On August 6, 2014, after receiving the response of the New York Court of Appeals to two certified questions, the Second Circuit issued its decision in Geron v. Seyfarth Shaw LLP (In re Thelen LLP), affirming the decision of the United States District Court for the Southern District of New York, which held that, under New York law, the "unfinished business doctrine" does not apply to a dissolving law firm's pending hourly matters, and that a partnership does not retain any property interest in such matters upon the firm's dissolution.
The partners of Thelen LLP voted to dissolve the firm on October 28, 2008. As part of the dissolution, the partners adopted an amended partnership agreement and dissolution plan. The partnership agreement provided that it was governed by California law and included an "Unfinished Business Waiver." After Thelen's dissolution, eleven partners joined Seyfarth Shaw LLP, bringing unfinished matters from Thelen with them. Ten of these eleven partners joined Seyfarth's New York office. Seyfarth billed the clients of the transferred matters for their services.
On September 18, 2009, Thelen filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code in the Southern District of New York, and Yann Geron was appointed as the chapter 7 trustee of Thelen's bankruptcy estate. Geron sought to avoid the "Unfinished Business Waiver" as a fraudulent transfer under sections 544 and 548 of the Bankruptcy Code and California state law and recover the value of Thelen's unfinished business for the benefit of Thelen's bankruptcy estate. Geron argued that the pending hourly matters were among Thelen's assets and that Thelen's partners fraudulently transferred those assets to individual partners without consideration when they adopted the Unfinished Business Waiver on the eve of dissolution. Seyfarth moved for judgment on the pleadings, arguing that New York law applied to the issue of whether Seyfarth received any property interest of Thelen and that, under New York law, it did not.
The United States District Court for the Southern District of New York agreed that New York law governed the issue and found that, under New York law, the "unfinished business doctrine" does not apply to a dissolving law firm's pending hourly matters. Therefore, a partnership does not retain any property interest in such matters upon the firm's dissolution. Accordingly, the United States District Court for the Southern District of New York granted Seyfarth's motion for judgment on the pleadings, and then sua sponte certified its order for interlocutory appeal.
On appeal, the Second Circuit agreed that New York law governed the issue. The Second Circuit then certified two unresolved questions of New York law regarding the scope and applicability of the "unfinished business doctrine" to the New York Court of Appeals: (1) Is client matter that is billed on an hourly basis property of a law firm such that, upon dissolution, the law firm is entitled to the profit earned on such matters?; and (2) If so, how does New York law define a "client matter" for the purposes of the "unfinished business doctrine" and what proportion of the profit derived from an ongoing matter may the new law firm retain?
On July 1, 2014, the New York Court of Appeals answered the first question in the negative, holding that no law firm has a property interest in future hourly legal fees because they are too contingent in nature and speculative to create a present or future property interest. The New York Court of Appeals declined to answer the second certified question in light of its response to the first question. After receiving the response of the New York Court of Appeals, the Second Circuit affirmed the decision of the United States District Court for the Southern District of New York.
As a result of this decision, partners from failed law firms, and the firms that they later join, can rest assured that a bankruptcy trustee cannot later recover the fees that the new firm billed on the matters that a partner brought from his or her failed firm. Unfortunately for the trustees administering the bankruptcy estates of failed law firms, this decision effectively forecloses their ability to pursue valuable avoidance actions to recover fees from matters taken from the failed firms.
The partners of Thelen LLP voted to dissolve the firm on October 28, 2008. As part of the dissolution, the partners adopted an amended partnership agreement and dissolution plan. The partnership agreement provided that it was governed by California law and included an "Unfinished Business Waiver." After Thelen's dissolution, eleven partners joined Seyfarth Shaw LLP, bringing unfinished matters from Thelen with them. Ten of these eleven partners joined Seyfarth's New York office. Seyfarth billed the clients of the transferred matters for their services.
On September 18, 2009, Thelen filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code in the Southern District of New York, and Yann Geron was appointed as the chapter 7 trustee of Thelen's bankruptcy estate. Geron sought to avoid the "Unfinished Business Waiver" as a fraudulent transfer under sections 544 and 548 of the Bankruptcy Code and California state law and recover the value of Thelen's unfinished business for the benefit of Thelen's bankruptcy estate. Geron argued that the pending hourly matters were among Thelen's assets and that Thelen's partners fraudulently transferred those assets to individual partners without consideration when they adopted the Unfinished Business Waiver on the eve of dissolution. Seyfarth moved for judgment on the pleadings, arguing that New York law applied to the issue of whether Seyfarth received any property interest of Thelen and that, under New York law, it did not.
The United States District Court for the Southern District of New York agreed that New York law governed the issue and found that, under New York law, the "unfinished business doctrine" does not apply to a dissolving law firm's pending hourly matters. Therefore, a partnership does not retain any property interest in such matters upon the firm's dissolution. Accordingly, the United States District Court for the Southern District of New York granted Seyfarth's motion for judgment on the pleadings, and then sua sponte certified its order for interlocutory appeal.
On appeal, the Second Circuit agreed that New York law governed the issue. The Second Circuit then certified two unresolved questions of New York law regarding the scope and applicability of the "unfinished business doctrine" to the New York Court of Appeals: (1) Is client matter that is billed on an hourly basis property of a law firm such that, upon dissolution, the law firm is entitled to the profit earned on such matters?; and (2) If so, how does New York law define a "client matter" for the purposes of the "unfinished business doctrine" and what proportion of the profit derived from an ongoing matter may the new law firm retain?
On July 1, 2014, the New York Court of Appeals answered the first question in the negative, holding that no law firm has a property interest in future hourly legal fees because they are too contingent in nature and speculative to create a present or future property interest. The New York Court of Appeals declined to answer the second certified question in light of its response to the first question. After receiving the response of the New York Court of Appeals, the Second Circuit affirmed the decision of the United States District Court for the Southern District of New York.
As a result of this decision, partners from failed law firms, and the firms that they later join, can rest assured that a bankruptcy trustee cannot later recover the fees that the new firm billed on the matters that a partner brought from his or her failed firm. Unfortunately for the trustees administering the bankruptcy estates of failed law firms, this decision effectively forecloses their ability to pursue valuable avoidance actions to recover fees from matters taken from the failed firms.
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