal. 2010), the plaintiff’s employee “facilitated” the mass departure of a number of the plaintiff’s key employees. The court held that “solicitation, encouragement or coercion are [not] prima facie elements necessary for a finding of breach of fiduciary duty,” and that it was sufficient that defendant employee set up interviews, reviewed contracts and facilitated a “smooth [] transition process.” Id. at *9.

In Bancroft-Whitney, an officer of the plaintiff arranged for meetings between a competitor and key employees and facilitated the competitor’s solicitation of other employees, resulting in a simultaneous mass resignation. The court held that the officer had breached his fiduciary duty of loyalty by engaging in “a consistent course of conduct . . . designed to obtain

(2008). th 3 In one notable case, though, Heller v. Pillsbury, Madison & Sutro, 50 Cal. App. 4 1367, 1368 (1996), the Court refused to find a breach of the duty of good faith by a law partnership in expelling a partner holding, “Where, as here, clear and integrated law partnership agreements contain clauses authorizing expulsions through “the guillotine approach,” and law partners are expelled pursuant to the agreements, there is no breach of the duty of good faith.”

for a competitor those of plaintiff’s employees whom the competitor could afford to employ and would find useful.” Id. at 347-48. The court also noted that while employees are generally allowed to prepare to compete against their employer at some point in the future when their employment comes to an end, failure to disclose preparations to compete breaches a fiduciary’s duty “where particular circumstances render nondisclosure harmful to the corporation,” and where the employee’s actions “constitute a breach under the general principles applicable to the performance of his trust.” Bancroft-Whitney, 64 Cal. 2d at 347.

In GAB, the officer secretly communicated with his company’s competitor and solicited his own company’s employees himself to join the competitor. The court held that the officer’s conduct was “worse” than in Bancroft-Whitney because the officer had used his “insider’s knowledge” to “recruit valued employees” through direct communications with them. GAB, 83 Cal. App. 4th at 424.

Out of state cases also have found that aggressive actions taken by a departing partner prior to announcing a departure may be improper. See, e.g., Gibbs v. Breed, Abbott & Morgan, 710 N.Y.S. 2d 578 (N.Y. App. Div. 2000). In Gibbs, the court held that the partners had violated their fiduciary duties of loyalty to their firm because they “began their recruiting [of other partners and employees] while still members of the firm and prior to serving notice of their intent to withdraw.” 710 N.Y.S. 2d at 583 (emphasis added). The court noted “[p]rewithdrawal recruitment is generally allowed ‘only after the firm has been given notice of the lawyer’s intention to withdraw.’” Id. (quoting Hillman, Loyalty in the Firm: A Statement of General Principles on the Duties of Partners Withdrawing from Law Firms, 55 Wash & Lee L. Rev. 997, 1031 (1988) (emphasis added).

Likewise, any attempt to gain advantages by using inside information to solicit clients or lucrative contingency fee cases will run afoul of the duty of loyalty. Courts have repeatedly held that an attorney’s secret, one-sided solicitations of his law firm’s clients—even after the attorney has provided the firm with notice of his intention to depart—gives rise to a breach of the attorney fiduciary duties. See Graubard Mollen Dannett & Horowitz v. Moskovitz, 653 N.E.2d 1179, 1183 (N.Y. App. 1995) (holding attorney would violate his fiduciary duties to his firm by “secretly attempting to lure firm clients (even those the partner has brought into the firm and personally represented) to the new association, lying to clients about their rights with respect to the choice of counsel, lying to partners about plans to leave, and abandoning the firm on short notice (taking clients and files)”); Meehan v. Shaughnessy, 535 N.E.2d 1255, 1265 (Mass. 1989) (holding attorneys breached fiduciary duties to their firm by soliciting clients via “a one-sided announcement, on [their former law firm’s] letterhead, so soon after notice of their departure” because in doing so, they “excluded their partners from effectively presenting their services as an alternative to those of [the departing partners]” and “took advantage of [the remaining] partners’ confusion”).

In Meehan, several of a law firm’s attorneys secretly agreed to leave their firm and take as many clients as they could with them. See Meehan, 535 N.E.2d at 1264 (attorneys made secret agreement to be “‘ready to move’ the instant they gave notice to their partners”). After they gave notice, they “continued to use their position of trust and confidence to the disadvantage of [their firm]” by “immediately . . . communicating with clients and referring attorneys” without informing their firm that they were doing so. Id. at 1265. Moreover, the communication was

“one sided,” “did not clearly present to the clients the choice they had between remaining at [the old firm] or moving to the new firm,” and occurred “so soon after their departure” so as to “exclude[] their partners from effectively presenting their services as an alternative.” Id. The court held that the “speed and preemptive character of their campaign” violated their fiduciary duties of “utmost good faith and loyalty.” Id.4

The Restatement of the Law Governing Lawyers provides that an attorney’s solicitation of clients prior to his or her departure is permissible only after the attorney tells the firm he intends to solicit the clients. See Restatement Third, The Law Governing Lawyers § 9(3) (2000). Similarly, the California Bar and the ABA have issued opinions calling for “joint notice” to clients of departure, with a clear statement that the client may choose either the departing attorney or the firm, without advocating in favor of the departing attorney.5 These rules help define the scope of the fiduciary duties of partners in a failing law firm.6

Courts have repeatedly held that attorneys may not compete against their firms for clients or take advantage of partnership opportunities for personal gain. See, e.g., Rosenfeld, Meyer & Susman v. Cohen, 146 Cal. App. 3d 200, 212 (1983) (recognizing the “obvious and essential unfairness in one partner’s attempted exploitation of a partnership opportunity for his own personal benefit and to the resulting detriment of his copartners”) quoting Leff v. Gunter, 33 Cal. 3d 508, 514-515 (1983)), overruled on other grounds by Applied Equip. Corp. v. Litton Saudi Arabia Ltd,, 7 Cal. 4th 503 (1994).

In Rosenfeld, two partners, Cohen and Riordan (“C & R”) left their firm, Rosenfeld, Meyer & Susman (“RM & S”), causing its dissolution. The following month, a major RM & S client discharged RM & S, moved its business to C & R, and entered into a new fee agreement with C & R under which the amount payable to C & R was twice what their anticipated share would have been under the RM & S partnership agreement. Rosenfeld, 146 Cal. App. 3d at 211.

4 Meehan involved several partners and an associate. The court held that all owed fiduciary duties to the firm, and all had violated them. See Meehan, 535 N.E.2d at 1265. 5 See Standing Comm. On Prof. Resp. and Conduct of the State Bar of Calif. Formal Op. 1985- 86 (“Where practical, the attorneys should provide joint notice . . . .”); ABA Comm. On Ethics and Prof. Resp., Formal Op. 99-415 (1999) (“Far the better course to protect clients’ interests is for the departing lawyer and her law firm to give joint notice of the lawyer’s impending departure . . . .”); ABA Committee on Ethics and Responsibility Informal Op. 1457 (1980) (providing, inter alia, “the notice does not urge the client to sever a relationship with the lawyer’s former firm and does not recommend the lawyer’s employment (although it indicates the lawyer’s willingness to continue his responsibility for the matters)”). 6 See Stanley v. Richmond, 35 Cal. App. 4th 1070, 1086 (1995) (“The scope of an attorney’s fiduciary duty may be determined as a matter of law based on the Rules of Professional Conduct which, together with statutes and general principles relating to other fiduciary relationships, all help define the duty component of the fiduciary duty which an attorney owes to his [or her] client.”) (internal citations omitted); Meehan, 535 N.E.2d at 1265 (holding ethical standards provide “general guidelines as to what partners are to expect from each other concerning their joint clients and the division of their practice.”).

The court held that RM & S had sufficient grounds to support breach of fiduciary duty claims, because:

A trier of fact could find that C&R dissolved RM&S for the very purpose of voiding its fiduciary duty to RM&S; that Rectifier’s mid-May discharge letter was therefore the result of C&R’s breach of duty to complete unfinished business rather than a termination of C&R’s duty; that it was because of C&R’s breach of duty during the period May 1 to mid-May that the dissolved RM&S was discharged by Rectifier and lost the difference between what it would have received under the RM&S-Rectifier agreement and the quantum meruit recovery less attorneys’ fees that RM&S would have received from Rectifier. Id. at 191.

It is also possible that law firms hiring partners from dissolved firms may run into trouble if they cross the line in helping the partners bring over cases or clients. Under California law, “[l]iability may . . . be imposed on one who aids and abets the commission of an intentional tort if the person . . . knows the other’s conduct constitutes a breach of duty and gives substantial assistance or encouragement to the other to so act.” Saunders v. Super. Ct., 27 Cal. App. 4th 832, 846 (1994). Liability for aiding and abetting requires proof of two elements: (1) that “the defendant had actual knowledge of the specific primary wrong” and (2) that “the defendant substantially assisted” it. Id.

In Kruss v. Booth, 185 Cal. App. 4th 699, 703-04 (2010), the corporate director defendants “aided and abetted” each others’ breach of their respective fiduciary duties when they executed a “reverse merger” that transferred assets out of the plaintiff’s company to their own privately-held companies, and then transferred the liabilities of the latter into the former. Id. at 704-710. The California Court of Appeal held that because “the complaint treat[ed] the four defendant directors as entirely united in those actions, . . . it is a reasonable inference that each of the directors knowingly and substantially [aided and abetted one another] in those breaches” (id. at 728-29).

Issues regarding the duty of loyalty could surface with respect to actions taken by law firm managers to sell practice groups. Again, if the law firm managers or their close colleagues can be seen as selling a practice group too cheap, or facilitating the move of a practice group to another firm without obtaining sufficient consideration, they could face claims for usurping partnership opportunities. In the Coudert bankruptcy case, for example, the Examiner thoroughly investigated the sales of four practice groups to other law firms, including several possible claims for self-dealing of breach of the duty of loyalty. [cite] Ultimately, the Examiner, though, determined that even when evaluated under the fairness standard rather than a business judgment standard, there was sufficient consideration to conclude the law firm managers acted in good faith. [cite] Duty of Care.

As noted above, under California’s version of RUPA, partners owe the partnership a duty of care. California Corporations Code §16404(a). However, the duty is limited to a duty “to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a

knowing violation of law.” Corporations Code §16404(c). In that sense, the standard is much like proving a breach of duty in the corporate context where directors and officers are entitled to protection by the business judgment rule. California Corporations Code §309 protects corporate directors so long as they act “in good faith, in a manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances.” This has been interpreted to immunize [corporate] directors from personal liability if they act in accordance with its requirements, and another which insulates from court intervention those management decisions which are made by directors in good faith in what the directors believe is the organization’s best interest.” Lee v. Interinsurance Exchange, 50 Cal. App. 4th 694, 714 (1996).

Put differently, the business judgment rule generally means that courts will not review or second guess the substantive decision of an officer or director, regardless of the consequences of the decision, if the process by which the fiduciary reached the decision satisfied the following general elements: (1) the fiduciary was not interested in the subject of the decision, (2) the fiduciary was informed with respect to the subject of the decision, and (3) the fiduciary rationally believed that the decision was in the best interests of the corporation. As a practical matter, therefore, in order for a plaintiff to establish a breach of the fiduciary duty of care, the plaintiff will have the burden to establish that the defendant is not entitled to the protection of the business judgment rule. See, e.g., Everest Investors 8 v. McNeil Partners, 114 Cal.App.4th 411, 430 (2003) (“The rule establishes a presumption that directors’ decisions are based on sound business judgment, and it prohibits courts from interfering in business decisions made by the directors in good faith and in the absence of a conflict of interest.”) For law firm managers, then, if the managers can show they acted impartially based on the advice of the law firm’s inside and outside professionals (e.g., financial officers, accountants, and lawyers) they could be protected by the business judgment rule.

It should be noted, however, that the precise scope of the standard applying to the duty of care in the partnership context, and more particularly the law firm context, has not been developed. With respect to the business judgment rule itself, courts have held that the business judgment rule specifically applies only to corporate directors, not corporate officers because corporate officers are not performing the duties of directors. Gaillard v. Natomas Co., 208 Cal. App. 3d 1250, 1265-66 (1989). In Gaillard, the Court determined that inside directors were not, as a matter of law, protected by the statutory business judgment rule. Id. The decision in Gaillard made clear that not only was the business judgment rule only available to corporate directors, but where directors were also officers, their decisions would not be protected by the business judgment rule. Id. If the reasoning of Gaillard is followed in the law firm context, then there would be no automatic protection within the confines of the business judgment rule, but the standards would be those of general application of the rules where a gross negligence and recklessness standard applies.

Two California cases highlight the uncertainty over whether, and how, the business judgment rule applies in the partnership context. In Lamden v. La Jolla Shores Clubdominium Homeowners Ass’n, 21 Cal. 4th 249, 259 (1999) the court held that “neither the California statute nor the common law business judgment rule, strictly speaking, protects noncorporate entities.” In Lamden, the question was whether the rule applied to the decisions of the board for an

unincorporated homeowner’s association. Although it upheld the board’s decision, the Court applied a test of objective reasonableness to the board’s statutory discretionary decision-making authority. The Court specifically noted that, “California’s statutory business judgment rule contains no express language extending its protection to noncorporate entities or actors.”

Despite the holding in Lamden that “neither the California statute nor the common law business judgment rule, strictly speaking, protects noncorporate entities,” California Courts have applied the common law business judgment rule in the partnership context. See Lee, 50 Cal. App. 4th at 712. In applying the business judgment rule to limited partnerships, Courts have relied on Wyler v. Feuer, 85 Cal. App. 3d 392, 402 (1978), to draw an analogy between limited partnerships and corporate business judgment:

These characteristics–limited investor liability, delegation of authority to management, and fiduciary duty owed by management to investors–are similar to those existing in corporate investment, where it has long been the rule that directors are not liable to stockholders for mistakes made in the exercise of honest business judgment, or for losses incurred in the good faith performance of their duties when they have used such care as an ordinarily prudent person would use. By this standard, a general partner may not be held liable for mistakes made or losses incurred in the good faith exercise of reasonable business judgment. [Internal citations omitted]

The Wyler case, as well as subsequent cases relying on Wyler, involved corporate entities which had organized into partnerships, either limited partnerships or general partnerships. If followed, Wyler would offer significant protections to law firm managers: “The good faith business judgment and management of a general partner need only satisfy the standard of care demanded of an ordinarily prudent person, and will not be scrutinized by the courts with the cold clarity of hindsight.” 85 Cal. App. 3d at 403. This “ordinarily prudent person” standard of care is the same as that articulated in the business judgment rule, although the Wyler Court did not hold that the good faith of the general partner will be presumed, as is the case under the business judgment rule.

If law firms continue to struggle and face bankruptcy these issues are likely to become fertile ground for interesting and importance court decisions as lawsuits like Mr. Bunsow’s against the former Dewey & LeBoeuf managers go forward. Misrepresentation Claims.

Law firm managers or insiders may also be liable based on claims of intentional or reckless misrepresentations or failures to disclose information. Especially with respect to the financial position of the firm, this could be fertile ground for litigation. For example, in the case of the Dewey & LeBouef firm, there are allegations that for 2011 gross revenues were more than $150 million lower than reported to the Am Law 100; the profits were over $88 million lower than reported; and the profits per equity partner were over $700,000 lower than reported. Given the severe financial condition of distressed law firms, along with the frequent press reports

surrounding troubled firms and the need for pubic responses, the number of statements that could be later challenged could be enormous.7

One recent California case may provide some comfort to law firm managers. In Mission West Properties, L.P. v. Republic Properties Corp., 197 Cal. App. 4th 707, 716 (2011), the Court found that there was no breach of fiduciary duty, under either the common law or statute, by one defendant for inadequate disclosure of financial information where the partners (real estate developers) were both sophisticated business persons with knowledge and access to information. However, while the non-manager partners in a law firm presumably are sophisticated, the Mission West Properties Court emphasized the fact that, not only were the partners sophisticated, but that they had equal access to the sources of information. In the law firm context, financial information is generally guarded and filtered by the firm management.

Although the argument was rejected in the real estate development partnership context in Mission West Properties, some financial information may be mandatory for managers of a law partnership to circulate to other partners. RUPA specifies that each partner “shall furnish . . . [w]ithout demand, any information concerning the partnership’s affairs reasonably required for the proper exercise of the partner’s rights and duties under the partnership agreement or this chapter.” California Corporations Code §16403(c)(1). Moreover, a partner must furnish “on demand, any other information concerning the partnership’s business and affairs, except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances.” Id., §16403(c)(2). This duty, however, is likely waivable in the partnership agreement. See Official Comment 3 to RUPA §403(c). Lawyers who suspect their firm may be failing financially should consider requesting specific and updated information regarding the firm’s finances.

Several cases involving law firms and law partners have recognized that “[p]artners have a duty to make a full and fair disclosure to other partners of all information which may be of value to the partnership. 1 Rowley on Partnership § 20.2, at 512-13 (2d ed. 1960).” Day v. Sidley & Austin, 394 F. Supp. 986, 993 (D.D.C. 1975), aff’d 548 F.2d 1018 (D.C. Cir. 1976), cert. denied 431 U.S. 908 (1977); see also Roan v. Keck, Mahin & Cate, 1992 U.S. App. LEXIS 12030 (7th Cir. May 18, 1992) (A partner’s fiduciary “duty bars concealment, deception or fraud”).

Again, if the unfortunate trend of law firm failures continues, there are likely to be a variety of lawsuits surrounding allegations of misrepresentations regarding the firm’s financial performance and related issues.

Insurance Coverage.

One important option for all law firms of significant size to consider is management liability insurance. The website of the Chubb Group of Insurance companies puts it well: “Today, the demands of both running the business and providing ever-broadening professional

7 See, for example, the alleged misstatements by firm leaders of Dewey & LeBouef as reported at http://www.bankruptcymisconduct.com/new/organizations/dewey-leboeuf/dewey-leboeuf- viability.html.

services to clients often require that the firm delegate management responsibility among dedicated committees. Now smaller groups of partners or shareholders typically are making the decisions. This corporate management structure exposes the partners and shareholders to many of the same liability risks faced by the directors and officers of corporate entities. Like corporate entities, professional firms -- including law firms -- require specialized insurance for the decisions they make in the day-to-day management of their business.”8

Chubb’s Management Liability Insurance policy for law firms includes these important policy features:

• Coverage for claims brought by partners not involved in the firm’s management -- an internal exposure that traditional directors and officers (D&O) and errors and omissions (E&O) liability insurance policies do not generally provide. • Coverage for claims of mismanagement or negligence in the day-to-day business decisions made by the firm’s management committee or executive officers. • Coverage for partnership agreement and compensation disputes. • Business tort coverage, such as for claims for interference with contractual relations. • Punitive damages coverage (where insurable by law). • Defense sublimit of 10% for claims seeking enforcement of a contract. • Spousal coverage. • Coverage for subsidiaries.

In a dissolution context, it is typical for the partners in charge of the dissolution to specifically obtain errors and omissions liability insurance.

A substantial area of controversy and uncertainty is whether, and when, an action can be brought on behalf of the bankruptcy estate. Such claims might be barred under the “insured v. insured” exclusion. Typically, such an exclusion provides, “basically, that if [a corporation] sues its directors or officers itself, they have no liability coverage. Some covered claims, such as shareholders’ derivative actions, are excepted from the exclusion, even though they are at least in theory on behalf of the corporation.” Biltmore Associates, LLC v. Twin City Fire Insurance Co.¸ 572 F.3d 663, 666 (9th Cir. 2008). As the Ninth Circuit explained, a typical “insured v. insured” exclusion, “provides [that] ‘[t]he Insurer shall not be liable to make any payment for Loss in connection with any Claim made against the Directors and Officers . . . brought or maintained by or on behalf of an Insured in any capacity.’” Id. at 688. The Court commented that, “This is not the gobbledygook it sounds like to the uninitiated on an overly rapid reading. Insurance against shareholders derivative suits and employment claims is essentially liability insurance. The trigger for liability insurance is a claim by someone not under the control of the insured himself. By contrast, people buy casualty insurance against the risks created by their own bad luck or carelessness. Thus, one buys fire insurance and gets indemnified even for carelessly leaving a lit candle untended and burning down one’s own house. And one buys automobile comprehensive and collision coverage to get indemnified for carelessly damaging one’s own car.” Id.

In Biltmore, applying Arizona law, the Ninth Circuit broadly held that, “that for purposes of the insured versus insured exclusion, the prefiling company and the company as debtor in

8 http://www.chubb.com/businesses/csi/chubb832.html.

possession in chapter 11 are the same entity. The bankruptcy code defines a Chapter 11 debtor in possession as the debtor. The debtor, in turn, is defined as the ‘person or municipality concerning which a case under this title has been commenced.’ Bankruptcy cases can be filed only with respect to pre-bankruptcy persons. Thus the debtor in possession is the debtor, and the debtor is the person, Visitalk, that filed for bankruptcy. Applying these statutory provisions literally, Visitalk, the debtor in possession, is the same person for bankruptcy purposes as Visitalk, the pre-bankruptcy corporation. There is no good reason to interpret the language other than literally in this context.” Id. at 671.

The Ninth Circuit referenced the many conflicting decisions on this point from around the country and specifically overruled contrary opinions from both a bankruptcy court and a district court. Id. at 671 & notes 15-17. But Biltmore Associates is far from the final word. Other cases, in both other federal circuits and in state courts, have come to the opposite conclusion – at least based on the facts before them. For example, in Yessenow and Patel v. Executive Risk Indemnity, Inc., 953 N.E.2d 433, 443 (Ill. App. 2011), the Illinois Appellate Court found

Biltmore [to be] distinguishable from the instant case in some key respects, [and] we find that it does not support Executive’s argument. First, in this case, Abrams filed the lawsuits against plaintiffs in his capacity as a court-appointed trustee, not a debtor-in-possession. A court-appointed trustee, unlike a debtor-in-possession, is acting with the imprimatur of the court, reducing the fear of collusion, which, as the Biltmore court noted, is “among the kinds of moral hazard that the insured versus insured exclusion is intended to avoid.” Biltmore, 572 F.3d at 674. Further, in Biltmore, there was actual evidence of collusion, as Visitalk, the debtor-in-possession, initially filed the lawsuit against the corporation’s officers and directors and then consented to a judgment against itself before assigning the claims to the trustee. No such evidence of collusion is present in this case and, as noted above, would be unlikely given that the trustee is acting with the authority of the court. Therefore, in this case, unlike in Biltmore, where a court-appointed trustee is working on behalf of creditors and under the authority of the bankruptcy court, we find that the trustee and the debtor hospital are not the same entity for purposes of the insured versus insured exclusion.

In another notable case, the district court for the Northern District of Georgia did not follow Biltmore with respect to an action brought by a committee of noteholders. The Court concluded that, while “[t]he Bondholders Committee filed its action on behalf of At Home’s estate, bankruptcy law does not treat it and At Home as the same entity.” Cox Communications Inc. v. National Nation Union Fire Insurance Co., 708 F. Supp. 2d 1322, 1330 (N.D. Ga. 2010).

Similarly, in In re Central Louisiana Grain Cooperative, Inc., 467 B.R. 390, 397 (Bankr. W.D. La. 2012), in a well-reasoned opinion, a bankruptcy court in Louisiana refused to apply the insured v. insured exclusion to foreclose a claim by a trustee on behalf a bankruptcy estate. The bankruptcy court emphasized that not only is a trustee a “legal entity separate from the debtor,” but also “owes his or her duties not to the debtor, but to the bankruptcy estate and ‘the entire community of interests’ of the debtor.” Id. at 395-96.

The lessons from these cases is that the law – at least outside of federal courts in the Ninth Circuit – is in flux and split; the specific policy language and the state law governing must be examined carefully; and the structure of what entity brings a claim can be critical.

JEWEL v. BOXER CHRISTOPHER D. SULLIVAN Trepel Greenfield Sullivan & Draa LLP Jewel v. Boxer claims.

Introduction

One of the most controversial issues in law firm insolvencies has been the application of the 1984 California case, Jewel v. Boxer, 156 Cal. App. 3d 171, 178-89 (1984). In particular, the questions of whether (a) profits from unfinished business matters that move with the partners of a dissolved firm to a new firm can be recovered by the dissolved firm under the Uniform Partnership Act (see Development Specialists, Inc. v. Aiken Gump Strauss Haur & Feld (In re Coudert Brothers LLP, 2012 U.S. Dist. LEXIS 110715, *18-19 (S.D.N.Y July 18, 2012)) and (b) if a dissolved firm’s waiver of the rights under the Jewel v. Boxer (“Jewel waiver”) can be attacked as a fraudulent transfer (see In re Heller Ehrman LLP v. Arnold & Porter, LLP (In re Heller Ehrman LLP), 2011 Bankr. LEXIS 1497 (Bankr. N.D. Cal. April 22, 2011).) In In re Brobeck, Judge Montali described the question of whether such a Jewel waiver by an insolvent firm is valid as a matter of apparent first impression: a dramatic intersection of well-established and necessary rules appropriate for the winding up and dissolution of a law firm with the equally well-established principles recognizing rights of third-party creditors that protect them from the adverse financial consequences of an otherwise valid transaction. In a time when the financial collapse of legacy institutions can occur quickly, a last minute attempt at order rather than chaos cannot prevail over the rights of that firm's creditors. Greenspan v. Orrick, Herrington & Sutcliffe LLP (In re Brobeck, Phleger & Harrison LLP), 408 B.R. 318, 325 (Bankr. N.D. Cal. 2009). Since Judge Montali’s decision in Brobeck, many law firms and lawyers have debated the merits of the decision, with some denouncing the outcome. Yet, the courts that have since addressed these issues have followed Brobeck, allowed similar unfinished business claims to go forward, and denied interlocutory appeals of such decisions. In particular:

• On August 10, 2012, the Northern District of California again rejected attempts by law firm defendants to remove the reference from Judge Montali’s court based

largely on the law firms’ contentions that the importance of the issues required immediate consideration by a District Court. Greenspan v. Paul, Hastings, Janofsky & Walker LLP, 2012 U.S. Dist. LEXIS 112926 (N.D. Cal. Aug. 10, 2012).

• On July 18, 2012 and May 24, 2012, the Southern District of New York in the Coudert Brothers bankruptcy case upheld claims based on a dissolved firm’s right to unfinished business profits holding that, “if a former partner makes use of a "partnership asset," or "partnership property," she has a fiduciary duty to account to her former partners for any benefit that she derives from it. That includes the business of the partnership.” Development Specialists, Inc. v. Aiken Gump Strauss Haur & Feld (In re Coudert Brothers LLP), 2012 U.S. Dist. LEXIS 110715, *18-19 (S.D.N.Y July 18, 2012)).

• On March 21, 2011, the Southern District of New York denied a motion for permissive interlocutory appeal from Judge Drain’s decision denying law firm defendants’ motions to dismiss the complaints alleged by the trustee in In re Coudert Brothers LLP bankruptcy for unfinished business profits, holding that “[a]lthough the application of the unfinished business doctrine to hourly fee matters is a matter of first impression in New York, that alone does not mean that the question is a ‘difficult’ one. . . . the Court is aware of [no authority] that conflicts with the decision of the Bankruptcy Court. Rather, authorities in other jurisdictions uniformly hold that the unfinished business doctrine applies to hourly fee matters as well as contingency fee matters.” Dev. Specialists, Inc. v. Akin Gump Strauss Hauer & Feld, LLP (In re Coudert Bros. LLP Law Firm Adversary Proceedings), 447 B.R. 706, 712-13 (S.D.N.Y. 2011).

• On April 22, 2011, Judge Montali denied motions to dismiss by several law firms fraudulent transfer claims based on Heller Ehrman LLP’s waiver in its dissolution plan of its rights under Jewel rights to hourly fees from unfinished business matters. See In re Heller Ehrman LLP v. Arnold & Porter, LLP (In re Heller Ehrman LLP), 2011 Bankr. LEXIS 1497 (Bankr. N.D. Cal. April 22, 2011).

• On March 22, 2011, the Southern District of New York in Development Specialists, Inc. v. Jones Day, et al., Case No. 1:10-cv-09334-VM, Docket No. 33, denied an interlocutory appeal from a bankruptcy court decision allowing unfinished business claims to go forward holding that there was no “substantial basis for dispute” that hourly fees arising from a law firm’s unfinished business were “firm assets,” noting “authorities in other jurisdictions uniformly hold that the unfinished business doctrine applies to hourly fee matters as well as contingency fee matters.” The Court also held that “under New York law, when a professional corporation of lawyers dissolves and a lawyer leaves with a contingent fee case, . . . that case remains a firm asset”) (quoting Santalucia v. Sebright Transp. Inc., 232 F.3d 293, 300-01 (2d Cir. 2000); id. at 10 (“Numerous decisions of the New York Appellate Division are in accord.”).

• On September 2, 2010, the Northern District of California denied a motion for permissive interlocutory appeal from Judge Montali’s decision in Brobeck, noting “Defendants fail to cite analogous case law indicating that other bankruptcy judges have come to a different conclusion.” N.D. Cal. Case No. 09- 04256, Docket No. 8.

• On August 7, 2009, Judge Robert D. Drain of the Bankruptcy Court for the Southern District of New York denied a motion to dismiss the complaints by the trustee in the In re Coudert Brothers bankruptcy against law firms seeking the profits derived from hourly fees received on the debtor’s unfinished business. See In re Coudert Brothers LLP, U.S. Bankr. Ct. S.D.N.Y., Case No. 06-12226, Adv. P. 09-1494 Dckt. No. 14

To provide a good overview of the legal issues raised, we are providing excerpts from the Heller Ehrman estate’s recent motion for summary judgment in the Heller bankruptcy, as well as the oppositions of both the Jones Day firm and Orrick, Herrington & Sutcliffe, LLP.

Motion for Summary Judgment of Plaintiff Heller Ehrman LLP

INTRODUCTION Plaintiff can establish as a matter of law a number of specific elements under 11 U.S.C. §

548 and Cal. Civ. Code ' 3439.03, sufficient to confirm the defendant’s liability for a constructive fraudulent transfer. First, there has been a transfer of the Debtor’s property to defendant. Second Amended Complaint (Docket No. 27) (“SAC”) ¶¶ 98, 100; 11 U.S.C. § 548(a)(1). Sections II.A., II.B. & III.A., infra. Second, nothing was bargained for, exchanged, or promised to Heller in return for its passage of the Jewel Waiver. There was no actual exchange of anything of value in return for the transfer. Thus, the Debtor received less than reasonably equivalent value as a matter of law. SAC ¶ ¶ 101, 102; 11 U.S. C. § 548(b)(1); see Greenspan v. Orrick, Herrington & Sutcliffe LLP (In re Brobeck, Phleger & Harrison LLP), 408 B.R. 318, 341 (Bankr. N.D. Cal. 2009). Sections II.C. & III.B., infra. Third, at the time of the transfer, the debtor intended to incur, and believed it would incur, debts beyond its ability to pay as such debts matured. Debtor had debts (millions) that were due, many more (millions) that were coming due, and no money of its own (zero) with

which to pay them. Therefore, undisputable facts demonstrate the debtor was insolvent as a matter of law. SAC ¶ 104; 11 U.S.C. § 548(b)(ii)(III). Sections II.D. & III.C., infra. Fourth, defendant received money from legal fees for Heller unfinished business matters, entitling plaintiff to recover the value of the property transferred for the benefit of the estate. SAC ¶ 105; see 11 U.S.C. § 550(a)(2). Sections II.B. & III.A., infra. Fifth, the defendant cannot meet its burden to sustain an affirmative defense under 11 U.S.C. § 550(b)(1). Defendant (a) did not take the property for value (Sections II.E. & III.D.1.) and (b) admits to being aware of a number of undisputable facts, which precludes any “good faith” defense (Sections II.F. & III.D.2.). Defendant had sufficient knowledge such that it did not take without knowledge of the voidability of the transfer -- it knew the Debtor was financially troubled, had defaulted on its loans, was at risk of bankruptcy, and attempting a transfer which had resulted in identical claims for fraudulent transfer that resulted in widely- publicized payouts of millions of dollars by other firms; and (iii) admits that several firms (including defendant Orrick, Herrington & Sutcliffe LLP [“Defendant” ]) actually contacted the debtor prior to the transfer to discuss “bankruptcy risks” and “Jewel v. Boxer” issues. See 11

U.S.C. ' 550(b). * * * *

ARGUMENT

A. The Jewel Waiver Effected A Transfer Of The Property Of The Debtor To The Defendant. For the reasons set forth in the Court’s April 22 Memorandum Decision, the undisputed facts establish that the Jewel Waiver transferred an interest in the property of the Debtor: specifically, the Debtor’s “right to profits from a dissolved law firm’s unfinished business as defined in Jewel and as reiterated by this court in [Brobeck].” Heller Ehrman LLP v. Arnold & Porter LLP (In re Heller Ehrman LLP), 2011 Bankr. LEXIS 1497, at *14-15 (Bankr. N.D. Cal. Apr. 22, 2011). Heller itself previously took the position that Jewel applies to Heller regardless of Heller’s “two-tiered” structure. Supra, pg. 4 & n.6. Shareholders that served on Heller’s management committees have confirmed that despite this two-tiered structure, Heller operated as one firm; the Shareholders owed fiduciary duties of loyalty to one another and to the firm; and

that the clients the Shareholders provided legal services to were clients of the firm. See supra, Part II.A. In fact, the Shareholders specifically testified that they did not believe that the “two tiered” structure effected their fiduciary duties. See id. Under the Court’s previous ruling, these facts establish the Jewel Waiver transferred property of the Debtor. See In re Heller Ehrman LLP, 2011 Bankr. LEXIS 1497, at *10 (holding Jewel applied where the Shareholders “worked together as attorneys, representing clients, sharing the good with the bad, and quite importantly, trusting one another as fellow members of the same law firm.”); id. (noting the Shareholders were “themselves attorneys practicing an honored and respected profession, and they are governed by yet another set of rules that bind those professionals together. Those are the rules of trust, confidence and loyalty, rules that apply to attorneys representing clients together, fiduciary ones to be sure.”). This conclusion is strongly reinforced by the recent decision in the Coudert proceedings in the Southern District of New York, Development Specialists, Inc. v. Akin Gump Strauss Hauer Feld LLP, 11-5994, Docket No. 35 (S.D.N.Y., May 24, 2012). In that case it was squarely held that the unfinished “Client Matters were Coudert assets on the Dissolution Date” and this “the Former Coudert Partners are obligated to account for any profits.” Id. at 12. Heller’s Plan of Dissolution resulted in a transfer of those rights to profits without a duty to account under Jewel, which the Defendant then received as (at least) an “immediate transferee.” Brobeck , 408 B.R. at 339 n.31; Docket No. 28 at 12. It is undisputed that Defendant has received at least some of the “unfinished business” of the Debtor following the Jewel Waiver. See Sullivan Decl. Ex. 65 (Interrog. Resp. at 24). Thus, as a matter of law it should be found that there was a transfer of the property of the Debtor to the Defendant.

B. Heller Did Not Pass The Jewel Waiver As Part Of A Contemporaneous Exchange In Return For Anything Of Value. A transfer of an interest of the property of the debtor may be avoided where the debtor received less than a reasonably equivalent value (“REV”) in exchange for the transfer. See 11

U.S.C. ' 548(a)(1)(B)(i) (where the transferor “received less than reasonably equivalent value in exchange for such transfer or obligation”); Cal. Civ. Code ' 3439.04 (where the debtor

transferor “made the transfer or incurred the obligation without receiving a reasonably equivalent value in exchange for the transfer or obligation”). “Given the similarities and similar origins of

California fraudulent transfer law and 11 U.S.C. ' 548, cases applying the phrase ‘reasonably equivalent value’ under Bankruptcy law are applicable.” Easyriders, Inc. v. Bayview Commer. Leasing (In re Easyriders, Inc.), 2006 Bankr. LEXIS 2445, at *20-21 (Bankr. C.D. Cal. May 18, 2006). Determining whether a debtor received REV in exchange for the transfer involves several steps. See In re Brobeck, Phleger & Harrison LLP, 408 B.R. 318, 341 (Bankr. N.D. Cal. 2009) (describing determination as a “two step process”) (citing Jordan v. Kroneberger (In re Jordan), 2008 Bankr. LEXIS 3262, at *28-29 (Bankr. D. Idaho July 1, 2008) and Barber v. Dunbar (In re Dunbar), 313 B.R. 430, 437 (Bankr. C.D. Ill. 2004)); Pummill v. Greensfelder, Hemker & Gale, P.C. (In re Richards & Conover Steel, Co.), 267 B.R. 602, 612 (B.A.P. 8th Cir. 2001) (REV determination “requires analysis of whether: (1) value was given; (2) it was given in exchange for the transfers; and (3) what was transferred was reasonably equivalent to what was received.”). Here, summary judgment is appropriate on the lack of “reasonably equivalent value” given in exchange for the Jewel Waiver because there is no evidence that anything of “value” was provided “in exchange” for the waiver. “Value is defined for purposes of section 548 of the Code as ‘property, or the satisfaction or securing of a present or antecedent debt of the debtor[.]’” Wyle v. C.H. rider & Family (In re United Energy Corp.), 944 F.2d 589, 595 (9th Cir.

