Bankrupcty Litigation

Cross-Border Bankruptcy Stay Honored Without Recognition

Sarah Franzetti

St. John’s University School of Law

American Bankruptcy Institute Law Review Staff

 

The Uncertain Future of the Unfinished Business Doctrine

By: Daniel Teplin

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, a federal district court in California issued a decision in Heller Ehrman LLP v. Davis, Wright, Tremaine, LLP[1], which is of great importance to former partners of dissolved law firms, holding that under California law, the unfinished business doctrine does not apply to hourly fee matters.[2] Therefore, the court concluded that the bankruptcy estate of a dissolved law firm did not retain a property interest in the hourly fee matters that were pending at the time the firm dissolved.[3] Heller Ehrman LLP (“Heller”) was a large global law firm before it dissolved in 2008.[4] After Heller defaulted on its revolving line of credit, the partners were unable to continue operating the firm and therefore voted to dissolve the firm.[5] Their dissolution plan included a “Jewel Waiver,” which waived unfinished-business claims for the profits generated by former Heller attorneys from any pending hourly fee matters.[6] After it filed for bankruptcy, the bankruptcy trustee sought to avoid the “Jewel Waiver” as a fraudulent transfer and recover the profits from the firm’s former members’ new firms for the pending hourly fee matters on two grounds. First, pursuant to California law, the trustee argued that the bankruptcy estate had a property interest in pending hourly matters, citing Jewel v. Boxer,[7] because the former members of the dissolved law firm violated their fiduciary duty “with respect to unfinished partnership business for personal gain.”[8] Second, the trustee asserted that two separate public policy considerations supported his claim.[9] The first consideration asserted by trustee was that “preventing extra compensation to law partnerships ‘prevents partners from competing for the most remunerative cases during the life of the partnership in anticipation that they might retain those cases should the partnership dissolve.’”[10] The idea being, that this would allow the firm to operate as one entity, and dissuade its individual members to act purely with their own interest in mind. The trustee argued that the second consideration was that holding that Heller had a property interest in the hourly matters would prevent former partners of firms from “seeking personal gain” by soliciting the firm’s former clients after its dissolution.[11] Ultimately, the court rejected the trustee’s arguments and granted summary judgment in favor of the defendant law firms and against the trustee.[12]