California firm Heller Ehrman LLP went bankrupt a decade ago, and it’s taken that long for some of the financial repercussions to be ironed out. A major one was whether a defunct firm has any right to claw back money made from unfinished legal work that departed partners take with them to their new employers.
The California Supreme Court ruled this week that failed law firms are not entitled to fees earned on legal matters that are in progress – but not completed – at the time the firm closes its doors.
“Any expectation the law firm had in continuing the legal matters cannot be deemed sufficiently strong to constitute a property interest allowing it to have an ownership stake in fees earned by its former partners, now situated at new firms, working on what was formerly the dissolved firm’s cases,” wrote Justice Mariano-Florentino Cueller for the court.
The decision, which was unanimous, has been eagerly awaited by California law firms, especially those who had hired partners from bankrupt firms. Heller’s estate brought suit against 49 law firms to recover millions of dollars it said were owed from legal work that the firm’s former partners had taken with them to their next legal workplace. But this ruling appears to let the law firms off the hook.
About a dozen law firms already had settled the claims against them, including Greenberg Traurig, which in April 2013 agreed to pay $4.9 million to the Heller creditors.
Heller Ehrman, based in San Francisco, was a global law firm with more than 700 lawyers in the United States, Asia and Europe. But the firm, founded in 1890, encountered financial problems at the time the economy started becoming unmoored in 2007. Some of its partners left, and it was unable to find a merger partner. So the firm announced it was closing its doors in 2008, and dozens of its former lawyers joined other firms.
In 2010, Heller’s bankruptcy administrator filed suit to claw back earnings from the former firm members. The trustee’s case had a major setback in 2014 when a federal district judge in California ruled that a defunct firm does not have a financial stake in ongoing legal matters.
The bankruptcy trustee appealed the decision in favor of Jones Day; Orrick, Herrington & Sutcliffe; Davis, Wight Tremaine; and Foley & Lardner. But the Ninth U.S. Circuit Court of Appeals said it was a question for the California Supreme Court.
The case attracted a flurry of legal briefs, including from the American Bar Association, the bar associations in San Francisco and Los Angeles – along with more than 30 law firms – many of whom took a stand against forcing existing law firms to pay for unfinished work from a defunct firm.
During a hearing last December, Heller bankruptcy lawyer Christopher Sullivan argued that the issue turned on California partnership laws which provide that partners have a fiduciary duty to work on a case even after their firm shuts down.
The state’s top court appeared to agree with law firm challengers who argued that Heller had no financial stake in the legal matters that partners took with them after the firm wound down.
“Why should Heller be paid for work it didn’t do?” asked Cuellar during the courtroom arguments.
That review was reflected in the ruling, which concluded that, “A mere possibility of unearned, prospective fees cannot constitute a property interest.”
The ruling “deals a death blow to claims by bankruptcy trustees that dissolved law firms are entitled to feed indefinitely off of hourly earnings of the law firms that their former clients choose to complete their cases,” said Steve Hirsch, of the law firm, Keker, Van Nest & Peters, who represented Davis Wright Tremaine.
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