1995) (quoting ' 548(d)(2)(A)). Moreover, this “value” must be given “in exchange” for the interest in property that was transferred. “A transfer is for value if one is quid pro quid of the other.” Id. Such an exchange must be contemporaneous: “the requirement that the debtor must have ‘received’ the value in question expresses a temporal condition demanding an element of contemporaneity in the determination of whether something close to the reasonable equivalence has been exchanged.” In re Brobeck, 408 B.R. at 342 (quoting Jackson v. Mishkin (In re Adler, Coleman Clearing Corp.), 263 B.R. 406, 466-67 (S.D. N.Y. 2001)).1

1 In the third step, “if there was value in exchange, the court must determine whether the value of what was transferred was reasonably equivalent to what the debtor received.” In re Brobeck, 408

Here, as a matter of law, nothing of value was “exchanged.” “Any ‘property’ that a [transferor] would have enjoyed, regardless of [the transfer], cannot be regarded as property received ‘in exchange for’ the transfer or obligation.” Rosen v. Moreno (In re Rood), 2011 Bankr. LEXIS 1708, at *11 (Bankr. D. Md. Feb. 11, 2011) (quoting In re TOUSA, Inc., 422 B.R. 785, 867-68 (Bankr. S.D. Fla. 2009). Moreover, the fact that a debtor “hoped, or even expected,” that the transfer would result in benefits to the debtor at some point in the future is irrelevant. Id. Three cases are illustrative. In Brobeck, the defendants contended that the Brobeck law firm received “value” from the firm’s Jewel waiver at dissolution because the waiver resulted in the “[Brobeck firm’s former partners] assisting with collecting pre-dissolution accounts receivable . . . relieving Brobeck of the obligation to complete Unfinished Business and/or account for it, avoiding malpractice claims against Brobeck or disputes that would have arisen had Brobeck retained the Unfinished Business . . . assisting former Brobeck employees to find jobs, and assembling and returning files back to Brobeck clients.” Brobeck, 408 B.R. at 342. The court rejected this argument, holding:

[E]ven if what the Partner Defendants provided Brobeck constitutes value, such value was not ‘in exchange for’ the Jewel Waiver. Defendants either provide no evidence that any of the items they contend benefitted Brobeck were actually bargained for in exchange for the Jewel Waiver, or even if some of them were, such items are required by law or professional ethics rules and hence do not constitute value in exchange. Id. at 343. The court also noted that the Brobeck partners’ assistance in accounts receivables and other activities were already required by California law. Thus, “no evidence exists in the record that a partner had to perform any of these tasks in exchange for the Jewel Waiver.” Id. The court granted summary judgment to the trustee on this issue. See id. Similarly, in United States v. Crystal Evangelical Free Church (In re Young), 82 F.3d

B.R. at 341. “Reasonably equivalent value” means that “the debtor has received value that is substantially comparable to the worth of the transferred property.” BFP v. Resolution Trust Corp., 511 U.S. 531, 548 (1994). “Because the policy behind fraudulent transfer law is to preserve assets of the estate, reasonably equivalent value is determined from the standpoint of creditors; it is not determined from the defendant's perspective.” In re Brobeck, 408 B.R. at 341 (quoting Brandt v. nVidia Corp. (In re 3dfx Interactive, Inc.), 389 B.R. 842, 862 (Bankr. N.D. Cal. 2008)).

1407 (8th Cir. 1996),2 the court affirmed the bankruptcy court’s holding on summary judgment that the debtors did not receive reasonably equivalent value “in exchange” for their contributions to their church because, even assuming that religious services provided to the debtor were cognizable “value” under the Bankruptcy Code, there was no dispute that “church services were available to all regardless of whether any contributions were made.” 82 F.3d at 1415. Affirming the bankruptcy court, the Eight Circuit noted the long line of cases holding that where there is no dispute that church services would have been provided regardless of contribution, no “exchange” of reasonably equivalent value can be found for such contributions. See id. at 1415 (collecting cases). Similarly, in TSIC, Inc. v. Thalheimer (In re TSIC, Inc.), 428 B.R. 103 (Bankr. D. Del. 2010), the court granted summary judgment and held that the debtor did not receive reasonably equivalent value “in exchange” for a severance package to its CEO. The court held that summary judgment was appropriate because the CEO already “had a pre-existing duty to serve as CEO pursuant to the Employment Agreement,” and thus nothing was provided to the Debtor in exchange for the severance package. 428 B.R. at 114-15.3 See also Daley v. Chang (In re Joy Recovery Tech. Corp.), 286 B.R. 54, 75 (Bankr. N.D. Ill. 2002) (debtor corporation received no value from shareholder's covenant not to compete after his stock had been repurchased; as principal of the corporation, shareholder owed such a duty in any event: “Prior to the

2 The Eighth Circuit’s opinion was reversed and then later affirmed on different grounds, specifically, the applicability of the Religious Freedom Restoration Act to the Bankruptcy Code’s constructive fraudulent transfer provisions. See Christians v. Crystal Evangelical Free Church, 521 U.S. 114 (1997) (vacated and remanded on other grounds); Christians v. Crystal Evangelical Free Church (In re Young), 141 F.3d 854 (8th Cir. 1998) (reinstated on remand); Christians v. Crystal Evangelical Free Church, 525 U.S. 811 (1998) (writ of certiorari denied).

3 The court in TSIC also held that the CEO’s waiver of possible, future claims against the debtor in exchange for the severance package was not value provided in exchange for the transfer because any benefit to the Debtor would have occurred much later, as the CEO “did not have a claim already filed against Debtor at the time of the transfer.” In re TSIC, Inc., 428 B.R. at 114- 15. This holding is similar to the holding in Brobeck, where the court rejected arguments that the law firm’s Jewel waiver resulted in less malpractice claims on the grounds that “[s]uch claims are speculative and none of the Partner Defendants attempted to quantify the value of these alleged avoided malpractice claims or what economic value they provided to Brobeck.” Brobeck, 408 B.R. at 344.

transaction, Chang owed a fiduciary duty to Joy not to compete with it. After the transaction, Joy had the same promise, except it cost the company $ 100,000.”). Here, as in Brobeck, even assuming that Heller received “value” as a result of the Jewel Waiver, as in Brobeck, In re Young, and TSIC, there is no evidence that Heller was given such “value” “in exchange” for the Waiver. Mr. Benvenutti, former head of Heller’s Dissolution Committee and other Shareholders as well have repeatedly confirmed that the Shareholders (like the Brobeck partners and the TSIC CEO) already had a duty to provide assistance to Heller in collection of accounts receivables and to fulfill their professional obligations to Heller’s clients. See supra Part II.C. More fundamentally, as in Brobeck and In re Young, the evidence confirms that such services (and the alleged “benefits” alleged to have resulted from such services) were not provided “in exchange” for the Jewel Waiver. See supra Part II.C. As the testimony of Mr. Benvenutti—as well as other Heller shareholders—makes clear, the alleged “benefits” that supposedly accrued to Heller as a result of the Jewel Waiver were not provided “in exchange” for the Waiver: as in Brobeck, it is undisputed that there was no “bargained for” exchange of any kind. See In re Brobeck, 408 B.R. at 342 (“A transfer is for value if one is quid pro quid of the other.”). Here, there was no “quid pro quid.” As in Brobeck, summary judgment is thus appropriate on this issue.

C. At The Time Of The Jewel Waiver, Heller Could Not Pay Its Debts As They Become Due. A transfer of an interest in property may be avoided where, inter alia, the debtor made the transfer under circumstances in which it was unable to pay its debts as they became due. See

11 U.S.C. ' 548(a)(1)(B)(iii) (applicable where the transferor “intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor’s ability to pay as such debts matured”); Cal. Civ. Code ' 3439.04 (applicable where the transferor “[i]ntended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.”). Courts, in interpreting these provisions, look to the law of other states that have adopted the UFTA, as well as courts’ application of 11 U.S.C. ' 303(h)(1). See generally Ash v. Moldo (In re Thomas), 2006 Bankr. LEXIS 4855, at *17-21 (B.A.P. 9th Cir.

July 25, 2006); Asarco LLC v. Ams. Mining Corp., 396 B.R. 278, 399 n. 140 (S.D. Tex. 2008). Under California law, “[o]nce the burden to show that the transferor did not receive reasonably equivalent value is met, a transfer is presumptively fraudulent and the burden shifts.” Cal. Serv. Emples. Health & Welfare Trust Fund v. Advance Bldg. Maint., Inc., 2010 U.S. Dist. LEXIS 90529, at *14-15 (N.D. Cal. Sept. 1, 2010) (citing Whitehouse v. Six Corp., 40 Cal. App. 4th, 527, 534 (1995), In re Pajaro Dunes Rental Agency, Inc., 174 B.R. 557, 489-90 (Bankr. N.D. Cal. 1994)). “The transferee must show that (1) the debtor's remaining assets were not unreasonably small in relation to the business in which it was engaged and (2) the debtor should not have reasonably believed that it would incur debts beyond its ability to pay as they

became due.” Id. (citing Cal. Civ. Code ' 3439.04(a)(2); In re Pajaro Dunes, 174. B.R. at 590). The test for whether a debtor believed that it would incur debtor that would beyond the debtor’s ability to pay as such debts matured “has a subjective and objective prong, and the test is satisfied if either prong is met.” Asarco LLC, 396 B.R. at 400. “The objective prong measures whether [the debtor], as a going concern, would reasonably have been able to pay its debts after making the challenged transfer.” Id. This “objective” test is met when it is established that the debtor was, as a factual matter, unable to pay its debts at the time of the transfers in question. Thus, where, at the time of the transfer, a debtor is already in default on loans which are due, the debtor is deemed to not be paying debts as they become due. See, e.g., Official Employment-Related Issues Committee of Enron Corp. v. Arnold (In re Enron Corp.), 2005 Bankr. LEXIS 3261, at *65-57 (Bankr. S.D. Tex. Dec. 9, 2005) (debtors deemed insolvent and “unable to pay their debts as they became due” where lowered credit ratings resulted in a “note trigger event” requiring Enron to repay, refinance or cash collateralize additional facilities totaling $ 3.9 billion and debtors immediately stopped operations thereafter,); In re Vitreous Steel Products Co., 911 F.2d 1223, 1238 (7th Cir. 1990) (reversing bankruptcy court’s finding that debtor was solvent on grounds that debtor, while paying certain “new bills as they became due,” had been “in default to the bank” and to other creditors at the time of the transfer).4

4 See also In re KUTZ, 1979 Bankr. LEXIS 768, at *5 (Bankr. W.D. Ky. Nov. 9, 1979) (“The mere fact of default should have given her reasonable cause to question Kutz' ability to orderly

Here, it is undisputed that as of September 19th, Heller’s loans from the Banks were due and owing. It is similarly undisputed that the Heller could not pay this debt as it was due, and did not believe that it would be able to repay this debt for months. This undisputed fact is alone sufficient to establish that Heller could not objectively believe that it was able to pay its debts as they became due at the time of the Jewel Waiver. It is undisputed that debts of over $50 million were already due at that time, and Heller could not pay them. Moreover, it is undisputed that after September 19, 2008, Heller’s Banks had “taken possession” of all of Heller’s cash and all proceedings from Heller’s collection of accounts receivables. This complete control over Heller’s cash and receivables rendered Heller unable to pay any of its other debts to other parties as they became due. Where a debtor’s only ability to make payments on debts is by use of funds controlled or provided by a third party, they are deemed to not be making payments on debts as they become due. See, e.g., Osherow v. Nelson Hensley & Consol. Fund Mgmt, L.L.C. (In re Pace), 456 B.R. 253, 272-73 (Bankr. W.D. Tex. 2011) (debtor was unable to pay debts as they became due where it lacked available funds to pay debts, necessitating borrowing tens of thousands of dollars”); Red Rock Rig 101, Ltd. v. Unibridge Sys. (In re Red Rock Rig 101, Ltd.), 2008 Bankr. LEXIS 1423, at *8-9 (B.A.P. 10th Cir. May 15, 2008) (“A company whose payments of its debts with borrowed funds which creates another liability is generally not paying its debts as they come due.”).5

retire his debts as they became due.”); Nelson v. Walnut Inv. Partners, L.P., 2011 U.S. Dist. LEXIS 75534, at *23 & *27 (S.D. Ohio July 13, 2011) (granting summary judgment where plaintiff established that prior to the transaction at issue, defendant “was out of covenant on two loans [and] had extended the aging of its accounts payable” thus demonstrating its inability to service its debts as they came due.”). 5 See also In re Food Gallery, 222 B.R. 480, 489 (Bankr. W.D. Pa. 1998) (granting involuntary petition and holding the debtor was unable to pay debts as they became due where it had only been able to make payments via voluntary “cash infusions” by general partner, such payments “must be considered by this Court for purposes of this matter to be third party payments of the debtor's obligations,” concluding “Consequently, the Court must conclude that the debtor itself has not, for the past year, generally been paying a significant portion of its debts as they become due.”); In re Chong, 16 B.R. 1, 5 (Bankr. D. Hawaii 1980) (entering order of relief and holding the debtor was not paying her debts as they became due, noting that debtor’s only means of paying debts was via receipt of gifts from relatives); In re Central Hobron Associates, 36 B.R. 111, 116 (Bankr. D. Hawii 1983) (same, noting “[a] company whose only payments of debts 'in the regular course of business' is with borrowed cash which creates still another liability is not

Here, Heller had no ability to pay its debts as they became due after the Banks took control of its funds. This is undisputable. A similar “unilateral” act of taking control over a debtor’s liquid assets occurred in Akers v. Castillo (In re Juarez), 2008 Bankr. LEXIS 4501 (Bankr. S.D. Cal. Feb. 5, 2008). There, the debtor sold real property to a third party. The proceeds of the sale were placed into a joint account to which the debtor had access. Thereafter, however, the debtor’s daughter-in-law transferred the remaining balance to an account solely in her name. The bankruptcy court held this was a constructive fraudulent transfer, because, while the daughter-in-law continued to make payments to third parties on behalf of the debtor following that transfer, when she “unilaterally took control of the money,” she rendered the Debtor insolvent and generally unable to pay his debts as they became due. 2008 Bankr. LEXIS 4501, at *9-11. Furthermore, it cannot be disputed that Heller was not paying its debts as they became due even before default, and that, thereafter, Heller only paid a limited group of “essential” creditors partial amounts. That Heller was partially paying some debts, or believed that at some point, it would be able to pay the past-due balances, is far from sufficient. Where a debtor is only able to make “partial” payments of its debts or hopes that it would be able to “renegotiate” them, they are deemed to be not paying their debts as they become due. See, e.g., Pajaro Dunes Rental Agency v. Spitters (In re Pajaro Dunes Rental Agency), 174 B.R. 557, 568, 593-94 (Bankr. N.D. Cal. 1994) (debtor lacked reasonably belief that it could pay debts as they became due, where debtor did not offer evidence that it could repay principal loan due “at the end of its original eight month term” and president admitted that debtor would not have been able to pay this debt on time and sought to “negotiate a new repayment schedule”); In re Ethanol Pac., 166

generally paying its debts as they become due.”), rev'd on other grounds, 41 B.R. 444 (D. Haw. 1984); In re Midwest Processing Co., 41 B.R. 90, 101 (Bankr. D. N.D. 1984) (entering order of relief and holding debtor was not paying its debts as they became due because “[a]lthough Midwest has been able to keep current on a large number of its monthly obligations, it has been only able to do so because of a deferral of payments on its obligations to its shareholders, in addition to the large infusions of cash received from its shareholders.”), rev’d on other grounds, 47 B.R. 903 (D.N.D. 1984), aff’d, 769 F.2d 483 (8th Cir. 1985); In re Knoth, 168 B.R. 311, 317- 18 (Bankr. D.S.C. 1994) (granting involuntary petition and holding debtor was unable to pay debts as they became due, noting “[p]ayments of a debtor's obligations by a third party are not treated as payment by the debtor himself.”).

B.R. 928, 930 (Bankr. D. Idaho 1994) (holding debtor was not paying its debts as they became due where debtor had liquidated its assets and “paid its creditors approximately one quarter of the amount they are owed”); In re Duty Free Shops Corp., 6 B.R. 38, 40 (Bankr. S.D. Fla. 1980) (holding debtor’s “[u]nilateral partial payment on overdue accounts is insufficient” to constitute payment of debts as they become due). In sum, following the September 19th default, Heller repeatedly acknowledged both before and after the Jewel Waiver, that it did not have funds to pay its debts that were due to the Banks, nor did it have funds to pay debts that were due to its creditors and employees. These undisputed facts establish, at the very least, that Heller, as an objective matter, lacked a reasonable belief that it could pay its debts as they became due.

D. No Affirmative Defense Is Possible Under Section 550(b)(1) Or Cal. Corp. Code ' 3439.08(b)(2).

11 U.S.C. § 550(b)(1) and Cal. Corp. Code ' 3439.08(b)(2) provide certain safe harbor defense to some transferees who have acted in good faith.6 See generally Schafer v. Las Vegas Hilton Corp. (In re Video Depot, Ltd.), 127 F.3d 1195, 1199 (9th Cir. 1997) (noting that initial transferees are subject to strict liability while subsequent transferees may assert the good faith defense). Under Section 550(b)(1), “[t]he elements of the ‘good faith’ defense are (1) good faith, (2) for value, and (3) without knowledge of the voidability of the transfer.” Woods & Erickson, LLP v. Leonard (In re AVI, Inc.), 389 B.R. 721, 735 (B.A.P. 9th Cir. 2008). Similarly, Cal. Corp. Code Section 3439.08 provides a defense to a subsequent transferee that is a “good faith

transferee who took for value.” Cal. Corp. ' 3439.08(b)(2). Under federal and California law, the burden of proving a good faith defense is upon the subsequent transferee. See Wolkowitz v. Beverly (In re Beverly), 374 B.R. 221, 240. (B.A.P. 9th Cir. 2007); In re AVI, Inc., 389 B.R. at 735. Here, Defendant cannot prove the elements required for this defense.

E. Defendant Did Not Take “For Value.”

6 Plaintiff alleges in the alternative that, under the unique circumstances here, Defendant qualifies as “an entity for whose benefit the transfer was made.” SAC ¶ 99. For the purposes of this motion, however, Plaintiff will assume arguendo that defendant is a subsequent transferee. See Docket No. 28, at 12 (Defendant may be named as subsequent transferee).

A defense under Sections 550(b)(1) and 3439.08(b)(2) requires the transferee to have taken the property in exchange “for value.” While courts disagree as to whether “for value” requires “reasonably equivalent value,”7 it is settled that the value given must be “property, or

satisfaction or securing of an antecedent debt . . . .” (11 U.S.C. § 548(d)(2)(A)) and be given “in exchange” for the property of the debtor at issue. See, e.g., Boyer v. Crown Stock Distrib. (In re Crown Unlimited Machine, Inc.), 2006 Bankr. LEXIS 4651, at *44 (Bankr. N.D. Ind. Oct. 13, 2006) (“to take for value appears to contemplate some type exchange, the giving of one thing for another”), aff’d, Boyer v. Crown Stock Distrib., Inc., 2009 U.S. Dist. LEXIS 12393, at *43-44 (N.D. Ind. Feb. 17, 2009), aff’d in part and rev’d on other grounds, Boyer v. Crown Stock Distrib., 587 F.3d 787, 796-97 (7th Cir. 2009). Thus, a subsequent transferee does not take “for value” where it receives the debtor’s property merely by virtue of its status as shareholder (see id.) or partner. See Hayes v. Palm Seedlings Partners-A (In re Agric. Research & Tech. Group), 916 F.2d 528, 540 (9th Cir. 1990) (“The partnership distributions here were not for value because Palms Seedlings-A made the distributions on account of the partnership interests and not on account of debt or property transferred to the partnership in exchange for the distribution.”). Nor does a subsequent transferee take for value where the “value” was not given “in exchange” for the property right at issue. See Boyer, 2009 U.S. Dist. LEXIS 12393, at *43-45. Likewise, a subsequent transferee does not take “for value” where the “value” provided was the performance of duties already required by statute. See In re Still, 963 F.2d 75, 76-78 (5th Cir. Tex. 1992). Here, the Defendant’s own admissions make it undisputable that Defendant (1) did not pay the Debtor anything in exchange for the Jewel Waiver; (2) did not pay the Heller Hires anything in exchange for the Jewel Waiver, but rather treated the Heller Hires just as they would any other lateral partner they hired; (3) only received the benefits of the Jewel Waiver by virtue of its inviting the Heller Hires to the partnership; and (4) did not do anything different in its

7 Compare Boyer v. Crown Stock Distrib., Inc., 2009 U.S. Dist. LEXIS 12393, at *41-43 (N.D. Ind. Feb. 17, 2009) aff’d in part and rev’d on other grounds, Boyer v. Crown Stock Distrib., 587 F.3d 787, 796-97 (7th Cir. 2009) with Rodgers v. Monaghan Co. (In re Laguna Beach Motors), 159 B.R. 562, 568-569 (Bankr. C.D. Cal. 1993) (concluding “‘reasonably equivalent value’ and not ‘fair market value’ is the proper standard for value under 550(b)(1)”).

representation in the Heller unfinished business by virtue of the Jewel Waiver. Indeed, Defendant and the other Jewel Defendants have claimed (a) the Jewel Waiver did not factor into the decision to hire the Heller Hires; (b) there was no consideration provided to the Heller Hires in exchange for the Jewel Waiver; (c) Defendant did not take on the Heller Unfinished Business in exchange for (or as a result of) the Jewel Waiver; and (d) Defendant did not provide representation in the Heller Unfinished Business differently due to the Jewel Waiver. As Orrick partner Mark Levie testified, he does not recall any part of the discussion regarding the compensation to be paid to the Heller Hires being related to the Jewel Waiver and no part of the compensation offered to the Heller Shareholders was paid in return for the Jewel Waiver. Sullivan Decl., Ex __ (Levie Depo. at 30:21-31:23). While Defendant paid the incoming Heller Hires as lateral partners or contract attorneys, no part of the compensation was paid in exchange for the Heller Hires joining the firm without a duty to account for unfinished business profits. Under the undisputed facts, Defendant did not take “for value.”

F. Defendant Did Not Take In “Good Faith And Without Knowledge Of The Voidability Of The Transfer.” A defense under the second prong of section 550(b) is determined by “what the transferee objectively ‘knew or should have known’ rather than examining what the transferee knew from a subjective standpoint.” In re AVI, Inc., 389 B.R. at 735 (quoting In re Agric. Research & Tech. Group, Inc., 916 F.2d at 535). “Transferees also have a duty to investigate if there is sufficient information to put the transferee on notice that something is wrong.” Id. “Knowledge of the voidability’ does not require actual knowledge; knowledge of facts to induce a reasonable person to investigate is enough.” Diaz-Barba v. Kismet Acquisition, LLC, 2010 U.S. Dist. LEXIS 50320, at *51 (S.D. Cal. May 20, 2010) (quoting 11 U.S.C. § 550(b)(1)). If a reasonable person would be aware that a transfer is even potentially voidable, the “good faith” defense under section 550(b)(1) is unavailable. See id. (holding good faith defense unavailable where transferee had knowledge of the debtor’s bankruptcy, “which would put a reasonable person on notice about the potential voidability of the transfer.”) (emphasis added). The “reasonable person” standard is objective, but applied depending on the transferee at

issue: “whether a transferee is on inquiry notice is informed by the standards, norms, practices, sophistication, and experience generally possessed by participants in the transferee’s industry or class.” Christian Bros. High Sch. Endowment v. Bayou No Leverage Fund, LLC (In re Bayou Group, LLC), 439 B.R. 284, 313 (S.D.N.Y. 2010). Thus, a “reasonably prudent law firm” standard applies to Defendant’s “good faith” defense. See id. (“the issue is whether the alleged "red flag" information would have put a reasonably prudent institutional hedge fund investor on inquiry notice that Bayou was insolvent . . . .”). Once the transferee is on “inquiry notice,” they are charged with everything a “reasonably prudent law firm” would have asked about and/or discovered following a “diligent investigation.” See id. How “similarly situated” law firms or non-lawyers (such as the press or insurance groups) responded is relevant to the application of the objective “inquiry notice” standard. See id. at 315 n.29. “Courts have determined that knowledge of a debtor's financial condition at the time of the transfer is sufficient to establish that a transferee has knowledge of voidability of a transfer.” In re KEY DEVELOPERS GROUP, 2010 U.S. Bankr. Ct. Motions 256, at *6 (Bankr. M.D. Fla. Apr. 6, 2011). See also Brown v. Third Nat'l Bank (In re Sherman), 67 F.3d 1348, 1356 (8th Cir. 1995) (holding “a transferee does not act in good faith when he has sufficient knowledge to place him on inquiry notice of the debtor's possible insolvency”); Jobin v. McKay (In re M & L Bus. Mach. Co.), 84 F.3d 1330, 1336- (10th Cir. 1996) (holding transferee lacked good faith where “a reasonably prudent investor in Mr. McKay's position should have known of M & L's fraudulent intent and impending insolvency”); Enron Corp. v. Ave. Special Situations Fund II, LP (In re Enron Corp.), 333 B.R. 205, 234 (Bankr. S.D.N.Y. 2005) (explaining that “Courts have found that the transferee does not act in good faith if the transferee had knowledge of the debtor’s unfavorable financial condition at the time of transfer. . . . [and] have further found 'a transferee does not act in good faith when he has sufficient knowledge to place him on inquiry notice of the debtor's possible insolvency'”); In re Bayou Group, LLC, 439 B.R. at 314 (“the great weigh of authority holds that it is information suggesting insolvency or a fraudulent purpose . . . that triggers inquiry notice”).8

8 See also Cohen v. Morais (In re Morais), 2009 Bankr. LEXIS 704, at *16-17 (Bankr. M.D. Fla. Feb. 24, 2009) (“A transferee who has knowledge or notice of the debtor's financial difficulties

In In re Sherman, for example, the Eighth Circuit held that the “good faith” defense was unavailable because the transferee was aware of the debtor’s “precarious financial condition.” In re Sherman, 67 F.3d at 1356. The court noted that the transferee was aware the debtor had “incur[red] substantial medical debts” and that “the debtors were behind in mortgage payments to the Bank and that the Bank was planning to commence foreclosure proceedings.” Id. Similarly, in Kendall v. Sorani (In re Richmond Produce Co.), 151 B.R. 1012 (Bankr. N.D. Cal. 1993), the court held that that the transferee could not prove its “good faith” defense under 11 U.S.C. § 550(b)(1) because the transferee “had extensive knowledge of the Debtor’s financial condition as a result of negotiations leading to its offer of a line of credit to the Debtor,” such that a reasonable person would have known of the possibility that the debtor was insolvent or undercapitalized. In re Richmond Produce Co., 151 B.R. at 1022. The court also noted that a third party had expressed a “concern” that the transaction lacked reasonably equivalent value, but that the transferee did not make a reasonably diligent investigation. See id. Another example is Grove Peacock Plaza, Ltd. v. Resolution Trust Corp., 142 B.R. 506 (Bankr. S.D. Fla. 1992). There, the court held that the transferee had not received the transfer ‘without knowledge of the voidability of the transfer” because at the time, “the debtor was in default and negotiating with the [transferee] regarding repayment of the loan,” and the transferee was “aware of the debtor's financial condition and the potential for a bankruptcy petition.” Grove, 142 B.R. at 520. Here, it is undisputed that prior to the Jewel waiver, Defendant received news articles and emails from Shareholders discussing Heller’s deteriorating financial condition, default, dissolution, and possible bankruptcy. It is also undisputed that at the time, Heller was in default to its Banks for over $50 million, had no available cash with which to make any payments to any

does not act in good faith.”); In re O'Connell, 119 B.R. 311, 317 (Bankr. M.D. Fla. 1990) (denying defense where transferee had knowledge of debtor’s “poor financial condition at the time of transfer,” holding “[a] person is not a ‘good faith transferee’ if he has knowledge of the transferor's unfavorable financial condition at the time of the transfer.”); Meeks v. Red River Entm’t (In re Armstrong), 259 B.R. 338, 344 (Bankr. E.D. Ark. 2001) (“[Investor] failed to establish good faith under the objective standard of § 548(c) because investor] possessed sufficient knowledge to place [it] on inquiry notice of debtor's possible insolvency [such as a notation in the debtor's file that it had a federal tax lien against it and that debtor was in a financially precarious state] and, therefore, [investor] is not entitled to the good faith defense pursuant to § 548(c).”).

third parties, and was a “business failure.” It is also undisputed that Defendant was aware of the Brobeck trustee’s suits under the “unfinished business” doctrine, “acutely aware” of the Jewel v. Boxer issue, and repeatedly contacted Defendant to discuss this issue prior to the Jewel Waiver. Under such facts, Defendant cannot establish a “good faith” defense.

CONCLUSION For the reasons set forth above, the Debtor respectfully requests that the Court grant the motion for summary adjudication in its entirety.

OPPOSITION TO MOTION FOR PARTIAL SUMMARY JUDGMENT—ORRICK, HERRINGTON & SUTCLIFEE

ARGUMENT

I. HELLER DOES NOT HAVE AN INTEREST IN THE PROPERTY ALLEGEDLY TRANSFERRED, THAT IS, PROFITS EARNED BY OTHER FIRMS ON HOURLY RATE MATTERS. Plaintiff asserts a property interest—profits earned by other firms on hourly rate matters—allegedly created and defined by California's Revised Uniform Partnership Act ("RUPA"). RUPA provides that, after the dissolution of a firm, a partner has a duty to account to the partnership for "any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business," but the partners are free to modify or eliminate this duty. Cal. Corp. Code §16404(b)(1), 16103(a) ("relations among the partners and between the partners and the partnership are governed by the partnership agreement"); see also Jewel v. Boxer, 156 Cal. App. 3d 171, 176 (1984) ("absent a contrary agreement, any income generated through the winding up of unfinished business is allocated to the former partners according to their respective interests in the partnership") (emphasis added). For the reasons discussed below, the Jewel Agreement does not constitute a fraudulent transfer under state or federal law because Heller never had a property interest in post-dissolution profits from hourly rate matters. Contrary to the unsupported conclusions drawn in plaintiffs motion, the Court's April 22, 2011 ruling that the shareholders owed Heller a duty to account (Dkt. No. 28 at 4-8) does not answer the question of whether Heller had an interest in profits from hourly rate matters under the facts of this case. The Court's ruling establishes only the threshold issue—whether there was any duty to account at all. Even assuming the shareholders could be viewed as having a duty to account to Heller, which Orrick disputes, the question of whether Heller had an interest in post- dissolution profits from hourly rate matters depends on the legal and factual issues addressed in this section.

A. The California Supreme Court Likely Will Find That Hourly Rate Matters Are Not "Unfinished Business" Within The Meaning Of Section 16404(b)(1). The California Supreme Court has not decided whether hourly rate matters are "unfinished business" for purposes of the duty to account. This Court must predict how it will rule. See Trishan Air, Inc. v. Fed. Ins. Co., 635 F.3d 422, 427 (9th Cir. 2011). The California Supreme Court likely will hold that hourly rate matters are not “unfinished business” and therefore not subject to the duty to account because application of the duty to account to hourly rate matters violates several ethics rules and impairs clients’ choice of counsel.

The purpose of California’s Rules of Professional Conduct (“CRPC”) is “to protect the

public and to promote respect and confidence in the legal profession.” Chambers v. Kay, 29 Cal. 4th 142, 156 (2002); see also CRPC 1-100(A). Several of the rules reflect the principle that the interests of the clients must prevail over purely economic interests of lawyers and others who do business with lawyers. This principle applies with equal force in the context of law firm dissolutions. See State Bar of California Standing Comm. on Prof’l Responsibility & Conduct, Formal Opinion No. 1985-86 (“the interests of the clients must prevail over all competing considerations if the practitioner’s withdrawal from the firm or the firm’s dissolution is to be accomplished in a manner consistent with professional responsibility”) (a copy of which is attached as Exhibit G to the DiGennaro Decl.).

1. Rule 1-320 Prohibits Fee Sharing With A Non-Lawyer. One such rule is Rule 1-320, which provides that “[n]either a member nor a law firm shall directly or indirectly share legal fees with a person who is not a lawyer.” CRPC 1-320; see also Paul W. Vapnek et al., California Practice Guide: Professional Responsibility ¶5:511 (2006) (“Rule 1-320 prohibits an attorney from dividing fees with a nonattorney even with the client’s consent”) (emphasis in original). “[C]ourts have consistently upheld the prohibition based on a number of legitimate concerns.” McIntosh v. Mills, 121 Cal. App. 4th 333, 344-45 (2004). Among other things, Rule 1-320(A) is designed (a) to protect the integrity of the attorney-client relationship; (b) to prevent laypersons from assuming control over attorney services, which

should be controlled solely by lawyers; and (c) to ensure that the client’s best interests remain paramount. See Gassman v. State Bar, 18 Cal. 3d 125, 131-32 (1976) (fee splitting with non- lawyer assistant poses “serious danger to best interests of the client, and warrants discipline”); Emmons, Williams, Mires & Leech v. State Bar, 6 Cal. App. 3d 565, 573-74 (1970) (listing risks of fee splitting with non-lawyers).

Application of the duty to account to hourly rate matters creates the very problem that Rule 1-320 seeks to prevent by requiring clients' new law firms to share fees with Heller's non- lawyer Plan Administrator. A careful reading of Rule 1-320 precludes any implied exception for bankruptcy plan administrators, non-practicing dissolved law firms, their estates or their creditors. The Supreme Court expressly adopted a limited exception for the completion of certain unfinished business, but that exception applies only to payments that a law firm may make to a deceased lawyer's estate for his or her completion of "unfinished legal business of [the] deceased member." See CRPC 1-320(A)(2). There are no exceptions for a bankrupt firm. In view of the specificity of the single exception allowed by the Rule, which does not apply here, the Court may not create any other implied exceptions to force the shareholders to share fees with the Plan Administrator, Heller' s estate or its creditors in direct violation of Rule 1- 320. Jewel and its progeny did not address Rule 1-320, because the plaintiffs seeking to share fees in those cases were lawyers and Rule 1-320 pertains to fee-sharing with non-lawyers. There is nothing in Jewel or any of the California cases following Jewel that would permit a non- lawyer bankruptcy estate or plan administrator to share fees generated by Orrick or its partners.

2. Rule 2-200(A) Prohibits Fee Sharing With Lawyers Without Client Consent. To the extent the fraudulent transfer claims would require the former shareholders to share fees with the former Heller partnership (even though the proceeds are not going to lawyers, but rather to the Plan Administrator or to Heller's creditors), application of the duty to account to hourly rate matters also runs afoul of Rule 2-200(A) of the California Rules of Professional Conduct.

