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CTQ-2013-00009
Court of AppealsSTATE OF NEW YORK
YANN GERON, as Chapter 7 Trustee of the Estate of Thelen LLP,
Plaintiff-Appellant,—against—
SEYFARTH SHAW LLP,Defendant-Respondent.
ON APPEAL FROM THE QUESTIONS CERTIFIED BY THE UNITED STATES COURT OFAPPEALS FOR THE SECOND CIRCUIT IN DOCKET NO. 12-4138-BK
AMICI CURIAE BRIEF IN SUPPORT OFPLAINTIFF-APPELLANT’S BRIEF ON THE
CERTIFIED QUESTIONS FROM THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT
d
ANDREW B. RYAN, ESQ.JAMES D. SHEPPARD, ESQ.MICHAEL FISHEL, ESQ.DIAMOND MCCARTHY LLP1201 Elm Street, Suite 3400Dallas, Texas 75270 Telephone: (214) 389-5300 Facsimile: (214) 389-5399
Counsel for Allan B. Diamond,Chapter 11 Trustee for Howrey LLP
CHRISTOPHER D. SULLIVAN, ESQ.GREENFIELD SULLIVAN150 California Street, Suite 220San Francisco, California 94111Telephone: (415) 283-1776Facsimile: (415) 283-1777
Special Litigation Counsel for Heller Ehrman LLP, by andthrough Michael Burkhart, Plan Administrator
ALLAN B. DIAMOND, ESQ.HOWARD D. RESSLER, ESQ.ANDREW B. RYAN, ESQ.DIAMOND MCCARTHY LLP620 Eighth Avenue, 39th FloorNew York, New York 10018Telephone: (212) 430-5400 Facsimile: (212) 430-5499
Counsel for Alan M. Jacobs,Liquidating Trustee for the Dewey & LeBoeuf Liquidation Trust
April 25, 2014
TABLE OF CONTENTS
TABLE OF AUTHORITIES .................................................................................... .ii
DISCLOSURE STATEMENT .............................................................................. viii
INTRODUCTION .................................................................................................... ix
INTERESTS OF THE AMICI CURIAE .................................................................. xii
ARGUMENT ............................................................................................................. !
I. A Defunct Law Firm's Pending Client Matters Constitute the Firm's Unfinished Business, Entitling the Defunct Law Firm to the Profits Earned from the Completion Of those Client Matters ............................................................................................................. I
A. Partnership Law, as Codified by the Uniform Partnership Act, Has Consistently Applied the Unfinished Business Rule to a Legal Matter, Whether Contingent or Hourly Fee ...................................................................... I
B. Judge Pauley Has Not Provided a Valid Reason for New York to Become An Outlier and Reject the Application of the Unfinished Business Rule To a Law Firm's Hourly Matters ........................................................................... 9
C. Uniform Application of the Unfinished Business Rule Strengthens Law Partnerships and Fairly Compensates Creditors, While a Disjointed Application of the Rule Would Lead to Absurd Results ........................................................... 1 7
II. Under the No Compensation Rule, the New Law Firm Cannot Retain Any of the Profits Derived From Completing The Old Firm's Unfinished Business ......................................................................... 22
CONCLUSION ........................................................................................................ 26
TABLE OF AUTHORITIES
Cases
Bader v. Cox, 701 S.W.2d 677 (Tex. App.-Dallas 1985, writ refd n.r.e.) ....................... 25
Beckman v. Farmer, 579 A.2d 618 (D.C. 1990) ................................................................... 5, 23-24
Collins v. Shayne, No. 78AP-50, 1978 WL 217287 (Ohio App. Dec. 28, 1978) ........................ .4
Denver v. Roane, 99 U.S. 355 (1878) .................................................................................. 1, 2, 22
Development Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP (In re Coudert Brothers LLP),
480 B.R. 145 (S.D.N.Y. 2012) .............................................................. .passim
Development Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP (In re Coudert Brothers LLP), Adv. No. 08-1490 (DE# 13-1) (Banla. S.D.N.Y. Jan. 19, 2010) ............. 7, 11
Diamond v. Pillsbury Winthrop Shaw Pittman LLP (In re Howrey LLP), Adv. No. 13-3095DM, 2014 WL 507511 (Banla. N.D. Cal. Feb. 7, 2014) ................................. 14-15
Ellerby v. Spiezer,
485 N.E.2d 413 (Ill. App. 1985) ..................................................................... .4
Fox v. Abrams, 163 Cal. App. 3d 610 (1985) ......................................................................... 21
11
Frates v. Nichols, 167 So.2d 77 (Fla. App. 1964) ....................................................................... .4
Geist v. Burnstine, 19 N.Y.S.2d 76 (Sup. Ct., Queens County 1940) ..................................... 3, 23
Geron v. Robinson & Cole LLP (Jn re Thelen LLP), 476 B.R. 732 (S.D.N.Y. 2012) ...................................................... 9-10, 16, 17
Greenspan v. Orrick, Herrington & Sutcliffe LLP (In re Brobeck, Phleger & Harison LLP), 408 B.R. 318 (Banla. N.D. Cal. 2009) ............................................................ 6
Heller Ehrman LLP v. Arnold & Porter LLP (In re Heller Ehrman LLP), Adv. No. 10-3203DM, 2011 WL 1539796 (Banla. N.D. Cal. Apr. 22, 2011) .......................... 20
