In re: Thelen LLP

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The Court of Appeals answers two certified questions that arose in two separate law firm bankruptcy cases, where the firms dissolved their partnerships. In Thelen, the partners included an “Unfinished Business Waiver” or “Jewel Waiver” in their partnership agreement. This waiver arose from Jewel v. Boxer, 156 Cal. App. 3d 171 (Cal. Ct. App. 1984) which held that absent an agreement to the contrary, profits derived from a law firm’s unfinished business are owed to the former partners in proportion to their partnership interests. Thelen’s bankruptcy estate attempted to recover the value of Thelen’s unfinished business for the benefit of the firm’s creditors. The estate argued that pending hourly matters were among a law firm’s assets.

In Coudert, the firm’s bankruptcy estate argued that the partners’ new firms were liable to Coudert for any profits derived from completing the client matters that they brought from Coudert to their new firms.

The court was asked by the District Court to answer two unresolved questions of New York law regarding the applicability and scope of the “unfinished business doctrine.”  First, is a client matter that is billed on an hourly basis the property of a law firm, such that, upon dissolution and in related bankruptcy proceedings, the law firm is entitled to the profit earned on such matters as the “unfinished business” of the firm? Second, if the first question is answered affirmatively, how does New York law define a “client matter” for purposes of the unfinished business doctrine and what proportion of the profit derived from an ongoing hourly matter may the new law firm retain?

The Court answered the first certified question in the negative and found it unnecessary to answer the second certified question.

The Court of Appeals held that law firms cannot have a property interest in future hourly legal fees because they are ‘too contingent’ in nature and too speculative to create a present or future property interest given the client’s right to hire and fire counsel. The dissolved law firm would only be entitled to the value of the case at the date of dissolution, with interest.

The Court discusses several public policy considerations for the ruling including encouraging client choice and attorney mobility. First, treating a dissolved firm’s pending hourly fee matters as partnership property would allow former partners of dissolved firms to profit from work they do not perform, at the expense of a former partner and his new firm. This creates an “unjust windfall” for the dissolved law firm. Additionally, it would encourage partners to leave their firms before dissolution, so they can keep the fees earned from client matters. Moreover, it would make it difficult for former partners to find new jobs if they must remit the profits from their work for existing clients to their old firms. Clients might also worry that their hourly fee matters are not getting enough attention if the law firm is prohibited from profiting from its work on them.  For those reasons the court held that no law firm has a property interest in future legal fees, and therefore those fees are not property under the unfinished business doctrine.

20 N.E.3d 264 (N.Y. 2014)

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