Rule 2-200(A) prohibits a California attorney from dividing his fees "with a lawyer who is not a partner of, associate of, or shareholder with the member"—i.e., in the same law firm— without the client's informed written consent. CRPC 2-200(A); see also Mink v. Maccabee, 121 Cal. App. 4th 835, 838 (2004) (under Rule 2-200, client consent required prior to division of fees). As with Rule 1-320, Rule 2-200(A) is intended to protect clients. It is designed to protect a client's right to know the extent of, and the basis for, any sharing of attorneys' fees. Margolin v. Shemaria, 85 Cal. App. 4th 891, 903 (2000). “Rule 2-200 unambiguously directs that a member of the State Bar ‘shall not divide a fee for legal services’ unless the rule’s written disclosure and consent requirements and its restrictions on the total fee are met.” Chambers, 29 Cal. 4th at 156 (quoting CRPC 2-200(A) (emphasis in original)). Further, the rule helps ensure that the client “will not be charged unwarranted fees just so that the attorney who actually provides the client with representation on the legal matter has ‘sufficient compensation’ to be able to share fees with the [other] attorney.” Margolin, 85 Cal. App. 4th at 903; Strong v. Beydoun, 166 Cal. App. 4th 1398, 1402 (2008).

Jewel and some of its progeny have held that the Unfinished Business Rule does not violate Rule 2-200(A) even in the absence of client consent. The holdings of these cases are premised on the notion that “[o]nce the client’s fee is paid to an attorney, it is of no concern to the client how that fee is allocated among the attorney and his or her former partners.” Jewel, 156 Cal. App. 3d at 178; Anderson, McPharlin & Connors v. Yee, 135 Cal. App. 4th 129, 133 (2005) (same). These courts cite no California law for this conclusion, and their conclusion is directly contrary to the express language of Rule 2-200(A). In fact, cases applying Rule 2-200 to invalidate fee-splitting virtually all involve fees the client had already paid. Since former shareholders no longer belong to the same firm, they cannot share fees with each other absent informed client consent. Application of Rule 2- 200(A) does not turn on a factual determination in each case of whether fee sharing is “of concern” to a particular client. The rule contains a

blanket prohibition on fee-sharing unless the client consents in writing after full disclosure of the relevant facts. CRPC 2-200(A). Moreover, in reality, many clients do care what happens to the fees they pay to their attorneys. See, e.g., Declaration Of David B. Garten In Support Of Jones Day’s Motion For Summary Judgment ¶¶5-8 (filed in Case No. 10-ap-3221); Declaration Of Marian M. Durkin In Support Of Davis Wright Tremaine LLP Opposition To Motion For Partial Summary Judgment ¶5 (filed in Case No. 10-ap-3210); Declaration of G. Andrews Smith In Support Of Davis Wright Tremaine LLP Opposition To Motion For Partial Summary Judgment ¶4 (filed in Case No. 10- ap3210); Declaration of Michael Cunningham In Support Of Davis Wright Tremaine LLP Opposition To Motion For Partial Summary Judgment ¶5 (filed in Case No. 10-ap-3210). Lawyers handle matters of great importance for clients. Clients want to be sure that they fairly compensate the lawyers working on these matters. Many clients would object if they knew that their lawyers would be required to relinquish any profits earned on those clients’ matters, especially if that arrangement was contrary to the lawyers’ express (and totally legal) agreement that they did not have a duty to share such profits. Clients would be concerned that their matters would get less attention, would be given lower priority, or would attract fewer resources of the law firm if the firm was paying a secret tax on that work. See, e.g., id. Awarding plaintiff the damages it seeks to recover in this case would constitute improper fee-splitting. The hallmarks of fee-splitting are: (1) the money sought is directly linked in some fashion to revenue that was generated from legal work performed on a particular matter or matters (e.g., a portion of fees that a client paid on a particular matter or a portion of the amount of money recovered from a third party on a particular matter); and (2) the party’s “right” to collect the money is contingent on the outcome of the matter, as opposed to fixed regardless of the outcome (e.g., it is contingent on the client actually paying the fee or it is contingent on the client recovering money from a third party, such as from the defendant in a lawsuit, rather than being a fixed salary paid even if the matter generates no revenue). See Huskinson & Brown, LLP v. Wolf, 32 Cal. 4th 453, 459 (2004) (where a compensation award to an outside attorney

“divide[s]” or is “otherwise tied to” the specific legal fees paid by a client, it is a division of fees under Rule 2-200); see also Chambers, 29 Cal. 4th at 152 (compensation based solely on percentage of fee paid by client is a division of fees, whereas paying a salary or other wages for work on case is not). Both of these factors are present here. First, the amount plaintiff seeks is directly tied to the fees that various clients have paid to Orrick for work Orrick did on specific legal matters, i.e., the list of so-called “unfinished business” matters that plaintiff alleges were transferred from Heller to Orrick. See Second Am. Compl. ¶¶88, 96, 105, 118 & Exhibit C. And plaintiff clearly seeks a portion of the fees that those clients have paid to Orrick for those matters, to wit, the “profit” left over after deducting overhead and reasonable compensation to Orrick for having done the work that generated the revenue. See, e.g., Second Am. Compl. ¶¶25, 38, 42, 52, 66, 73, 74, 83 (referring to“Unfinished Business Profits”). Second, plaintiff’s alleged “right” to recover those fees is contingent on those clients actually paying the fees and Orrick actually making a profit. That is, if the client did not pay Orrick anything, or the work did not generate a profit, plaintiff would recover nothing. See Greenspan v. Orrick, Herrington & Sutcliffe LLP (In re Brobeck, Phleger & Harrison LLP), 408 B.R. 318, 346-47 (Bankr. N.D. Cal. 2009).7

B. Even If Hourly Rate Matters Could Be Viewed As Unfinished Business And Subject To The Duty To Account, Heller Did Not Have A Property Interest In Post-Dissolution Fees From Hourly Rate Matters Under The Facts Of This Case.

7 Plaintiff cannot escape this conclusion by arguing that it is not really recovering the fees themselves, but only the net “profit” earned on those fees. Demanding a share of the “profits” that a firm earned from working on a particular engagement qualifies as improper fee-splitting. See, e.g., Crawford v. State Bar, 54 Cal. 2d 659, 666 (1960) (discipline appropriate when attorney divided profits of his law firm with a non-lawyer partner, overruling earlier case that had approved compensation plan for non-lawyer based on net profits of the firm that was not linked to particular cases); Cain v. Burns, 131 Cal. App. 2d 439, 441-42 (1955) (holding that it was improper fee- splitting for investigator to be paid a given percentage of the profits in all cases in which he was employed).

1. Heller Never Had A Right To Pursue A Claim Under RUPA Against The Shareholders For Unfinished Business Profits Because The Shareholders Were Not Partners Of Heller. As Orrick previously argued in its motion to dismiss, the Jewel Agreement is much ado about nothing. It did not, and could not, transfer any property belonging to Heller. The Jewel Agreement accomplished nothing because the shareholders were not partners of Heller and did not owe under RUPA a duty to account to Heller or to the Heller PCs, and Heller also did not have a claim against the Heller PCs. Orrick will not repeat its argument here, but incorporates by reference the entirety of its memorandum of points and authorities in support of its motion to dismiss (Dkt. No. 17). In addition to relying on the Court’s ruling on Orrick’s motion to dismiss, plaintiff also argues that the shareholders themselves “did not believe the ‘two tiered’ structure affected” their fiduciary duties. Pltf. MPA 3-4 n.5. Plaintiff frequently mischaracterizes the shareholders’ testimony on this point8 and, in any event, whether the shareholders owed Heller a duty to account is a legal question that the Court must decide based on the undisputed facts about Heller’s corporate structure.

2. Under California Law, Heller Never Had A Property Interest In Post- Dissolution Fees From Hourly Rate Matters. To determine whether a matter is unfinished business under California law,9 the Court

8 For example, plaintiff contends that Bob Rosenfeld, the former chairman of Heller and a current Orrick partner, testified that he “did not believe the ‘two-tiered structure’ affected his fiduciary duties or made a difference between the duties he owed to Heller or to Orrick.” Pltf. MPA 4. Mr. Rosenfeld actually testified that he did not ever give the question any consideration (it “never crossed my mind”), not that he believed it made no difference. Sullivan Decl., Ex. 6 (Rosenfeld Dep.) 37:18-23, 84:19-85:5. Plaintiff also cites the testimony of Peter Benvenutti and Mark Plumer for the fact that “Heller continued to take the position that Jewel applied to Heller and that it had a right to recover contingency fees that accrued post-dissolution from destination firms.” Pltf. MPA 4 n.6. But this testimony relates solely to contingency fee matters, which were excluded from the Jewel Agreement and are not at issue here. 9 The Bankruptcy Code does not define “property” or “an interest in property.” Gaughan v. Edward DittlofRevocable Trust (In re Costas), 555 F.3d 790, 793 (9th Cir. 2009). Rather, “[i]n the absence of any controlling federal law, ‘property’ and ‘interests in property’ are creatures of state law.” Barnhill v. Johnson, 503 U.S. 393, 398 (1992).

must look to the partnership agreement in place and the status of the partnership’s matters at the moment of dissolution. Jewel, 156 Cal. App. 3d at 178 (“we must look to the circumstances existing on the date of dissolution. . . to determine whether business is unfinished business of the dissolved partnership”); Grossman v. Davis, 28 Cal. App. 4th 1833, 1836 (1994) (whether a matter “qualifies as unfinished business is to be ascertained from the circumstances existing at the time of the dissolution, not from events which occurred thereafter”). If the partners had an agreement regarding the partnership’s unfinished business, then that agreement controls. Cal. Corp. Code §16103(a); see also Jewel, 156 Cal. App. 3d at 176. Partners may defer such an agreement until dissolution. Rothman v. Dolin, 20 Cal. App. 4th 755, 758 (1993) (if partners Agree, partnership “could. . . simply close[] its books on the date of dissolution, and all work performed subsequently would have constituted new business of the respective parties”). Here, the Plan of Dissolution modified the duty to account and excluded hourly rate matters from the Firm’s unfinished business. See Sullivan Decl. Ex. 22 ¶VI.F. Accordingly, at the moment Heller dissolved, there was “an agreement to the contrary”—that is, an agreement that defined the scope and extent of Heller’s unfinished business as including only contingent fee cases. That agreement governs. Cal. Corp. Code §16103(a). As a result, hourly rate matters were not part of Heller’s unfinished business and, therefore, Heller did not have a property interest in such profits.10 Plaintiff suggests that the Jewel Agreement “waived” Heller’s rights and so was a fraudulent transfer, but the effect of the Jewel Agreement is not a waiver of a preexisting right; rather, it precluded that right from ever arising. The right to post-dissolution profits earned on unfinished hourly rate matters did not exist at the moment of dissolution because at the moment of dissolution, the duty to account had been modified. As a result, there was no right to waive.

10 The disclaimer statutes are an analogous example of how state law can operate to preclude the existence of a property interest. See, e.g., In re Costas, 555 F.3d at 793-94 (a properly executed disclaimer is deemed to “relate back” to the date of the decedent’s death and “a disclaimant neither transfers nor possesses an interest in disclaimed property and thus creditors cannot reach the disclaimed interest”); Wood v. Bright (In re Bright), 241 B.R. 664, 668 (B.A.P. 9th Cir. 1999) (disclaimer is not a transfer of an interest in property because after the disclaimer is executed, the relation back doctrine “erases” that interest and, therefore, “as of the moment before the disclaimer is executed, the beneficiary has no interest in the property, so no transfer could have occurred”).

Likewise, the Jewel Agreement did not deprive Heller or its creditors of anything that had previously belonged to Heller. Heller always had, and even after dissolution continued to have, a contractual right to be paid by its clients for services it had performed, and the Jewel Agreement did not in any way impair that right. By contrast, profits earned by other firms were never Heller’s property. See Holdrup Decl. ¶29 (distinguishing between work-in-progress and “unfinished business”); Declaration Of Stephen Bomse In Support Of Defendant Orrick, Herrington & Sutcliffe LLP’s Opposition To Plaintiff’s Motion For Partial Summary Judgment ¶¶5-6; Declaration Of Karen Dempsey In Support Of Defendant Orrick, Herrington & Sutcliffe LLP’s Opposition To Plaintiff’s Motion For Partial Summary Judgment ¶¶5-6; Declaration Of Barry Levin In Support Of Defendant Orrick, Herrington & Sutcliffe LLP’s Opposition To Plaintiff’s Motion For Partial Summary Judgment ¶¶5-6; Declaration Of Jessica Pers In Support Of Defendant Orrick, Herrington & Sutcliffe LLP’s Opposition To Plaintiff’s Motion For Partial Summary Judgment ¶¶5-6.

There was nothing in any of the Basic Documents that gave Heller the right to be paid for services performed by a different law firm. Those agreements did not give Heller any right to collect fees from departed shareholders for post-departure services, much less from the clients’ new law firms. Thus, the Jewel Agreement preserved the pre-existing distinction between the services rendered by Heller (for which Heller had a right to be paid), and the services performed by former Heller shareholders after departure or dissolution (for which Heller never had any right to be paid). Plaintiff relies on Development Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP, No. 11 civ. 5994, 2012 WL 2952895 (S.D.N.Y. May 24, 2012) (“DSI, Inc.”), but that case is completely inapposite. In that case, the court determined that pending but incomplete hourly rate matters were Coudert’s “assets” on the dissolution date. Id. at *4. This holding rested in large part on the absence of a Jewel agreement in the Coudert partnership agreement. “While the

Coudert Partnership Agreement could have provided otherwise, it does not .... In the absence of any evidence that Coudert’s partners intended to exclude pending but uncompleted client representations from the firm’s assets, [plaintiff] is entitled to a declaration that the Client Matters were Coudert assets on the Dissolution Date. Because they are Coudert assets, the Former Coudert Partners are obligated to account for any profits they earned while winding the Client Matters up at the Firms.” Id. (emphasis added); see also id. at *5 (“Significantly for our case, the Coudert Partnership Agreement expressly incorporates the Partnership Law’s default rules”) (emphasis added); id. at *12 (“If the parties indicate a contrary intent, that will control”); id. at *26 (“If Coudert had wished it otherwise, the firm could have drafted its Partnership Agreement differently. It did not. As a result, [plaintiff] is entitled to a declaration that the Client Matters were Coudert’s property on the Dissolution Date”). Here, of course, there is ample evidence—including a written agreement—that Heller intended to exclude pending but uncompleted hourly rate matters from its unfinished business. See, e.g., Sullivan Decl., Ex. 22 ¶VI.F. In fact, to the extent that it is relevant at all, the Coudert court’s reasoning supports Orrick’s position. Crucially, in the Coudert case, the court ruled only that the matters in question “belonged to Coudert on the Dissolution Date”—not before—and that a property interest arose on the dissolution date because the partnership failed to agree otherwise. DSI, Inc., 2012 WL 2952895, at *26 (emphasis added). The court suggested that had it done so, Coudert would not have had an interest in the pending hourly rate matters.

[B]ecause the Client Matters belonged to Coudert on the Dissolution Date, and because the Coudert Partnership calls for the application of the Partnership Law to determine the post- dissolution rights of the partners, the Former Coudert Partners have a duty to account for profits they earned completing the Client Matters at the Firms. If Coudert had wished it otherwise, the firm could have drafted its Partnership Agreement differently. It did not. As a result, [plaintiff] is entitled to a declaration that the Client Matters were Coudert’s property on the Dissolution Date. (Id. (emphasis added))

The mere fact of bankruptcy cannot create a property interest where there was none to begin with under state law. Gaughan v. Edward DittlofRevocable Trust (In re Costas), 555 F.3d 790, 797 (9th Cir. 2009). Here, absent bankruptcy, Heller’s creditors would have no claim for profits derived from services performed exclusively by other firms on hourly rate matters. Jewel, 156 Cal. App. 3d at 176 (no duty to account where there is an agreement to the contrary); Fracasse v. Brent, 6 Cal. 3d 784, 791-93 (1972) (if a client replaces one law firm with another, the terminated firm has a claim only for the quantum meruit value of the services it actually performed). Plaintiff cannot reconcile this fundamental contradiction.

C. Fiduciary Duties Do Not Create A Property Interest And Therefore The Shareholders’ Modification Of Their Fiduciary Duties Did Not Transfer Anything. The unfinished business doctrine does not exist to assure that a law firm is paid for work performed after its dissolution or to protect creditors. Rather, as the Coudert court explained, “[i]t exists to settle accounts among partners upon dissolution of their business.” DSI, Inc., 2012 WL 2952895, at *17. This is because the duty to account is a fiduciary duty that partners owe to each other and which they may lawfully modify. See Cal. Corp. Code §§16103(a), 16404(b)(1). The existence of a fiduciary duty does not create a property interest and is not a creditors’ remedy. See United States v. Adler, 186 F.3d 574, 579 (4th Cir. 1999). In Adler, the government pursued federal wire fraud charges against defendant Adler, who was a co-owner of Adler Industries. The wire fraud charges were based on false statements that Adler made to one of the company’s suppliers about the proceeds from a settlement. On appeal, the Fourth Circuit addressed the issue of whether Adler had deprived its supplier of any property in which the supplier had an interest—specifically, whether the supplier possessed a property right in the settlement proceeds. The government argued that the supplier’s property interest was based on the fiduciary duties that Adler, as director of the company, owed the company’s creditors once the company became insolvent. Rejecting this argument, the Fourth Circuit explained that the existence of a fiduciary duty does not mean that “creditors

have a property right in the corporation’s assets. Rather. . . a violation of the duty merely creates a right ‘to an action against the directors to recover sums improperly paid out by the corporation.’” Id. at 578 (citation omitted; emphasis added). The court found no legal basis for the notion that “the mere existence of a fiduciary duty upon a corporation’s directors creates a property right in the corporate assets for that corporation’s unsecured creditors, much less that the directors’ duty could create a property right for a particular creditor in particular assets.” Id. at 579. Accordingly, modification of a fiduciary duty does not transfer anything or enhance or diminish Heller’s estate. As a result, there is no fraudulent transfer. See 5 Collier on Bankruptcy ¶548.03[2][a] (Alan N. Resnik & Henry J. Sommer eds. 16th ed. 2011) (“Collier on Bankruptcy”) (“[N]ot all transfers are within section 548’s scope; only those that affect property that would have been property of the estate but for the transfer. The organizing principle behind this view is that creditors’ recoveries are affected only by those transfers which touch on property that would have been available for distribution to creditors had the debtor not parted with the interest”) (footnote omitted).

MPA IN SUPPORT OF JONES DAY'S CROSS MOTION FOR SUMMARY JUDGMENT AND OPPOSITION TO PLAINTIFFS MOTION FOR PARTIAL SUMMARY JUDGMENT

ARGUMENT

Heller asserts that the Jewel provision caused a fraudulent transfer of property under 11 U.S.C. § 548, and that it is entitled to recover the value of that property from Jones Day as a subsequent transferee under 11 U.S.C. § 550. See Am. Compl. ¶¶85-96; Status Conf. Transcript, Jul. 10, 2012 at 42:16-20 (Agenbroad Decl. Ex. 8). Accordingly, Heller must identify (a) a specific interest in property that (b) Heller transferred to its shareholders, and that (c) the shareholders then transferred to Jones Day. Whether Heller had a cognizable interest in property is a matter of state law, while"[w]hat constitutes a transfer and when it is complete is a matter of federal law." Barnhill v. Johnson, 503 U.S. 393, 397-98 (1992).1 The Supreme Court has stressed the need to define with exacting precision the alleged state-law property interest that was purportedly transferred. For example, in Barnhill, 503 U.S. 393, a trustee sued under 11 U.S.C. § 547-which allows a trustee to avoid transfers within 90 days of a bankruptcy petition-to recover funds paid pursuant to a check that had been delivered to a creditor 92 days before the bankruptcy petition, but that was honored by the bank 90 days before the petition. Id. at 395. The Court carefully scrutinized the property interest at issue in determining that the transfer occurred only when the bank honored the check. Id. at 399. Until that time, while the creditor had "a chose in action against the debtor" (who wrote the check), he did not have a "right in the funds"-the relevant property that the trustee sought to recover. Id. at 399-400. Far from precisely identifying the property interest at issue and explaining how and when it was allegedly transferred, Heller relies on conclusory assertions and ever-shifting definitions. At different points, Heller refers to the relevant property as "former Heller clients" (SJ Mem. 4),

1 Plaintiff is also incorrect to assert that Jones Day received $40 million in fees for matters opened by Heller partners while operating for Heller. SJ Mem. 4. The cited chart lists all the matters opened by former Heller partners during their first six months at Jones Day, including matters that don't meet even plaintiffs definition of "unfinished business." The reference to "operating" for Heller, taken from an earlier discovery response, simply refers to matters opened when the lawyer was working at Heller. See Jones Day's Amended and Second Supplemental Response to Plaintiffs First Request for Production of Documents, No.4 (Agenbroad Decl. Ex.7). Nor does the term "'Heller Hires" accurately describe becoming a Jones Day partner

"matters ... [that were] ongoing at Heller," (/d.), "the right to profits from a dissolved firm's unfinished business" (SJ Mem. 35), "legal fees for Heller unfinished business matters," (SJ Mem. I), and "the Jewel waiver" (SJ Mem. 1, 8, 19, 20, 3 7). This is not accidental imprecision, but an attempt to obscure that the facts do not fit the fraudulent transfer framework. Summary judgment is appropriate where the record shows "that there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56 ( a). Because the undisputed facts establish, as a matter of law, that Heller did not have the property interest it alleges or transfer any alleged property interest to Jones Day, summary judgment should be entered for Jones Day. And because Heller has failed to carry its burden as a movant of showing through undisputed facts that its property was fraudulently transferred to defendants "via" or "through" the Jewel provision (SJ Mem. 4,5), Heller's motion 2 for partial summary judgment should be denied. 2

A. HELLER HAS NO PROPERTY INTEREST IN LEGAL REPRESENTATIONS FOR WHICH CLIENTS RETAINED JONES DAY OR IN PROFITS EARNED BY JONES DAY FROM THOSE REPRESENTATIONS.

Bedrock principles of California law establish that a client has an absolute right to replace its counsel at any time and that a discharged firm has no right to profits earned by the replacement firm. The result that Heller seeks through its summary judgment motion-a holding that California law gives Heller a property interest in the profits earned not by Heller, but by a third-party law firm that a client chose to retain--cannot be reconciled with these basic rules or e contractual and ethical principles that animate them. This inconsistency calls for a brief review of black-letter law. A law firm has no right to continue representing a client. Rather, "[i]t has long been recognized in [California] that the client's power to discharge an attorney, with or without cause, is absolute." Fracasse v. Brent, 6 Cal. 3d 784, 790 (1972). "Such a discharge does not constitute

2 Contrary to plaintiffs suggestion, In re Brobeck, Phleger & Harrison LLP, 408 B.R.318 (N.D. Cal. 2009), does not control in this case. A district court is not bound by prior district court decisions. See, e.g., 18 Moore's Federal Practice§ 134.02[1][d] (3d ed. 1997). Moreover, the defendants in Brobeck did not present the same arguments or develop the same factual record presented here. And to state the obvious, Jones Day, which was not a party in the Brobeck case, has a compelling due process interest in an independent adjudication of its arguments. Parklane Hosiery Co. v. Shore, 439 U.S. 322, 327, n.7 (1979) ("It is a violation of due process for a judgment to be binding on a litigant who was not a party or a privy and therefore has never had an opportunity to be heard.").

a breach of contract for the reason that it is a basic term of the contract, implied by law into it by reason of the special relationship between the contracting parties, that the client may terminate that contract at will." Id. at 790-91. See also Drum v. Midland Risk Ins. Co., Nos. B 169512, B 172504, 2005 WL 775741, at *2 (Cal. Ct. App. Apr. 7, 2005) ("Like any litigant, Midland has an absolute right to discharge its attorney, and Drum has no right to force himself on a client who no longer trusts him."); In re Aesthetic Specialties, Inc., 37 B.R. 679, 680 (BAP 9th Cir. 1984) ("It is well settled in California that a client's power to discharge his attorney, with or without cause, is absolute."); Response to Jones Day's RF A 7 at 10:23-24, 11:9 (Agenbroad Decl. Ex. 6) (admitting that "the client had the right to terminate Heller's representation at will"). Because a client's choice to discharge an attorney cannot constitute a breach of contract, Fracasse, 6 Cal. 3d at 790, a discharged attorney has no right to any lost profits resulting from his discharge. Rather, when a client exercises "the unilateral right to discharge his or her attorney with or without cause at any time-even on the courthouse steps," the attorney "only has a right to quantum meruit recovery" representing the value of past work. Jalali v. Root, 109 Cal. App. 4th 1768, 1777 (2003); see also Oliver v. Campbell, 43 Cal. 2d 298, 304 (1954) (noting the general rule that "[i]n no event is the agent entitled to compensation for services unperformed" and holding that, where a client terminated a fixed fee contract, the attorney was entitled only to "the reasonable value of services recoverable by the employee for his part performance"); Cazares v. Saenz, 208 Cal. App. 3d 279,285 (1989) ("The client's only obligation [upon discharging counsel] is to compensate the discharged attorney ... for the reasonable value of any services rendered."); Benson v. Killingsworth, No. 0038343, 2003 WL 1996049, at* 1 (Cal. Ct. App. May 1, 2003) (holding that a discharged attorney is "not entitled to recover, either on a contract or tort theory, more than the value of the services he provided" before the discharge); In re Aesthetic Specialties, Inc., 37 B.R. at 680 ("A discharged attorney is entitled [only] to recover the reasonable value of his services rendered to the time of discharge."). This is because a law firm has no right to fees for work it does not perform. Indeed, any contract that attempts to circumvent these principles contravenes public policy. See, e.g., Federal Sav. & Loan Ins. Corp. v. Angell, Holmes & Lea, 838 F.2d 395, 397 (9th Cir. 1988) (holding that "[law] firms' attempt[ s] to assure by the contract either their continued employment or at least the retention of the fees" for completing unfinished matters was unenforceable because "even if the fee provision did not invade the absolute liberty of a client to fire his lawyer, the contract

would be unenforceable for reasons of public policy") (citing Cal. Civil Code§ 1689(b)(6)). See also Cal. R. Prof. Conduct 3-700(0)(2) (providing that an attorney violates ethical rules by refusing to "[p]romptly refund any part of a fee paid in advance that has not been earned"). By the same token, where a client replaces a lawyer, the terminated law firm has no claim against the new firm for profits that the new firm earns on the matter. For example, in Kallen v. Delug, 157 Cal. App. 3d 940,951 (1984), a discharged attorney refused to withdraw from a representation until the replacement attorney signed a fee-sharing agreement giving the discharged attorney an interest in the potential recovery that exceeded the value of his work already performed. In refusing to enforce the agreement, the court noted that the discharged attorney had provided no consideration because "a client has an absolute right to substitute one attorney for another for any reason, whether or not the client owes the attorney money [for past services]; it is immaterial that such a substitution will work to the purported detriment of the original attorney." Id. And enforcing the agreement would have violated public policy because "an attorney breaches his ethical duty ... when he uses his refusal to execute a substitution of attorney as a device to protect his fees." Id. Likewise, in Champion v. Super. Ct., 201 Cal. App. 3d 777 (1988), the court invalidated a partnership agreement stating that "all clients and client files remain the property of the partnership and that if a client desires to hire [a] withdrawing party, any fees realized in any [pending] case shall remain the property and asset of the Partnership, subject to the withdrawing partner's right to receive his partnership percentage of the fees." Id. at 782 (internal quotation marks omitted). As the court explained, the agreement "provide[ d], in essence, that for the very act of signing [a retainer] agreement, the ... Firm [wa]s entitled to receive almost all the legal fees recovered, regardless of how much of the case preparation is performed by the ... Firm." Id. The court reasoned that such a requirement would have given the discharged firm an unconscionable fee and violate public policy by burdening the client's "absolute" "power to discharge an attorney, with or without cause." Id. at 783. This doctrine reflects well-established considerations of public policy and equity. As a policy matter, the doctrine recognizes the paramount importance of client choice. "The relation of attorney and client is one of special confidence and trust," and "the client is justified in seeking to dissolve that relation whenever he ceases to have absolute confidence in ... the capacity of the attorney." Fracasse, 6 Cal. 3d at 789-90 (quoting Gage v. Atwater, 146 Cal. 170,

172 (1902)). In light of this special relationship, a client must be free to change attorneys without owing damages to the discharged lawyer. Id. at 790. Otherwise, as Fracasse explained, "[t]he right to discharge is of little value if the client must risk paying the full contract price for services not rendered upon a determination by a court that the discharge was without legal cause." Id. For the same reason, attorneys violate their ethical obligations by entering an agreement that "restricts the right of a member to practice law" after leaving a firm. Cal. R. Prof. Conduct 1- 500(A). The doctrine also recognizes that it would be inequitable to allow a discharged attorney to recover fees paid for the work of a replacement attorney. Once an attorney has been discharged, he generally contributes neither further services nor capital assets to an engagement. Accordingly, it is unconscionable to allow "fees [that] have no relationship whatsoever to the amount of service provided or to be provided by the partnership to the client." Champion, 201Cal. App. 3d at 783. Indeed, "[t]he division of fees without regard to services actually rendered is contrary to [California] public policy." Fraser v. Bogucki, 203 Cal. App. 3d 604, 610 (1988) (overruled in part) ("We fail to see why a lawyer ... should be permitted to share in expected future profits from clients who have elected not to retain his services."). In short, it is black letter-law, supported by strong public policy interests and principles of equity, that where a client replaces one law firm with another, the discharged firm has no right to profits for work it did not perform.

B. JEWEL DOES NOT CREATE A RIGHT TO PROFITS EARNED BY A THIRD-PARTY LAW FIRM THAT A CLIENT RETAINS TO HANDLE MATTERS THAT THE DISSOLVED FIRM COULD NOT HANDLE.

Contrary to Heller's contention (SJ Mem. 36), Jewel does not entitle it to the profits earned by Jones Day on matters that Heller previously handled. At most, Jewel recognized an obligation among the dissolving firm's partners to account for profits earned by the partners while winding up the business of that firm. Here, the profits at issue were earned by Jones Day under entirely new retainer agreements between Jones Day and its clients. Thus, Heller's business was terminated and wound up when Heller announced that it could no longer represent its clients and the clients accordingly signed these new agreements. The matters at issue were at that point Jones Day's business, not Heller's. To be sure, California courts have, acting in equity,

disregarded new retainer agreements signed between individual departing partners and their dissolving firm's clients, and treated the work of such partners as the work of the firm. However, the equitable justifications for that fiction are entirely lacking where the client chooses to retain a third-party firm, particularly where the dissolving firm is unable to continue to serve clients as a result of its own mismanagement. The Jewel cases, by their terms, apply only to profits earned by a dissolving firm's partners from winding up the dissolving firm's business. Thus, when the California Supreme Court recognized the duty to account for profits from so-called unfinished business, it was referring to "unfinished business intrusted to the firm, and which the client permits the surviving partner to complete." Little v. Caldwell, I 01 Cal. 5 53, 561 (1894) (emphasis added). And Jewel itself based its holding on the duties owed between partners "until the winding up of unfinished partnership business." 156 Cal. App. 3d at 176 (emphasis added). By contrast, work performed by Jones Day is not business ofthe dissolved Heller partnership. Indeed, Jewel does not support the proposition that a dissolving firm is entitled to recover the profits earned by a third-party firm that completes work that clients hired it to perform after the dissolved firm was unable to do so. As Little recognized, "the option to declare the contract terminated [remains] with the client," and any duty to account for post-dissolution profits applies only "if [the client] does not do so." 101 Cal. at 559-60. This is especially true where the law firm has itself terminated the client, announcing that it "will cease providing legal services to all clients," (Sullivan Decl. Ex. 30) because "[t]he Firm is not in a position to represent [its] clients" (Sullivan Decl. Ex. 31 at HE ORR ESI00063954). See also Joint Plan of Liquidation of Heller Ehrman LLP § 6.1.1, ECF No. 1431, Case No. 08-32514, In re Heller Ehrman (failing to assume, and hence rejecting, Heller's executory contracts); Response to Jones Day's RFAs 14-16 at 15:13-16:21 (Agenbroad Decl. Ex. 6) (admitting that the matters at issue were executory contracts, which were not assumed and hence rejected). In every case in the Jewel line, the clients used the same partners to complete their pending matters as had started them; indeed, we have not found a single California case applying

Jewel to grant a discharged firm a right to the profits from work completed by a third-party firm.3 There is no basis to extend Jewel to the situation here, in which a client decides to retain a new third-party law firm with new and unique lawyers and resources. Such an extension of Jewel would contravene the bedrock principles, supra at 13-16, that "[i]n no event is the agent entitled

to compensation for services unperformed" and that a discharged attorney is entitled only to "the reasonable value of services recoverable by the employee for his part performance." Oliver, 43 Cal. 2d at 304. It would impede client choice because third-party firms would essentially be taxed for taking on matters previously handled by the dissolved firm. And it would be wholly inequitable, as it would confiscate profits earned by firms that use their own resources to perform legal services at the request of a client, while granting a windfall to a firm that, through its own actions, can no longer meet its clients' needs.4 ______

3 In Jewel, for example, a four-person partnership split into separate two-partner firms. 156 Cal. App. 3d at 175. "[E]ach former partner sent a letter to each client whose case he had handled for the old firm, announcing the dissolution [and enclosing] a substitution of attorney form." Id. The court held that, on these facts, "'a partner completing unfinished business cannot cut off the rights of the other partners in the dissolved partnership by the tactic of entering into a 'new' contract to complete such business.' Accordingly, the substitutions pf attorneys here did not alter the character of the cases as unfinished business of the old firm." Id. at 178 (quoting Rosenfeld, Meyer & Susman v. Cohen, 146 Cal. App. 3d 200, 219 (I983)). See also, e.g., Grossman v. Davis, 28 Cal. App. 4th 1833 (I994) (two-partner law firm divided with one partner taking large contingency matter; the only person who shared in profits from the new substituted engagement with the client was the partner who left with the case); Rothman v. Dolin, 20 Cal. App. 4th 755, 24 Cal. Rptr. 2d 57 I (1993) (two shareholders in a two-shareholder professional corporation agreed to split up and divide the firm's cases; the only persons who shared in profits from the new substituted engagements with the clients were the former shareholders); Fox v. Abrams, 163 Cal. App. 3d 6I 0 ( I985) (only persons who shared in profits from substituted engagements with clients were former shareholders of four-shareholder professional corporation); Rosenfeld, 146 Cal. App. 3d 200 (two partners in a 17-partner law partnership left with the firm's biggest contingency case; the only persons who shared in profits from the substituted engagement with the client were the two former partners).

4 Moreover, even if Jewel were applied to give Heller a property interest where a client signs a new retainer agreement with a third-party firm, it would not give Heller a property interest in Jones Day's profits, but rather would create a right to bring a claim for an accounting against Heller's former shareholders. And, as explained infra at 29-32, no such property interest could have been transferred to Jones Day. As Barnhill illustrates, a contingent right to sue for breach of fiduciary duty where profits are earned by a partner after dissolution is a separate and distinct form of property from the underlying funds. See Barnhill, 503 U.S. at 399- 400 (distinguishing between possession of a check and possession ofthe actual funds promised by the check and noting that, "at most, what petitioner gained [upon receiving the check] was a chose in action against the debtor"); see also, e.g., United States v. Adler, 186 F.3d 574, 578 (4th Cir. I999) ("[A] violation of [ a fiduciary] duty merely creates a right to an action against the [violator] to recover sums improperly paid out ... That is, it creates a right to sue the [violator], not a right to any particular funds.") (internal citation and quotation marks omitted). "Myriad events can intervene between" the dissolution of a firm and any right to future profits from the former firm's matters. Barnhill, 503 U.S. at 399. The matter at issue could conclude without further work; the matter could produce no profits; or, as in fact occurred here, the clients could retain a new firm once Heller terminated its client relationships. Accordingly, at the time of the Jewel provision, Heller "at most [possessed] a chose in action" that could be brought against individual shareholders. Id. at 400. It did not possess a property interest in future profits themselves, and surely not to profits earned by a third party rather than by Heller shareholders.

In essence, Heller asks the Court to treat the work performed by Jones Day as if it were in fact performed under a retention agreement with Heller. There is no basis for such a fiction here.

