► In This Issue:

• New York Law’s Application of the “Unfinished-Business” Doctrine in the Thelen Liquidation
• Law Firm Bankruptcies: Partners May Run, but They Can’t Hide
• My Firm Folded and My Capital is Gone; What Next?: Disgorging Partner Compensation in Dewey and Thelen
• Is the Unfinished-Business Rule Finished? Recent Decisions Could Close the Book on Hourly Matters
• Application of Jewel v. Boxer Rejected in Big Firm Bankruptcies

Note from the Newsletter Editor:

The topic for this edition of the Bankruptcy Litigation Committee Newsletter is law firm bankruptcies. This newsletter surveys recent decisions about the unfinished business rule, discusses potential claims against partners of the firm, and explores suits to disgorge compensation. Additionally, the committee will be hosting a committee call where the authors of each article will be available to discuss their respective articles, and the research involved in the writing of their piece. Your invitation will be hitting your inbox soon!

Ferve Ozturk
Newsletter Editor

New York Law’s Application of the “Unfinished-Business” Doctrine in the Thelen Liquidation

Yann Geron Fox Rothschild, LLP New York

The New York State Court of Appeals’ decision in Geron v. Seyfarth Shaw LLP reflects the New York courts’ evolving view of the mobility of partners and their clients in large firms. In this decision, the court of appeals held that under New York law, pending hourly fee matters are not “property” or “unfinished business” of a dissolved law firm partnership. The court essentially nullified the so-called unfinished-business doctrine for partners practicing under New York law, starkly contrasting with a number of decisions in California and other jurisdictions. The events leading to this notable New York decision are worthy of review, as are its ramifications.   Read More

Law Firm Bankruptcies: Partners May Run, but They Can’t Hide

Jeffrey C. Toole Buckley King LPA Cleveland

Over the last 30 years, dozens of notable U.S. law firms have dissolved or gone bankrupt. Although many of those firms were relatively small, others were among our country’s largest and most venerated.

A law firm’s demise is often years in the making. But once circumstances become dire, a law firm’s collapse can happen swiftly. Sensing the end, equity partners, contract partners and laterals may leave individually or in groups, taking the most profitable business with them and accelerating a teetering firm’s death spiral. If the firm ends up in bankruptcy, though, departed partners, retired partners, lateral hires and others may learn, to their chagrin, that they have not escaped unscathed.  Read More

My Firm Folded and My Capital is Gone; What Next?: Disgorging Partner Compensation in Dewey and Thelen

Evan Hollander Arnold & Porter LLP New York

Jonathan W. Hughes Arnold & Porter LLP San Francisco

Dana Yankowitz Elliott Arnold & Porter LLP Washington, D.C.

The collapse of a business is traumatic for any owner-operator.  They worry about their employees, damage to their reputations, and may well face an uncertain financial future.  If the business was operated as a corporation, the failure of the company may have a devastating impact on the owner-operator, but she will not likely be compelled to repay compensation she received as an officer of the company prior to the filing.  The same is not true for members of a partnership.  Depending upon the jurisdiction of their firm’s formation and the provisions of their partnership agreements, even those partners who have generated revenues far in excess of their earnings may find themselves obligated to repay all compensation that they received months, or even years, prior to their firm’s failure.

Two recent bankruptcy cases out of the Southern District of New York shine a light on the harsh realities that partners face when their firms fail.  The Dewey & LeBoeuf LLP case involved the failure of a New York limited liability partnership.  In that case, the court applied unique features of New York insolvency and debtor-creditor law to recover all of the distributions made to the defendant former partners for more than three years prior to the filing.  In contrast, the Thelen LLP case involved the failure of a California limited liability partnership.  There, the court applied a contractual analysis of the partnership agreement to recover all distributions made to defendant-former partners in excess of the firm’s net income during its last year of operation.  While both decisions were unwelcome news for law firm partners, the Dewey decision and its grounding in uniquely harsh New York state law exposes partners to much greater risks than the Thelen decision.

The Dewey Opinion
In May 2012, Dewey filed for chapter 11 protection in the United States Bankruptcy Court for the Southern District of New York (Judge Martin Glenn).   Read More

Is the Unfinished-Business Rule Finished? Recent Decisions Could Close the Book on Hourly Matters

Paul R. Hage Jaffe Raitt Heuer & Weiss PC Southfield, Mich.

Patrick R. Mohan Reorg Research Inc. New York

Editor's Note: Reprinted with permission from the ABI Journal, Vol. XXXIII, No. 9, September 2014.

Partnership law and bankruptcy law are not strangers. Perhaps no greater proof can be found than in the recent battle over the unfinished-business claims of dissolved law firms, which pit a law firm’s bankruptcy estate against the lawyers that often served as the firm’s lifeblood prior to their bankruptcy filing.

Recent decisions in the cases of defunct law firms Coudert Brothers, Thelen and Heller Ehrman may serve as the fatal blow for the so-called “unfinished-business rule,” generally asserted by trustees for the firms, who argue that pending hourly matters and the profits generated by those matters are partnership property that belongs to the estate. At the very least, these decisions suggest that courts are beginning to focus more on the equities surrounding a lawyer’s ability to provide services following a law firm’s dissolution and the public policy behind unfinished-business claims.

How Did We Get Here?
The unfinished-business rule is rooted in the basic concepts of partnership law. Under the Uniform Partnership Act of 1997 (UPA) and similar state statutes, a partnership is “an association of two or more persons to carry on as co-owners [of] a business for profit.” Joint ownership of the business and the sharing of profits and losses are key indicia of a partnership.   Read More

Application of Jewel v. Boxer Rejected in Big Firm Bankruptcies

Matthew C. Heyn California Department of Justice Los Angeles

The dissolution of a law firm can be a financial catastrophe for its partners. In a typical law firm dissolution, the partners lose any bonuses, end-of-year draws, and thousands or hundreds of thousands of dollars in capital. Adding insult to injury, if the firm’s creditors force it into bankruptcy, which often happens following law firm dissolutions, the partners can expect to be the targets of litigation.

In the major law firm bankruptcies, there are two types of claims usually alleged. The first are “clawback” lawsuits. These lawsuits assert that the former partners must return all or a substantial portion of their draws and other compensation because, allegedly, the bankrupt law firm was insolvent or inadequately capitalized when it paid the distributions to the partners.  Read More