Heller Ehrman LLP v. Jones Day (Jn re Heller Ehrman LLP), Adv. No. 10-322 IDM, 2013 WL 951706 (Banla. N.D. Cal. Mar. 11, 2013) ...................................... 6
Huber v. Etkin,
58 A.2d 772 (Pa. Super. 2012) ...................................................................... 13
Hughes v. Aycock, 598 S.W.2d 370 (Tex. App.-Houston [14th Dist.] 1980, writ ref d n.r.e.) ............................ 25
In re Coudert Brothers LLP Law Firm Adversary Proceedings,
447 B.R. 706 (S.D.N.Y. 2011) ........................................................................ 7
In re Mondale and Johnson,
437 P.2d 636 (Mont. 1968) .............................................................................. 5
In re Thelen LLP,
736 F.3d 213 (2d Cir. 2013) ........................................................ 1, 6, 8, 19, 22
lll
Jewel v. Boxer,
156 Cal. App. 3d 171 (1984) .................................................................. passim
King v. Leighton,
100 N.Y. 386 (1885) .................................................................................. 1, 23
Kirsch v. Leventhal, 181A.D.2d222 (3d Dep't 1992) ........................................... 10-11, 12, 24-25
LaFond v. Sweeney, No. 10CA2005, 2012 WL 503655 (Colo. App. Feb. 16, 2012) ............. 13, 20
Lingle v. Norge Div. of Magic Chef, Inc., 486 U.S. 399 (1988) ...................................................................................... 17
Little v. Caldwell, 101 Cal. 553 (1894) ......................................................................................... 2
Niesig v. Team I,
76 N.Y.2d 363 (1990) .................................................................................... 16
Nixon Peabody LLP v. de Senilhes, Valsamdidis, Amsallem, Jonath, Flaicher Associes, No. 2008/10374, 2008 WL 4256476 (Sup. Ct., Monroe County Sept. 16, 2008) ................... 15
Official Comm. Of Unsecured Creditors v. Ashdale (In re Labrum & Doak, LLP),
227 B.R. 391 (Bankr. E.D. Pa. 1998) ..................................................... passim
People of State of NY. v. O'Neill,
359 U.S. 1 (1959) ............................................................................................ 2
People v. Herr,
86 N.Y.2d 638 (1995) .................................................................................... 16
lV
People v. Martynov,
No. 199/2010, 2012 WL 2899027 (Sup. Ct., Kings County Mar. 6, 2012) .......................... 16
Platt v. Henderson,
361 P.2d 73 (Or. 1961) .................................................................................... 5
Resnick v. Kaplan,
434 A.2d 582 (Md. App. 1981) ...................................................................... .4
Rhein v. Peeso,
194 A.D. 274 (1st Dep't 1920) .................................................................. 1, 23
Robinson v. Nussbaum,
11 F. Supp. 2d 1 (D.D.C. 1997) .................................................................. 6-7
Rosenfeld, Meyer & Susman v. Cohen,
146 Cal. App. 3d 200 (1983) .......................................................................... .4
Rothman v. Dolin,
20 Cal. App. 4th 755 (1993) ...................................................................... 6, 20
Santalucia v. Seabright Transp., Inc.,
232 F.3d 293 (2d Cir. 2000) .............................................................. 11, 12, 25
Shandell v. Katz,
217 A.D.2d 472 (1st Dep't 1995) .................................... 10-11, 24-25
Sheresky v. Sheresky Aronson Mayefsky & Sloan LLP, No. 150178/10, 2011 WL 7574999 (Sup. Ct., N.Y. County Sept. 13, 2011) ................... 13-16
Stem v. Warren,
227 N.Y. 538 (1920) ........................................................................................ 1
v
Timmerman v. Timmerman,
538 P.2d 1254 (Or. 1975) .............................................................................. 25
Ueland v. US.,
291F.3d993 (7th Cir. 2002) ........................................................................... 5
Weisbrod v. Ely, 767 P.2d 171 (Wyo. 1989) ............................................................................ 25
Welman v. Parker,
328 S.W.3d 451 (Mo. App. 2010) ........................................................... 11-13
Uniform Laws, New York Statutes, or Ethics Rules
N.Y. EXEC. LAW§ 165 ....................................................................................... 17-18
New York Partnership Law§ 2 ............................................................................. 1-2
New York Partnership Law Section 4(4) ...................................................... .3, 16, 17
New York Partnership Law Section 40( 6) ................................................... 22, 24, 25
New York Partnership Law Section 43(1) .......................................... .3, 9, 10, 11, 13
New York Partnership Law Section 73 .................................................. 10-11, 24-25
New York Rule of Professional Conduct 1.5 .................................................... 14, 16
New York Rule of Professional Conduct 5.6 .................................................... 14-16
Revised Uniform Partnership Act§ 404(b)(l) .......................................................... 9
Uniform Partnership Act§ 18(£) .............................................................................. 22
Uniform Partnership Act § 21 .................................................................................... 9