California courts have at times disregarded new retainer agreements signed by individual partners from a dissolving firm to perform the work themselves. However, these cases reflect a "equit[able]," case-specific determination, Little, 101 Cal. at 561, based on factors entirely absent here. In each case, the signatory ofthe new agreement had a "fiduciary duty not to take any action with respect to unfinished partnership business for personal gain." Jewel, 156 Cal. App. 3d at 179. And, "[t]here [wa]s an obvious and essential unfairness in one partner's attempted exploitation of a partnership opportunity for his own personal benefit and to the resulting detriment of his copartners. " Rosenfeld, Meyer & Susman v. Cohen, 146 Cal. App. 3d 200, 213 (1983). Likewise, the new retainer agreements did not appear to alter in any way which lawyers performed the work, suggesting that they were simply sham attempts to "cut of fthe rights of the other partners in the dissolved partnership by the tactic of entering into a 'new' contract." Jewel,156 Cal. App. 3d at 178. Moreover, the courts opined, treating the work of individual partners as the work of their dissolving partnership would not harm clients because the partners of the firm had a duty to complete the work and the partner doing so would still receive the profits he or she "would have received had the partnership not dissolved." !d. at 179-80. Finally, there was no evidence in these cases that the dissolving firm could not satisfy its duty of competence to its clients. None of these rationales is implicated here. First, in agreeing to represent the clients at issue here, Jones Day did not violate any fiduciary duty to Heller. "It is clear that Jones Day was under no ethical or legal obligation to the Heller firm [because, u]nder the law governing lawyers, duties run from lawyers to the client and not to other law firms." Steele Decl. ¶ 11. There was therefore no "exploitation of a partnership opportunity for [a partner's] personal benefit." Rosenfeld, 146 Cal. App. 3d at 213. There is no unfairness in anything Jones Day did. Second, the retention agreements between Jones Day and its clients cannot be considered some sort of "sham" transaction with the same underlying substance as Heller's original retainer agreements. Although clients' choices to retain defendants may have been based in part on a former Heller shareholder joining defendants, that is entirely different from a client retaining a former Heller shareholder to perform work directly. As shown above (supra at 10), Jones Day provided access to its partners, associates, and support staff; it provided a network of offices and expertise across a range of subject areas; and it employed its capital assets (offices, computers, expense accounts, reputations, etc.) to enable its personnel to handle the matters effectively.

Clients accordingly "retained Jones Day, not any particular lawyer, and [they] did so because [they] believed that Jones Day had the resources and expertise to represent [them] in [their] best interests." Carl Goldfischer Decl. ¶ 9. In short, Jones Day, in both form and substance, is distinct from the former Heller shareholders, and not some sort of "alter-ego" of them. Third, although the Jewel court opined that, on the facts before it, allocating the profits based on partnership shares rather than quantum meruit furthered "sound policy reasons" and would not hinder client choice, 156 Cal. App. 3d at 179, the effect of requiring third-party law firms to disgorge their "profits" would be dramatically different. Third-party firms do not, of course, participate in any such partnership shares--and, in a bankruptcy situation, neither do the former partners. Third-party firms have no duty to take on any matter, including one previously handled by a dissolving firm. Imposing a 100% tax on profits on certain matters would obviously discourage firms from taking on partners from a dissolving firm in the first place or taking on the matters at issue. And that, in turn, would make it less likely that clients could retain a new firm while simultaneously benefitting from the services of a partner already familiar with the pending matter. See Garten Decl. ¶ 7 (explaining that if plaintiffs rule were adopted, "lawyers working on my companies' matters at a firm that dissolves will find it more difficult to join another law firm if that law firm is unable to make any profit on the matters. And the new law firm would have an incentive not to take on my companies' matters, forcing us to find new counsel and incur additional expenses and delay in the handling of our matters"); Steele Dec I.¶ 27 ("[A ]ny rule that gave dissolving firms the right to profits earned by other firms that were actually doing the legal work would also impair the client's right to select counsel and undermine the core premises of professional responsibility rules."). Moreover, there is no doubt that clients care if their law firms are forced to work for no profit. See Garten Dec I. ¶¶ 5, 6; Goldfischer Dec I. ¶ I 0-11;

Leibowitz 9 Decl. ¶ 9-10; Steele Decl. ¶¶25-27. 8 ______

8 In addition to the declarations submitted herewith, Jones Day relies upon the declarations submitted by co- defendants.

Nor is there any basis for Heller's claim that it must be given a right to Jones Day's "profits" to prevent law firms from "run[ning] up large debts, obtain[ing] lucrative ongoing matters that will yield millions in legal fees, and then 'dissolv[ing],' leaving the law firms' creditors with no assets or recourse." Response to Jones Day's RFA 9 at 12:22-24 (Agenbroad

Decl. Ex. 6). Indeed, at deposition, Heller's plan administrator admitted the obvious flaws with that theory: Lawyers already have huge disincentives to engaging in such conduct, including the possibility that they would be denied a discharge through bankruptcy and the virtual certainty that they would lose all the capital they had invested in their law firms. Burkart Dep. 223:8- 11(Agenbroad Decl. Ex. 3) ("Well, in the bankruptcy scenario, ... you may be denied a discharge and then you're in the so-called debtors prison."); id. at 223:25-224:4 ("Q: And also would there be a disincentive because the law firm partners would tend to lose the capital that they had invested in the firm? A: That's true, assuming they had capital invested, yes."). Notably, plaintiff does not contend, and certainly has not offered any evidence, that Heller's shareholders were running up debt with the intent to dissolve and siphon off cases. Finally, although cases in the Jewel line deemed it equitable to disregard new retainer agreements "[g]iven the facts of th[e] case," Rosenfeld, 146 Cal. App. 3d at 219, the equitable considerations here tilt decisively the other way. Heller became unable to represent clients, in circumstances that Heller's plan administrator attributes to mismanagement. By contrast, Jones Day, using its own resources, was able to respond to the needs of the clients that Heller abandoned, thereby heading off potential malpractice claims against Heller. See Redman v. Walters, 88 Cal. App. 3d 448, 456 (Cal Ct. App. 1979) (stating that a dissolving partnership is no longer liable for malpractice "[w]here a person agrees to assume the existing obligations of a dissolved partnership") (quoting Cal. Corp. Code§ 15036). Jones Day is thus in a markedly different position than the defendants in the Jewel line of cases, who had effectively appropriated partnership business at the expense of their former partners. On the facts here, adopting a fiction that the work of defendants was in fact the work of Heller would be plainly inequitable. See Champion, 20 I Cal. App. 3d at 783 (describing as unconscionable a division of "fees [that] have no relationship whatsoever to the amount of service provided or to be provided by the partnership to the client"); Fraser, 203 Cal. App. 3d at 610 ("We fail to see why a lawyer ... should be permitted to share in expected future profits from clients who have elected not to retain his services."). Thus, nothing in Jewel, or any other California case, gives Heller a right to the profits at issue in this case: profits earned under bonafide retainer agreements in which clients made an independent decision to retain a third-party law firm to handle legal work that Heller could not handle.9

C. IN ANY EVENT, HELLER WAS ENTITLED ONLY TO PROFITS EARNED BY USE OF ITS CAPITAL, AND NO SUCH PROFITS EXIST.

If Jewel were read more broadly as Heller urges, it would still not establish the property interest that Heller alleges. That is because Jewel was decided under the Uniform Partnership Act (UPA),10 which has been superseded by the Revised Uniform Partnership Act (RUPA). RUPA makes clear that, whatever else can be said about the "unfinished business" fiction, a dissolving firm has, at most, a property interest in post-dissolution profits earned by use of its capital. Heller concedes that Jones Day did not use any of Heller's capital. This is an independent ground for granting Jones Day's motion and denying plaintiffs. Jewel relied on UP A's provision that "[n]o partner is entitled to remuneration for acting in the partnership business, except that a surviving partner is entitled to compensation for his services in winding up the partnership." UPA § 18(f) (1914). Accordingly, Jewel concluded that a partner who winds up the partnership's business following a voluntary dissolution must account to his former partners for the fees earned from that work. In 1996, California adopted RUPA, which made applicable to all partners the UPA rule that surviving partners are entitled to compensation for services in "winding up" the partnership. In particular, RUPA provides that a partner is entitled to "reasonable compensation for services rendered in winding up the business of the partnership." Cal Corp. Code§ 1640l(h). As explained in the comments to RUPA, "Subsection (h) deletes the UPA reference to a 'surviving' partner. That means any partner winding up the business is entitled to compensation, not just a surviving partner winding up after the death of another partner." RUPA § 401 (h), cmt.; see also Gull v.

9 Moreover, even if, contrary to the foregoing, Jewel gave Heller a property interest in profits earned by a third- party firm, it would at most give Heller a right to the profits earned by its former shareholders themselves-not by other Jones Day attorneys under a contract between the client and Jones Day. Heller cannot have it both ways: if a matter is considered to be under contract with the firm in fact retained by the client, then all work was done by Jones Day, not Heller or its former partners. If Heller, however, seeks to improperly and constructively treat its former matters as completed by individual lawyers, then the bulk ofthe work was completed by Jones Day lawyers, who had no duties to Heller and against whom Heller has no claim. See In re Labrum & Doak, LLP, 227 B.R. 391,418 (Bankr. E.D. Pa. 1998) ("One ofthe underlying principles of the []UPA theory on which liability is based is that only funds generated by the partners themselves can be utilized as a basis for recovery."). VanEpps, 185 Wis.2d 609, 626 (Wis. App. 1994) (noting that RUPA, then in draft form, was intended to equalize the treatment of unfinished business in all dissolution cases). In light of the foregoing, this Court has held, and plaintiff has conceded, that even if Heller had a right to the profits of work performed by Jones Day, Jones Day would still be

entitled to reasonable compensation. See ECF No. 21 ("MTD Order") at 10 (holding that any rights to so-called unfinished business profits are "subject to the reasonable compensation for completing the work in progress that RUPA (unlike the former Uniform Partnership Act) recognizes, this Court in Brobeck recognized, and the Debtor in the Complaint recognizes"); see also Am. Compl. ¶17. When the California Legislature enacted RUPA, the term "reasonable compensation" had a settled meaning, of which the Legislature is presumed to have been aware. Moradi-Shalal v. Fireman's Fund Ins. Co., 46 Cal. 3d 287, 318 (1988) ("In adopting legislation, the Legislature is presumed to know of existing domestic judicial decisions and to enact and amend statutes in light of such decisions that have a direct bearing on them."). In Jacobson v. Wikholm, 29 Cal. 2d 24 (1946), the estate of a deceased partner in a construction partnership sued a surviving partner for a share of the profits from a pending contract. In determining the "reasonable compensation" due the surviving partner (under UPA), the California Supreme Court explained that "[i]t is the fact that the surviving partner has expended time, labor, and skill in the administration of the partnership assets incident to the successful termination of the unfinished business that now governs his right to remuneration therefore." Id. at 29. The court then held: [T]he most that the representatives of the deceased partner can justly demand is that [the surviving partner] should account to them for their capital, and, in addition, for whatever it has earned. This involves the necessity of inquiring how much of the profits is attributable to the services and skill of the surviving partner, and how much to the capital invested in the business. The latter portion of the profits shows what the capital has earned, and should rightfully be divided among the owners of the capital in proportion to their shares of the capital.

Id. at 30-31.

Thus, Jacobson held that the profits owed the dissolving partnership--i.e., profits minus "reasonable compensation"-were those profits from completing the partnership's business that

were attributable to partnership capital.11 Jacobson's definition of "reasonable compensation" tapped into a well-established legal distinction between profits attributable to labor and skill as opposed to the use of a partnership's capital. Specifically, where a dissolving partnership is continued by one partner using joint

partnership assets, courts have long held that partner completing new work must share profits attributable to partnership capital, but can retain reasonable compensation attributable to his own skill and labor. See, e.g., Vangel v. Vangel, 45 Cal. 2d 804, 808 (1955) ("For the use of his partnership assets in the continuing business, pending a settlement of the accounts, [a departing partner] was entitled to receive ... the profits attributable to the use of his right in the property of the dissolved partnership" (internal quotation marks omitted)); Urzi v. Urzi, 140 Cal. App. 2d 589, 592 ( 1956) ("When any partner retires or dies, and the business is continued without any settlement of accounts, ... he or his legal representative ... may have ... the profits attributable to the use of his right in the property of the dissolved partnership."). 12 No basis exists for adopting a different meaning of "reasonable compensation" specifically for law firms on the theory that law firm profits will never entail the use of firm capital. Modern legal practice regularly requires the use of substantial capital, including office space, computers and other technology, and operating funds. Sims Decl. ¶ 5. In any event, RUPA reflects the judgment of the California legislature that, although many dissolving partnerships ______

11 Plaintiff cannot evade this analysis by arguing that the definition of reasonable compensation goes only to damages. Plaintiffs entire theory is based on the argument that the damages Heller might obtain if it successfully brought a claim for an accounting against its partners (pursuant to Jewel) should instead be considered a property interest. Plaintiff cannot simultaneously argue that it is premature to address a statutory revision eliminating the very damages on which his property theory is based. 12 Other jurisdictions have applied the same definition of "reasonable compensation" to law firms as well as other partnerships. See, e.g., Bader v. Cox, 701 S.W.2d 677, 683 (Tex. App. 1985) (holding in case involving law partnership that "the estate is entitled to the value of decedent's percentage interest in the assets, less any outstanding liabilities, plus any profits attributable to the use of his right in the property after deducting the value, if any, of Cox's and Bader's services in winding up the business of the dissolved partnership."); id. at 684 ("To recover profits, [the plaintiff widow] must prove, by competent evidence, the profits gained after dissolution and prior to termination which are attributable to the use of decedent's right in the property of the dissolved partnership."); Seattle-First Nat '1. Bank v. Marshall, 31 Wash. App. 339, 349 (Wash. Ct. App. 1982) (holding in case involving real estate partnership, "upon the death of a partner, unless otherwise agreed, ... the estate is entitled to ... profits attributable to the use of the decedent's right in the property of the dissolved partnership.").

will contribute capital to future work even after dissolution, and should receive the resulting profits, those partnerships that do not contribute any such capital should not be entitled to any profits. Indeed, a primary purpose underlying RUPA was to avoid the unjust result of professional partnerships recovering profits attributable solely to the "professional skill and labor" of departing partners. Denver v. Roane, 99 U.S. 355, 359 (1879). That was recognized as "a particular problem in law firm partnerships" that dissolved. See UPA Revision Subcommittee of the Committee on Partnerships and Unincorporated Business Organizations, Should The

Uniform Partnership Be Revised?, 43 Bus. Law. 121, 148 (Nov. 1987) (explaining that UP A's requirement that all profits be remitted to a dissolving firm, even if not attributable to capital, "has been a particular problem in law firm partnerships"). Accordingly, RUPA limits a dissolving partnership, whether in voluntarily dissolution or dissolution because of death, to the measure of post-dissolution profits set out by the California Supreme Court in Jacobson. Because Heller does not, and cannot, allege that any profits resulted from Heller capital following its dissolution, Heller has no property interest in any profits earned by Jones Day. This Court's ruling on the sufficiency of the complaint, absent any discovery or factual development about the meaning of Heller's Basic Documents, does not foreclose this argument based on Jacobson in light of the evidence submitted with this motion. First, the term "work in progress" or WIP as used in Heller's Basic Documents means "time already incurred but not yet billed to clients." Benvenutti Decl. ¶ 28. It does not encompass time to be incurred in the future, much less time incurred in the future by another law firm. Id. ("Work in progress [or] 'WIP,' was a regularly used term in discussing the day-to-day operations of the firm. Work in progress, or WIP, was never used to refer to time that might be incurred in the future, much less future time incurred by another law firm retained by clients after the law firm's dissolution."); Holdrup Decl.¶ 29 ("It would not be correct or appropriate to use the phrase 'work in progress' to refer to future fees that might be billed in the future for work to be done in the future, nor would it be correct to use that phrase to include fees that some other firm might earn on future work."); see also Response to Jones Day's RF As 19-20 at 18:6-19:10 (Agenbroad Decl. Ex. 6) (admitting that Heller's balance sheet included work in progress and accounts receivable, but did not include unfinished business). Plaintiff agrees that WIP "means time that has actually been spent or incurred, but not yet billed to the client." Burkart Dep. 185:8-11

(Agenbroad Decl. Ex. 3). 13 The record contains no contrary evidence. 14 Second, neither the references to "work in progress" nor any other provision in the Basic Documents purport to define the "reasonable compensation" that, as this Court has already acknowledged (MTD Order. at 1 0) RUPA provides for winding up the work of a partnership. Benvenutti Decl. ¶¶ 13, 17, 21, 25, 29. As the Court recognized, the Basic Documents repeatedly incorporate California Jaw. MTD Order 7-8. Accordingly, absent any special definition of"reasonable compensation" in the

Basic Documents, the definition provided by Jacobson governs. After all, Jacobson is a controlling decision by the California Supreme Court that was the basis for RUPA's "reasonable compensation" requirement. It has lost no vitality and is as much, if not more, a part of California law than the court of appeal's decision in Jewel.

D. THE JEWEL PROVISION NEVER TRANSFERRED ANY PROPERTY RIGHT, HOWEVER DEFINED, TO JONES DAY. The fundamental incoherence of Heller's theory is also illustrated by its inability to trace any transfer of any form of consistently defined property from Heller to its shareholders to Jones Day. This is a further, independent reason to grant Jones Day's motion and deny Heller's. The undisputed facts summarized above show that, after Heller abandoned clients, some of them retained Jones Day to handle matters that Heller was no longer able to handle. Neither ______

13 See also id. at 185: 17-186: 1 ("Q: [W]ork in process is work or time that has been expended in which you're planning to bill the client? A: That's true. At the end of the billing cycle and when all the attorneys in their time slips, they run it through their accounts payable department and generate an invoice, and then that's mailed to the client. So that's-in that interim stage before it's compiled and billed in an invoice.").

14 Earlier, Heller cited cases that refer to "unfinished business" as cases, work or matters in progress or process. ECF No. 30 ("MTD2 Opp.") at 13-14. None of them purported to address WIP as used in Heller's documents. Because Heller used that term "in a technical sense" and it has a "special meaning ... given to [it] by usage," it is the specific understanding of the parties to the Basic Documents that "controls judicial interpretation." La Jolla Beach & Tennis Club, Inc v. Indus. Indem. Co., 9 Cal. 4th 27, 37 (1994) (quoting AIU Ins. Co. v. Superior Court, 51 Cal. 3d 807, 822 ( 1990)). As described above, the only relevant evidence in the record-the sworn declarations of the parties to the Basic Documents and the consistent testimony of Heller's plan administrator-uniformly and dispositively establishes that the term "work in progress" referred only to time already incurred but not yet billed. Jones Day nor the clients were even aware of the Jewel provision. See Sims Decl. ¶ 8; Goldfischer Decl. ¶ I2. And the undeniable fact is that neither Jones Day nor clients needed a waiver from Heller (or its shareholders) to enter into retention agreements. Faced with these facts, plaintiff is reduced to asserting (SJ Mem. 36) that these retention agreements were entered into "following" the Jewel provision, as if a temporal relationship establishes a causal connection or raises a triable issue about whether there was a transfer of property. (In any event, the cited document (Sullivan Decl. Ex. 65) relates to Orrick, not Jones Day). Nowhere does plaintiff attempt to explain how that transfer supposedly occurred. Notably, plaintiff does not assert that- as a result of the Jewel provision or otherwise-Heller assigned (or could have assigned) its

retention agreements to its shareholders or that the shareholders re-assigned the agreements to Jones Day. Plaintiffs transfer theory fails however the alleged property interest is defined. If the relevant "property" is Heller's right to bring a claim against former Heller shareholders under Jewel, see supra, note 7, and if the Jewel provision could be considered a transfer of a legal benefit from Heller to the Heller shareholders, see, e.g., Durkin v. Shields, No. 92-I 003, I997 WL 808628, at *6 (S.D. Cal. Aug. 20, I997), this legal benefit was obviously never transferred to Jones Day. To establish a transfer, plaintiff must show that the alleged transferee exercised "dominion" over the property in question. In re Incomnet, Inc., 463 F.3d I064, I068 (9th Cir.2006). "[D]ominion," in turn, requires that the recipient have both "legal title to [the property] and the ability to use [it] as he sees fit." Id. at I07I; see also In re Cohen, 300 F. 3d I097, II02 (9th Cir. 2002) ("In practical terms, the 'dominion test' requires that a transferee be 'free to invest the whole amount in lottery tickets or uranium stocks." (quoting Bonded Fin. Servs., Inc. v. European Am. Bank, 838 F.2d 890, 894 (7th Cir. I988)). Jones Day did not, in any sense, have factual or legal possession of a Jewel claim against the Heller Shareholders. As Durkin explained, "[ c ]learly, the derivative parties were not transferees of [the released] claims, as they never exercised dominion or control over the claims." 1997 WL 808628, at *6. Because Jones Day owes no fiduciary duty to Heller, it does not benefit from a waiver of Heller's possible Jewel claims against its shareholders. Indeed, it is difficult to imagine how a subsequent transferee could be involved where the alleged transfer was the release of a claim between the debtor and the initial transferee. That, no doubt, is why plaintiff goes to such lengths to argue that the alleged property is something other than the release of the Jewel claim. But Heller fares no better when it improperly defines the "property" as a direct right to profits from matters it could no longer handle. That approach creates two insurmountable problems for Heller. First, Heller did not transfer that "property" to its former shareholder within the meaning of "transfer" under the Bankruptcy Code. The former Heller shareholders did not exercise factual or legal control over the alleged profits. Clients paid the fees at issue to Jones Day, not to the former Heller shareholders who never had the ability to dictate who received the profits. As Heller's plan administrator admitted using Mr. Benvenutti and Lehman Brothers as an example, the administrator did not have "the power to make Lehman Brothers retain Jones Day." Burkart Dep. 146:23-25 (Agenbroad Decl. Ex. 3). "[T]hat was Lehman Brothers's own decision."

Id. at 146:25-147:7. The legal fees were paid directly to Jones Day, pursuant to its engagement letters with its clients. And the Heller shareholders never had "legal title to [client's fees] and the ability to use [them] as [they saw] fit." In re Incomnet, Inc., 463 F.3d at 1071; see also Response to Jones Day's RFA 9 at 11:22-12:24 (Agenbroad Decl. Ex. 6) (admitting that "former Heller PC shareholders had no legal right to require Heller clients to follow them to new firms"). There was accordingly never any transfer of profits from Heller to the former Heller shareholders. Second, Heller shareholders certainly never transferred any such "property" to Jones Day. Jones Day obtained its right to fees directly from the clients, not from Heller's former shareholders, who never exercised "dominion" over such fees. See, e.g., In re Slack-Horner Foundries Co., 971 F.2d 577, 580 (l0th Cir. 1992) (holding that a bankruptcy estate must first identify a fraudulent transfer to an initial transferee before it can seek recovery against a subsequent transferee). In this key respect, Heller's fraudulent transfer claim fails as a matter of law. As Heller's plan administrator admitted, this case does not fit the paradigm of a transfer of real property to an initial transferee who then transfers the property to a subsequent transferee. Here, "what we're dealing with is a client like Lehman Brothers choosing to retain Jones Day."Burkart Dep. 147:13-16 (Agenbroad Decl. Ex. 3). That is how Jones Day obtained its work, not "via" the Jewel provision. Not one of the fraudulent transfer cases cited by plaintiff finds liability against a subsequent transferee without first finding that there was an initial transferee who exercised factual and legal control over the property in question and then re-transferred the same property to someone else. See, e.g., In re Richmond Produce Co., 151 B.R. 1012, 1021 (N.D. Cal. 1993) (finding that the ultimate recipient of a cashier's check from a debtor was a subsequent transferee only where the intermediary purchaser of the debtor had exercised "complete control over the transaction" before assigning the cashier's check to the subsequent transferee). To put the point differently, at the time of the Jewel provision, Heller did not have any right to collect profits for work that had not yet been performed; by definition, that work had not been done. Rather, on this version of Heller's theory, before the Jewel provision, Heller had only a contingent expectation of profits in the future based on subsequent work by Heller shareholders. Accordingly, when Heller announced that it was no longer able or willing to serve clients, and clients chose to retain Jones Day rather than Heller or its former shareholders, it was these

actions that destroyed Heller's contingent expectation of future profits. Although Heller asserts that the Jewel provision effectuated a transfer of property, Heller would have been in the

identical position whether or not it adopted the Jewel provision. 15 It is accordingly impossible that the Jewel provision caused a transfer of profits to the shareholders and, in turn, to defendants. In all events, the simple point is that clients, not Heller, and not its former shareholders, gave Jones Day the right to complete the matters it did and the fees that Jones Day earned for its work. No basis exists to engage in the dual fiction that not only was this Heller's business but that Heller somehow transferred it first to its shareholders and then to Jones Day via a waiver that neither Jones Day nor the clients was aware of. ______

15 For this same reason, even if Heller were right on the law and facts, it would be entitled only to setting aside of the Jewel provision. That would return the estate to the identical position it occupied before the alleged fraudulent transfer. "Recovery [of property] is necessary only when the remedy of avoidance ... is inadequate ... [I]f the avoidance and preservation constitute a sufficient remedy, then the trustee need not seek recovery under § 550(a), nor must the bankruptcy court grant it." In re Bremer, 408 B.R. 355, 359 (1Oth Cir. BAP 2009); see also In re Cohen, 199 B.R. 709, 716 (BAP 9th Cir. 1996) ("[T]he determination that the transfer is fraudulent is conceptually distinct from the avoidance of the transfer, which is, in turn, separate and distinct from a recovery based upon the avoidance of a transfer."); In re Taylor, 599 F.3d 880, 890 (9th Cir. 2010) (internal quotation marks omitted) (goal is "to restore the estate to the financial condition it would have enjoyed if the transfer had not occurred.")

THE ETHICAL RESPONSIBILITIES OF PARTNERS OF A LAW FIRM IN DISSOLUTION

CHRISTOPHER D. SULLIVAN Trepel Greenfield Sullivan & Draa LLP

Fiduciary Duties -- Generally.

Law partners, of course, owe each other fiduciary duties. “The fiduciary duty includes an

obligation to act in the highest good faith and not to obtain any advantage over the other partners

in partnership affairs . . . .” Dickson, Carlson & Campillo v. Pole, 83 Cal. App. 4th 436, 445

(2000). A dissolved firm continues as a partnership until the wind-up is complete. Thus the

fiduciary duties of the partners to each other and the firm continue with respect to winding up the

partnership’s business. See Jewel v. Boxer, 156 Cal. App. 3d 171, 178-89 (1984). As recently

held by Judge McMahon in the Southern District of New York:

[A fiduciary] duty devolves on all partners at the moment of dissolution, whether they remain behind to wind up the firm’s business (as Coudert’s Executive Board did), or leave their former firm and wind up the business elsewhere. Compare Stem v Warren, 227 N.Y. 538, 125 N.E. 811 (1920) (post- dissolution liability of winding up partner), with Rhein v Peeso, 194 A.D. 274, 185 N.Y.S. 150 (1st Dep’t 1920) (post-dissolution liability of departing partner); see also Shandell v Katz, 217 A.D.2d 472, 629 N.Y.S.2d 437 (1st Dep’t 1995) (departing law partner); Murov v Ades, 12 A.D.3d 654, 786 N.Y.S.2d 79 (2d Dep’t 2004) (same). In either case, if a former partner makes use of a “partnership asset,” or “partnership property,” she has a fiduciary duty to account to her former partners for any benefit that she derives from it. That includes the business of the partnership. As the Supreme Court put it in Denver v. Roane, 99 U.S. 355, 358, 25 L. Ed. 476 (1878): Having jointly undertaken the business intrusted to the partnership, all the parties were under obligation to conduct it to the end. This duty they owed to the clients and to each other. And as to the unfinished business remaining with the firm on [the date of dissolution], the duty continued, (emphases added).

Development Specialists, Inc. v. Aiken Gump Strauss Haur & Feld, 2012 U.S. Dist. LEXIS 110715, *18-19 (S.D.N.Y July 18, 2012.)

The fiduciary duties apply regardless of whether the law firm operates as a professional corporation or with a mixed form of LLP and professional corporation. Heller Ehrman, LLP v. Arnold & Porter (In re Heller Ehrman LLP), 2011 Bankr. LEXIS 1347 (Bankr. N.D. Cal. 2011) (“This court will apply those [fiduciary] principles to a partnership consisting of corporations that are owned by the attorney-employees who give them professional life and meaning.”); Fox v. Abrams, 163 Cal. App. 3d 610 (1985) (“Attorneys practicing together in a law corporation owe each other fiduciary duties very similar to those owed by law partners, and therefore the fact that a law corporation is involved is no reason to disregard the fair and reasonable principles of [Jewel]”)) (emphasis added); Grossman v. Davis, 28 Cal. App. 4th 1833, 1835 (1994) (holding that “[f]ollowing their decision to dissolve, Grossman and Davis were obligated to wind up the partnership’s affairs and complete transactions begun but not then finished”; that this principal applied “whether the dissolved firm was organized as a partnership or a professional corporation,” and that “Davis participated in the settlement process as Grossman’s fiduciary”); Sullivan, Bodney & Hammond v. Houston Gen. Ins. Co., 2 F.3d 824, 827 (8th Cir. 1993) (“To preserve integrity and professionalism, however, in substance, insofar as the relationship of attorney and client and of attorney and the general public is concerned, practice in corporate form will be . . . substantially similar to the practice of law as it presently exists in firms operating as law partnerships.”) (internal quotations omitted); Sufrin v. Hosier, 896 F. Supp. 766, 769 (N.D. Ill. 1995) (“Attorneys practicing together in a law corporation owe each other fiduciary duties very similar to those owed by law partners, and therefore the fact that a law corporation is involved is no reason to disregard the fair and reasonable principles of [Jewel] or to interpret the parties’ agreement in a manner favoring one group over another.”) (quoting Fox); ; Hurwitz v. Padden, 581 N.W.2d 359, 362 (Minn. Ct. App. 1998) (applying Fox and Jewel to dissolution of limited liability company, noting that “reliance on partnership principles is appropriate when enforcing fiduciary duty among shareholders in close corporations”). Given the obligations of a dissolving partnership to collect assets to satisfy its obligations to its creditors, the fiduciary duties of the partners to the firm in dissolution certainly should include such duties as working with the firm to collect accounts receivable and cooperating with the firm to

help transition clients and avoid malpractice exposure. As Judge McMahon noted, a partner owes a “duty to account for his use of partnership property after dissolution. This qualification is so implicit in the nature of a partnership that it should go without saying. A departing partner is not free to walk out of his firm’s office carrying a Jackson Pollack painting he ripped off the wall of the reception area, simply because the firm has dissolved. Partnership property remains partnership property, dissolution notwithstanding . . . .” These principles should apply with equal force to the general pre-dissolution responsibilities you would expect law partners to owe to the firm that the firm in dissolution will continue to need: assistance collecting accounts receivable; minimizing law firm liabilities; organizing and protecting client files; and like matters.

A. Duty to Complete Unfinished Business. There are many difficult repercussions flowing from the dissolution of a law firm. One critical item to address is the responsibility to complete unfinished business. Law firms undoubtedly owe a fiduciary duty to their clients. E.g., Stanley v. Richmond, 35 Cal. App. 4th 1070, 1086 (1995). It should be equally clear that the individual lawyers owe fiduciary duties not only to their clients to finish the business, but to the firm in dissolution as well. In fact, in this area courts are consistent: “The partners of a dissolved partnership owe each other a fiduciary duty to complete the partnership’s unfinished business, and the failure to discharge that duty is actionable.” Dickson, Carlson & Campillo v. Pole, 83 Cal. App. 4th 436, 445 (2000); Champion v. Superior Court, 201 Cal. App. 3d 777, 787 (1988) (recognizing that “the fiduciary obligations of former partners, the duty to wind up and complete the unfinished business of the dissolved partnership, and the principle that no former partner may take any action with respect to unfinished business which leads to purely personal gain” applied to shareholders in “dissolution of a law corporation”); Jewel v. Boxer, 156 Cal. App. 3d 171, 179 (1984) (“First, each former partner has a duty to wind up and complete the unfinished business of the dissolved partnership.”); Rosenfeld, Meyer & Susman v. Cohen, 146 Cal. App. 3d 200, 217 (1983) (“Each partner of a dissolved partnership has the duty to wind up and complete the business of the dissolved partnership existing prior to its dissolution.”); Osment v. McElrath, 68 Cal. 466, 470 (Cal. 1886) (“The business was intrusted to the firm, and it was the duty

of both parties to conduct it to an end. This duty they owed to the clients and to each other, and it continued after the dissolution as to all unfinished business.”).

The Rosenfeld case is very instructive. The Court found that

A partner’s fiduciary duty to complete unfinished business on behalf of the dissolved partnership arises on the date of dissolution and governs each partner’s future conduct regarding this business. Since the Rectifier case remained exactly the same before and after RM&S’s dissolution, C&R [was liable] for failing to complete the Rectifier case for the dissolved RM&S and by entering into a contract personally to profit from the business of the dissolved RM&S . . . .

[The partner] may not seize for his own account the business which was in existence during the terms of the partnership to cause a termination of the partnership business . . . 146 Cal. App. 3d at 220.1 There is an abundance of case law in other jurisdictions as well imposing a duty to the partners of a dissolving firm to complete unfinished business. See, e.g., Vowell & Meelheim, P.C. v. Beddow, Erben & Bowen, P.A., 679 So. 2d 637, 640 (Ala. 1996) (adopting “majority rule” and recognizing “principle that pending contingent-fee cases are assets of the originating firm and that lawyers practicing together have a continuing fiduciary duty to each other and the firm”); Sullivan, Bodney & Hammond v. Bodney, 820 P.2d 1248, 1251 (Kan. Ct. App. 1991) (holding “obligation to complete the work in progress” applied to shareholders of dissolved law corporation). Partners of the firm in dissolution and law firms that hire partners from the firm in dissolution are also at risk to the extent that they interfere with the ability of the firm to obtain the benefits from completing a contingency fee contract. In Weiss v. Marcus, 51 Cal. App. 3d 590 (1975), a client of the plaintiff, who was an attorney, discharged the plaintiff without cause and sought the defendant’s representation. The plaintiff had a valid attorney’s lien on the client’s settlement, but the defendant, on notice of plaintiff’s lien, advised the client that they were not required to withhold any settlement funds due plaintiff. The court held these allegations sufficiently

1 In Rosenfeld, two partners, Cohen and Riordan (“C & R”) left their firm, Rosenfeld, Meyer & Susman (“RM & S”), causing its dissolution. The following month, a major RM & S client discharged RM & S, moved its business to C & R, and entered into a new fee agreement with C & R under which the amount payable to C & R was twice what their anticipated share would have been under the RM & S partnership agreement. Rosenfeld, 146 Cal. App. 3d at 211. The court held that RM & S had sufficient grounds to support of breach of fiduciary duty claims.

stated a cause of action for intentional interference with the plaintiff’s contract (id. at 594-96, 601). In the context of a firm in dissolution, if partners of the firm in dissolution do not complete the contingency contract and/or allow another firm to obtain the benefits of the contingency fee contract, without protecting the rights of the firm in dissolution, they may face exposure for an intentional interference claim.

B. Maintain Client Confidences. The partners of a dissolved firm should be mindful of the broad duties under California law to maintain client confidences and protect attorney-client privileged material. California Rule of Professional Conduct 3-100, of course, prohibits disclosure of confidential attorney-client privileged material. Under California law, though, the protection extends beyond even strictly confidential or attorney client privileged communications and extends to “the secrets” of his or her clients – or indeed any information told to them in confidence. California Business & Professions Code section 6068(e). The comments to the professional rules elaborate on the “principle [that] client-lawyer confidentiality applies to information relating to the representation, whatever its source, and encompasses matters communicated in confidence by the client, and therefore protected by the attorney-client privilege, matters protected by the work product doctrine, and matters protected under ethical standards of confidentiality, all as established in law, rule and policy. See In the Matter of Johnson 4 Cal. State Bar Ct. Rptr. 179 (Rev. Dept. 2000); Goldstein v. Lees, 46 Cal. App.3d 614, 621. (1975).” A member’s ethical duty of confidentiality is not limited in its scope of protection for the client-lawyer relationship of trust. The duty prevents a member from revealing the client’s confidential information whether or not the client or a representative of the client is there to protect the information. A member may not reveal such information except with the consent of the client or as authorized or required by the State Bar Act, rules of conduct, or other law.

