Failed Law Firms Delivered Another Blow

Failed Law Firms Delivered Another Blow 2

Dealing with failed law firms is an issue for an increasing number of bankruptcy trustees and it is also creating its own body of law. But a ruling from a federal judge in California has delivered a blow to the trustees in the Howrey LLP case.

The judge has ruled that the failed law firm has not rights to profit from unfinished legal work that went to the partners’ new firms

Bloomberg reports that Judge James Donato of the U.S. District Court in San Francisco Wednesday overturned a bankruptcy-court ruling and dismissed the trustee’s lawsuits against eight firms that took on Howrey partners. In doing so, the judge roundly rejected the so-called unfinished business doctrine that bankruptcy trustees have argued gave them authority to claw back money earned on pending legal matters for the benefit of creditors.

The question in the Howrey case, Judge Donato said, was if a client fires a law firm and hires a competitor, does the old firm have a right to profit from the new firm’s work? For Judge Donato, the answer is “yes” only if the work at issue was done under the original engagement contract.

“Those circumstances are not present here,” the judge said in a 17-page decision. “When, as here, a client discharges a firm and retains pre-existing third-party firms—indeed, competitors of the discharged firm—it has launched a new matter.”

Judge Donato also reversed the bankruptcy-court decision to let the trustee pursue lawsuits based on the legal theory of “unjust enrichment,” dismissing lawsuits against the eight firms, among them Pillsbury Winthrop Shaw Pittman LLP, Perkins Coie LLP and Jones Day.

“The trustee cannot possibly have a stronger equitable claim than the law firm defendants to the profits they earned by the sweat of their brow,” the judge said. “The law firm defendants performed the work; they deserve the pay.”

Judge Donato cited a previous federal-court ruling dismissing an unfinished business suit involving partners of the failed law firm Heller Ehrman LLP as well as a New York appellate decision rejecting similar suits involving the failed firms of Coudert Brothers LLP and Thelen LLP. The New York ruling discussed the “perverse effects” such lawsuits have given the reality of today’s evolving legal landscape.

Likewise, Judge Donato said the Howrey trustee’s conception of the unjust enrichment also leads to bad public policy, as it is no longer rare for lawyers to change firms.

“Lateraling between firms is the reality of law practice today and has been the reality for many years,” the judge said. “As the trustee candidly acknowledged at the hearing, its unjust enrichment theory threatens to impose the heavy hand of court-ordered ‘equity’ on these completely normal career moves.”

Howrey bankruptcy trustee Allan Diamond couldn’t be reached for comment. The other firms who won dismissals are Hogan Lovells US LLP, Seyfarth Shaw LLP, Neal, Gerber & Eisenberg LLP, Kasowitz, Benson, Torres & Friedman LLP, and Sheppard Mullin Richter & Hampton LLP.

Mr. Diamond began winding down the firm in 2100 after partners voted to dissolve the firm following a wave of defections. He began the process of recovering unfinished business proceeds by striking settlements with some of the dozens of law firms that hired many of Howrey’s 300-some former partners.

At its peak, the Washington, D.C., law firm employed hundreds of lawyers around the world and was known for its antitrust and litigation work.
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