Uniform Partnership Act § 42 .................................................................................. 25
Vl
Other Authorities
Alan R. Bromberg & Larry E. Ribstein,
BROMBERG & RlBSTEIN ON LIMITED LIABILITY PARTNERSHIPS
ANDTHEREVISEDUNIFORMPARTNERSHIPACT § 1.01 (2008 ed.) .......... 18-19
Douglas R. Richmond, Migratory Law Partners and The Glue of Unfinished Business, 39 N. KY. L. REV. 359 (2012) ................. 11
Geoffrey C. Hazard, Jr. & W. William Hodes,
THE LAW OF LAWYERING§ 47.4 (3d ed. 2001) ............................................. 15
Larry E. Ribstein, The Death of Big Law, (2010) (University of Illinois - College
of Law) .......................................................................................................... 20
Mark H. Epstein & Brandon Wisoff, Winding Up Dissolved Law Partnerships: The No-Compensation Rule and Client Choice, 73 Cal. L. Rev. 1597 (1985) .......................................................................... 23
Mark Harris, Why More Law Firms Will Go The Way of Dewey & LeBoeuf, Forbes, (May 8, 2012) ................................................................................... 20
Michael D. DeBaecke & Victoria A. Guilfoyle, Law Firm Dissolutions:
When the Music Stops, Does Anyone Need to Account For Any Unfinished Business?, 14 DEL. L. REV. 41 (2013) .......................... 11
Steven J. Harper, The Lawyer Bubble: A Profession in Crisis (2013) .................... 19
Susan Fortney, Seeking Shelter in the Minefield of Unintended Consequences -the Traps of Limited Liability Law Firms, 54 WASH. & LEE L. REV. 717 (1997) ..................................................... 18-19
Vll
DISCLOSURE STATEMENT PURSUANT TO 22 NYCRR 500.1(0
Pursuant to Rule 500.l(f) of the Rules of Practice of the Court of Appeals,
the Amici Curiae make the following disclosure:
The Dewey & LeBoeuf LLP Liquidation Trust, the Estate of Howrey LLP
and the Heller Ehrman LLP Liquidation Trust are represented by court-appointed
trustees or plan administrators and do not have a parent corporation, subsidiary, or
corporate affiliate.
Vlll
INTRODUCTION
The Trustee Amici join the arguments of their colleague, Yann Geron, the
chapter 7 trustee of the estate of Thelen LLP ("Thelen"), but write separately to
highlight the importance of uniform application of partnership statutes to national
law firms and why uniform application of these laws benefits the legal profession.
The breakup of a law firm partnership is not a new phenomenon. What has
changed in the past decade, however, is the ripple-effects of the largest law firm
breakups and dissolutions. The dissolution of a large law firm is not a simple or
amicable separation between partners. When a law firm with hundreds of partners
and dozens of offices dissolves and enters bankruptcy, the impact is enormous.
Hundreds, if not thousands of employees lose their jobs. Retired partners see their
pensions disappear. Landlords, lenders, and trade creditors are not paid. The total
debt owed by these defunct law firms can reach hundreds of millions of dollars.
To blunt the impact of these law firm bankruptcies, the Trustee Amici have
sought to enforce the fiduciary duty to account that partners owe each other and
their partnerships under the uniform partnership statutes. This duty to account
requires the former partners to hold any profits earned from the completion of
ongoing client matters for the benefit of the dissolved partnership (the "Unfinished
Business Rule"). Until Judge Pauley's decision in the Thelen LLP bankruptcy,
three federal judges had ruled that New York would apply the Unfinished Business
IX
Rule to a law firm's hourly matters and every court in every major urban or
financial center - from California to Washington D.C. to Illinois and Pennsylvania
- had applied the Unfinished Business Rule to law firms, regardless of whether
ongoing client matters were billed on a contingent or hourly basis. This uniform
application of the Unfinished Business Rule permits the Trustee Amici to seek to
recover the profits from the bankrupt law firm's pending matters, regardless of
where the former partner or his or her successor firm was located. In the fall of
2012, Judge Pauley's decision brought chaos where there was once order by
finding that New York, the epicenter of the U.S. legal market, would not abide by
the uniform application of the Unfinished Business Rule.
The Trustee Amici argue that this Court should conclude that New York law
compels an application of the Unfinished Business Rule to a law firm's hourly
matters. In short, the Trustee Amici present three arguments. First, neither the
Law Firms nor Judge Pauley provide a sufficient reason (or, often, any reason) to
countermand the rationales ofNew York's sister states that have confirmed that the
Unfinished Business Rule applies to all of a law firm's pending matters. Second,
the uniform application of the Unfinished Business Rule strengthens law
partnerships and fairly compensates creditors while, on the other hand, the
disjointed application of the Unfinished Business Rule urged by the Law Firms
(i.e., applying the Rule only to contingent matters, or only to attorneys from
x
national law firms who do not reside in New York) would lead to absurd results.