The duties survive past the dissolution of the firm, even if the lawyer has no on-going

relationship to the client, in order to protect the sanctity of the confidential relationship between

and attorney and client. People ex rel. Dept. of Corporations v. SpeeDee Oil Change Systems,

Inc. 20 Cal. 4th 1135, 1147 (1999); Jeffry v. Pound, 67 Cal. App. 3d 6, 9 (1977).

Two recent cases apply the duty to protect client confidences broadly. Styles v. Mumbert,

164 Cal. App. 4th 1163, 1167 (2008) (“attorney is forever forbidden from using, against the

former client, any information acquired during such relationship, or from acting in a way which

will injure the former client in matters involving such former representation”); Deitz v.

Meisenheimer & Herron, 177 Cal. App. 4th 771 (2009) (discussions regarding tax strategies that

client wanted to keep as confidential, even discussions with third parties, protected as client

confidences). In fact, the case law provides that in addition to not being able to directly reveal or

use confidences after the termination of the relationship, an attorney may not act in a way which

would undermine his continuing duty to protect the confidential relationship. Styles, 164 Cal.

App. 4th at 1168. Needless to say, caution in this area is called for and erring on the side on non-

disclosure is the better course.

Safeguarding Client Files.

Both the partners of a law firm and the law firm owe continuing obligations to maintain

and protect client files. The best guidance on the most important factors in deciding how, and

how long, client files should be maintained is found in ABA Informal Opinion 1384 (1977). The

opinion puts forth seven basic considerations to keep in mind when considering whether to keep

or discard a client file:

1. Unless the client consents, a lawyer should not destroy or discard items that clearly or probably belong to the client. Such items include those furnished to the lawyer by or in behalf of the client, the return of which could reasonably be expected by the client, and original documents (especially when not filed or recorded in the public records).

2. A lawyer should use care not to destroy or discard information that the lawyer knows or should know may still be necessary or useful in the assertion or defense of the client’s position in a matter for which the applicable statutory limitations period has not expired.

3. A lawyer should use care not to destroy or discard information that the client may need, has not previously been given to the client, and is not otherwise readily available to the client, and which the client may reasonably expect will be preserved by the lawyer.

4. In determining the length of time for retention or disposition of a file, a lawyer should exercise discretion. The nature and contents of some files may indicate a need for longer retention than do the nature and contents of other files, based upon their obvious relevance and materiality to matters that can be expected to arise.

5. A lawyer should take special care to preserve, indefinitely, accurate and complete records of the lawyer’s receipt and disbursement of trust funds.

6. In disposing of a file, a lawyer should protect the confidentiality of the contents.

7. A lawyer should not destroy or dispose of a file without screening it in order to determine that consideration has been given to the matters discussed above.

8. A lawyer should preserve, perhaps for an extended time, an index or identification of the files that the lawyer has destroyed or disposed of.

Informal Opinion 1384 is still very widely cited in state bar ethics opinions. See, e.g.

New Jersey 692 (2002), West Virginia Bar Opinion 2002-01(2002), California State Bar Opinion

2001-157 (2001), The Association of the Bar of the City of New York Opinion 1999-05 (1999),

Pennsylvania Bar Opinion 99-120 (1999), Arizona Bar Association Opinion 98-07(1998),

Wisconsin Opinion E-98-01 (1998), Utah State Bar 96-02 (1996) and South Dakota Opinion 94-

6 (1994).

THIS PROPOSED PARTNER CONTRIBUTION PLAN IS NOT AN OFFER WITH RESPECT TO A SOLICITATION OF ACCEPTANCES OR REJECTIONS OF A CHAPTER 11 PLAN. SUCH SOLICITATION WILL ONLY BE MADE IN COMPLIANCE WITH ALL APPLICABLE PROVISIONS OF CHAPTER 11 OF THE BANKRUPTCY CODE.

UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK ------x In re: Chapter 11 COUDERT BROTHERS LLP, Case No.: 06-12226 (RDD)

Debtor. ------x

PROPOSED PARTNER CONTRIBUTION PLAN AND EXPLANATORY REPORT OF HARRISON J. GOLDIN, COURT-APPOINTED EXAMINER OF COUDERT BROTHERS LLP

TO: THE HONORABLE ROBERT D. DRAIN, UNITED STATES BANKRUPTCY JUDGE:

Harrison J. Goldin, as Examiner for the above-captioned Debtor, hereby submits this Proposed Partner Contribution Plan and Explanatory Report.

Dated: New York, New York March 27, 2008

GOLDIN ASSOCIATES, L.L.C. KAYE SCHOLER LLP 400 Madison Avenue 425 Park Avenue New York, New York 10017 New York, New York 10022 (212) 593-2255 (212) 836-8000 David Pauker Arthur Steinberg, Esq. Gary Polkowitz Scott Davidson, Esq. Attorneys for the Examiner

Table of Contents

I. Executive Summary 1 II. Background 10 III. The Part B Investigation and the Methodology Used in Formulating the PCP 14 A. Contract Claims 14 1. Over-Distributions 2005/2004 14 2. Tax Payments 15 3. Loans/Advances 16 4. Capital Contributions 16 5. Over-Distributions Prior to 2004 17 6. The Applicability of Setoffs 17 7. Prejudgment Interest 18 8. Conclusion 18 B. Avoidance Claims 19 1. Legal Standards 19 2. Payments Made to Partners While Insolvent 20 3. The Application of a Reasonable Discount to the Incremental Avoidable Transfer Claims 21 4. Conclusion 23 C. Recourse Claims 23 1. The Claims of the Retired Partners Trust 25 a. The Retired Partners Trust’s Claims Are Largely Derivative Claims That Belong to the Debtor’s Estate 25 b. Breach of Contract Claims Arguably Cannot Be Asserted Against Individual Partners 25 c. It is Unclear Whether Retired Partners Are Owed Fiduciary Duties by the Remaining Partners 26 d. Conclusion 27 2. The Claims of SenoRx 27 3. Other Potential Recourse Claims 29 D. Individual Claims 31 1. Management Claims 31 a. Legal Analysis 31 b. Practice Group Sales Claims 33 i. Baker Transaction 35 ii. Dechert Transaction 38 iii. Orrick Transaction 40 iv. DLA Transaction 42 v. Conclusion 43 c. Bank-Related Claims 43 d. Possible Insurance Coverage 44 2. Individual Partner Claims 45 E. Adjustments 47 IV. Conclusion 48 APPENDICES:

1. Aggregation of All Partner Claims 2. PCP Matrix

Program Materials - final.doc ii

Executive Summary

Coudert Brothers LLP (“Coudert,” the “Firm” or the “Debtor”) was an international law firm founded in 1853 and was, as of October 1, 2001, a New York limited liability partnership. It operated pursuant to the Coudert Partnership Agreement (the “Partnership Agreement”).

Partnership earnings at the Firm declined in 2004, compared to prior years. During that year Coudert explored the possibility of merging with Squire, Sanders & Dempsey LLP, but the partners were divided as to whether the transaction would be advantageous. By 2005 the Firm had decided not to pursue such a transaction; but it recognized the pressing need to stay competitive by making changes to its business affairs in order to become more profitable. The Firm was projecting that earnings for 2005 would be disappointing again. In February, 2005 a new Executive Board1 was elected by the partners and a new chairman of the Executive Board (Clyde Rankin) was named. In May, 2005 the Executive Board retained a consulting firm -- Hildebrandt International (“Hildebrandt”) -- to advise the Firm as to business restructuring alternatives and/or potential merger candidates. Shortly thereafter, in May, 2005, the Executive Board learned that all the partners in Coudert’s London and Moscow offices were defecting and joining Orrick, Herrington & Sutcliffe LLP (“Orrick”). Because of the number of partners lost, Coudert no longer met the requirement of its loan agreements with Citibank, N.A. and JPMorgan Chase Bank (collectively, the “Banks”) as to the minimum number of partners of the Firm. Coudert was, therefore, in default under the loan agreements.

The departure of the Moscow and London partners and the reaction of one of the Banks to the situation was a major blow to the partners’ perception of the Firm’s long-term prospects and caused the Executive Board to accelerate its efforts to restructure the Firm or find a merger partner. Hildebrandt advised the Executive Board that based on, among other things, the Firm’s weakened profitability, partner attrition, multiple offices and unfunded retirement obligations, only a limited number of law firms would be interested in a full merger with the Firm. In June, 2005 the Executive Board presented a restructuring plan to the partners which provided, among other things, for offices to be closed, a trimming of the partnership ranks, a decreased earnings projection for 2005 and a slightly increased earnings projection for 2006. The restructuring plan projected additional capital needs for the Firm, with the money coming from new loans by the Banks or from other sources. According to the Debtor’s representatives, at the request of the Banks and certain Firm partners the Executive Board also prepared a plan of dissolution and an accompanying financial analysis.2 Around the same time, Hildebrandt identified Baker & McKenzie LLP (“Baker”) to the Firm as a potential merger candidate and aggressively pursued discussions with Baker. The reaction of the partners to the June, 2005 restructuring plan was unenthusiastic, at best. The prevailing sentiment at the Firm favored a Baker merger; many of the partners had apparently decided that the Firm’s survival was dependent on a merger with Baker. In early August, 2005 Baker indicated to the Executive Board that, after two months of diligence, it was not interested in a full merger with the Firm. The Executive Board concluded quickly that the majority of the Firm’s partners were not inclined to accept a restructuring plan.

1 Capitalized terms in this Report have the meaning set forth in the Partnership Agreement, except to the extent otherwise defined herein. 2 While the written version of the dissolution plan was not distributed to partners, a presentation made to the partners in June, 2005 included an “orderly dissolution analysis,” which indicated that on a worst case basis the Firm was then insolvent by approximately $30 million.

At a special partners meeting held on August 16, 2005 (“August 16 Partners Meeting”) a resolution was adopted providing overwhelmingly for the dissolution of the Firm (the “Dissolution Resolution”). Representatives of Hildebrandt and outside counsel retained by Coudert,3 who were advising the Executive Board on restructuring alternatives and partnership fiduciary responsibilities, were present at the August 16 Partners Meeting. Shortly thereafter, the Executive Board established a Special Situation Committee (“SSC”) to oversee the wind down and dissolution of the Firm. The SSC effectively supplanted the Executive Board. Pursuant to the Dissolution Resolution, the SSC was authorized to manage the affairs of the Firm consistent with the Dissolution Resolution, which included the authority to negotiate and enter into agreements respecting the sales and transfers of Firm assets.

For over a year the SSC pursued a wind down of the Firm outside of bankruptcy. During this 13-month interval the Firm was in default under its loan agreements with the Banks, which had a lien on substantially all of Coudert’s assets. The Banks imposed an operating budget on the Firm and had final approval of sale transactions. During this interval, among other things, Coudert collected its accounts receivable, sold practice groups and paid its secured loans (which were guaranteed by the partners) in full.

Also during this period, Coudert tried through negotiations to extricate itself from several unfavorable leases and defended itself against various malpractice actions. In one litigation, Lyman Gardens Apartments LLC et al. v. Coudert Brothers LLP, et al., on July 27, 2006 Coudert filed a notice of appeal on a judgment for over $2.5 million entered against the Firm in May, 2006. It did not, however, have sufficient funds to post a bond to stay enforcement of the judgment. The bankruptcy filing obviated the need for Coudert to post a bond for the appeal.4

According to one SSC member, the Firm delayed filing for bankruptcy pending the transfer of its license to operate in China to Orrick and its receipt from Orrick of $1 million. That was accomplished in September, 2006.

On September 22, 2006 (the “Petition Date”) the Debtor commenced its bankruptcy case in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). On October 10, 2006 the United States Trustee appointed an Official Committee of Unsecured Creditors (the “Committee”). On December 8, 2006 the Committee filed a motion seeking the appointment of a Chapter 11 trustee (the “Trustee Motion”). That same day the Debtor filed an application (the “RR Application”) seeking to establish procedures for entering into settlements with its former partners concerning so-called “Reconciliation Reimbursement Claims”5 (“RR Claims”).

Thereafter, as a compromise of the issues raised in the Trustee Motion and the RR Application, the Bankruptcy Court appointed the Examiner (defined below), initially to conduct an investigation (the “Part A Investigation”) respecting (i) the RR Claims and (ii) whether the

3 Coudert had previously retained Jager Smith PC to advise the Firm on restructuring issues. Coudert had also retained Pillsbury Winthrop Shaw Pittman LLP to advise the Firm on partnership issues. 4 See Affidavit of Pat Kane Pursuant to S.D.N.Y. Local Bankruptcy Rules 1007-2 and 9077-1 and in Support of Debtor’s First Day Motions, dated September 22, 2006, at ¶ 12. 5 As defined in the RR Application.

Debtor was insolvent prior to the Petition Date.6 As stated in the Part A Report, the RR Claims are essentially contract claims reflecting amounts due the Firm from partners pursuant to various provisions of the Partnership Agreement. While the Examiner found that the Debtor’s RR Claims calculation was generally consistent with the Partnership Agreement, he noted that in 2005 (after it was placed on a budget by the Banks) Coudert changed its historical method of paying invoices and began to delay or, in some cases, stop paying certain expenses altogether.7 This resulted in an accumulation of unrecorded expenses for 2005 that was inconsistent with the Firm’s prior practice. The Examiner proposed in the Part A Report a $1.75 million adjustment to Coudert’s 2005 financial statements to take this inconsistency into account. The effect of this adjustment was to increase the RR Claims by $1.4 million, or from $7.9 million to approximately $9.3 million.8

As to solvency, after discussions with the Debtor and the Committee the Examiner analyzed whether the Debtor was solvent or insolvent on three test dates: (i) September 22, 2006; (ii) August 31, 2005; and (iii) June 30, 2005. The Examiner concluded in the Part A Report that the Debtor was surely insolvent on the first two test dates and most likely insolvent on June 30, 2005.9

After the completion of the Part A Investigation and discussions with the Debtor and the Committee as to what additional investigations would be necessary and appropriate in this case, the Bankruptcy Court entered the Modified Examiner Order (defined below), directing the Examiner to investigate possible additional claims against the former partners of Coudert (the “Part B Investigation”) and, thereafter, to formulate a “partner contribution plan” (“PCP”). The PCP is essentially a proposal for settling Partner Claims (defined below); based on this report (the “Report”), it presents a matrix (the “PCP Matrix”) that contains a proposed settlement amount for each partner the Examiner believes has liability to the Debtor’s Estate. Appendix 1 annexed hereto contains an aggregation of all Partner Claims. Appendix 2 annexed hereto is the PCP Matrix, which sets forth the names of the partners and each of their individual settlement amounts.10

As noted, from October, 2001 forward Coudert was a limited liability partnership, not a general partnership. Unlike partners of failed law firm general partnerships, the former partners of Coudert are not individually responsible for the liabilities incurred by Coudert. Rather, the

6 The Examiner’s findings respecting the Part A Investigation are contained in the “Report of Harrison J. Goldin, Court-Appointed Examiner of Coudert Brothers LLP Respecting Part A Investigation,” dated May 14, 2007 (the “Part A Report”). 7 Coudert used a modified cash basis of accounting; the Firm recorded revenues when they were received and recorded expenses when they were paid (except in certain situations). For a discussion as to Coudert’s method of accounting, refer to pages 12-13 of the Part A Report. 8 For a complete discussion of the RR Claims and the Examiner’s analysis and conclusions respecting them, refer to Part II of the Part A Report. 9 For a complete discussion of the Examiner’s solvency analysis, refer to Part III of the Part A Report. 10 The PCP Matrix annexed hereto as Appendix 2 comprises the following two schedules: (i) one setting forth the names of active Coudert partners as of or after January 1, 2005 and their individual settlement amounts and (ii) one setting forth the names of former Coudert partners who departed, retired, withdrew or were terminated before January 1, 2005 and their individual settlement amounts.

former partners are liable to the Firm and its creditors only to the extent set forth in the Partnership Agreement or other contractual commitments and/or pursuant to applicable law.11

Two cautionary notes as to the PCP and the Report warrant emphasis. First, the proposed aggregate settlement amounts for former partners of the Debtor contained in the PCP should not be assumed to be the amounts that would be sought by a representative of the Debtor’s Estate in litigation or amounts that might be found to be due and owing by a court of law. The amount for each partner in the PCP comprises what the Examiner believes constitutes a fair and equitable compromise as to disputed issues.

Second, the Modified Examiner Order directs the Examiner to investigate Partner Claims, not claims against other third parties (e.g., the Banks and the law firms that acquired Coudert’s practice groups or offices). The Examiner takes no position as to the viability of any potential claims against such third parties. The liquidating agent under any proposed plan of liquidation, or any other duly authorized Estate fiduciary, might seek to pursue such claims. Thus, the PCP relates solely to claims against former partners of Coudert.12

In constructing the PCP the Examiner analyzed four categories of potential claims against partners: (i) contractual claims and obligations (“Contract Claims”); (ii) bankruptcy avoidance claims (“Avoidance Claims”); (iii) recourse claims (“Recourse Claims”); and (iv) claims against individual partners (“Individual Claims” and, with the Contract Claims, Avoidance Claims and Recourse Claims, “Partner Claims”).13 Appendix 1 breaks down the aggregate amount of Partner Claims by each of the foregoing categories. Appendix 2 sets forth the amount each partner is being asked to contribute to the Debtor’s Estate to settle all claims against that partner in exchange for a release and/or a protective injunction from creditor claims under a plan of liquidation.

In evaluating possible Partner Claims, as well as any defenses thereto, the Examiner did not just focus on whether a claim might be asserted or a complaint filed against a partner; he also considered the likelihood such a claim (or defense thereto) would succeed on the merits, resulting in partner liability. Where there was no basis to conclude that a claim has a reasonable probability of success on the merits, the Examiner did not ascribe value to it for the purpose of the PCP; his approach was the same in evaluating possible defenses partners might assert in response to Partner Claims.

The Examiner’s findings as to each of the four categories of claims described above can be summarized as follows:

11 In certain foreign jurisdictions (such as France, England, Australia, Tokyo and Hong Kong) the Firm was not permitted to operate as a limited liability partnership and, therefore, conducted its affairs as a Related Partnership (as defined in the Partnership Agreement) and in the form of a general partnership. Partners of Coudert were partners of the Related Partnerships and have potential liability for unpaid claims against the Related Partnerships. The Related Partnerships have not filed for bankruptcy in the United States. 12 Claims relating to the so-called “unfinished business” doctrine, see Jewel v. Boxer, 203 Cal. Rptr. 13 (Cal. Ct. App. 1984), involve primarily the potential liability of successor firms that bought assets of the Firm and are not addressed in this Report. 13 The Modified Examiner Order specifically excluded from this category (and the PCP in general) malpractice claims assertable against individual partners.

Contract Claims: Contract Claims are claims that may be asserted against former partners pursuant to the Partnership Agreement or other agreements entered into between the Debtor and individual partners. Much of the analysis involving this category of claims was performed during the Part A Investigation relating to the RR Claims; that analysis has been incorporated into the Part B Investigation and the PCP. However, in connection with the Examiner’s review of the RR Claims as part of the Part A Investigation he was not directed in the Examiner Order (defined below) to take into account certain other potential claims and adjustments. These additional claims and adjustments, which are included in the Contract Claims category and, thus, in the formulation of the PCP, are: (i) an adjustment to the 2005 financial statement; (ii) capital contributions owed by partners after May 18, 2005 that were not paid to Coudert; (iii) claims against partners who withdrew from Coudert prior to 2004 and who received over- distributions; (iv) prejudgment interest on the Contract Claims; and (v) appropriate setoffs that partners may assert based on amounts owed to them. Based on the foregoing, the aggregate amount of Contract Claims (inclusive of prejudgment interest) approximates $10.2 million.

Avoidance Claims: Avoidance Claims primarily comprise potentially avoidable transfers recoverable from partners pursuant to Section 548 of the Bankruptcy Code. As explained herein, the Examiner utilized May 18, 2005 (the date the London and Moscow partners announced their withdrawal from the Firm, which was the triggering event for the default under the loan agreements with the Banks) as the earliest date on which the Debtor was insolvent. To ascertain the universe of potential Avoidance Claims, the Examiner reviewed all payments made to partners after that date. Total potential Avoidance Claims approximate $10.8 million. The Examiner analyzed the extent to which the Avoidance Claims overlap the Contract Claims and, based on the methodology discussed below, determined that approximately $6.7 million of Avoidance Claims do not overlap the Contract Claims. With that amount as a base, the Examiner considered the relevant law respecting Avoidance Claims and whether it could reasonably provide a partner with defenses to such claims. Consideration of these factors led the Examiner to conclude that a 50% discount should in the main be applied to the non-overlapping portion of the Avoidance Claims that arose between May 18, 2005 and August 16, 2005; the exception is Loans/Advances (defined below) and the return of capital and interest payments on capital accounts to which the Examiner applied a 25% discount. The Examiner concluded that no discount should apply to payments partners received after August 16, 2005.14 The aggregate amount of Avoidance Claims, after the discounts are applied, approximates $3.9 million.

Recourse Claims: The Examiner reviewed claims asserted against the Debtor by third parties that have also been asserted against partners individually to determine whether it is appropriate to include those claims in the PCP. One group of material unresolved

14 Potential preference payments to partners during the one year period prior to bankruptcy totaled $626,530. This amount does not include certain payments made to partners who assisted in winding down the Firm or certain offices -- the Examiner did not treat such amounts as recoverable pursuant to an Avoidance Claim. Except for a $20,000 preferential payment to a former SSC member in August, 2006, preference payments overlap the Section 548 avoidable transfer payments the Examiner reviewed; they were not dealt with separately because of this overlap and the relatively small amount involved.

potential recourse claims involves claims made by a trust formed by a group of retired Coudert partners (“Retired Partners Trust”) against various other Coudert partners who were involved in the Firm’s management, the winding down of its affairs and/or the liquidation of the Firm’s assets (“Management Partners”). The Examiner concluded that the claims of the Retired Partners Trust are likely derivative claims that belong to the Debtor’s Estate and/or may be insufficient as a matter of fact and/or law to give rise to recourse liability to the Retired Partners Trust on the part of Management Partners individually. Accordingly, the Examiner believes no incremental value should be added to the PCP based on claims against the Management Partners asserted by the Retired Partners Trust.

In addition to the claims of the Retired Partners Trust, SenoRx, Inc. (“SenoRx”), a former client of the Firm that is suing Coudert for professional malpractice, has asserted claims against over 100 partners on the ground that a California statute imposes individual liability on partners for the self-insured retention component of the Firm’s malpractice insurance. The Examiner concluded that the Firm likely complied with the statute and that no recourse liability to SenoRx lies against partners individually. Accordingly, the Examiner believes no incremental value to the PCP is warranted based on the claims asserted by SenoRx against partners.

A recourse claim has also been asserted against certain partners of Coudert Freres (“CF”),15 a New York general partnership that is a Related Partnership to the Debtor. Additional recourse claims might be asserted against partners by virtue of their being partners in CF and/or other Related Partnerships. The assertion of recourse claims against certain partners could lead to contribution claims by those partners against other partners. Claims against Coudert by creditors of the Related Partnerships may be objected to on the ground that they are not properly asserted against Coudert.

The Examiner considers it appropriate to add $900,000 to partner contributions under the PCP on account of claims involving the Related Partnerships. A fund (the “Recourse Fund”) deriving from these additional contributions would support a compromise whereby creditors of Related Partnerships could receive distributions from Coudert under the Plan. Absent such a compromise, those claims might or might not receive a distribution. Moreover, the Recourse Fund could be accessed to defend against and otherwise resolve recourse claims that are or might be asserted by creditors, if any, of Related Partnerships which may not be barred (on a real or practical basis) by the Section 105 injunction. Initially, the Recourse Fund would be available exclusively for the latter purpose. After an agreed period, any amount remaining in the Recourse Fund would be available for distribution to holders of allowed general unsecured claims. Allowing recourse creditors of the Related Partnerships to participate in the Recourse Fund and allocating any remainder to satisfy general claims against the Coudert Estate provides settling partners with the broadest possible protection against third-party claims pursuant to Section 105 of the Bankruptcy Code. This should encourage partners to participate in the PCP, which will, in turn, benefit creditors.

15 The CF office was located in Paris, France.

Pursuant to this construct, all non-retiree partners who were partners at Coudert as of and after January 1, 2005 would be required to contribute approximately $2,940 each to the Recourse Fund on account of their potential exposure for these claims, either directly or through contractual liability under the Partnership Agreement. In addition, those partners who were required by the Partnership Agreement to contribute capital to the Firm would be obliged to share in contributing an additional $450,000 to the Recourse Fund. That contribution would be apportioned among those partners on the basis of their relative ownership interest in the Firm. These contributions would range up to approximately $6,995 per partner.

Individual Claims: Individual Claims consist of two subcategories of claims: (i) possible claims against the Management Partners16 arising from the conduct of partners involved in the Firm’s management (“Management Claims”) and (ii) possible claims based on an individual partner’s conduct that is unrelated to the overall management of the Firm (“Individual Partner Claims”).

a. Management Claims: The universe of Management Claims that counsel for the Debtor and the Committee agreed the Examiner should consider involve (i) the prepetition sales of certain of the Debtor’s practice groups and/or offices (“Practice Group Sales Claims”) and (ii) the decision to pay down the Debtor’s secured bank debt and the pledging of additional collateral to the Banks (“Bank-Related Claims”).

1. Practice Group Sales Claims: The Debtor and the Committee agreed that the Examiner should focus on transactions relating to the New York office, the Paris office, the China practice and the Singapore office. The Examiner reviewed relevant documents involving these sales and conducted appropriate interviews. His investigation led the Examiner to conclude that no adjustment in the PCP for Management Partners is warranted based on a purported breach of fiduciary duty claim relating to these sale transactions.17

2. Bank-Related Claims: The Examiner reviewed information and conducted interviews respecting (i) whether in July, 2005 at least one of the Banks demanded additional collateral to ensure repayment of Coudert’s obligations; (ii) whether it was prudent for the Firm, while in default under its loan agreements, to give the Banks additional collateral in order, first, to finance its business and, second (when the Baker merger negotiations broke down), to finance an orderly wind down of the Firm; and (iii) whether the decision to pay down the Banks was essentially a response to pressure from the Banks -- as contrasted to an essentially pressure-

16 Management Partners, referenced in this category, are partners who were on the Executive Board after February, 2005 and the original members of the SSC. 17 A possible exception is the Dechert Transaction (defined below). But as discussed in Section III.D.1.b.ii, below, the Examiner proposes no additional payments by partners on account of the Dechert Transaction.

free decision by the Management Partners -- since the Banks had a lien on the Debtor’s cash proceeds and demanded that Coudert operate in accordance with a budget approved by them. Based on his investigation, the Examiner determined that no adjustment should be made in the PCP for Management Partners based on a purported breach of fiduciary duty claim relating to actions they took vis-à-vis the Banks.

b. Individual Partner Claims: The Debtor and others have identified potential claims against a handful of individual partners that are based on separate and distinct fact patterns. The Examiner reviewed relevant documents respecting such claims, discussed the circumstances with representatives of the Debtor and had discussions with certain of the partners involved. The Examiner concluded that these unique circumstances warrant special treatment in the PCP for such partners.

The aggregate amount of Partner Claims (excluding the Individual Partner Claims and Recourse Claims) approximates $14.1 million. In furtherance of a financial incentive for partners to contribute to the PCP and given the interest of the Debtor’s Estate in a timely recovery and avoiding costs of litigation and “collection from partners” issues, the Examiner made two adjustments in formulating the PCP: (i) he eliminated the prejudgment interest component of the Contract Claims18 (approximately $2.0 million) and (ii) he then applied a 10% discount (approximately $1.2 million). These additional factors, together with the addition of the Recourse Claims (which aggregate $900,000), led the Examiner to conclude that a fair and equitable settlement of all Partner Claims approximates $11.8 million in the aggregate.19 The Examiner believes this is a reasonable amount for former partners to pay to the Debtor’s Estate in order to settle all Partner Claims and obtain full releases and/or injunction protections from claims by the Debtor.

The Examiner understands that individual lawsuits against partners might generate enhanced recoveries for either the partners or the Debtor’s Estate. But litigation carries the risk of an adverse outcome, delays in distributions to creditors and legal expense for both sides. The PCP is intended to reflect the independent judgment of a Court-appointed arbiter, with the intended goal of reducing conflict and litigation. In that connection, the Examiner recommends that the PCP be incorporated in a plan of liquidation proposed by the Debtor. For the plan to become effective, a sufficient number of partners will need to participate by a date certain. The Debtor will determine the appropriate number of partners and the appropriate date, after consultation with the Committee and approval by the Bankruptcy Court.

18 As discussed below, prejudgment interest can arguably attach to the Avoidance Claims. The Examiner believes that even if such an argument lies, prejudgment interest for Avoidance Claims should be eliminated for purposes of the PCP. 19 The full economic impact on individual partners of the settlement of Partner Claims may be reduced by tax effects resulting from partners taking deductions on their individual tax returns for amounts paid pursuant to the PCP or by partners filing amended individual tax returns for the years in question. Partners should consult their tax advisors in this regard.

Part II of this Report summarizes the circumstances surrounding the Examiner’s appointment, the investigation he was directed to perform and the procedures he followed in conducting his investigation. Part III of this Report sets forth an explanation of the methodology the Examiner used in formulating the PCP and calculating the Partner Claims.

Background

On February 2, 2007 the Bankruptcy Court entered an “Order Directing the Appointment of an Examiner” (the “Examiner Order”) in the Coudert bankruptcy case. The United States Trustee subsequently appointed Harrison J. Goldin (the “Examiner”), whose appointment became effective as of Mr. Goldin’s acceptance on February 16, 2007.

The Examiner Order, in relevant part, provides for the Examiner to investigate:

(i) Reconciliation Reimbursement Claims (“RR Claims”) against the Debtor’s former partners; (ii) whether and to what extent the Debtor was insolvent prior to its bankruptcy filing (items (i) and (ii) are referred to hereafter as the “Part A Investigation”); (iii) pre-petition transactions pursuant to which the Debtor sold, transferred or disposed of assets outside of the ordinary course of business, including the sale of its offices or practice groups and whether any claims or causes of action exist as a result of those transactions; (iv) any other claims against the Debtor’s former partners, including, but not limited to, claims arising out of the Debtor’s pre-petition transactions with its lenders; and (v) matters relating to all the foregoing, as determined by the Examiner after consultation with the Debtor and the Committee (collectively, items (i) - (v), the “Authorized Investigations”).

Examiner Order ¶ 2. The Examiner was initially directed to conduct only the Part A Investigation; he was not to conduct the balance of the Authorized Investigations until after a status conference was held following the submission of his Part A Report.

The Examiner completed the Part A Investigation and filed his Part A Report on May 14, 2007. Thereafter, counsel for the Debtor, counsel for the Committee and the Examiner and his professionals discussed the remaining Authorized Investigations; after consideration of a number of alternatives, the parties concluded that the Examiner should formulate the PCP, which could be incorporated into the Debtor’s Chapter 11 plan of liquidation.

Thereafter, upon the joint request of the Debtor and the Committee, the Bankruptcy Court entered the “Order Modifying and Expanding Terms of Examiner’s Appointment,” dated July 30, 2007 (the “Modified Examiner Order”), which authorized the Examiner to “investigate claims of the Debtor’s Estate and/or creditors against its former partners related to their status, acts or omissions as partners of the Debtor (the ‘Partner Claims’) and formulate a partner contribution plan (the ‘PCP’), which structure the Debtor intends to incorporate into the chapter 11 plan of liquidation . . . .” Modified Examiner Order ¶ 2. Except for claims relating to professional malpractice, the Examiner was authorized to “take into consideration any issue that the Examiner believes may reasonably result in the assertion of a Partner Claim,” including:

a. claims for “reconciliation amounts”;

b. claims to avoid and recover fraudulent and preferential transfers under the Bankruptcy Code and applicable non-bankruptcy law;

c. recourse claims; and

d. any other tort or contractual claims, including without limitation (i) indemnification and contribution claims20 and (ii) breach of fiduciary duty claims.

Id. The PCP the Examiner was directed to prepare was intended to include “a list of proposed settlement amounts corresponding to each former partner that the Examiner believes have liability based upon a Partner Claim, which amounts will reflect the Examiner’s opinion as to a fair and reasonable sum that each former partner may pay the Debtor’s Estate in order to settle all Partner Claims and obtain a full release.” Id. at ¶ 3. In addition to preparing the PCP, the Examiner was also directed to prepare an “explanatory report.” Id.

The Examiner has been assisted in his investigation by members of his staff at Goldin Associates, L.L.C. In addition, following his appointment, the Examiner engaged Kaye Scholer LLP to provide legal advice on various matters.

As directed by the Modified Examiner Order, the Examiner submitted a Part B Investigation draft work plan to the Debtor and the Committee. On or about September 12, 2007, the Examiner was informed that both the Debtor and the Committee had approved the work plan; the Part B Investigation commenced shortly thereafter.

Given the parameters of the Part B Investigation, the financial condition of the Debtor and the fact that the PCP was to reflect a compromise of claims, the Examiner determined that an exhaustive research, and a review and analysis of the complete universe of documents that could have a bearing on all potential Partner Claims, was neither appropriate nor necessary. Instead, in conducting the Part B Investigation the Examiner focused on the essential issues and reviewed and analyzed selected information relating to Partner Claims. Counsel for the Debtor and counsel for the Committee were consulted on this approach and did not object to it. Nonetheless, over the course of his investigation and in constructing the PCP the Examiner and his professional advisors reviewed thousands of pages of documents and financial data provided by numerous sources, including the Debtor, Debtor’s counsel(s), the Committee’s counsel and certain third parties. In addition to the documents he reviewed during the Part A Investigation, the Examiner and his professionals reviewed, inter alia, the following documents:

• E-mails of certain key employees and partners involved in the prepetition management of Coudert, including, but not limited to, numerous e-mails on a variety of subjects either to or from (i) Pat Kane, the Debtor’s executive director and a current member of the SSC; (ii) Clyde Rankin, the Debtor’s former chairman; (iii) Anthony Williams, an original member of the SSC; (iv) Edward Tillinghast, the Debtor’s former deputy general counsel; and (v) Brian Rees, the Debtor’s chief financial officer; • Administration and desk files of Pat Kane; • Documents and correspondence relating to the sale and transfer of the Debtor’s practice groups and/or offices, as well as appraisals of assets;

20 Since the Modified Examiner Order carved out malpractice claims, the PCP does not comprehend contribution claims or indemnity claims arising therefrom. Indemnity/contribution claims are analyzed in the Recourse Claim section of this Report.

• Corporate documents, including Partnership Agreements, Executive Board resolutions, Compensation Committee memoranda and reports and minutes of meetings of committees; • Documents and correspondence relating to efforts to restructure the Firm, as well as liquidation and dissolution plans, analyses and projections; • Documents and correspondence relating to secured financings, including loan agreements, forbearance agreements, waivers, bank debt analyses and cash flow analyses; • Documents, reports and agreements relating to partner compensation, billings, collections and originations; and • Pleadings and other documents and correspondence relating to possible claims against individual partners of the Debtor.

As part of the document review process, the Examiner reviewed Coudert’s e-mail retention policy. E-mails in the Debtor’s domestic offices were fully backed up on a daily basis; with the sales of practice groups at overseas offices, the Debtor was unable to confirm that those offices backed up their e-mails on a daily basis. The Debtor located over 500 back-up tapes; approximately 300 were for the New York office alone. None of the back-up tapes had been labeled; in order to determine the dates of the tapes, each had to be loaded onto the e-mail server. The New York August, 2005 month-end back-up for certain identified partners was compared to the September, 2005 month-end back-up for those partners to determine whether any e-mails from August to September had been deleted. The Examiner reviewed information respecting deleted e-mails for certain e-mail accounts and found nothing warranting any modification to his conclusions.

