An Unworkable Result: Examining the Application of the Unfinished Business Doctrine to Law Firm Bankruptcies
| Publication year | 2015 |
An Unworkable Result: Examining the Application of the Unfinished Business Doctrine to Law Firm Bankruptcies
John W. Edson
The disastrous effect of the 2008 global financial crisis on the American legal industry is still evident. Some of America's largest, most prestigious law firms, firms thought to be insulated from such a crisis, succumbed to the economic aftershocks. As failed firms and their creditors attempt to pick up the pieces, jurisdictions across America have grappled with determining who owns the right to revenue from client business that was still pending at the time of bankruptcy.
When a law firm dissolves, the legal issues underlying unfinished client business do not cease to exist—nor does a former partner's desire to continue practicing law. Unfinished business claims are the result of the partners of a bankrupt firm finding new employment and taking their old clients with them. Arguing that fees derived from work started at the bankrupt firm is property of that firm's bankruptcy estate, trustees bring unfinished business claims to recover this revenue. In many cases, the trustees have succeeded.
Recent debate has centered on whether pending hourly fee arrangements should be included in the bankruptcy estate. The underlying basis for these unfinished business claims is based on antiquated law that does not apply to the modern legal industry. This Comment will demonstrate that extending unfinished business claims to hourly fee arrangements not only violates public policy but also creates unworkable results in a bankruptcy setting.
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The 2007 merger of Dewey Ballantine and LeBoeuf, Lamb, Greene & MacRae, two esteemed New York firms with roots running back nearly a century, instantly created a global force in the legal industry.1 At its peak, Dewey and LeBoeuf ("Dewey") employed nearly 1400 attorneys in twenty-six offices.2 Despite Dewey's penchant for high-profile transactions and its "enviable roster of corporate clients,"3 the firm was not immune to the economic aftershocks of the 2008 financial crisis.4 In 2012, in what the New York Times called "the largest law-firm collapse in United States history," Dewey filed for chapter 11 bankruptcy.5
While the factors leading to Dewey's collapse may involve more than a stagnant economy,6 the firm's fate underscores changing dynamics in the legal industry.7 In the years following the financial crisis, some of America's largest and most prestigious law firms have struggled to stay afloat as they attempt to navigate a changing industry in a slowly recovering economy.8
So, what happens when a firm like Dewey fails? For one, partners of the failed firm need to find a landing spot. Competing firms are more than happy
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to welcome talented attorneys, and their books of business, with open arms.9 In a growing source of litigation, trustees of bankrupt firms want to ensure that the displaced partners are not taking more than they should to their new firms.10
Unfinished business claims provide for "post-dissolution profits arising from the work of former partners at new firms on matters that began at the dissolved firm to be deemed property of the old firm's estate and to be available to pay creditors of the old firm."11 In plainer terms, trustees argue that any post-dissolution work derived from client business started at the bankrupt firm is property of the bankrupt firm's estate.12 The underlying rationale for unfinished business claims has roots in state partnership laws, which provide that partners of a dissolved firm have a fiduciary duty to wind-up any pending business.13
Unfinished business claims have played a role in nearly every major law firm bankruptcy in the past ten years.14 As major law firm bankruptcies become more prevalent, scholarly debate has centered on whether unfinished business qualifies as property of the estate.15 In June and July of 2014, two separate decisions, In re Thelen LLP in New York and Heller Ehrman LLP v. Davis, Wright, Tremaine, LLP in the Northern District of California, held that client cases pending at the time of bankruptcy are not property of the bankrupt law firm's estate.16 Though many in the legal community felt that these
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decisions would put an end to unfinished business claims nationwide,17 the current state of unfinished business claims is unresolved.18
A clear and uniform understanding of how the law views unfinished business claims is imperative for firms as legal industry consultants predict that more large law firms will fail in the coming years.19 Thus, the purpose of this Comment is two-fold. First, this Comment will demonstrate that despite recent judicial decisions, unfinished business claims still pose a threat to firms and their partners. Second, this Comment will rebut the extension of the unfinished business doctrine to hourly fee arrangements.