Third, this Court must follow the plain language of New York's Partnership Law
and conclude that a partner who completes pending matters during a law firm's
winding up is not entitled to any compensation for his or her services (hereinafter,
the "No Compensation Rule"). For these reasons, as discussed fully below, the
Trustee Amici urge this Court to answer the Second Circuit's certified questions in
favor of Yann Geron, the chapter 7 trustee of the estate of Thelen LLP
Xl
INTERESTS OF THE AMICI CURIAE
The Trustee Amici are the three court-appointed trustees or plan
administrators of the largest law firm bankruptcies in U.S. history. As fiduciaries
with the responsibility to marshal all assets available to their respective estates
(including claims related to the Unfinished Business Rule), the Trustee Amici have
a significant academic and financial interest in this Court's resolution of the
certified questions. The Trustee Amici are:
• Michael Burkhart, Plan Administrator, Heller Ehrman LLP Liquidation Trust. Heller Ehrman LLP was a California-based law firm with over 600 lawyers and 670 staff when it dissolved in 2008 with at least $54 million in secured debt and $5.9 million more in unsecured claims. Mr. Burkhart was appointed the Plan Administrator of the Heller Ehrman LLP Liquidation Trust on August 9, 2010.
• Allan Diamond, Chapter 11 Trustee, Howrey LLP. Howrey LLP was a Washington, D.C.-based law firm with over 750 lawyers and 1,200 staff when it dissolved in March 2011. At its dissolution, Howrey had approximately $80 million in secured debt and $100 million more in unsecured claims. Mr. Diamond was appointed the Chapter 11 trustee of Howrey LLP on October 12, 2011.
• Alan M. Jacobs, Trustee of the Dewey & LeBoeuf LLP Liquidation Trust. Dewey & LeBoeuf LLP was a New York-based law firm with over 1,3 00 lawyers before it filed for bankruptcy in May 2012. At the time of its dissolution, Dewey had approximately $250 million in secured debt and approximately $400 million more in unsecured claims. Mr. Jacobs was appointed the Trustee of the Dewey & LeBoeuf LLP Liquidation Trust on March 22, 2013.
Xll
ARGUMENT
I. A Defunct Law Firm's Pending Client Matters Constitute the Firm's Unfinished Business, Entitling the Defunct Law Firm to the Profits Earned from the Completion of those Client Matters.
A. Partnership Law, as Codified by the Uniform Partnership Act, Has Consistently Applied the Unfinished Business Rule to a Legal Matter, Whether Contingent or Hourly Fee.
Long before uniform statutes codified the common law of partnerships, New
York courts applied the Unfinished Business Rule to the winding up of various
partnerships. See, e.g., King v. Leighton, 100 N.Y. 386, 393 (1885) (applying
unfinished business doctrine to bridge-building partnership); Stem v. Warren, 227
N.Y. 538, 540 (1920) ("In completing the [architecture partnership's] unfinished
business, not only is the surviving partner precluded from making an individual
profit at the expense of the firm, but upon him is imposed the duty of completion
of the unfinished business without personal recompense."); Rhein v. Peeso, 194
A.D. 274, 277 (1st Dep't 1920) (applying Stem to dental partnership). As the
Supreme Court of the United States and the Second Circuit have noted, there is no
reason - under the Unfinished Business Rule or general partnership law - to
distinguish between "commercial partnerships" and "partnerships between
lawyers." Denver v. Roane, 99 U.S. 355, 358-59 (1878); see also In re Thelen
LLP, 736 F.3d 213, 222 (2d Cir. 2013) ("Thelen If') ("[T]he New York Partnership
Law, which, to reiterate, sets only default rules, makes no distinction between
1
types of partnerships.") (citing NEW YORK PARTNERSHIP LAW § 2) (hereinafter
"NYPL"). Unsurprisingly, long before the enactment of uniform partnership
statutes, the common law was "well settled in regard to commercial partnerships
that the surviving partner must complete all executory contracts of the firm which
remain in force after the death of a partner, and must settle the business of the
partnership without charge against the partnership for his personal services." Little
v. Caldwell, 101 Cal. 553, 559 (1894) (citing Denver to require accounting for a
law firm's contingent fee case).
The adoption of uniform partnership statutes did nothing to change the
common law or its application to law partnerships. Indeed, the Uniform
Partnership Act of 1914 (the "UPA") was a codification of common law precedent
applicable to partnerships. The UP A's purpose - similar to other uniform laws -
was to provide an identical set of rules that would, across the many states, allow
for predictability and certainty regarding the obligations and rights of partners. See
People of State of NY. v. O'Neill, 359 U.S. 1, 10 (1959) ("The uniform laws
proposed by the National Conference of Commissioners on Uniform State Laws
and adopted by individual States have (among other benefits) increased ease of
interstate commercial relationships by providing uniformity in commercial laws ..
. . "). The New York Legislature adopted the UPA as part of the New York
2
Partnership Law in the fall of 1919. By the 1970's, nearly every state had adopted
the UPA.1
With one exception that is not at issue here,2 NYPL codifies fiduciary duties
among partners during the dissolution or wind up of the partnership and holds that
partners owe each other (and the partnership) the duty to account for "any benefit"
or "any profits" derived from the use of partnership property. See NYPL § 43(1).
Although few New York courts have applied NYPL § 43(1) to law firms, the New
York Legislature included the express legislative directive - outlined in Section
4( 4) - that the provisions of NYPL be applied and construed uniformly with the
other states that adopted the UP A. See NYPL § 4( 4) ("This chapter shall be so
interpreted and construed as to effect its general purpose to make uniform the law
of those states which enact it."). Further, New York's sister states have repeatedly
and uniformly extended the UPA's duty to account to a law firm's pending client
matters, regardless of whether the fee was contingent or hourly.