In addition to reviewing extensive documents and financial data, the Examiner conducted examinations of certain parties affiliated with the Debtor. The Examiner consulted with the Debtor and the Committee as to who should be examined and as to whether such examinations should be by formal deposition or interview. After receiving comments from the Debtor and the Committee on these matters, the Examiner interviewed the following people:

• Pat Kane; • Clyde Rankin; • Edward Tillinghast; • Anthony Williams; • Frederick Konta (an original member of the SSC); • Andrew Hedden (an original member of the SSC); and • Jonathan Wohl (a former partner who assisted the Debtor in certain transactions during the wind down of the Firm).

Counsel for the Debtor and the Committee were present at each interview and given the opportunity to ask supplementary questions.

The Examiner also had numerous discussions, correspondence and meetings with Pat Kane, Brian Rees and Charles Keefe (a former Coudert partner and a current member of the SSC), each of whom has been involved in the Debtor’s ongoing wind down activities. In addition, the Examiner had numerous discussions and correspondence with counsel for the

Debtor and counsel for the Committee and kept them apprised of the Examiner’s progress respecting the Part B Investigation. Lastly, the Examiner had telephonic discussions with individual partners (or their counsel) on matters relating to potential claims against them.

Finally, the Examiner provided drafts of the Report to counsel for (i) the Debtor; (ii) the Creditors Committee; (iii) the Retired Partners Trust; and (iv) certain of the Management Partners. He solicited and reviewed their comments and made revisions to the PCP, as he considered appropriate.

Throughout, the Debtor cooperated fully with the Examiner, providing information and responding to his questions. This greatly facilitated the Examiner’s ability to discharge his duties in a timely and efficient manner.

The Part B Investigation and the Methodology Used in Formulating the PCP

The PCP Matrix covers domestic and foreign equity, contract and retired partners, as well as partners who had left the Firm. The four categories of Partner Claims are: (i) Contract Claims; (ii) Avoidance Claims; (iii) Recourse Claims; and (iv) Individual Claims. A final adjustment was made to the Partner Claims in order to promote the likelihood of partner participation and the prompt payment of such amounts. Each of the components of the PCP Matrix, as well as other elements not included in the PCP Matrix, but reviewed and analyzed by the Examiner, are discussed in the following sections of this Report. Contract Claims

Seven components comprise Contract Claims in the PCP: (i) a calculation of each partner’s Profit Share for 2005 and his/her share of contingency fees, less all 2005 Monthly Draws and certain other periodic payments (and, if applicable, any remaining over-distribution or under-distribution of a partner’s Profit Share for a previous year), resulting in a determination as to any excess Profit Share due from or deficiency due to each partner (the “Over-Distribution” or “Under-Distribution”); (ii) a calculation of net tax payments made by Coudert on behalf of partners in payment of their personal income tax obligations (“Tax Payments”); (iii) loans/advances and/or other miscellaneous disbursements made to certain partners by the Firm or its local offices (“Loans/Advances”); 21 (iv) capital contributions owed to Coudert by partners who withdrew from the Firm after May 18, 2005; (v) claims against partners who withdrew from Coudert prior to 2004 and who received over-distributions; (vi) an adjustment for setoffs that partners may assert based on Under-Distributions; and (vii) prejudgment interest.

Over-Distributions 2005/2004

Coudert paid its partners monthly draws, which were intended to be applied against each partner’s share of distributable profits for that year. Each partner’s ultimate entitlement to a profit distribution was determined by a point system. The distribution each partner was entitled to in excess of his/her contract guaranty or minimum payment is the “Profit Share.”

In addition to Monthly Draws, some partners who achieved certain performance targets were entitled to additional draws, called “Supplemental Draws.” With few exceptions, Monthly Draws (including foreign currency exchange payments) were terminated on or about August 1, 2005. In a typical year, partners received a variety of other payments, including interim profit distributions and other payments. To determine the amount of Over-Distributions and Under- Distributions, the Examiner reviewed the Debtor’s calculation of each partner’s 2005 and 2004 Profit Share, which he then compared to that partner’s draws and the other payments he/she

21 Claims respecting Over-Distributions, Tax Payments and Loans/Advances formed the basis of the RR Claims described in the RR Application and the Part A Report.

received throughout the year.22 The Partnership Agreement provides that any excess distributions must be returned to the Firm.23

The calculation of Over-Distributions, which, as noted, was performed by the Debtor, is reflected in the RR Application. However, the RR Application and the calculation of the RR Claims performed by the Debtor did not take into account conditions at the Firm beginning in August, 2005 and how those conditions affected Coudert’s accounting methodology. As discussed in the Part A Report, Coudert maintained its books and records and prepared its financial statements on a modified cash basis of accounting, generally recording revenues when received and recording expenses when paid. As noted in the Part A Report, in 2005, after the Firm was in default to the Banks, Coudert changed its historical method of paying invoices and began to delay significantly (or stop altogether) paying certain expenses, apparently because of restrictions imposed by at least one of the Banks. This shift impacted the Firm’s calculations as to its profitability, because under Coudert’s method of accounting it did not record liabilities until invoices were paid. This delay or cessation in making payments resulted in an accumulation of unrecorded expenses for 2005 that was inconsistent with past practices. Accordingly, the Examiner posited in the Part A Report that Coudert’s financial statements at the end of 2005 should be adjusted by an additional $1.75 million of expenses to take into account the extent to which invoices were no longer paid in the ordinary course.

As noted in the Part A Report, the Debtor questioned the appropriateness of the adjustment. During the Part B Investigation the Debtor again questioned the appropriateness of the adjustment, noting that a significant portion of the expenses included in the $1.75 million adjustment were client-related expenses that were ultimately billed to clients. In addition, the Debtor urged that the provision in the Partnership Agreement which states that the “profits and losses of the Partnership shall be determined in the manner in which the Partnership reports its income and expenses for U.S. federal income tax purposes” should be controlling. See Partnership Agreement, Art. 6(b). The calculation of the RR Claims was consistent with the way in which the Debtor prepared its 2005 tax returns. The Examiner considered the arguments raised by the Debtor and analyzed them in the context of a proposed settlement of the Contract Claims. Since the Examiner recognizes that these issues are not free from doubt, he applied a 50% discount to the $1.75 million adjustment, which reduces the amount to $875,000.24 Based on this adjustment, the aggregate amount of Over-Distributions is $5,007,085.

Tax Payments

Coudert made quarterly estimated state and Federal and foreign Tax Payments on behalf of partners, which were recorded as receivables owed by those partners. To recoup those

22 For a fuller discussion of Over-Distributions/Under-Distributions, refer to pages 7 to 9 of the Part A Report. 23 See Partnership Agreement, Art. 6(e) (“If any Partner’s aggregate distributions from the Partnership with respect to any year shall exceed the amount to which such Partner is entitled for such year as herein provided, then such Partner shall be indebted to the Partnership in the amount of such excess and the same shall be deducted . . . from any subsequent distributions payable by the Partnership to such Partner.”). 24 Because of the overlap of Contract Claims and Avoidance Claims explained below, reducing the adjustment by $875,000 reduced contributions for Contract Claims by approximately $1 million, but increased contributions for Avoidance Claims by approximately $144,000.

payments, the Firm withheld either a portion of a partner’s Monthly Draw or future distribution payments.25 Other taxes Coudert paid for partners in various foreign and domestic jurisdictions were similarly deducted from future distributions of partners’ Profit Shares.26 As with other overpayments to partners, prior to 2005 Coudert deducted any such amounts from any Profit Share ordinarily payable the following year. The foregoing practices comport with the Partnership Agreement.27 The aggregate net amount of Tax Payments that Coudert advanced on behalf of partners that remains unpaid is $2,540,844.

Loans/Advances

Coudert’s local offices occasionally made loans and gave advances to partners for a variety of reasons, including, but not limited to, travel, car lease payments, personal taxes and the like.28 They were booked as due from a partner, pending that partner providing appropriate receipts and documentation respecting their use. The aggregate amount of unpaid Loans/Advances is $994,388.

Capital Contributions

Pursuant to the Partnership Agreement, Equity Partners and Contract Partners eligible to receive Profit Shares were required to contribute capital to the Firm.29 However, while partners were required to contribute capital to the Firm, when the Firm was solvent the customary practice was not to require departing partners to pay any outstanding capital balances owed to Coudert because pursuant to the Partnership Agreement departing partners were entitled to a return of capital. Conversely, the Partnership Agreement contemplated that in the event of Coudert’s insolvency any capital that partners had on account would be used to satisfy creditor claims. Thus, were Coudert insolvent when partners who owed the Firm capital withdrew, they would have an obligation to meet their unpaid capital commitments.

As discussed in the Avoidance Claim section below, the Examiner believes the earliest date the Debtor was likely insolvent was May 18, 2005; that was the date (i) the partners in the London and Moscow offices announced they were withdrawing from the Firm and joining Orrick and (ii) it became clear that Coudert would breach the provision in its loan agreements with the Banks respecting the minimum number of partners. To be sure, the question of Coudert’s solvency or insolvency as of specific dates involves a fact-intensive inquiry that is subject to dispute.

25 In certain situations Coudert received tax refunds for individual partners and applied those amounts against tax payments advanced to such partners. 26 The only tax payments withheld from Monthly Draws were for French foreign taxes. All other taxes were withheld from quarterly or special distributions. 27 See Partnership Agreement, Art. 3(g) (“Each Equity Partner, Contract Partner or Salaried Partner will reimburse the Partnership for any taxes so paid by the Partnership for the benefit or account of such Partner, whether by way of withholding or otherwise, and will indemnify the Partnership against any liability, including penalties and interest, incurred by the Partnership in connection therewith.”). 28 Many Loans/Advances were made at offices other than New York; supporting documentation is not readily available to verify them. 29 Partnership Agreement, Art. 5(a).

The Debtor’s books and records establish that former partners who withdrew from the Firm after May 18, 2005 owe $682,325 on account of their unpaid capital contributions.30 However, with the exact timing of Coudert’s insolvency subject to dispute, the Examiner discounted by 25% the amount of the capital contributions owed by partners who left the Firm during the period May 18, 2005 through August 16, 2005; the net amount of claims relating to capital contribution owed by partners who withdrew from the Firm during this period, after the application of the discount, is $55,076. The Examiner believes that claims arising from capital contributions owed by partners who withdrew from the Firm after August 16, 2005 should not be subject to a discount for solvency because, as stated in the Part A Report, the Debtor was likely insolvent as of that date. Accordingly, the Examiner did not apply any discount to these claims, which total $627,249. The aggregate amount of claims based on capital contributions owed by partners is, thus, $668,556, after applying the $13,769 discount referenced above.

Over-Distributions Prior to 2004

As noted in the Part A Report, seven partners who left the Firm before 2004 received Over-Distributions totaling $241,131. These amounts are included in the PCP.

The Applicability of Setoffs

Certain Coudert partners who received Over-Distributions, Tax Payments and/or Loans/Advances or have unpaid capital commitments were (i) under-distributed for 2005 or 2004; (ii) owed money for their tax refunds by the Firm; and/or (iii) owed money for unreimbursed expenses paid by the partner, but not reimbursed by the Firm. These partners will presumably assert the right to net, or setoff, the amounts they owe the Firm against distributions or other amounts due and payable to them which they did not receive.

The assertion relating to a 2004 Under-Distribution arises under the following circumstance: Coudert was solvent and profitable in 2004. A partner’s entitlement to under- distributed profits is the equivalent of a debt the Firm owes the partner. Not all profits attributable to 2004 were distributed to partners by the time payments to partners ceased in August, 2005. The under-distributed portion is the 2004 Under-Distribution.

The assertion relating to a 2005 Under-Distribution arises for the period January 1, 2005 to August 16, 2005 for partners who had contracts providing for minimum guaranteed payments or partners who had special compensation arrangements. Generally, Coudert’s monthly draws to partners were less than the monthly pro rata amount of guaranteed annual payments -- the difference for this period is the 2005 Under-Distribution amount.

Any unpaid distributions that should have been made under the Partnership Agreement or any amounts owed to partners based on tax refunds or unreimbursed expenses are arguably partner “claims” within the meaning of the Bankruptcy Code. Stated differently, if amounts that

30 The Debtor’s business practice was not to require partners to pay capital after they withdrew from the Firm, since Coudert would have been required to return those amounts. Insofar as the Firm followed that practice in settling claims with departing partners under the Partnership Agreement, such arrangements would be avoidable only to the extent they occurred after the deemed insolvency date (i.e., May 18, 2005). Therefore, the Examiner made no adjustment to reflect capital owed by partners who withdrew from the Firm prior to that date.

a partner owes Coudert can be satisfied by a charge against distributions otherwise owed to the partner, the indebtedness of the partnership (if truly debt) to a partner (in the form of an underpayment or an amount due based on a tax refund or unreimbursed expenses) should, by the same token, be satisfied by the debt the partner owes the partnership.

Under Section 553(a) of the Bankruptcy Code a setoff is appropriate where: (i) a creditor holds a “claim” against a debtor that arose before the commencement of the case; (ii) a creditor owes a debtor a “debt” that also arose before the commencement of the case; (iii) the claim and debt are “mutual”; and (iv) the claim and debt are each valid and enforceable. 5 COLLIER ON BANKRUPTCY ¶ 553.01[1], at 553-7 (15th ed. rev. 2006) (“COLLIER”). Here, all Contract Claims arise under the same agreement, i.e., the Partnership Agreement. Accordingly, any underpayment to a partner could arguably qualify as a claim against the Debtor available to offset a debt the partner owes the Debtor. The set off component is $1,324,963.

In constructing the PCP Matrix the Examiner accepted the argument that a partner’s debt to Coudert in the nature of a Contract Claim can be offset by that partner’s claim for Under- Distributions in 2004 or 2005, or a claim based on a tax refund owed to the partner or a claim based on unreimbursed expenses. However, this issue is not free from doubt and might be contested in litigation by an Estate representative.31

Prejudgment Interest

New York law provides that prejudgment interest can be awarded in breach of contract cases; it is generally calculated at the legal rate of 9% per annum from the earliest ascertainable date the cause of action arose. Were the Contract Claims litigated, an Estate representative might well collect prejudgment interest. The prejudgment interest component as of May 31, 2008 is $2,042,002;32 it will increase depending on when judgments against partners are obtained.

Conclusion

Based on the foregoing, the aggregate amount of Contract Claims, as detailed in Appendix 1, inclusive of prejudgment interest, is $10,169,043.

31 By contrast, the claims identified in the Avoidance Claim section of this Report -- claims that arose after the Firm was insolvent -- are not subject to a setoff based on Under-Distributions because the Firm was insolvent and arguably should not have made “profit” distributions to partners. However, to the extent a partner was under- distributed and has a claim based on a tax refund due the partner or a claim based on unreimbursed expenses, the claims respecting tax refunds or unreimbursed expenses will be deemed satisfied by a post-May 18, 2005 distribution and will offset the amount of any avoidable transfer claim for which the partner may otherwise be liable. 32 This assumes interest accruing from August 16, 2005, the date the partners authorized the wind down of the Firm. As of that date, all partner distributions ceased and all partners were aware that Over-Distributions had to be repaid. Query whether the starting point for accruing interest should be at a later date since the amount of the Contract Claims was not precisely known by the partners and arguably no formal demand was ever made on them. The Examiner calculated interest through May 31, 2008, a projected settlement date. But for purposes of the PCP only, any issues respecting prejudgment interest are moot because the Examiner recommends that prejudgment interest be waived for settling partners.

Avoidance Claims

In formulating the PCP the Examiner considered the possibility that partners could potentially be liable to the Debtor for having received avoidable transfers.33 The Examiner identified $10,839,143 of payments made to partners after May 18, 2005, the date from which the Examiner concluded that the Debtor was likely insolvent. The Examiner determined that, as part of the PCP, partners should repay $3,941,162 of that amount.

Legal Standards

Generally, a representative of a debtor’s estate can pursue avoidable transfer claims in a bankruptcy case pursuant to, inter alia: (i) section 544(b)(1) of the Bankruptcy Code, which incorporates state avoidable transfer law;34 (ii) section 548(a)(1)(A) of the Bankruptcy Code, which requires actual intent to defraud;35 and/or (iii) section 548(a)(1)(B), which does not require fraudulent intent, but which, in general terms, requires proof of insolvency or undercapitalization, coupled with a lack of reasonably equivalent value. Where a debtor is a partnership, Section 548(b) may also be applicable if there was a transfer to a general partner when the partnership debtor was insolvent.

Except for intentional fraudulent transfers, each of the aforementioned statutes requires that a debtor be in a precarious financial condition at the time of the transfer. As discussed in the next section, for purposes of the PCP the Examiner focused on the solvency36 of Coudert as of May 18, 2005.

In addition to solvency, an avoidable transfer analysis under Section 548 of the Bankruptcy Code usually includes a review of whether reasonably equivalent value was given in exchange for such transfer. See 11 U.S.C. § 548(a)(1). However, with Coudert a limited liability partnership, the question arises as to whether Section 548(b) of the Bankruptcy Code – as contrasted with Section 548(a) -- applies to any potential avoidable transfer. Section 548(b) addresses transfers made by a partnership debtor to a general partner of the debtor.37 If Section

33 For the reasons set forth in footnote 14, above, except for a $20,000 preferential payment made to a former SSC member in August, 2006, the Examiner did not perform a separate preference analysis. 34 Section 544(b)(1) of the Bankruptcy Code provides that a trustee or debtor may exercise the rights of creditors under a state’s avoidable transfer law. An avoidable transfer analysis under both state law and the Bankruptcy Code are similar and require similar proof. For purposes of the Part B Investigation and this Report, the Examiner analyzed the possibility of an avoidable transfer claim under Section 548 of the Bankruptcy Code. 35 As it does not appear there was any actual fraud in this matter, the Examiner did not analyze possible claims under Section 548(a)(1)(A) of the Bankruptcy Code. 36 The Bankruptcy Code defines “insolvent” to mean that “the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation, exclusive of (i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity’s creditors; and (ii) property that may be exempted from property of the estate under section 522 of this title.” 11 U.S.C. § 101(32)(A). 37 Most cases under Section 548(b) deal with general partnerships. Note, however, that partners of a limited liability partnership are generally viewed as general partners. See 16 N.Y. JUR.2d Business Relationships § 2270 (2007) (“A limited liability partnership is a general partnership, without limited partners, in which each of the partners is a professional; the LLP form is not available to a limited partnership. The LLP remains a general partnership which, upon registration, acquires certain limited liability characteristics.”); see also Joachim v. Flanzig, 773 N.Y.S.2d 267, 272 (N.Y. Sup. Ct. 2004)(“A limited liability partnership is a general partnership which acquires certain limited liability characteristics upon registration with the Secretary of State.”).

548(b) applies, in order to recover the entire amount of the transfer the Debtor need only show that a transfer was made while the Debtor was insolvent. While case law on this issue is sparse, at least one court has found that Section 548(b) applies to a debtor law firm that was organized as a limited liability partnership. See Official Committee of Former Partners v. Brennan (In re Labrum & Doak, LLP), 227 B.R. 383 (Bankr. E.D. Pa. 1998). But even if Section 548(b) applies, that does not end the inquiry. The next question is whether Section 548(c) of the Bankruptcy Code applies; it would afford the partners a defense to potential avoidable transfer claims, if in good faith they gave value for the transfers. There is a dearth of case law on this issue, as well. The Labrum & Doak court did find that Section 548(c) applies as a defense to an avoidable transfer claim predicated on Section 548(b), but that may not be the final word on this issue.

Assuming Section 548(b) of the Bankruptcy Code applies and Section 548(c) does not, there is strict liability as to all transfers to a general partner while the partnership was insolvent. If Section 548(c) does apply as a defense to a Section 548(b) claim, additional complex questions arise respecting whether the partners gave value for the transfers in good faith. This is a fact- intensive inquiry potentially involving a costly and time-consuming analysis of, inter alia, billings, collections, originations and a comparative review of law firm market compensation for each partner.

A similar factual inquiry as to value applies if Section 548(a)(1) of the Bankruptcy Code is applicable and the Bankruptcy Court has to determine whether reasonably equivalent value was provided by a partner in exchange for a transfer.38

Payments Made to Partners While Insolvent

To ascertain the aggregate amount of potential avoidable transfers to partners, the Examiner had to determine the earliest date from which the Debtor may have been insolvent. In connection with the Part A Investigation, after consultation with the Debtor and the Committee, the Examiner focused on whether the Debtor was insolvent as of three dates, two in 2005 and one in 2006, the earliest date being June 30, 2005. The Examiner concluded that the Debtor was most likely insolvent as of June 30, 2005. In conducting the Part A Investigation, the Examiner was not directed to, nor did he perform, a solvency analysis for any earlier date.

In developing the PCP the Examiner assessed whether Coudert was insolvent before June 30, 2005 and, if so, as of when. He decided to use May 18, 2005 after reviewing the materials he

38 There is a question as to whether prejudgment interest would be awarded were Avoidance Claims litigated and, if so, when it would start to accrue. “Bankruptcy courts have generally awarded prejudgment interest in fraudulent transfer actions from the time the demand is made or from the time the adversary proceeding is initiated.” In re All American Petroleum Corp., 259 B.R. 6, 20 (Bankr. E.D.N.Y. 2001); see also In re Cassandra Group, 338 B.R. 583, 600 (Bankr. S.D.N.Y. 2006) (awarding prejudgment intrerest “from the time the adversary proceeding was commenced”); but see In re Teligent Inc., 380 B.R. 324, 344 (Bankr. S.D.N.Y. 2008) (awarding plaintiff prejudgment interest on a preference claim “at the federal judgment rate in effect on the petition date, from the [petition date] to the date that judgment is entered”). Coudert has not commenced an adversary proceeding against any partner asserting an avoidable transfer claim. In addition, no demand has been made on partners respecting avoidable transfer claims. In any event, even assuming some amount of prejudgment interest might be appropriate, the Examiner’s view is that, for purposes of the PCP, prejudgment interest on Avoidance Claims, if it exists at all, should be waived for settling partners.

collected during the solvency phase of his Part A Investigation and after taking into account a number of additional factors. For example, May 18, 2005 is the date on which the London and Moscow partners announced their departure from the Firm. This was also the trigger for the ultimate breach of the covenant in Coudert’s loan agreements with the Banks which required that the Firm maintain a minimum number of partners.

While the Examiner determined to use May 18, 2005 as the date on which Coudert became insolvent, he did not perform a formal solvency analysis of the Debtor as of that date. He recognizes that establishing definitively the timing of the Debtor’s insolvency is a complex, fact-intensive question that only a court can determine after a potentially lengthy and costly trial at which it must be presumed experts would offer competing testimony. A court would need to determine when it was appropriate to change from a “going concern” valuation methodology to a “liquidation” valuation methodology. Creditors might argue that the Firm was insolvent at an earlier date; partners might argue that it was not insolvent until a much later date.

The Examiner identified $10,839,14339 of payments made to or on behalf of partners after May 18, 2005, his deemed insolvency date. These payments include partner distributions, Tax Payments and Loans/Advances that are already included in the Contract Claims. It also includes the return of capital to withdrawing partners. Therefore, to ascertain the amount of avoidable transfer claims that should be reflected in the PCP, the Examiner determined the portion of the $10,839,143 that is incremental to the amounts included in the Contract Claims. First, for partners who were over-distributed and, even after the application of a setoff, still received post-May 18, 2005 payments that exceeded their Contract Claims, the difference represents additional payments that need to be reviewed in the context of an avoidable transfer analysis; the aggregate of such amounts is $2,170,072. Second, for partners who were under- distributed after netting out amounts due-to and due-from those partners for 2004 and 2005, but who nonetheless received post-May 18, 2005 payments, 100% of those post-May 18, 2005 payments represents potential incremental avoidable transfer claims. However, to the extent a partner was under-distributed and has a claim based on a tax refund due that partner which was collected by the Firm and/or a claim for unreimbursed expenses, such amounts were applied as offsets to this second group of avoidable transfer claims; the aggregate of such amounts, after applying the offsets, is $4,525,636. Accordingly, the total amount of potential incremental avoidable transfer claims is $6,695,708.

The Application of a Reasonable Discount to the Incremental Avoidable Transfer Claims

The Examiner is mindful that parties may take different positions on, among other issues, (i) whether the Debtor was insolvent before, on or after May 18, 2005 or on an alternate date; (ii) whether Section 548(a)(1) or Section 548(b) of the Bankruptcy Code applies; (iii) if Section 548(a)(1) applies, whether reasonably equivalent value was given by the partners for the

39 The amount of payments made to or on behalf of partners includes amounts Coudert thought it was obligated to make to taxing authorities on behalf of partners. While Coudert did not make tax payments after August 16, 2005, the taxing authorities have filed proofs of claim in the Debtor’s bankruptcy case relating to taxes due from certain partners after August 16, 2005. In their tax returns for 2005 these partners fully deducted the amount of taxes Coudert should have paid after August 16, 2005. Accordingly, these amounts are treated as if advanced by Coudert and are included in the Examiner’s avoidable transfer analysis.

transfers at issue; (iv) whether Section 548(c) of the Bankruptcy Code is available to partners as a defense if Section 548(b) applies; and (v) if Section 548(c) applies, whether all factors set forth therein, including the “good faith” requirement and the “value” component, are satisfied as to each affected partner.

In developing the PCP, the Examiner was directed to propose appropriate settlements of potential partner claims, taking into account the various issues and defenses implicated in such claims. Accordingly, the Examiner considered the above-mentioned issues and determined that it is appropriate to apply a discount factor to the potential avoidable transfer claims in calculating the amount each partner should pay; in his view, a single uniform discount factor should apply. The Examiner determined that (except as noted in the next paragraph) a fair outcome involves a discount of 50% to potential avoidable transfer claims relating to payments made during the period from May 18, 2005 to August 16, 2005. The amount of this discount takes into account, among other things, the arguable timing of Coudert’s insolvency in advance of the August 16 Partners Meeting and the extent of the “value” contributed by partners for services rendered to the Firm. Avoidable transfer claims based on payments made closer to the May 18, 2005 deemed insolvency date may be somewhat more difficult to prove and avoidable transfer claims based on payments made closer to the August 16 Partners Meeting may be easier to prove. Moreover, most partners will likely assert that they gave the Firm value for the payments they received, whether that was by virtue of time charges, collections, originations or otherwise. Creditors can be expected to respond that such arguments are irrelevant, given the applicable law referenced above. In lieu of attempting to identify and evaluate for discount purposes every conceivable argument and defense that might be raised, the Examiner determined that a single, uniform discount factor for all partners -- i.e., 50% -- should apply in this situation.

Some of the payments made to partners after May 18, 2005 but before August 16, 2005 represented Loans/Advances, the return of capital and interest payments on partners’ capital accounts. The Examiner believes that the recovery of such amounts is likelier because affected partners would not be able to invoke the “reasonably equivalent value” component as a defense to an avoidable transfer challenge. Accordingly, the Examiner determined to discount these claims by 25%, rather than 50%.

Some payments to partners were made after August 16, 2005.40 These payments, which total $513,991, primarily involve payments to partners in the Debtor’s Brussels and Paris offices after all other payments to partners had ceased; they also include a $20,000 preferential payment made to an SSC member in August, 2006 after he resigned from the SSC. The Examiner believes that payments made after the partners authorized the wind down of the Firm should not be subject to discount for solvency litigation and other risks and, in fact, may also be recoverable as preferences. Accordingly, the Examiner did not apply any discount to these claims.

40 This category of avoidable transfer claims does not include payments Coudert made to partners after August 16, 2005, with the approval of the SSC, for their contemporaneous services to the Debtor in connection with the wind down of the Firm. The Examiner does not believe such claims should be subject to recapture as part of the PCP.

Conclusion

Based on the foregoing, the aggregate amount of settlements (net of the discounts and offset applied) proposed for Avoidance Claims, as detailed in Appendix 1, is $3,941,162.41 Recourse Claims

Recourse claims are claims third parties may have against the Debtor that may also be asserted against individual partners. These types of claims are relevant to the Examiner’s conclusions because, in exchange for a partner agreeing to pay the settlement amount applicable to him/her, as outlined in the PCP Matrix, the Debtor’s plan of liquidation will presumably contain (i) a release provision, absolving partners on all claims which could be asserted against them that arose on account of their being partners of the Firm and/or (ii) an injunction pursuant to Section 105 of the Bankruptcy Code barring any party, including creditors of the Debtor, from commencing or continuing any legal proceeding against such partners that involves claims or causes of action based on their status as partners of the Firm. Hence, the Examiner looked at claims creditors of the Debtor or creditors of its Related Partnerships have asserted or which may be asserted against individual partners and considered whether they should be included in the PCP.

The Examiner is aware of only two potential recourse claims that have been asserted against certain of the Firm’s partners in the United States. The first concerns claims against the Management Partners by the Retired Partners Trust. In that regard, the Retired Partners Trust commenced an action in the Supreme Court of the State of New York, County of Westchester (“New York State Court Action”) against, among other others, the Management Partners, asserting causes of action grounded in breach of contract, breach of fiduciary duty, constructive trust, conspiracy and unjust enrichment. In the Examiner’s view, the claims of the Retired Partners Trust are likely derivative claims that belong to the Debtor’s Estate and cannot be asserted by the Retired Partners Trust. Moreover, as discussed below, these claims may not be sufficient as a matter of law to give rise to liability on the part of the Management Partners

41 For a discussion of potential avoidance claims that may arise in connection with the Dechert Transaction (defined below), refer to footnote 62, below. Creditors told the Examiner during the course of his Part B Investigation that during 2005 Coudert partners received distributions of 2004 profits which should be considered in a review of potential avoidable transfers. Partners did receive such payments from January, 2005 through April, 2005. But since those payments were made prior to the “deemed” insolvency date, they are not included in the $10,839,143 of potential avoidable transfers. They are, however, included in the calculation of Under-Distributions and Over-Distributions in the Contract Claims analysis. Coudert continued to pay monthly draws and supplemental draws to partners after April, 2005. During July and August, 2005 Coudert allocated 50% of each partner’s monthly draw and 100% of their supplemental draws to unpaid 2004 distributions. As to Contract Claims, the allocation of 2005 payments to 2004 distributions is irrelevant because in the Contract Claims analysis 2005 Over-Distributions and 2004 Under-Distributions were netted. As to Avoidance Claims, the allocation is similarly irrelevant because the Examiner analyzed all payments made to partners after May 18, 2005, regardless of how they were characterized by Coudert. In the fall of 2005 Coudert retroactively recharacterized partners’ 2005 monthly draws, applying those payments to any unpaid 2004 distributions. Those reversals have no impact on the calculation of claims. In calculating Contract Claims the Examiner included all payments, regardless of how Coudert characterized them. Also, as noted, the Examiner included all payments made after the deemed insolvency date in his analysis of avoidable transfer claims.

individually because (i) it is questionable whether the Management Partners owed a fiduciary duty to the retired partners and/or (ii) such claims are arguably foreclosed by applicable provisions of the Partnership Agreement. As noted in Section III.D.1 below, which discusses the viability of the Management Claims, it is also doubtful that these claims, derivative or not, are likely to succeed on the merits. As discussed below, from an analysis of the applicable case law and the Debtor’s Partnership Agreement the Examiner concluded that the PCP should ascribe no incremental liability to the Management Partners based on the claims asserted by the Retired Partners Trust.

The second potential recourse claim asserted in the United States concerns claims against partners by SenoRx. SenoRx commenced an action in the Superior Court of the State of California for the County of San Francisco (“California State Court Action”)42 against Coudert, seeking damages for professional malpractice. Pursuant to a California statute, SenoRx also asserted claims against over 100 partners, seeking to hold them individually liable for the self- insured retention portion of Coudert’s malpractice insurance. SenoRx has not alleged that these partners committed malpractice; they were named defendants solely by virtue of their having been partners of Coudert. As discussed below, the Examiner believes Coudert complied with the requirements of the statute and that, therefore, it is unlikely SenoRx will prevail on its claims against individual partners. Accordingly, the Examiner ascribed no incremental liability in the PCP to the partners named in the California State Court Action based on the claims asserted by SenoRx.

In the more than two and a half years since the August 16 Partners Meeting, only a handful of other claims have been asserted outside the United States against partners individually. It is, of course, still possible that recourse claims could be asserted against partners by creditors of Related Partnerships in jurisdictions in which the Firm could not operate as a limited liability partnership. In such jurisdictions, many (if not all) of Coudert’s partners could have exposure on these claims, either as direct targets of litigation or through contribution claims asserted by partners who are sued locally.

The existence of recourse claims is significant because partners, in exchange for making a contribution to the Debtor’s Estate, have a right to insist on being protected from claims that could be asserted against them by third parties. The form of this protection for partners would be an injunction issued by the Bankruptcy Court barring any of Coudert’s creditors from asserting claims against partners individually. However, the effectiveness of an injunction issued by a court in the United States purporting to bar claims asserted in foreign jurisdictions by creditors of Related Partnerships who have not filed a proof of claim or who have not otherwise appeared in the Debtor’s case is unclear. Accordingly, to address potential recourse claims that could be asserted against partners, the Examiner considers it appropriate to create a Recourse Fund, which could be used, inter alia, to defend against and, if warranted, satisfy potential claims of creditors of Related Partnerships (that did not operate as limited liability partnerships) who have asserted or may assert claims against the Debtor’s partners that are not (either in fact or as a practical matter) subject to the Section 105 injunction. Contributions to the Recourse Fund would be in furtherance of a compromise whereby creditors of Related Partnerships would be able to receive

42 In February, 2007 Coudert removed the California State Court Action to the United States District Court for the Northern District of California. The action was subsequently transferred to the Bankruptcy Court.

distributions from Coudert under a plan of liquidation. As detailed below, the construct contemplates that partners who were active partners of the Firm as of or after January 1, 200543 would contribute in the aggregate $900,000 to the Recourse Fund in connection with potential recourse claims that might be asserted against them.

The Claims of the Retired Partners Trust

The Retired Partners Trust’s Claims Are Largely Derivative Claims That Belong to the Debtor’s Estate

Many of the allegations in the Retired Partners Trust’s amended complaint are essentially no different from those that form the basis of the Management Claims that belong to the Debtor (which were reviewed separately by the Examiner in connection with the Part B Investigation and are discussed in Section III.D.1 of this Report). Aside from the breach of contract claim asserted in the New York State Court Action, the gist of the claims asserted by the Retired Partners Trust is that the Management Partners are guilty of mismanagement, self-dealing, breach of fiduciary duty and fraud. However, the Retired Partners Trust has not alleged any particularized or individualized injury that belongs solely to it; the harm complained of applies to all the Debtor’s creditors or equity holders and could be asserted by each or all of them. With such claims derivative in nature, in the bankruptcy context they belong to the Debtor’s Estate, not the Retired Partners Trust. See In re Granite Partners, L.P., 194 B.R. 318, 327-28 (Bankr. S.D.N.Y. 1996) (noting that claims for breach of fiduciary duty, mismanagement, waste and self- dealing were derivative in nature and became property of the estate); In re XO Commc’ns, Inc., 330 B.R. 394, 427 (Bankr. S.D.N.Y. 2005) (“A derivative cause of action has been consistently found to vest in the debtor upon the filing of its bankruptcy petition as property of the estate under section 541.”).

Breach of Contract Claims Arguably Cannot Be Asserted Against Individual Partners

The Retired Partners Trust has also alleged a breach of contract claim against the Management Partners. In the New York State Court Action the Retired Partners Trust asserts that the Management Partners “breached the Partnership Agreement by, among other things, (i) selling the assets of Coudert to the Successor Firms; and (ii) liquidating their personal debt, without providing for the payment of pension payments due to the” retired partners. Amended Complaint ¶ 50. However, the Partnership Agreement expressly provides that an action for retiree benefits cannot be maintained against individual partners. The Partnership Agreement states:

Payees of Retirement Income shall not have any claim for same against any individual Partner but shall look for payment only to the partnership or a partnership which may fairly be considered a successor partnership of the Partnership by reason of continuity of personnel and clients . . . .

