Profit on unfinished business isn’t property belonging to a defunct law firm, New York’s highest court has ruled answering a question submitted to it by the 2nd U.S. Circuit Court of Appeals.
The New York Court of Appeals reached the same result as a federal district judge in San Francisco, who decided last month that a lawyer who leaves a failed firm can retain the hourly fees earned at the new firm in completing unfinished business. Both decisions together give comfort to the legal community, which has been roiled for 30 years by an obscure California decision.
That 1984 intermediate appellate court ruling, called Jewel v. Boxer, said that profit earned after dissolution belongs to the “old” firm, not to a newly formed firm that completed the work. As the San Francisco judge said, the Jewel doctrine had been uncritically accepted as gospel ever since.
In New York, the issue surfaced in the bankruptcies of Thelen LLP and Coudert Brothers LLP. Two different federal district judges in New York reached opposite conclusions, one following Jewel and one not. Appeals were taken in both cases.
In November, the 2nd Circuit handed down a 27-page opinion kicking the underlying legal issue to the New York Court of Appeals because it’s a question of state law.
The New York state court gave its answer this week in an 18-page opinion, saying that unfinished business isn’t “property” of the bankruptcy firm that a trustee can recover. The Thelen and Coudert cases will now return to the 2nd Circuit, which could order dismissal of lawsuits where trustees for the bankrupt firms were trying to recover profits from completing unfinished business.
The New York state court said there is “strong public policy encouraging client choice and, concomitantly, attorney mobility.” To say otherwise “ignores common sense and marketplace realities,” the court said. There would be “numerous perverse effects” if lawyers couldn’t easily take unfinished business with them when they change firms, according to the opinion.
The New York court said that state partnership law doesn’t define what’s property and what’s not; instead, the law only describes how to divide property when a firm liquidates. The uniform partnership law “has nothing to say” about whether client matters are partnership property.
Unfinished business isn’t property because future legal fees “are too contingent in nature and speculative” to create a property interest, given that clients have an “unqualified right” to fire a lawyer at any time.
If Jewel were good law, the state appeals court said lawyers might have difficulty finding new homes when their firms fail and clients might worry that their cases won’t get “as much attention as they deserve” if the lawyer must give up profit on unfinished business.
The July 1 opinion also means that lawyers from Dewey & LeBoeuf LLP, also in bankruptcy, won’t be obliged to disgorge profits on unfinished hourly business. However, many former Dewey lawyers already settled to avoid litigation.
The Thelen and Coudert cases in the New York state court are Geron v. Seyfarth Shaw LLP (In re Thelen LLP), and Development Specialists Inc. v. K&L Gates LLP (In re Coudert Brothers LLP, nos. 136 and 137, New York State Court of Appeals (Albany).
The Thelen appeal in federal court is Geron v. Seyfath Shaw LLP (In re Thelen LLP), 12-4138, U.S. Court of Appeals for the Second Circuit (Manhattan), and the Coudert appeal in federal court is Development Specialists Inc. v. DeFoestraets (In re Coudert Brothers LLP), 12-4916, in the same court.