The most well-known of these decisions is Jewel v. Boxer, 156 Cal. App. 3d
171 (1984). Jewel applied the Unfinished Business Rule to cases that were
Over ten states adopted the UPA between 1915 and 1919 which included Alaska, Idaho, Illinois, Maryland, Michigan, New Jersey, New York, Pennsylvania, Tennessee, Virginia, Wisconsin, and Wyoming. By 1976, a total of 49 of the 50 states enacted statutes that followed the UPA. 2 The NYPL "made only one change in the common law" related to post-dissolution duties - that only a surviving partner can receive compensation in winding up the firm's affairs. See Geist v. Burnstine, 19 N.Y.S.2d 76, 77 (Sup. Ct., Queens County 1940) (dissolution of twoperson law partnership). See infra at p. 22.
3
completed after the dissolution of a four-lawyer firm. Id. at 174 ("In this case, we
hold that in the absence of a partnership agreement, the Uniform Partnership Act
requires that attorneys' fees received on cases in progress upon dissolution of a law
partnership are to be shared by the former partners according to their right to fees
in the former partnership, regardless of which former partner provides legal
services in the case after the dissolution."). But Jewel was not unique - in fact,
multiple courts had applied the Unfinished Business Rule to a law firm's
contingent fee matters long before Jewel. See, e.g., Frates v. Nichols, 167 So.2d
77, 80-81 (Fla. App. 1964); Collins v. Shayne, No. 78AP-50, 1978 WL 217287, at
*2 (Ohio App. Dec. 28, 1978) ("[One partner] is required to account to the
partnership for contingent fee cases handled by him, just as [the other two partners]
are required to account for partnership cases handled by them during the winding
up process."); Resnick v. Kaplan, 434 A.2d 582, 587 (Md. App. 1981); Rosenfeld,
Meyer & Susman v. Cohen, 146 Cal. App. 3d 200, 219 (1983). In the thirty years
since Jewel, UPA states have (with one exception that is discussed at length below)
held that fees obtained by contingent fee matters are assets of a dissolved (or
winding up) law firm that are subject to distribution in accordance with the
partnership statute. See, e.g., Ellerby v. Spiezer, 485 N.E.2d 413, 416 (Ill. App.
1985) (citing Jewel with approval); Official Comm. Of Unsecured Creditors v.
4
Ashdale (Jn re Labrum & Doak, LLP), 227 B.R. 391, 405-06 (Bankr. E.D. Pa.
1998) (same).
As Unfinished Business Rule cases developed, law firm defendants began to
argue that these fiduciary principles should be limited to contingent fee cases and
not applied to a law firm's hourly matters. But this argument could not be squared
either with prior case law or the underlying rationale for the Unfinished Business
Rule. As an initial matter, many UP A jurisdictions had applied the Unfinished
Business Rule to law partnerships without any distinction between (or reference to)
how the client compensated the firm-whether a flat-fee, hourly rate, or contingent
fee arrangement. See, e.g., Platt v. Henderson, 361 P.2d 73, 81-82 (Or. 1961) (fees
collected from forty cases finished by one partner must be accounted back to the
original firm); In re Mondale and Johnson, 437 P.2d 636, 640-41 (Mont. 1968)
(post-dissolution fees collected on firm matters must be split equally among
partners of dissolved firm); Beckman v. Farmer, 579 A.2d 618, 639 (D.C. 1990)
(unfinished business doctrine applied to "all work" performed by the law firm).
That these cases did not distinguish between contingent and hourly matters "does
more to show that the proposition is too clear to be questioned than to show that it
is debatable." Uelandv. US., 291F.3d993, 997 (7th Cir. 2002) (Easterbrook, J.).
And when faced with the supposed distinction between contingent and
hourly matters, numerous courts applying the UP A have confirmed that the
5
Unfinished Business Rule applies to hourly matters. See, e.g., Rothman v. Dolin,
20 Cal. App. 4th 755, 759 (1993) ("That one matter is to be compensated at an
hourly rate and another on a contingency basis is of no consequence in determining
whether a matter is unfinished business."); Greenspan v. Orrick, Herrington &
Sutcliffe LLP (Jn re Brobeck, Phleger & Harison LLP), 408 B.R. 318, 333 (Ban1cr.
N.D. Cal. 2009) (same); Heller Ehrman LLP v. Jones Day (Jn re Heller Ehrman
LLP), Adv. No. 10-3221DM, 2013 WL 951706, at *4 (Banlcr. N.D. Cal. Mar. 11,
2013) (same); Robinson v. Nussbaum, 11 F. Supp. 2d 1, 5 (D.D.C. 1997) (same,
applying D.C. law); In re Labrum & Doak, LLP, 227 B.R. at 405 (same, applying
Pennsylvania law). Indeed, UPA courts had - until Judge Pauley in Thelen I -
universally determined that the Unfinished Business Rule also applied to a law
firm's hourly matters. See, e.g., Thelen II, 736 F.3d at 222 n.10 (collecting cases).