43 The relevance of the January 1, 2005 date is that it was the beginning of the year of the Firm’s wind down and a large majority of the unpaid recourse claims were presumably incurred during that year.

Partnership Agreement, Schedule 5-7, Art 9(iv). With the Retired Partners Trust suing the Management Partners because the retired partners have not received their retirement income, retired partners are limited by the Partnership Agreement to collecting such payments from the Firm (a proof of claim has been filed in the Debtor’s bankruptcy case) or a successor firm (defendants in the New York State Court Action include law firms that acquired certain of the Debtor’s practice groups and/or offices); they may not pursue individual partners.

It is Unclear Whether Retired Partners Are Owed Fiduciary Duties by the Remaining Partners

The general rule in New York (and most other jurisdictions) is that partners of a partnership owe each other a fiduciary duty. See Application of Lester, 386 N.Y.S.2d 509, 512 (N.Y. Sup. Ct. 1976). What is not clear is whether that “fiduciary duty” extends to retired partners. In one case outside of New York the court found that a retired partner was not owed a fiduciary duty because he withdrew from the partnership and that as to him the partnership terminated. See Bane v. Ferguson, 890 F.2d 11 (7th Cir. 1989). In Bane a retired partner of a law firm brought an action against certain partners involved in the management of the firm, alleging that their actions caused the demise of the law firm that resulted in the termination of retirement benefits. The Seventh Circuit found that no fiduciary duty was owed to the retired partner. “Nor can [plaintiff] obtain legal relief on the theory that the defendants violated a fiduciary duty to him; they had none. A partner is a fiduciary of his partners, but not of his former partners, for the withdrawal of a partner terminates the partnership as to him.” Id. at 13. By contrast, in Newberger, Loeb & Co., Inc. v. Gross, 563 F.2d 1057 (2d Cir. 1977), the Second Circuit found that a partner who withdrew from the partnership, but continued to have capital in the firm and was able to share in a portion of the profits and losses, was owed a fiduciary duty by the partnership and its members. Id. at 1078.

Provisions in the Partnership Agreement appear to support the proposition that retired partners were not considered partners of the Firm. For example, the Partnership Agreement provides:

(i) “Article 2. Retirement. Each Partner shall cease to participate actively in the practice of law with the Partnership effective upon his or her Retirement Date.” Partnership Agreement, Schedule 5-3, Art. 2; and

(ii) “Upon termination of his or her Phase-Down Period, a Partner shall withdraw from the partnership and, if such Partner is a Qualified Partner, become entitled to receive such Retirement Income as may be authorized by this Schedule 5 in the case of Qualified Partners.” Partnership Agreement, Schedule 5-4, Art. 3.

Accordingly, with the Partnership Agreement providing that, upon their retirement and withdrawal from the Firm, retired partners were no longer viewed as partners of the Firm, the remaining partners arguably owe them no specific fiduciary duty. However, as noted, the law on this issue is not settled.44

44 The Examiner does not consider it productive to review each and every weakness associated with the

Conclusion

In formulating the PCP the Examiner did not ascribe any incremental value to the claims asserted by the Retired Partners Trust against the Management Partners. Accordingly, the Examiner believes an injunction designed to protect settling partners pursuant to Section 105 of the Bankruptcy Code that will be issued in conjunction with confirmation of the Debtor’s plan of liquidation should protect Management Partners from the claims asserted by the Retired Partners Trust.45 Should the Retired Partners Trust decide to press its claims against the Management Partners, the issue will be contested at confirmation.

The Claims of SenoRx

The claims of SenoRx against individual partners are grounded solely in California Corporations Code § 16956. Pursuant to that statute, for partners to obtain the protections of a limited liability structure, any domestic or foreign limited liability partnership of which they are members that does business in California must provide some type of security for the payment of claims “based upon acts, errors or omissions” of partners arising out of the practice of law. See CAL CORP. CODE § 16956 (a)(2)(A). The security can take many forms, one of which is insurance coverage in a minimum amount of $7.5 million. The statute further provides that each partner, by virtue of his or her status as a partner, automatically guarantees the payment of any difference between the firm’s insurance coverage and the minimum coverage required by the statute. See CAL. CORP. CODE § 16956(a)(2)(C). Coudert had applicable insurance policies for the relevant year; the policy limits are $50 million per claim and a $100 million annual aggregate, with a self-insured retention portion of $3 million per claim and $6 million a year in the aggregate. SenoRx has asserted that if it is successful in its malpractice claims, the partners of Coudert are individually liable for that portion of the $3 million self-insured retention which is not paid by Coudert.

While the statute provides that individual partners guarantee any difference between the firm’s insurance coverage and the minimum coverage required by the statute, it also provides that (i) “[a] policy or policies of insurance maintained pursuant to this subparagraph may be subject to a deductible or self-insured retention” (see CAL. CORP. CODE § 16956(a)(2)(A)) and (ii) the impairment or exhaustion of the aggregate limit of liability by amounts paid pursuant to settlement, discharge or defense of claims “shall not require the partnership to acquire additional insurance coverage for that designated period” (id.). No cases analyze this statute. Nonetheless, the provision in the statute which provides that the insurance policy may be subject to a self- insured retention is not qualified in any way. In addition, any insurance coverage can be eroded by defense costs. Thus, it appears that so long as the partnership has insurance coverage of at least $7.5 million it has satisfied the conditions of the statute and the partners will receive the full benefit of the limited liability structure and will not be personally liable for malpractice claims.

causes of action asserted by the Retired Partners Trust against the Management Partners. But there is serious doubt overall as to whether the Retired Partners Trust’s unjust enrichment claim is viable, given that, arguably, there was a valid and enforceable contract in this matter -- i.e., the Partnership Agreement. There is also a serious question as to whether a party to a contract can be sued for “conspiracy to tortiously interfere” with its own contract. 45 Any release or injunction in favor of partners that may be issued as part of a plan of liquidation will not in and of itself preclude the Retired Partners Trust from continuing the New York State Court Action against any law firm it believes is a successor of Coudert.

Legislative history supports this view. The language in the statute providing that insurance policies may be subject to deductibles or self-insured retentions was added in 1997. The California Legislature considered additional language at the time which would have required that any deductible or self-insured retention not exceed 10% of the aggregate limit of liability specified in the statute. Under the proposed language, if the deductible or self-insured retention exceeded 10%, the partnership would be able to make up the difference by maintaining sufficient funds in the manner set forth in the statute46 (if it did not, the individual partners would presumably have to make up the difference). While this language was proposed and commented on, the California Legislature did not adopt it. However, the unqualified language respecting the deductible and self-insured retention was added to the statute.47 Thus, the statute contains no cap on deductibles or self-insured retentions.48

Coudert had insurance policies with limits of $50 million per claim ($100 million in the aggregate) for the year in question; it thereby satisfied the conditions set forth in the statute. However, even had it not satisfied those conditions and even were the self-insured retention component found to be too large under the statute, Coudert’s insurance policy has an endorsement -- entitled “Limited Liability Partnership Endorsement -- which provides that “[i]t is understood and agreed that, notwithstanding anything contained herein to the contrary, such insurance as would be provided by this Policy shall apply, where required to comply with the legislation of any particular jurisdiction, without regard to the RETENTION” (emphasis in original). This endorsement appears to reduce Coudert’s self-insured retention component to an amount that satisfies the California statute. Hence, partners should not be individually liable for any of SenoRx’ claims and additional insurance coverage may be available to address such claims. Accordingly, the partners named in the California State Court Action should receive the full benefit of the limited liability structure. Thus, the Examiner ascribed no incremental value to the PCP based on SenoRx’ claims against the individual partners.

The claims asserted by SenoRx against the individual partners are now before the Bankruptcy Court. If SenoRx continues to believe it has viable claims against the individual partners pursuant to California Corporations Code § 16956, it may object to the release and/or injunctive provisions that will be an integral part of the plan of liquidation. In such event, the Bankruptcy Court will have the opportunity to address the merits of the claim at confirmation. If SenoRx is successful on both its underlying malpractice claims and its claims predicated on

46 See Legis. Counsel’s Dig., Senate Bill No. 1080, as amended (1997-1998 reg. sess.), available on the website maintained by the State of California Office of Legislative Counsel (“Legislative Counsel”); it can be accessed at www.legislativecounsel.ca.gov/Legislative+Counsel/Home/_default.htm; see also CALIFORNIA SENATE COMMITTEE ANALYSIS OF SB 1080 (May 14, 1997), also available on the Legislative Counsel’s website. 47 The individual partners advanced this argument in the California State Court Action in connection with their Demurrer to SenoRx’ fourth amended complaint. While the state court denied the Demurrer, it stated that “[a]n ultimate resolution of the issues raised in Defendants’ Demurrer to Fourth Amended Compliant will involve dissecting the provisions of this statute and applying the fruits of that undertaking to the facts of this case. The viability of plaintiff’s cause of action needs to be analyzed in a factual context whether on a Motion for Summary Judgment/Summary Adjudication or at trial.” SenoRx, Inc. v. Coudert Brothers, LLP et al., Case No. CGC 04- 435849 (Cal. Super. Ct. filed Jan. 23, 2007). 48 Other states have similar statutes. However, those statutes do not contain similar language, which in California provides that a partnership can satisfy the security requirement, even if its insurance coverage has a deductible or self-insured retention component.

California Corporations Code § 16956, the amount of the Recourse Fund and the partners’ contributions thereto may have to be adjusted upward.

Other Potential Recourse Claims

The Examiner has been informed of one action49 commenced against various partners of CF (which, as noted, is a New York general partnership that was a Related Partnership to the Debtor).50 In addition, the Examiner has been informed that one other potential creditor of CF has threatened to sue CF partners in France.51 Creditors of other Related Partnerships may also commence actions against the Debtor’s former partners. All Coudert partners are also partners of CF and the partners of the other Related Partnerships are also Coudert partners.52 Thus, while partners in foreign jurisdictions would likely be the initial targets of litigation, given their proximity and the location of assets, all partners of Coudert would potentially be liable on such claims, either directly or through the assertion of contribution claims made by the partners actually sued.53 Hence, all of Coudert’s partners have potential exposure. Partner contributions pursuant to the PCP are among the largest potential assets of the Debtor’s Estate. However, former partners of Coudert will likely be reluctant to contribute to the Debtor’s Estate unless all claims against them are released and/or otherwise addressed and third parties are enjoined from commencing suit against them. Consequently, without the injunction, a significant asset will be lost or minimized, to the detriment of all creditors. As stated recently in In re Adelphia Commc’ns. Corp., 368 B.R. 140 (Bankr. S.D.N.Y. 2007), “in the Second Circuit, third-party releases or injunctions to prevent a creditor from suing a third party now are permissible under some circumstances, but not as a routine matter. They are permissible if, but only if, there are unusual circumstances to justify enjoining a

49 This is an action commenced in France by BNP Paribas (“BNP”) against certain CF partners on account of money owed by CF under certain equipment leases. The Examiner has been informed that this action could result in a claim of approximately EUR100,000 or less. The Examiner is also aware of an action commenced in France by Stephen Montravers, a former partner, against certain CF partners for wrongful termination; the Examiner has been informed that this action was dismissed in November, 2007. 50 Another asserted potential recourse claim of which the Examiner is aware is a claim previously asserted by La Compagnie Fonciere Parisienne (“CFP”), the landlord of the Debtor’s former Paris office, against individual partners of CF. CFP asserted claims only against the CF partners. The Examiner has been informed that CFP either settled with all CF partners and has given them releases or has withdrawn any legal proceedings against CF partners. Accordingly, these potential recourse claims appear to have been resolved and are not factored into the PCP. 51 The Examiner has been informed that Paul Schmidtberger, a former CF associate, sued CF for wrongful termination and is seeking approximately EUR125,000. While he has threatened to sue CF partners on this claim, he has not done so. 52 CF and the other Related Partnerships are not debtors in these proceedings. 53 See Partnership Agreement, Art. 3(h)(3) (“In the event of a default by the Partnership occurring on or after the Effective Date to pay a valid and final judgment entered by a court of competent jurisdiction against the Partnership or any Partner in respect of a Specified Liability, each Partner at the time of such default shall be liable, to the extent of such Partner’s Contribution Percentage in respect of such Specified Liability determined at the time of such default, to any current or former Partner who individually satisfied such Specified Liability in whole or in part by payment of any amount in excess of such paying Partner’s Contribution Percentage in respect of such Specified Liability determined at the time of such default.”). “Specified Liability” is defined in the Partnership Agreement as including any liability of the Firm “for which Partners are held liable solely by reason of the non- recognition, under the laws of any jurisdiction (other than the State of New York) to which the partnership is deemed to be subject, of the limited liability of partners of a registered limited liability partnership duly organized under the Act. Specified Liabilities shall include any of the foregoing liabilities of a Related partnership or Professional Corporation to which the partnership is subject.” Partnership Agreement, pp. 4-5.

creditor from suing a non-debtor party.” Id. at 267. In a situation similar to that present here, the District Court in In re Gaston & Snow found: The injunction issued by the bankruptcy court clearly played an important part in the Plan. The bankruptcy court found that “Partners ... clearly will only have incentive to pay their respective Partner Contributions ... if they can take comfort that such payments will shield them from all future exposure for any action brought by any person for the purpose of ... contribution or indemnification.” The Court of Appeals for the Second Circuit has held that an injunction is properly issued to induce parties related to a debtor to agree to a settlement. Thus, the injunction issued by the bankruptcy court in this case was no different in form or in scope from the injunction that have been issued by other bankruptcy courts under similar circumstances. Thus, the injunction was properly issued.

Id., No. 93 Civ 8517 (JGK), 1996 WL 694421, *5 (S.D.N.Y. Dec. 4, 1996) (citations omitted).

This is an unusual case with special circumstances that warrant an injunction. And to obtain the broadest injunction possible, the PCP must address liabilities associated with pending and potential recourse claims associated with the Related Partnerships. The Examiner included $900,000 of additional partner contributions in the PCP on account of claims involving the Related Partnerships. These additional contributions are to be deposited into the Recourse Fund, designed to support a compromise enabling creditors of Related Partnerships to receive distributions from Coudert under the plan of liquidation. Absent such a compromise, those claims might or might not receive a distribution. The Recourse Fund could also be used to defend against and otherwise resolve any recourse claims that might be asserted by creditors of Related Partnerships which might not be barred (on a real or practical basis) by the Section 105 injunction. Initially, the Recourse Fund should be segregated and used exclusively for this latter purpose. After an agreed period, any amount remaining in the Recourse Fund could be available for distribution to the holders of allowed general unsecured claims. Channeling the remainder interest in the Recourse Fund to the general Estate and allowing recourse creditors of the Related Partnerships to participate therein would afford settling partners the broadest possible injunction against third-party claims pursuant to Section 105 of the Bankruptcy Code. This would encourage partners to participate in the PCP, which, in turn, would benefit creditors.

All active partners at Coudert as of and after January 1, 2005 should be required to contribute to the Recourse Fund to address their potential exposure on these claims, either directly or for contribution through their contractual liability under the Partnership Agreement. Each partner should be required to make a minimum contribution of $2,941 to the Recourse Fund on account of his/her contingent liability for debts of the Related Partnerships. The balance of the Recourse Fund should be apportioned among partners on the basis of their relative ownership interest in the Firm, calculated by reference to a partner’s capital obligation to the Firm as a percentage of the overall capital obligations of all partners. These amounts range from no additional contribution to $6,994 per partner.

Given that just two claims by Related Partnership creditors, which may only aggregate approximately EUR225,000, have been asserted or threatened against partners, the amount of the Recourse Fund should be more than sufficient to defend against and, if appropriate, satisfy such claims, while leaving a surplus to address possible additional claims, if asserted. The Examiner

believes the amount of the Recourse Fund is a reasonable compromise, based on his review of the claims asserted against the partners individually and the amount of potential claims that may be asserted.54

Except for the claims asserted by the Retired Partners Trust and SenoRx, the Examiner is not aware of any recourse claims that have been asserted against partners in any jurisdiction within the United States. Creditors of Related Partnerships that were listed in the Debtor’s bankruptcy schedules or filed proofs of claim in this case, and who will receive a distribution from the Debtor’s Estate, should be barred by the Section 105 injunction. As noted, it is not clear whether creditors of the Related Partnerships are also creditors of the Debtor. Nonetheless, such creditors who filed claims or who are scheduled as not being disputed, contingent or unliquidated should obtain the benefit of a distribution under the plan, which will include the remaining balance of the Recourse Fund. By accepting a distribution from the plan (notwithstanding their arguable creditor status), such creditors would get an additional benefit and should be bound by the Section 105 injunction.

Some creditors of Related Partnerships who are not listed in the Debtor’s bankruptcy schedules may not have filed proofs of claim. Such creditors will not receive a distribution from the Debtor’s Estate; arguably, they may not be subject (either actually or practically) to the Section 105 injunction. The Recourse Fund could be used to defend against and/or otherwise resolve these potential recourse claims.

In sum, the Recourse Fund will protect partners from Related Partnership creditors; to the maximum extent possible, it will result in enforcement of the Section 105 injunction in all jurisdictions. The remainder interest in the Recourse Fund will be distributed pro rata to holders of allowed general unsecured claims against the Debtor – rather than the partners; this will bolster the applicability of the Section 105 injunction against creditors of the Related Partnerships who receive distributions under the plan, notwithstanding the uncertainty of their status as creditors of the Debtor.

Individual Claims

Management Claims

Pursuant to the concurrence of the Debtor and the Committee, the Examiner investigated the two identified sets of Management Claims: the Practice Group Sales Claims and the Bank- Related Claims.

Legal Analysis

“A partnership is fiduciary in character with each partner owing the others the highest degree of fidelity, loyalty and fairness in their mutual dealings. It has been classically expressed as ‘Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior’.” Application of Lester, 386 N.Y.S.2d 509, 512 (N.Y. Sup. Ct. 1976) (quoting

54 If recourse creditors have a contrary view, the amount of the Recourse Fund will be a contested issue at confirmation.

Meinhard v. Salmon, 249 N.Y. 458 (1928)).55 While partners clearly owe each other a fiduciary duty while the partnership is in existence, “it is equally clear that the fiduciary relationship between partners terminates upon notice of dissolution.” Morris v. Crawford, 757 N.Y.S.2d 383, 386 (1st Dep’t 2003) (collecting cases).

In this case, the “notice of dissolution” occurred when the partners voted on August 16, 2005 to wind down the Firm. “The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business; dissolution occurs when a partner manifests an unequivocal election to dissolve the partnership.” Ebker v. Tan Jay International Ltd., 741 F. Supp. 448, 468 (S.D.N.Y. 1990) (collecting cases). Here, the wind down authorization was a clear manifestation of the partners’ intent to dissolve the Firm. Accordingly, the fiduciary relationship that existed among Coudert’s partners while it was a viable law firm ended on the date the partners authorized the wind down of the Firm, i.e., August 16, 2005.

Although the fiduciary duty Coudert’s partners owed to each other ended on August 16, 2005, “[t]he partner charged with winding up the affairs of the partnership still retains a fiduciary duty as an agent of the remaining partners with respect to the liquidation of the firm.” Matter of Silverberg, 438 N.Y.S.2d 143, 144 (N.Y. App. Div. 1981); see also Morris, supra, 757 N.Y.S.2d at 386 (citing Silverberg); Ebker, supra, 741 F. Supp. at 469 (“Any partner normally has the right to participate in the winding up process and the duty imposed upon this liquidation partner is one of agency.”). The duty owed by partners involved in the process of winding up the affairs of a partnership is good faith and full disclosure. New York Jurisprudence states that

[u]nder the Partnership Law, the agency authority of a partner after dissolution -- and therefore his power to bind the partnership in transactions with third persons -- frequently depends upon whether the transactions are appropriate to winding up the partnership affairs and upon whether the partner has authority to wind up the affairs.

Liquidating partners winding up a partnership must, with reasonable diligence, collect and adjust the debts due to the firm, turn the assets into money, discharge the liabilities, and distribute the surplus.

The good faith and full disclosure required of partners [involved in the winding-up process] must continue during the winding up.

15A N.Y. JUR.2d, Business Relationships § 1705 (November, 2007).

55 This standard is equally applicable when a partnership is a limited liability partnership; a limited liability partnership is considered a partnership under New York law, albeit one in which partners have limited liability. “A partnership without limited partners that has been registered as a registered limited liability partnership is for all purpose the same entity that existed before the registration and continues to be a partnership without limited partners under the laws of this state.” N. Y. P’SHIP LAW § 121-1500(d); see also ALAN R. BROMBERG AND LARRY E. RIBSTEIN, LIMITED LIABILITY PARTNERSHIPS, THE REVISED UNIFORM PARTNERSHIP ACT, AND THE UNIFORM LIMITED PARTNERSHIP ACT (2001) § 4.01 (2006 ed.) (“[i]n most respects . . . the default rules of the partnership laws do apply . . . .”).

As to agency, in winding up a partnership’s affairs, an agent is a fiduciary who is required to exercise good faith and reasonable diligence and exhibit such skill as is ordinarily possessed by people of common capacity engaged in the same business. See Blonsky v. Allstate Ins. Co., 491 N.Y.S.2d 895, 897 (N.Y. Sup. Ct. 1985). Moreover, the “business judgment rule, which provides that if a decision is made in good faith and without personal bias or conflict of interest, a fiduciary is not liable even if the decision turns out to be unwise or unsound, applies to partners acting as fiduciaries for the partnership and the other partners.” 15A N.Y. JUR.2d, Business Relationships § 1462.

However, the business judgment rule is trumped by the duty of loyalty. In New York

the business judgment rule does not protect corporate officers or partners who engage in fraud or self-dealing, or corporate fiduciaries when they make decisions affected by an inherent conflict of interest. Wolf v. Rand, 258 A.D.2d 401, 404, 685 N.Y.S.2d 708 (1st Dept.1999); Simpson v. Berkley Owner's Corp., 213 A.D.2d 207, 623 N.Y.S.2d 583 (1st Dept.1995). Under such circumstances, the burden shifts to the Defendant to prove the fairness of the challenged acts.

Kantor v. Mesibov, 796 N.Y.S.2d 884, 888 (N.Y. Sup. Ct. 2005).

The issue here is whether it is reasonable to assert that the Management Partners breached their fiduciary duty by (i) approving the prepetition sales of certain of the Debtor’s practice groups and/or offices (i.e., the Practice Group Sales Claims) and/or (ii) paying down the Debtor’s prepetition secured debt and granting additional collateral to the Banks (i.e., the Bank- Related Claims).

Practice Group Sales Claims

The Debtor and the Committee concurred that the Examiner should limit his review to the following four transactions: (i) the New York office transaction with Baker (the “Baker Transaction”); (ii) the Paris office transaction with Dechert LLP (the “Dechert Transaction”); (iii) the China practice transaction with Orrick (the “Orrick Transaction”); and (iv) the Singapore office transaction with DLA Piper Rudnick Gray Cary (Singapore) Pte. Ltd. (“DLA”) (the “DLA Transaction”).

In selling practice groups the SSC had significant obstacles.56 First, before its dissolution the Firm had already been shopped by Hildebrandt; only one viable candidate emerged (Baker) and it ultimately declined to proceed. The likelihood of finding a merger partner after the Firm’s dissolution was remote, at best. Second, after dissolution Coudert stopped paying its partners. The partners needed to find other jobs; the likelihood of keeping groups of partners together diminished each day that a transaction did not occur. The SSC was under severe time pressure from the partners (who otherwise would proceed independently) to do a transaction. Other pressures on the SSC to conclude a transaction involved the need of Firm personnel overall to find replacement jobs and clients of the Firm to be serviced, as well as fixed overhead costs that

56 The sale transactions were effected by the SSC, not the Executive Board. At the time of each of the sale transactions the SSC had one to three members, who are all part of the PCP Matrix. Accordingly, any impropriety relating to the sale transactions involves the potential liability of a small number of partners in the PCP Matrix.

had to be paid (in order to maintain a saleable segment of the Firm) in the absence of significant revenue generated from the offices now in dissolution. Third, Coudert partners were free to practice wherever they chose, including at any other law firm that was willing to pay them. The SSC had limited options as to which firms to deal with once various practice groups decided collectively where they wished to go; this was especially true for the foreign offices. 57

After the wind down was authorized, the asset of the Firm represented by “goodwill” dissipated. By voting for dissolution, partners (i) had decided that it no longer made sense to practice law collectively and (ii) had created an immediate need for each of them to find a new job and replenish their income. The SSC had little control over the situation other than to try and prevail on partners though moral suasion to act collectively in smaller groups in order to preserve the maximum number of jobs (legal and non-legal), maximize assets and minimize the Firm’s liabilities. Essentially, this meant that in selling a practice group or office the SSC was generally looking for an acquiring law firm that would (i) buy on favorable terms accounts receivable, fixtures, furniture and equipment, as well as advantageous leases and contracts; (ii) assume other contractual liabilities; and (iii) offer jobs to as many people as possible.

The members of the SSC were a different group than those who served on the Executive Board. As one SSC member put it, getting a position on the SSC was not difficult. It was a time consuming and high pressure position, subject to criticism and potential liability. Not surprisingly, the original members of the SSC were long-time partners of Coudert who felt an obligation to the Firm and its personnel to effect an orderly wind down. The original SSC members were Anthony Williams, Andrew Hedden and Frederick Konta. Anthony Williams was a prior chairman of the Firm and knew Coudert well; he resigned from the SSC on or about July 31, 2006. Andrew Hedden was a senior member of the Firm whom partners trusted; he resigned from the SSC after one month, on September 22, 2005. Frederick Konta was asked to be a member of the SSC because of his expertise in pension matters and his reputation for high ethical standards; he resigned from the SSC on September 29, 2005.

Except as to the Baker Transaction, the partners and/or other Coudert representatives negotiating a proposed sale transaction on Coudert’s behalf -- i.e., SSC members, Pat Kane (before she was an SSC member), Jonathan Wohl and Charles Keefe -- were in each instance not joining the acquiring firm. In addition, the Management Partners obtained no individual financial benefit from the DLA Transaction. Accordingly, no duty of loyalty issues arise in connection with the DLA Transaction; that transaction can be considered in light of the business judgment standard.

Arguably, the Baker Transaction is not reviewable under a business judgment standard because of the participation of the SSC members and Clyde Rankin (who were all joining Baker) in the negotiations surrounding that transaction. The Dechert Transaction and the Orrick Transaction are also arguably not reviewable under the business judgment standard because these transactions, as discussed below, relieved all former partners of the Firm (including the SSC member – Anthony Williams -- who approved the transaction) of potential liability. Nonetheless, the Examiner’s review indicated that as to all the transactions there were arms-

57 All SSC members practiced in the New York office; after the partners voted to wind down the Firm, they had less influence over the partners in foreign offices.

length negotiations between the Debtor and the acquiring law firms.

Notably, all four transactions were negotiated and approved during the period when the Banks had liens on the assets to be sold; their consent to release liens and, in certain cases, their entitlement to a portion of the cash proceeds of the sale were important elements in the transactions. The Banks reviewed each transaction and ultimately consented to all of them.

From his analysis of the four transactions the Examiner determined that it was not necessary to perform an independent valuation of the assets transferred. The more relevant focus, in his view, relates to the facts and circumstances of the transactions and whether (i) the Management Partners involved in the negotiations sought or obtained improvements in the terms of the transactions; (ii) the Firm would have done better forgoing the transactions and liquidating the assets; and (iii) the decisions to approve the transactions satisfy the “business judgment” standard or the “fairness” standard. Even absent any claim against the Management Partners relating to the transactions, there may still be claims against the purchasing firms for acquiring practices of greater value than the consideration they paid while Coudert was insolvent.

A more detailed discussion of each of the four transactions follows.

Baker Transaction

The primary components of the Baker Transaction were the transfer of (i) accounts receivable and work in process; (ii) contingency fee receivables; (iii) leasehold interests; (iv) leasehold improvements; and (v) fixed assets. Coudert’s consideration for each component was as follows:

a. Approximately $6.6 million for both accounts receivable and work in process, which together had an outstanding balance approximating $13.2 million. The amount derived from a formula based on the aging of the accounts receivable (or work in process); a “true-up” formula related to ultimate collections;

b. Receivables relating to contingency fee cases (which were to be continued at Baker) were subject to a separate formula. Based on this formula, Coudert received approximately $2.6 million of contingency fee collections in December, 2005;

c. $7 million for Coudert’s New York office lease (“NY Lease”), comprising $4 million from Baker and $3 million from the landlord;58

d. Approximately $498,000 in consideration of the purchase of leasehold improvements; and

e. Approximately $516,000 for the purchases of fixed assets.

58 Coudert received a total of $11 million for the NY Lease, $8 million from Baker and $3 million from the landlord. However, pursuant to a provision in the NY Lease requiring Coudert to share with the landlord 50% of any profit obtained from an assignment or sublease, Coudert was obligated to turn over to the landlord $4 million of the $8 million Baker paid Coudert on account of the NY Lease.

The Examiner’s interviews with Coudert’s partners and others established that other law firms expressed a general interest in the New York office, but that Baker was the most aggressive suitor and the only one ultimately interested in acquiring the NY Lease. Given the time pressures on Coudert, the dubious prospects of an expeditious resolution with another firm and the expectations of the partners in the New York office, the SSC decided early on to “ride one horse” and see whether a transaction could be consummated with Baker.

It took more than a month to conclude the Baker Transaction. The interviews the Examiner conducted revealed that there were spirited and extended negotiations between Coudert and Baker over asset values. For example, Pat Kane said in her interview that it took a month to negotiate the accounts receivable formula. As for the other assets sold to Baker, after the dissolution vote Coudert obtained an appraisal of the NY Lease and a fixed assets appraisal as a basis for the negotiation with Baker over the amount it would pay for these assets. As explained below, the lease negotiation became a three-way discussion among Baker, the Firm and the landlord.

Anthony Williams and Pat Kane both said in their interviews that they tried to get an extra payment for the “goodwill” value for the Firm. They were rebuffed by Baker.

Notably, none of the SSC members or Clyde Rankin seems to have tried to negotiate their salaries with Baker; each apparently accepted whatever was offered. Frederick Konta stated during his interview that the SSC members were not on the original list of partners going to Baker; he was approached to go to Baker shortly before the agreement with Baker was signed on September 7, 2005. Mr. Konta was nearing retirement age and did not go to Baker as an equity partner; he joined as a “national” partner.

The negotiations over the NY Lease were difficult and complicated. The NY Lease had a provision requiring (i) the landlord’s consent (not to be unreasonably withheld) for any assignment or sublease; (ii) that Coudert share with the landlord 50% of any profit made by the Firm respecting any assignment or sublease; and (iii) that the Firm post a security deposit of one year’s rent (approximately $5.8 million) if the number of partners decreased by 50% in any one year. The landlord for the Firm’s New York and Los Angeles offices was the same entity. The LA office lease was considered a liability (not an asset) for the Firm. Moreover, Baker wanted only half the Coudert space covered by the NY Lease.

From the interviews he conducted the Examiner learned that Coudert was concerned the New York landlord would drag its feet and delay approval of the transaction, thereby jeopardizing the Baker deal. The Firm was also concerned that (i) the landlord would argue that the large $5.8 million security deposit was due because the Firm was in wind down and all the partners had effectively resigned; (ii) the Firm had no realistic capability to post this amount; and (iii) the failure to post the security deposit could be construed as an event of default, leading to a forfeiture of the NY Lease, which was considered a valuable asset.

Apparently, the Firm did not try to market the NY Lease to non-law firms. According to the interviews, the SSC believed that that would have made it impossible to keep the New York office intact, thereby jeopardizing jobs, the maximization of the other assets of the New York office and the effort to minimize liabilities relating to the New York office. Marketing the New

York office more widely could have been a prolonged affair and might have triggered additional fees, such as a brokerage commission.

The Firm’s appraisal of the NY Lease was $18 million, which assumed a market rent of approximately $55 a square foot. Baker’s evaluation of rental rates in the building assumed a market rent of approximately $48 a square foot. According to independent market data reviewed by the Examiner, comparable rents in the Grace Building (where the New York office was located) in 2005 (both before and after the Baker Transaction closed) were in the range of $48- $57 a square foot; the sublease market was $37-$43 a square foot. Thus, the evaluations appear to have been within the then prevailing market range, with the Firm’s appraisal on the higher point of the range and Baker’s evaluation on the lower point. And, as noted, whatever the difference in value, half the profit had to be turned over to the landlord.

Baker effectively paid $8 million for approximately half the space. Had the Firm’s appraisal (i.e., $18 million) been accepted by Baker, it would have paid approximately $500,000 more for its share of the lease (with 50% of the leased space potentially worth $9 million, Baker paid $8 million; at the higher level, the landlord would have received 50% of the additional $1 million profit). Accordingly, Coudert received approximately 89% of the Firm’s appraised value of the portion of the leased space Baker took over.

The landlord paid $3 million for the remainder of the leased space. This was less than Baker; the difference reflected the slightly lower market for sublease space and the strength of the landlord’s negotiating position.

As to accounts receivable and work in process, the Baker Transaction provided for Coudert to collect the Initial Inventory Amount (as defined in the Baker asset purchase agreement), which comprised (i) 75% of its accounts receivable with an age of 90 days or less; (ii) 25% of its accounts receivable with an age of between 91 days and 180 days; (iii) 50% of its work in process with an age of 90 days or less; and (iv) 25% of its work in process with an age of between 91 days and 180 days. Baker was to receive the next $1 million collected, with additional collections to be shared 85% to Coudert and 15% to Baker. Based on this formula, out of approximately $13.2 million of accounts receivable and work in process at the New York office as of the date of the Baker Transaction, Coudert received approximately $6.6 million and Baker approximately $1.2 million. Accordingly, in total, Coudert received 85% of the collected accounts receivable and work in process; Baker received 15% of the collected accounts receivable and work in process.59

It appears that Coudert received significant value for the leasehold improvements and fixed assets transferred to Baker.60 Clyde Rankin stated in his interview that there were “hard negotiations” with Baker respecting the fixed assets. Also as part of the Baker Transaction, certain personal property leases were assumed and jobs preserved, which minimized liabilities for Coudert.

59 The amounts in this paragraph do not include any amounts collected attributable to contingency fee receivables. 60 While there were negotiations respecting the transfer to Baker of the artwork located at the New York office, a price could not be agreed upon and this asset was not included in the Baker Transaction.

The three original SSC members and Clyde Rankin all joined Baker. To try and alleviate a perceived conflict of interest as to the SSC members and Clyde Rankin joining Baker and also negotiating the transaction on behalf of Coudert, the Executive Board passed a special resolution authorizing Pat Kane and Jonathan Wohl to approve the transaction. Nonetheless, while the SSC members and Clyde Rankin may not have been the people negotiating directly with Baker, they were clearly involved in the decision-making process and gave Pat Kane and Jonathan Wohl guidance on a number of deal points. Clyde Rankin, Anthony Williams, Frederick Konta and Andrew Hedden all so affirmed in their interviews. Thus, despite the special resolution authorizing Pat Kane and Jonathan Wohl to approve the transaction, the SSC members themselves ultimately approved the transaction and executed the sale documents. Accordingly, the Baker Transaction cannot be weighed under the business judgment standard. Given that the duty of loyalty standard cannot be met, the fairness of the transaction must be evaluated.

After reviewing selected documents and the value received in the Baker Transaction, as well as considering what he learned in the interviews he conducted, the Examiner concluded that despite the involvement of the SSC members and Clyde Rankin in the negotiations respecting the Baker Transaction, there is no evidence that their conduct was compromised by self-dealing. Accordingly, the Examiner concluded that the three SSC members and Clyde Rankin should not be required to pay any additional amounts as part of the PCP based on their role in the Baker Transaction.