This Comment will begin by discussing the history of unfinished business claims while also providing context on how these claims relate to state partnership and federal bankruptcy law. Next, this Comment will analyze the statutory and public policy concerns unfinished business claims create. Finally, this Comment will provide practical solutions for law firms operating in jurisdictions where the law of unfinished business claims remains unresolved.
The prevalence of unfinished business claims is a product of changes in the nature of the American legal industry.20 Historically, it was uncommon for an attorney to make numerous lateral movements during the course of his or her career.21 This type of mobility is now assumed.22 Market volatility resulting in an increased number of law firm break-ups has only contributed to this trend.23 While lateral hiring is not a new phenomenon, its role in the long-term
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business strategies of large law firms has changed.24 Attracting key talent is important for firms as is attracting the talent's clients.25 The break-up of a large firm creates an immediate opportunity for other firms to grow by hiring the failed firm's former partners, and thus, acquiring the partner's business.26 This is the scenario that leads to unfinished business claims.27
The factors underlying unfinished business claims balance the attorney-client relationship against a partner's fiduciary duty to the partner's old firm.28 Placing these claims in the context of bankruptcy creates an extra layer of complexity because the rights of the failed firm's creditors also come into play.29 This section will provide an overview of how courts have addressed unfinished business claims. First, this section will discuss the state partnership law concepts that serve as the foundation for unfinished business claims. Next, this section will highlight the intersection of partnership law and bankruptcy law, as well as the development of bankruptcy law's role in deciding unfinished business claim cases.
A. Jewel v. Boxer—The Birth of the Unfinished Business Doctrine
Often referred to as "the seminal unfinished business doctrine case dealing with law firms," Jewel v. Boxer serves as the foundation for modern unfinished business claims.30 In 1977, the four-partner law firm of Jewel, Boxer & Elkind ("JBE") voted to dissolve.31 The four former partners paired off to create two new firms, one named Jewel & Leary, the other Boxer & Elkind.32 At the time of JBE's dissolution, the firm was handling a number of active cases.33 JBE's partners, hoping that their existing clients would follow them to their new firms, sent letters to their book of clients.34 The letters announced JBE's dissolution, served as notice of the creation of the two new firms, and provided
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each client with a substitution of attorney form.35 Many of JBE's former clients followed the partners to their new firms where the partners provided legal services under fee arrangements established at JBE.36
More than five years later, Jewel & Leary filed a complaint against Boxer & Elkind for "an accounting of [the fees from unfinished cases], contending they were assets of the dissolved partnership."37 Characterizing the fees as property of the dissolved partnership, Jewel & Leary argued that it was entitled to some of the profits derived from the JBE cases that the partners at Boxer & Elkind continued at their new firm.38 In a nonjury trial, the lower court allocated the disputed fees to the former partners on a quantum meruit basis, guided by the following three factors: (1) the time each firm spent handling the cases, (2) the source of each case, and (3) the result of any contingency cases.39 Not satisfied with the results of the quantum meruit approach, Jewel & Leary appealed the lower court's decision.40
While the First Circuit expressed its "admiration for the laudable efforts of the learned trial judge who masterfully developed a formula geared to achieving a just and equitable result for each party," it ultimately reversed the decision.41 As JBE lacked both a partnership agreement and an allocation of fees agreement, the court indicated that state partnership law, the Uniform Partnership Act ("UPA"), should be used to resolve the dispute.42 The court threw out the quantum meruit calculations, holding that UPA required that the profits from the unfinished business be returned to the partnership and distributed according to each partner's equity interest.43 The court relied heavily on a UPA provision that bars partners from receiving extra compensation for "services rendered in completing unfinished business."44 This provision is sometimes referred to as the "No Compensation Rule."45
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B. The No Compensation Rule
Understanding how the Jewel court arrived at its decision requires an examination of the No Compensation Rule.46 In fact, unpacking the No Compensation Rule is critical, as the rule serves as the...
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