Two of the foregoing cases are especially instructive on this point. In
Robinson, the court "seriously considered" whether it would be "unfair" to apply
the Unfinished Business Rule to hourly matters, but concluded the defendant's
concerns were unwarranted for three reasons: (1) partners "are free (indeed
encouraged)" to resolve unfinished business disputes through written partnership
agreements; (2) the unfinished business doctrine does not apply to new matters
brought into the successor firm after dissolution of the old firm; and (3) if applied
to all former partners, the unfinished business doctrine is equitable. 11 F. Supp. 2d
6
at 6. And in In re Labrum & Doak, LLP, the court - after noting that "every other
court confronted with the issue . . . has held that pending" hourly cases are
partnership assets subject to wind up and distribution - criticized the law firm
defendant's "sky is falling" argument by noting the defendant was "unable to point
to any disasters which have developed in any of the many jurisdictions [that
recognize that the unfinished business doctrine applies to hourly fee cases]." 227
B.R. at 407-09.
Based on these cases, three New York decisions have already applied the
Unfinished Business Rule to a law firm's hourly matters. See, e.g., Development
Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP (In re Coudert Brothers
LLP), Adv. No. 08-1490 (DE# 13-1) (Bankr. S.D.N.Y. Jan. 19, 2010) (Drain, J.)
("Coudert f') (denying law firms' motion to dismiss, endorsing "highly persuasive
precedents" and "well-reasoned authority from other jurisdictions applying the
same 'unfinished business' theory to hourly fee matters"); In re Coudert Brothers
LLP Law Firm Adversary Proceedings, 447 B.R. 706, 712-13 (S.D.N.Y. 2011)
(Marrero, J.) (considering law firms' motion for leave to appeal to Second Circuit,
noting "[t]he Law Firms have not cited any authority ... that conflicts with the
decision of [Judge Drain in Coudert I]. Rather, authorities in other jurisdictions
uniformly hold that the unfinished business doctrine applies to hourly fee matters
as well as contingency fee matters."); Development Specialists, Inc. v. Akin Gump
7
Strauss Hauer & Feld LLP (In re Coudert Brothers LLP), 480 B.R. 145, 173
(S.D.N.Y. 2012) (McMahon, J.) ("I believe that if faced with the issue, the New
York Court of Appeals would apply the same rule to hourly billed cases as its
Appellate Divisions apply to contingency fee cases: they are unfinished business
assets subject to distribution unless a contrary intention appears.") (hereinafter
"Coudert III"). Even the Second Circuit recognized "[a] substantial majority" of
courts apply the Unfinished Business Rule to hourly rate cases which "suggest[ s]
that the New York Court of Appeals would decline to create an exception to the
usual partnership rule for lawyers who bill their clients on an hourly basis." See
Thelen 11, 736 F.3d at 222.
Thus, the question for this Court is whether it should hold hourly rate
matters are law firm assets that are subject to a duty to account- like the courts of
California, the District of Columbia, Florida, Illinois, Indiana, Massachusetts,
Maryland, Montana, Oregon, and Pennsylvania - or whether to contradict decades
of persuasive and well-reasoned authority in order to join outliers from Missouri's
intermediate appellate court and an unpublished New York trial court decision that
form the basis of Judge Pauley's decision. For the reasons stated below, Judge
Pauley's rationale - echoed by the Law Firms - does not provide a valid basis for
New York to refuse to apply the Unfinished Business Rule to a law firm's hourly
matters.
8
B. Judge Pauley Has Not Provided a Valid Reason for New York to Become an Outlier and Reject the Application of the Unfinished Business Rule to a Law Firm's Hourly Matters.
In order to avoid acknowledging that his ruling departed from the
overwhelming majority of UP A decisions from New York's sister states, Judge
Pauley attempts to characterize the Law Firms' argument as having support in the
case law. But even a cursory review of these cases reveals four fundamental
analytical errors - errors that Judge Pauley then repeated - which require rejecting
the Law Firms' argument that the Unfinished Business Rule should not apply to a
law firm's hourly matters.
First, Judge Pauley made a fundamental error in Geron v. Robinson & Cole
LLP {In re Thelen LLP), 476 B.R. 732 (S.D.N.Y. 2012) ("Thelen I"), because he
did not analyze the correct provision of the NYPL that imposes the duty to
account. Courts examine the unfinished business doctrine by looking at the state
statute that mirrors Section 21 of the UP A or Section 404 of the Revised Uniform
Partnership Act ("RUP A"). These two provisions create the Unfinished Business
Rule by imposing upon partners a duty to account for profits derived from the
winding up of partnership business. &e UP A § 21; RUP A § 404(b )(1 ). Section
43(1) of the NYPL contains the identical provision to UPA § 21 that holds a
partner accountable, as a fiduciary, for the partnership's profits in completing the
firm's matters. But Judge Pauley's decision in Thelen I omits any reference to
9
NYPL § 43(1). Instead, Judge Pauley relied on NYPL § 73 - a statute applicable
only to the valuation of a partnership interest that is made when a partner retires or
dies. Compare NYPL § 73 (titled: "Rights of retiring or estate of deceased partner
when the business is continued") with NYPL § 43 (titled: "Partner accountable as a
fiduciary").
Judge Pauley' s invocation of NYPL § 73 is apparent by his reliance on two
New York Supreme Court decisions: Kirsch v. Leventhal, 181 A.D.2d 222 (3d
Dep't 1992) and Shandell v. Katz, 217 A.D.2d 472 (1st Dep't 1995). Although
Judge Pauley cited both cases for the proposition that New York would not apply
the Unfinished Business Rule to a law firm's hourly matters, both Kirsch and
Shandell involved contingency fee cases and said nothing about hourly matters.