Dechert Transaction

The Dechert Transaction concerned CF, a Related Partnership under the Partnership Agreement. In exchange for assuming various liabilities associated with the CF office in Paris (including substantial severance and other employment-related costs estimated to exceed $10 million), Dechert received the following: (i) certain accounts receivable and work in process at the Paris office, which had an outstanding balance of approximately $5.8 million; (ii) $400,000 to cover anticipated shortfalls in profitability; (iii) the dollar equivalent of EUR 201,866 for certain accrued vacation days, non-discretionary bonuses and other employee benefits relating to transferred employees for a specified period; (iv) $500,000 to be held in escrow until a date certain to fund possible costs required to be paid under French law in connection with the termination of employment or professional relationships relating to CF;61 (v) all cash held in a certain collection account maintained by Coudert in Paris, up to the amount of EUR 800,000; (vi) the right to rent the CF office in Paris, to use office equipment there and to have access to telecommunications facilities until January 2, 2006; (vii) the transfer of all client files of CF lawyers joining Dechert (subject to ethical guidelines and bar requirements); and (viii) the first right to purchase the contents of the law library at CF. While certain of the funds transferred to Dechert came from CF bank accounts, approximately $1.35 million transferred to Dechert came from the New York office.

From the interviews he conducted with Pat Kane, Jonathan Wohl and Anthony Williams,

61 The unused portion of this escrow account was supposed to be returned to Coudert after the specified time period elapsed. According to Pat Kane, Dechert informed Coudert that all the funds in the escrow account were needed to pay termination costs. However, again according to Pat Kane, approximately $367,000 remains in the escrow account because Coudert has disputed a payment Dechert made to the landlord of the Paris office, which Coudert asserts should have been paid to it.

the Examiner learned that the SSC members were concerned that were the Paris office not transferred to another law firm, significant liabilities would arise in connection with closing that office. Because French law affords employees substantial protections in the event of a wind down, it was important to try and keep the Paris office together and transfer it to another firm intact, thereby preserving jobs and minimizing severance liabilities.

Immediately after the August 16 Partners Meeting, Coudert was contacted by the Paris partners and told that, except for Jonathan Wohl, they were joining Dechert. The Paris partners also provided Coudert with an opinion from Barthelemy (a law firm in France specializing in employment law) which purported to show that the potential liabilities associated with closing the Paris office were approximately $15 million, with employee-related costs accounting for over 80% of the potential liabilities. Pat Kane stated in her interview that the extent of the potential liabilities was a real concern. Anthony Williams said he was not surprised by the Barthelemy opinion, since severance laws in France are very protective of employees.

In the Examiner’s opinion there is some uncertainty as to whether Coudert was liable for the CF liabilities and whether it was appropriate for Coudert to contribute cash as part of the Dechert Transaction. CF was a separate entity from Coudert; it was a Related Partnership and a general partnership, with all partners of Coudert also partners of CF.

Nonetheless, while as general partners all Coudert partners were liable for CF’s debts, it is not clear from the Partnership Agreement whether Coudert was liable for CF’s debts. The relevant provision of the Partnership Agreement appears to be Article 4(b), which provides:

When necessary or convenient for the practice of law in one of the jurisdictions in which the Partnership has or intends to have an office, and subject to first obtaining written consent of the Executive Board, two (2) or more partners may participate in one or more additional partnerships (“Related Partnerships”) consisting solely of partners who are also Partners of the Partnership and organized for the purpose of engaging in the practice of law; provided that, for the purpose of determining the entitlement of each Partner to share in the profits and losses of the Partnership and any such Related Partnership shall be regarded as consolidated into a unified, worldwide partnership governed by this Agreement. . . . If, due to reasons of practice restrictions, tax considerations or other impediments, this principle of a unified, worldwide partnership cannot be strictly maintained, then the Partnership and the Related Partnership shall establish accounting, trust or other permissible arrangements whereby the desired effect can be obtained to a degree found satisfactory by the Executive Board.

Partnership Agreement, Art. 4(b).

Moreover, under Article 4(e) of the Partnership Agreement the “Executive Board may provide such financing and other assistance to Related Partnerships, Affiliates and Professional Corporations, and may authorize such indemnifications and guarantees of performance and earnings of such entities, as may in its discretion be deemed appropriate.”

The Executive Board and the SSC apparently believed that the assets and liabilities of CF

(and other Related Partnerships, Affiliates and Professional Corporations) were the assets and liabilities of Coudert and conducted the Firm’s business accordingly. For example, Pat Kane informed the Examiner that if CF (or another affiliated partnership) had excess cash, it was routinely transferred to Coudert; if CF (or another affiliated partnership) could not fund its payroll, Coudert funded it. Coudert also maintained a single general ledger; while each of the foreign offices (except for an office in Russia) entered its own expenses and billing information, none had its own accounting systems, nor did they issue separate financial statements. Moreover, when Coudert prepared and filed its bankruptcy schedules, it included debts owed by its affiliated partnerships as debts owed by Coudert.

At his interview, Anthony Williams, the only person on the SSC at the time the Dechert Transaction was approved, indicated his belief that the potential liabilities associated with closing the Paris office would have become liabilities of Coudert (as would those of CF) and all Coudert partners and that he had no real choice but to proceed with the transaction. He stated that the only other choice was to close down the Paris office, which would have produced significant liabilities for the Firm.

The Dechert Transaction raises duty of loyalty issues. The remaining SSC member (as well as all Coudert partners) was not disinterested in this transaction; by agreeing to the Dechert Transaction, Anthony Williams (and all partners of Coudert) was relieved of potential liabilities through payments made by Coudert, which may or may not have been liable for those debts. Like the Baker Transaction, this transaction, therefore, cannot be considered under the business judgment standard. Instead, the “fairness” of the transaction needs to be evaluated.

Clearly, the payments to Dechert eliminated liabilities exceeding $10 million. Based on the way Coudert and its affiliated partnerships operated (i.e., as a unified, worldwide partnership), these liabilities could arguably have been the responsibility of Coudert. This transaction minimized liabilities; litigation on the issue was avoided, as well.

In the Examiner’s view, Anthony Williams acted in good faith when he approved the transaction. He believed the CF liabilities were also Coudert’s liabilities; he may have been correct in that assessment. In any event, based on the special circumstances involved, the Examiner determined that no adjustment to the PCP Matrix for Anthony Williams is warranted in connection with the Dechert Transaction.62

Orrick Transaction

The original asset purchase agreement for the Orrick Transaction provided for the following assets to be transferred to Orrick: (i) leasehold and subleasehold interests in connection with the Hong Kong, Beijing and Shanghai offices (collectively, “China Practice Offices”); (ii) all leasehold improvements, furniture, fixtures and equipment located at the China Practice Offices; (iii) accounts receivable and work in progress as of specified dates and specific

62 Notably, if partners do not participate in the PCP, the Estate fiduciary may assert an avoiding power claim relating to whether those partners realized an unwarranted benefit in the year prior to the Firm’s bankruptcy filing for using Coudert assets to pay down CF-only liabilities (and thereby relieve the partners of these obligations). This position would be predicated on the theory that the Debtor’s cash should not have been used to pay CF liabilities, which were not owed by the Debtor.

partners; (iv) all files, documents, instruments and related materials; (v) all legal and beneficial interests in Southgate Services, Polytime, Pacific Rim Consulting and the Hong Kong local law firm; (vi) an exclusive license to use the name “Coudert Brothers” for five years in connection with business conducted in China by Orrick and an exclusive perpetual license to use the name “Coudert Brothers” in Chinese characters in connection with business conducted in China by Orrick; (vii) contracts and agreements entered into by the China Practice Offices and related principally to the China Practice, to the extent of their assignability; and (viii) any other assets owned by Coudert and used principally in the China Practice. The Orrick Transaction also included a mutual release by the parties thereto, which included a release of former Coudert partners who joined Orrick as part of this transaction or prior transactions (e.g., the London office and the Moscow office).

In consideration for the assets transferred, Orrick initially paid, after a partial closing in connection with the Hong Kong office, approximately $2.8 million, of which approximately $1.4 million was paid on or about October 24, 2005 (subject to certain adjustments set forth in the second amendment to the Orrick Transaction) and $1.4 million was paid on or about January 31, 2006 (pursuant to the third amendment to the Orrick Transaction). In connection with the fourth amendment to the Orrick Transaction, Orrick paid the balance of the consideration, approximating $2.4 million; total consideration received by Coudert in connection with the Orrick Transaction was approximately $5.2 million. In their interviews with the Examiner, both Andrew Hedden and Frederick Konta stated that there were back and forth negotiations and that the consideration received by Coudert in connection with the Orrick Transaction increased pursuant to those negotiations.

In addition to the consideration it paid Coudert, Orrick assumed the following liabilities of the Firm relating to the China Practice: (i) all liabilities of Coudert under the leases for the China Practice Offices, certain transferred contracts and leases for office equipment; (ii) all liabilities associated with the assets acquired arising on or after specified effective dates; (iii) all liabilities arising on or after specified effective dates relating to associates, of counsel, consultants, staff and other employees of the China Practice who accepted offers of employment by Orrick; and (iv) all liabilities for salaries and other compensation owing to the individuals who were employees of the Beijing and Shanghai offices of Coudert on the date of the assignment to Orrick of the leases for such offices.

As recounted by Pat Kane and Andrew Hedden in their interviews with the Examiner, and as emerged from a review of certain e-mails, other law firms interested in certain of the offices that made up the China practice were Dorsey & Whitney LLP, Duane Morris LLP, Chabourne & Parke LLP and Pillsbury Winthrop Shaw Pittman LLP. However, Andrew Hedden said in his interview with the Examiner that a majority of the China partners had signed and delivered letters of intent to join Orrick. According to Andrew Hedden, who took the lead in the Orrick Transaction, the SSC was “pretty locked into” doing the deal with Orrick because of the commitment letters. Thus, as with the Dechert Transaction, the Orrick Transaction was driven by the partners in the offices themselves and their desire to join a particular firm.

As noted, an important component of this transaction was the transfer of Coudert’s license to practice law in China. The asset purchase agreement provided that the consideration for the license was $1 million. Although it was originally believed that the transfer of the license

would be a relatively quick process, it took over a year to accomplish; the final amendment to the Orrick Transaction was executed in August, 2006. During that year’s time, pursuant to amendments to the original contract respecting the Orrick Transaction, Orrick closed on a portion of the Orrick Transaction, allowing Coudert to receive certain payments ahead of schedule. In addition, as recounted by Pat Kane and Anthony Williams in their interviews with the Examiner, had Coudert sought bankruptcy protection prior to the license being transferred, the license (and the consideration Orrick was paying for it) would have been lost; additional damages might have accrued, as well.63

As with the Dechert Transaction,64 the Examiner believes there is some uncertainty as to whether the business judgment standard is applicable to this transaction or whether the duty of loyalty issue is implicated and the “fairness” standard should apply. The Orrick Transaction involved, among other offices, the Hong Kong office, which was a general partnership. The SSC member who approved this transaction (Anthony Williams) was not technically disinterested; by agreeing to the Orrick Transaction, he was relieved of potential liabilities associated with the Hong Kong office.

The Examiner reviewed whether there is a reasonable basis to believe that Coudert received less than what it should have gotten from Orrick because of an overriding concern by the SSC that individual partners be relieved of debt assumed by Orrick as part of the sale of the offices. The Examiner considered the significant cash received by Coudert as part of the sale and the value of the assets sold, as well as the liabilities associated with the offices assumed by Orrick; he determined that no adjustment should be made to the PCP Matrix for Anthony Williams in connection with the Orrick Transaction.

DLA Transaction

While the DLA Transaction was one of the smaller transactions, it seems to have been negotiated after the partners in the Singapore office had already joined DLA. The Singapore partners and other personnel joined DLA as of October 1, 2005, but the transaction was not entered into until January, 2006. DLA did not purchase accounts receivable for the period prior to October 1, 2005; they remained the property of Coudert. DLA simply assumed the lease for the Singapore office and agreed to restore the premises at the end of the lease term. This resulted

63 Certain creditors have expressed a concern that the Firm delayed filing for bankruptcy in order to insulate certain transfers from an Avoidance Claim. The Examiner believes those concerns are misplaced. No statute of limitations defense was created by a delay in a bankruptcy filing for (i) an alleged breach of fiduciary duty claim against the Management Partners; (ii) an alleged Section 548 Avoidance Claim for distributions to partners; and (iii) an alleged Section 548 Avoidance Claim arising from Practice Group Sales Claims. The new liens given the Banks, as described below, likely did not impact the Banks’ ability to get repaid. And, because of the insolvency date assumption (May 18, 2005), all transfers to partners covered by a preference analysis are included in the Section 548 Avoidance Claim analysis. In addition, categorizing these payments as “antecedent debt” for preference purposes is antithetical to a Section 548 Avoidance Claim since “reasonably equivalent value” includes the satisfaction of “antecedent debt.” Moreover, most partners would arguably have had defenses to a preference claim, including an “ordinary course of business” defense pursuant to Section 547(c)(2) of the Bankruptcy Code or a “new value” defense pursuant to Section 547(c)(4) of the Bankruptcy Code. Accordingly, any “delay” in filing for bankruptcy appears to have had little or no impact on the Avoidance Claims assertable against partners. 64 The issue relating to the use of Coudert cash to pay a Related Partnership debt which was present in the Dechert Transaction is not present in the Orrick Transaction.

in reducing Coudert’s liabilities associated with this office, as Coudert would have had to enter into negotiations with the landlord to terminate the lease prior to its expiration; Coudert would likely also have been required to expend funds to restore the premises. Coudert received $1,500 for the purchase of certain office equipment. Given that this transaction was documented three months after the partners joined DLA, it is doubtful the Management Partners could have negotiated a significantly better result.

Conclusion

The documents reviewed by the Examiner in connection with the Practice Group Sales Claims do not in any material way contradict the statements made to him in the interviews he conducted. Moreover, the Examiner performed an economic analysis of the four transactions, reviewing and analyzing the consideration received, the liabilities assumed or extinguished and the assets transferred. Each of these sales took place after the announced wind down of the Firm and at a time when the Debtor was no longer a going concern. Accordingly, the Examiner believes no adjustment should be made to the PCP on account of the Practice Group Sales Claims.

Bank-Related Claims

As noted, shortly following the announcement of the departure of the London and Moscow partners, Coudert breached a covenant in its loan agreements with the Banks requiring that the Firm maintain a minimum number of partners. Upon being notified of the default, the Banks monitored Coudert’s finances increasingly closely and ultimately put Coudert on a budget, with all expenditures needing the prior approval of at least one of the Banks. Thereafter, the Banks moved aggressively to receive a full pay down of the secured debt owed to them.

At the time of the London and Moscow departures, the Banks’ collateral was essentially Coudert’s accounts receivable, work in process and the proceeds thereof. There was some question whether the foreign accounts receivable and work in process were adequately perfected. At least one of the Banks demanded additional collateral in July, 2005 and suggested that were it not forthcoming it might assert remedies. Coudert believed at the time that the Banks were over- collateralized: it had, at a minimum, domestic accounts receivable (including significant, potential contingency fee receivables) well in excess of the outstanding amount of the secured debt. In addition, Coudert was involved in merger discussions with Baker and believed those negotiations would likely come to fruition. Coudert needed the Banks to finance its business and did not want to precipitate a dissolution while merger prospects were still being discussed or other reorganization efforts were possible. Accordingly, Coudert granted the additional collateral, which consisted of substantially all of Coudert’s remaining assets, including its leasehold interests and furniture, fixtures and equipment.65

The Examiner analyzed whether in July, 2005 the original collateral that secured the Banks’ debt was sufficient to satisfy the secured claims in full. In that regard, as of July 31, 2005 the total outstanding amount owed to the Banks was approximately $20.7 million. Based

65 The documents reviewed by the Examiner as to the Bank-Related Claims do not contradict the statements made in the interviews in any material way.

on the Examiner’s review and analysis of Coudert’s books and records, as of July 31, 2005 the collateral consisted at a minimum of the following: (i) $24.2 million of domestic accounts receivable; (ii) $26.1 million of domestic work in process; and (iii) contingent fee receivables.66

The Examiner performed calculations relating to certain collections, billings and time logged at the Firm. From August 1, 2005 to December 31, 2005 Coudert collected approximately $22 million from domestic accounts receivable. This includes the proceeds Coudert received from the sale of accounts receivable to buyers of certain practices. During the same time period Coudert billed clients approximately $13.2 million on account of domestic receivables; at the same time, it logged time for August and September, 2005, representing approximately $7 million of domestic receivables. Thus, it appears the amounts collected from August 1, 2005 to December 31, 2005 exceeded the outstanding amounts owed to the Banks as of July 31, 2005.

Finally, had the Banks attempted to assert their remedies and seize the Firm’s cash because they were not given additional collateral, Coudert would have been forced into bankruptcy before it could sell its practices. The ultimate realization of assets by Coudert would likely then have been less than was achieved by the Banks’ funding an orderly wind down. The Examiner believes that Coudert’s pay down of the Banks was not precipitated by the partners’ wish to extinguish their personal guaranties of the secured debt held by the Banks. Rather, it was the Banks which pushed for the pay down of the secured debt and used as negotiating leverage their position as secured lenders with a pervasive lien and the rights they had under a defaulted loan agreement. Given these circumstances, the Examiner believes the Management Partners should not be required to make an additional contribution to the PCP for granting the Banks additional collateral and paying down the secured debt.67

Possible Insurance Coverage

The Examiner recommends that any plan of liquidation provide that Management Partners who agree to participate in the PCP are given the full benefit of the Section 105 injunction. Management Partners would be protected thereby from any attempt (including by the Estate) to collect against their assets individually on account of potential Management Claims. However, an asset of the Debtor’s estate is the Debtor’s insurance policy in the face amount of $5 million issued by XL Specialty Insurance Company to protect the Management Partners for certain actions they might take on behalf of the Firm. To preserve any value associated with this insurance policy, the Debtor may wish to consider whether it is appropriate that any plan of liquidation not provide for the release of Management Partners from, among other things, potential Management Claims relating to the Practice Group Sales Claims or the Bank-Related Claims; the Estate fiduciary under the plan would then be able to assert claims against the insurance policy. But Management Partners who participate in the PCP would be protected from

66 In the Part A Investigation the Examiner valued contingency fee receivables in a range approximating $9 million to $17.5 million as of both June 30, 2005 and August 31, 2005. 67 As noted, the PCP only concerns claims against former partners of Coudert. It is for other Estate fiduciaries to determine if claims exist against third parties based on the facts and circumstances surrounding the Management Claims.

suit against their individual assets, with any possible claim surviving only on a non-recourse basis to the extent of available insurance coverage.68

Individual Partner Claims

As noted, according to the Debtor, a handful of individual partners may be liable for additional claims based on unique facts and circumstances. These partners and a description of the claims alleged against them are set forth below. The Examiner recommends that if these individual partners pay their Contract Claims, they receive the benefit of a release, but only as to those claims. To get a release of the claims described below and an injunction barring third- party claims, these partners must resolve any outstanding claims that could be asserted against them through negotiations with the Debtor; any agreed-upon resolution will need to be approved by the Bankruptcy Court on notice to, among others, the Committee.

Michael Calabrese: Michael Calabrese was a partner in Coudert’s Washington, D.C. office. Potential claims against Calabrese stem from irregularities Coudert found in connection with his billing of Lockheed Martin Corporation (“Lockheed”). Coudert ultimately reimbursed Lockheed (i) $50,980 for personal charges billed by Michael Calabrese and charged to Lockheed and (ii) $544,437 for other billing issues, for a total of $595,417. The Examiner discussed these matters with Michael Calabrese and believes a claim may lie against him for the amount Coudert had to refund to Lockheed. Michael Calabrese believes, among other things, that he is entitled to an offset for the capital he contributed to the Firm (which was withheld by the Firm) and distributions owed to him. However, even were such amounts deducted, the amount owed by him would still exceed $420,000; he has indicated he is incapable of paying that amount.

Jingzhou Tao: Jingzhou Tao was a partner in Coudert’s Beijing office and one of three partners not included in the Orrick Transaction. The allegations against Jingzhou Tao are that he (i) retained a company automobile valued in excess of $10,000; (ii) remained in his house, which was leased to Coudert, for several months after he withdrew from the Firm (the landlord for the premises has filed a claim in the Debtor’s case for unpaid rent in the amount of approximately $82,000); (iii) instructed clients not to pay outstanding receivables due Coudert (the amount of those receivables exceeds $2 million); and (iv) interfered with Coudert’s ability to transfer timely its license to practice law in China (according to the Debtor, this delay may have reduced the consideration received from Orrick by as much as $750,000). In a telephone interview Jingzhou Tao denied the material allegations against him. He said that while he remains in possession of the automobile, he has not used it because he does not have the required documentation. He admitted to remaining at the leased premises without paying rent until at least April, 2006. However, he stated that he never instructed any clients not to pay Coudert and did not interfere with Coudert’s ability to transfer the license to Orrick. He did say it was his belief that the license could not be transferred, but that he never tried to derail the process.

68 The insurance coverage might also be available to the Retired Partners Trust if it is ultimately determined that the Retired Partners Trust has claims against the Management Partners that are independent of the Debtor’s Estate.

Lance Miller, Oliver Wright and Dan Marjanovic: Lance Miller was the Office Managing Partner and Oliver Wright and Dan Marjanovic were contract partners in Coudert’s Singapore office. The allegations against these three partners are that after the Firm authorized the wind down and ceased making payments to partners, Lance Miller established a new bank account (“New Account”) into which clients were directed to deposit funds. Initially, Lance Miller, Oliver Wright, Dan Marjanovic and another local partner had signing authority on the New Account. Subsequently, Lance Miller and the other local partner withdrew their signing authority over the New Account, leaving Oliver Wright and Dan Marjanovic with sole control over it. Thereafter, Oliver Wright and Dan Marjanovic resigned from the firm, asserting that Coudert owed them past due compensation. Although they resigned from the Firm, Oliver Wright and Dan Marjanovic maintained control over the New Account, allegedly to protect their interests and to protect the interests of unpaid Singapore creditors, including Singapore taxing authorities. After his resignation, Oliver Wright transferred approximately $425,000 from the New Account into an account owned and maintained by him (the “Wright Account”). Coudert does not have access to the Wright Account. In addition, the New Account remains frozen by Standard Chartered Bank because of a dispute respecting the ownership of the funds in the New Account; Coudert has no access to the approximately $457,000 that remains in the New Account. The aggregate amount of funds currently under the control of Oliver Wright and Dan Marjanovic approximates $882,000.69

Michael Magotsch, Martin Heinsius and Rainer Jacob: Michael Magotsch was the Managing Partner in Coudert’s Frankfurt, Germany office, which was closed prior to the wind down of the Firm. Martin Heinsius and Rainer Jacob were partners in the Frankfurt office. Michael Magotsch helped Coudert wind down the German offices. Michael Magotsch allegedly took certain contingency fee receipts and paid local creditors without obtaining authorization from the SSC. Coudert has asserted that Michael Magotsch has failed to account for approximately EUR150,000 of contingency fee receipts. In addition, Michael Magotsch, for his benefit and for the benefit of Martin Heinsius and Rainer Jacob, allegedly purchased personally from Coudert the Frankfurt office furniture for EUR15,000 and then sold the same office furniture to DLA Piper Rudnick Gray Cary UK LLP (the firm they joined after withdrawing from Coudert) for EUR150,000. The Examiner, who discussed these allegations with counsel for Michael Magotsch,70 believes a fraudulent transfer claim may exist as to the furniture transaction.

William Sullivan: William Sullivan was a partner in Coudert’s Jakarta office. The allegations against William Sullivan are, among other things, that prior to 2005 he

69 The Debtor commenced an adversary proceeding against Oliver Wright and Dan Marjanovic in the Bankruptcy Court, seeking the turnover of the funds held in the New Account and the Wright Account. During the pendency of the Part B Investigation, the Debtor engaged in settlement discussions with Oliver Wright and Dan Marjanovic respecting the turnover of the funds. These negotiations appear to be on-going. Given these settlement discussions and at the request of the Debtor, the Examiner did not contact Lance Miller, Oliver Wright or Dan Marjanovic respecting these potential claims. 70 The Examiner first discovered the possible involvement of Martin Heinsius and Rainer Jacob in February, 2008 after a draft of this Report was circulated to the Debtor and the Committee. Given that the Examiner is recommending that Individual Partner Claims be pursued by the Debtor (or another Estate fiduciary) at a later date, he determined that it was not necessary or cost-effective for him to contact Martin Heinsius or Rainer Jacob for the purposes of this Report.

provided legal services to certain clients on an individual basis and collected the fees personally; they were not paid to Coudert. In addition, William Sullivan allegedly negotiated a rent reduction with his landlord in Jakarta, with the resulting rent less than the housing allowance provided by Coudert. The Examiner sent William Sullivan an e- mail, requesting that he contact the Examiner to discuss these allegations; he did not respond to that request. The amount Coudert claims William Sullivan owes is $57,049. Adjustments

To incentivize partners to join in the settlement proposed in the PCP and pay their share of the settlement amount, the Examiner believes further adjustments are warranted.71 Given the totality of the circumstances, the Examiner applied two adjustments to the gross settlement amount of Partner Claims (excluding Recourse Claims). First, as noted, were the Contract Claims to be litigated successfully against the former partners, prejudgment interest could be sought and obtained by the Debtor’s Estate. However, since the Examiner is proposing a settlement that does not entail litigation, he believes it appropriate to forego the prejudgment interest component of the Contract Claims in exchange for a prompt payment of Partner Claims. This compromise respecting prejudgment interest provides a discount on Partner Claims of $2,042,002 as of this date.

Second, additional factors that play a role in most settlement discussions concern collectibility, time and the cost of litigation. Given the significant and complex claims involved here and the potential for costly and time-consuming litigation if such claims are not settled, the Examiner considered collectibility, time and cost issues and applied a further 10% discount to the Partner Claims (excluding Recourse Claims), beyond the discount for prejudgment interest. This discount results in a further reduction of Partner Claims (excluding Recourse Claims) of $1,206,820.

71 To the extent a partner disagrees with the Examiner’s risk assessment of a claim against a partner or a defense of a partner, the proposed adjustments should ameliorate such a contention and, along with the recourse protection afforded by the Section 105 injunction, provide a further incentive for partners to participate in the PCP.

Conclusion

The Examiner concludes that, as set forth in Appendix 1 hereto, a fair and equitable settlement of Partner Claims totals in the aggregate $11,761,383.72 The Examiner recommends that the PCP be incorporated into a plan of liquidation proposed by the Debtor.

Dated: New York, New York March 27, 2008 ______HARRISON J. GOLDIN, Examiner

72 The Examiner has identified over $4.6 million of potential Individual Partner Claims that are not included in the PCP. As discussed in section III.D.2, above, for the partners involved to receive releases as to these claims, each affected partner will need to negotiate a resolution of such claims with the Debtor or other Estate fiduciary.

350 Fifth Avenue New York, New York 10118 Tel: 212 593 2255 www.goldinassociates.com David Pauker

David Pauker is executive managing director of Goldin Associates, LLC, a restructuring advisor to underperforming companies or their creditors or lenders. He has more than 20 years of experience as a financial advisor and turnaround manager in a broad array of industries. He is a Fellow of the American College of Bankruptcy and a member of the Board of Directors of Lehman Brothers, appointed pursuant to the Lehman bankruptcy plan. He is frequently ranked among leading U.S. restructuring advisors.

David was retained as special consultant to Dewey & LeBoeuf to assist the debtor to develop and implement a settlement of claims against former partners of the firm. During the bankruptcy of Coudert Brothers, he oversaw the investigation and preparation of examiner’s reports evaluating claims against partners. He was one of the principal architects and authors of the examiner’s Proposed Partner Contribution Plan (a term he coined), which was ultimately incorporated into the Coudert bankruptcy plan. He acted as CRO and staff director to the trustee during the bankruptcy of Gaston & Snow, at the time the second largest law firm bankruptcy in U.S. history. He has advised clients in other professional services bankruptcies as well.

He was CRO of Refco, Inc., a multi-billion dollar financial services company that was one of the largest-ever U.S. bankruptcy filings and that was named among the most successful bankruptcy filings of 2006. He has acted as CRO, CEO or COO in numerous bankruptcies or restructurings, including Young Broadcasting, Vlasic Foods/Swanson Frozen Foods, Pharmacy Fund, Grand Court Lifestyles, PSINet Consulting, Monarch Capital and First Interregional Advisors.

David has advised companies, creditors, lenders, investors and others during the bankruptcies or restructurings of Airborne, Bearing Point, Boston Generating, Bruno’s, Carlton Cove, Coudert Brothers, Crystal Brands, DiLorenzo Properties, District 65 UAW Retirement Trust, Drexel Burnham Lambert, Enzymatic Therapy, First Capital Holdings, Hudson Valley Financial Services, Intermedia Communications (WorldCom), Granite Partners, International Equine, Lehman Brothers Inc., Loral Space and Communications, Magnatrax, Metromedia Fiber, National Amusements, Northwestern Corp., Point Blank, Primus Telecom, Qimonda, R.A.B. Holdings, Redding Life Care, Residential Capital, River Ranch, Rockefeller Center Properties, Salerno Plastics, SeaSpecialties, SemGroup, Student Finance Corp., Syncora, Taylor Bean & Whitaker, Thornburg Mortgage, Tribune Companies, Trump City/Penn Yards, Trump Taj Mahal, United Merchants & Manufacturers and Wood River Capital Management.

David has frequently been called on to investigate the financial affairs of troubled companies and has been appointed by the Department of Justice or the Bankruptcy Court to act as trustee, examiner and mediator in Federal bankruptcy proceedings. Before joining Goldin Associates he was a senior aide to Harrison J. Goldin, then Comptroller of The City of New York. He is a graduate of Cornell University (1981) and the Columbia University School of Law (1984).

RESUME OF DAVID M. STERN

Education 1972: B.A. Columbia College, New York 1975: J.D. Stanford Law School Employment 1975-75: Law Clerk to Hon. Ben C. Duniway, U.S. Court of Appeals for the Ninth Circuit 1976-79: Stutman, Treister & Glatt 1979-99: Stern, Neubauer, Greenwald & Pauly 2000-12: Klee, Tuchin, Bogdanoff & Stern Professional Activities Publications Note Recent Developments in Truth in Lending Association of Business Trial Class Actions and Proposed Alternatives, 27 Lawyers, President (1997-98) Stanford Law Review 101 (1974) Ninth Circuit Judicial Conference California Civil Discovery Practice (1987) (1987-91; 2011-14) California Civil Discovery Practice 3d (1998) Fellow, American College of Bankruptcy (2012) Mediation: An Old Dog with Some New Tricks, 24 LITIGATION 31 (1998) Lawdragon 500 (2012) ABI, Fraudulent Transfer Litigation: The Shape of Things to Come (2010) Law Firm Bankruptcies, 37 LITIGATION 8 (Spring 2011) Significant Cases Adelphia Communications Corp.; Barry’s Jewelers, Inc.; Brobeck Phleger & Harrison LLP; Crescent Jewelers, Inc.; Dewey & LeBoeuf LLP; Enron Corp.; Heller Ehrman LLP; Howrey LLP; IndyMac Bancorp, Inc.; Iridium Operating LLC; Jefferson County, Alabama; Lake at Las Vegas Joint Venture LLC; Mahalo Energy (USA), Inc.; National Century Financial Enterprises, Inc.; National Energy Gas & Transmission, Inc.; Pliant Corp.; Washington Group, Inc. Reported cases In re Dominguez, 51 F.3d 1502 (9th Cir. 1995); In re Dominguez, 995 F.2d 883 (9th Cir. 1993); In re Recticel Foam Corp., 859 F.2d 1000 (1st Cir. 1988); Computer Communications, Inc. v. Codex Corp., 824 F.2d 725 (9th Cir. 1987); In re Shaw, 16 B.R. 875 (Bankr. 9th Cir. 1982); Siegel v. F.D.I.C., 2011 WL 2883012 (C.D. Cal. 2011); Enron Corp. v. Citigroup, Inc., (In re Enron Creditors Recovery Corp.), 410 B.R. 374 (S.D.N.Y. 2008); In re Enron Creditors Recovery Corp., 388 B.R. 489 (S.D.N.Y. 2008); In re Enron Corp., 379 B.R. 425 (S.D.N.Y. 2007); Canada Life Assur. Co. v. Bank of America, 2006 WL 45427 (N.D. Ill. 2006); In re Jefferson County, Ala., 465 B.R. 243 (Bkcy. N.D. Ala. 2012); In re IndyMac Bancorp, Inc., 2012 WL 103748 (Bkcy. C.D. Cal. 2012); In re Balas, 449 B.R. 567 (Bkcy. C.D. Cal. 2011); In re Adelphia Comm. Corp., 368 B.R. 348 (Bankr. S.D.N.Y. 2007); In re Adelphia Comm. Corp., 365 B.R. 24 (Bankr. S.D.N.Y. 2007); In re Adelphia Comm. Corp., 330 B.R. 364 (Bankr. S.D.N.Y. 2005).

Christopher D. Sullivan

Education -- Bachelor of Arts degree from the University of Massachusetts, Amherst in 1985

Juris Doctorate from the University of California, Hastings School of Law in 1990, magna cum laude

Editor-in-Chief, Hastings Law Journal (1989-90)

Clerkships -- Clerked for the Honorable Melvin J. Brunetti of the Ninth Circuit Court of Appeals

Memberships

Executive Committee, Federal Bar Association for the Northern District of California; Mediator, Northern District of California, ADR Panel

Awards and Honors Top 100 California Lawyers, California Daily Journal Northern California Super Lawyer Order-of-the-Coif, Hastings Law School Top Ten Award, Hastings Law School

400 Capitol Mall, Suite 1450 Sacramento, CA 95814 916/329-7400 [email protected] www.ffwplaw.com

Thomas A. Willoughby is a partner in the law firm of Felderstein Fitzgerald Willoughby & Pascuzzi LLP, a Northern California boutique law firm specializing in business insolvencies.

During his 24-year legal career Tom has represented chapter 11 debtors, creditors and trustees, and has assisted many businesses in successful reorganizations. He has also represented debtors bankruptcy trustees, creditors, financial institutions and official committees in a wide variety of industries, including skilled nursing facilities, auto dealerships, restaurants, contractors, real estate developers, agriculture, and, most recently, law firms.

Over the past four years, Tom has been the lead attorney for the Official Committee of Unsecured Creditors in the Heller Ehrman LLP chapter 11 case. In 2011, Tom served as counsel to the Howrey LLP Official Committee of Unsecured Creditors through the appointment of its Chapter 11 Trustee. Tom had also previously served for over nine years as the “bankruptcy partner” member of the dissolution committee of Diepenbrock, Wulff, Plant & Hannegan, LLP (“DWPH”), one of the large Sacramento-based full service business firms, after its dissolution in 1999. Tom also recently assisted a major Sacramento firm in its dissolution, including dealing with successor business claim issues under Jewel v. Boxer.

In the Heller case, the Committee and the Debtor jointly proposed a liquidation plan that included a shareholder contribution plan, which, along with other litigation recoveries, has resulted in a 38.5% distribution to the general unsecured creditors, after paying all priority claims. The distributions to unsecured creditors exceed all similar distributions to unsecured creditors in any of the other Am Law 100 law firm bankruptcy filings over the past ten years.

Tom earned his B.A. in Economics from the University of California, Los Angeles, in 1985, and received his J.D. in 1988 from the University of California, Davis. While at U.C. Davis, Tom received American Jurisprudence Awards in Federal Tax I and in Law & Economics. He also served as an Associate Editor of the U.C. Davis Law Review.

Tom is a member of the National Association of Bankruptcy Trustees, and the Bankruptcy Dispute Resolution Panel for the United States Bankruptcy Court for the Eastern District of California. Tom has served on the Debtor/Creditor Committee of the State Bar of California’s Business Law Section and the Board of Directors of the Sacramento Valley Bankruptcy Forum. He has also served on the Attorney Advisory Committee to the United States Bankruptcy Court Clerk’s Office for the Eastern District of California, and the Chapter 11 Liaison Committee to the Office of the U.S. Trustee.