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When law firms go bankrupt…

When a law firm throws in the towel, what happens to its lawyers? They move on, that’s what. And a lot of times, their clients and cases move right along with them to their new firms.

In the wake of a recent New York decision, those new firms may be resting a bit easier. But here in Maryland, there’s a 33-year-old reason to toss and turn.

First, the news: As Bloomberg reported, New York’s highest court has rejected the notion that a bankrupt firm has any claim on the hourly-fee matters the partners take with them, aside from payment for past services.

The bankruptcy trustees for Thelen LLP and Coudert Brothers LLP had argued that the pending matters were partnership property or “unfinished business” that belonged to the defunct firm under New York law. The cases resulted in a split that went to the 2nd U.S. Circuit Court of Appeals, which asked the New York Court of Appeals to interpret the state law.

“Pending hourly fee matters are not partnership ‘property’ or ‘unfinished business’ within the meaning of New York’s Partnership Law,” the New York Court of Appeals decided (pdf).  “A law firm does not own a client or an engagement, and is only entitled to be paid for services actually rendered.”

That tracked closely the reasoning of the American Bar Association, which filed an amicus brief in the matter. (HT: ABA Journal’s Law News Now).

Here in Maryland, however, the Court of Special Appeals expressly rejected the client’s-right-to-choose argument in a 1981 decision, Murray I. Resnick v. Solomon Kaplan et al.

“The proposition [that a client has the right to elect the attorney he prefers] is sound; but it does not mean, as appellant contends, that the fees thereafter earned by the partner chosen by the client are not subject to division in accordance with the partnership agreement. Nor does it mean that the fiduciary duty imposed upon partners to render a faithful accounting to the partnership for fees earned is diminished in the slightest.”

The court in Resnick affirmed a summary judgment ruling in favor of the partnership.

Now, 1981 was a long time ago, but Resnick v. Kaplan is still a factor in disputes over law firms’ “unfinished business” on dissolution, showing up in footnotes as recently as this year.

In writing about the New York case, Bloomberg’s Bill Rochelle noted that it gives “comfort to the legal community, which has been roiled for 30 years by an obscure California decision” from 1984, Jewel v. Boxer.

Now, Jewel not only cites Resnick but discusses it at some length, and concludes, “The decision in Resnick v. Kaplan… is closely analogous to the present case” and “The reasoning in Resnick… is sound.”

Jewel, of course, was never binding on New York courts. No decision of the New York Court of Appeals, or the 2nd Circuit, can overturn Jewel. Nor are the decisions of the New York Court of Appeals and the 2nd Circuit binding in Maryland courts or the federal courts here.

But they can be persuasive. How about it, Maryland partnership lawyers?  Are you feeling any more comfortable now?

 

2 comments

  1. That why states have their own courts! What may fly in one state, may be the complete opposite in another. Very interesting, regardless. Good news for California lawyers with bankrupt firms.

  2. Barbara Grzincic

    Thanks, B-A-L-A. With Bloomberg and other sources treating the New York opinion as the death of the “unfinished business” rule, we thought it was important to note that, as you point out, “individual results may vary.”

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