Compare Thelen I, 476 B.R. at 741 with Kirsch, 181 A.D.2d at 225 (requiring
accounting for case "under a contingent fee arrangement"); Shandell, 217 A.D.2d
at 4 72 (requiring accounting for "substantial number of cases taken on
contingency").
Neither Kirsch nor Shandell analyzed the duty to account imposed under
NYPL § 43. Despite there being a voluntary partner withdrawal in both cases
(thus, triggering NYPL § 43), Kirsch and Shandell relied on NYPL § 73. See
Kirsch, 181 A.D.2d at 225 (citing NYPL § 73); Shandell, 217 A.D.2d at 472-73
(quoting NYPL § 73). That is a plain error of statutory interpretation because a
10
voluntary withdrawal or dissolution triggers a duty to account under NYPL § 43,
while a partner's death or retirement brings about a valuation under NYPL § 73.
Accordingly, neither Kirsch nor Shandell provide any substantive guidance on
whether New York should apply the Unfinished Business Rule to hourly matters.
See Santalucia v. Seabright Transp., Inc., 232 F.3d 293, 300 (2d Cir. 2000)
(explaining NYPL § 73 "is not the source of the duty of a lawyer to account to his
former partners"). 3
Second, Judge Pauley's desire to follow blindly the Law Firms' arguments is
evidenced by his reliance on a Missouri appellate court decision in Welman v.
Parker, 328 S.W.3d 451, 458 (Mo. App. 2010). But Welman is a well-known
outlier (characterized as being "deeply flawed"), and subject to criticism by legal
scholars who caution: "courts that are inclined to resist application of the
unfinished business doctrine should search for different authority for doing so."
See Douglas R. Richmond, Migratory Law Partners and the Glue of Unfinished
Business, 39 N. KY. L. REV. 359, 379-81.4 This Court should not - and cannot -
3 As discussed infra at pp. 22-25, Judge Pauley's reliance on Kirsch and Shandell also gives rise to his unjustified rejection of the No Compensation Rule. Moreover, in Coudert I, Judge Drain also recognized that "Section 73 is not the source of the duty of a lawyer to account to his former partners." See Coudert I, Modified Bench Ruling at pp. 47-48; see also id. at p. 50 ("But, of course, the unfinished business rule applies to firms in dissolution, in keeping with New York Partnership Law Section 43(1), which applies specifically to firms in liquidation."). 4 See also Michael D. DeBaecke & Victoria A. Guilfoyle, Law Firm Dissolutions: When the Music Stops, Does Anyone Need to Account For Any Unfinished Business?, 14 DEL. L. REV. 41, 47 & n.36 (2013) ("The reasoning in Welman has its critics.").
11
rely on Welman because it does not address the first certified question and directly
contradicts existing New York partnership law.
As an initial matter, Welman addressed the allocation of a contingent fee
matter, so it does nothing to counter the weight of authority applying the
Unfinished Business Rule to a law firm's hourly matters. 328 S.W.3d at 454. But
even Welman 's holding fails to comply with established New York law. Welman
held that the dissolved firm's contingency case was not a firm asset and permitted
certain partners to only a quantum meruit recovery for pre-dissolution work on that
matter. 328 S.W.3d at 456; but see Santalucia, 232 F.3d at 300-01 (holding that
"when a professional corporation of lawyers dissolves and a lawyer leaves with a
contingent fee case, ... that case remains a firm asset");5 see also Coudert III, 480
B.R. at 157 (collecting five New York cases rejecting a quantum meruit allocation
when accounting for an unfinished contingent fee case).6 Thus, Judge Pauley's
5 To further understand why Welman is criticized, the Missouri appellate court commented that its ruling - that a contingent fee matter is not a firm assert - was justified because, otherwise, the responsible partner would be obligated to compensate both firms. 328 S.W.3d at 457 (justifying result as trying to prevent withdrawing partner from having "to pay a double contingent fee"). But such a statement merely shows that Welman failed to understand that the withdrawing partner would have shared just one contingent fee - split in accordance with the former partners' rights to the fees. 6 Even a flawed case like Kirsch flatly rejected quantum meruit damages in the context of a contingent fee cause because: (1) it is inconsistent with a partner's fiduciary duty to wind up the partnership affairs; and (2) it would encourage unethical battles among partners of a law firm facing dissolution over the clients of the firm. 181 A.D.2d at 225-26 (citing Aurnou v. Greenspan, 161 A.D.2d 438 (1st Dep't 1990)); see also Santalucia, 232 F.3d at 297-98 ("The [Shandell] court flatly rejected a quantum meruit rule that a lawyer could share in contingent fees
12
reliance on a Welman is questionable at best. Unsurprisingly, courts that are
confronted with the holding in Welman have rejected its flawed analysis. See, e.g.,
LaFond v. Sweeney, No. 10CA2005, 2012 WL 503655, at **12-13 (Colo. App.
Feb. 16, 2012) (rejecting Welman for multiple reasons, including well-established
opinions that confirm "a contingent fee earned by a partner who has departed a law
firm is an asset that belongs to the law firm"), cert granted in part, No. 12SC205,
2013 WL 4008757 (Colo. Aug. 5, 2013); see also Huber v. Etkin, 58 A.2d 772,
781-82 (Pa. Super. 2012) (same).
Third, Judge Pauley did not (and could not) cite to any logical appellate court
decision that rejects the application of the Unfinished Business Rule to hourly
matters and, thus, was left with no choice but to tum to an unpublished trial court
opinion: Sheresky v. Sheresky Aronson Mayefsky & Sloan LLP, No. 150178/10,
2011 WL 7574999 (Sup. Ct., N.Y. County Sept. 13, 2011). Sheresky, however,
only included about three paragraphs of analysis on the unfinished business
doctrine and that analysis has been refuted by appellate decisions in New York's
sister states.
Like Thelen, the flaws in Sheresky begin with its failure to discuss - let alone
distinguish- NYPL § 43. Instead of analyzing the proper section of the UPA (and
collected after dissolution .... [and] concluded that the sounder rule was that pending contingent fees are firm assets .... ").
13
case law in states applying it to a law firm's hourly matters), Sheresky confined its
analysis to New York case law and determined "the unfinished business. [doctrine]
for hourly fee cases ... [has] not been recognized by the New York courts." Id. at
*6. But Sheresky 's rejection of the Unfinished Business Rule to hourly matters is
based on a misguided belief that the Unfinished Business Rule conflicts with the
ethical rules governing attorneys - specifically Rule 1.5 (prohibiting fee splitting)
and Rule 5.6 (forbidding agreements that restrict lawyer mobility). It does not.
Generally, the Trustee Amici submit that the unfinished business doctrine (duties
between partners in a partnership) and a lawyer's ethical obligations (duties owed
by an attorney to a client) are separate and distinct and do not offend each other.
Specifically, though, the fee splitting and lawyer mobility arguments advanced by
Sheresky (and adopted in Thelen J) are not well reasoned.
For example, New York Rule 1.5 on fee splitting ensures that lawyers at
different firms inform their client about the nature of a joint representation and
sharing of fees. Simply put, Rule 1.5 is about client consent - not fee sharing
between partners in accordance with their fiduciary duties. Not surprisingly, other
courts applying ethics rules similar to Rule 1.5 have concluded that remitting
profits from unfinished business does not amount to fee splitting. See, e.g.,
Diamond v. Pillsbury Winthrop Shaw Pittman LLP (In re Howrey LLP), Adv. No.
13-3095DM, 2014 WL 507511, at **7-8 (Bankr. N.D. Cal. Feb. 7, 2014) (rejecting
14
the fee-splitting argument as "unpersuasive"); In re Labrum & Doak, LLP, 227
B.R. at 413-14 (collecting cases and authority that reject fee-splitting defense to
unfinished business doctrine). 7
Likewise, Rule 5.6 prohibits a lawyer from "offering or making" a
partnership agreement that "restricts the right of a lawyer to practice after" leaving
the firm. New York courts summarize the purpose of Rule 5.6 was:
designed, in part, to protect lawyers, particularly young lawyers, from bargaining away their right to open their own offices after they end an association with a firm or other legal employer.
See Nixon Peabody LLP v. de Senilhes, Valsamdidis, Amsallem, Jonath, Flaicher
Associes, No. 2008/10374, 2008 WL 4256476, at *7 (Sup. Ct., Monroe County
Sept. 16, 2008) (citing Geoffrey C. Hazard, Jr. & W. William Hodes, THE LA w OF
LAWYERING § 47.4 (3d ed. 2001) (concluding an "out-right prohibition on the
practice of law" would violate Rule 5.6)). There is no overlap between the stated
goal of Rule 5.6 (protecting young lawyers) and the unfinished business doctrine
(duty to account to partnership). Simply put, the unfinished business doctrine does
not restrict a lawyer's right to practice. Other courts applying ethics rules
analogous to Rule 5.6 have concluded that similar arguments advanced in Thelen I
7 Additionally, the fee-sharing argument in Sheresky contradicts itself. On the one hand, Sheresky says sharing fees for post-dissolution hourly work would violate New York's ethical rules, yet it also approves an alternative option that the law firm could have divided such postdissolution hourly fees under a partnership agreement - even though such an agreement would, according to Sheresky, violate ethics rules.
15
and Sheresky are "unimpressive." See In re Labrum & Doak, LLP, 227 B.R. at 415
(rejecting application of the Model Rules of Professional Conduct 5.4 or 5.6(a) to
unfinished business case); Coudert III, 480 B.R. at 169-70 (rejecting application of
Rule 5.6(a) to unfinished business cases).
Moreover, and even assuming his interpretation of these ethics rules were
correct, in discussing both Rules 1.5 and 5.6, Judge Pauley admits that New York
ethics rules "lack the force of law." Thelen I, 476 B.R. at 740 (citing Niesig v.
Team I, 76 N.Y.2d 363, 369 (1990)).8 A plain reading of this Court's decision in
Niesig demonstrates the clear difference between a statute ("the will of the
legislature") and a disciplinary rule ("essentially the legal profession's document
of self-governance"). 76 N.Y.2d at 369. Because the New York Rules of
Professional Conduct "have a different provenance and purpose," Niesig
determined that it "does not have the force of law." Id. This Court's decision in
Niesig confirms that Judge Pauley' s reliance on the New York ethics rules cannot
override a partnership statute enacted by the New York legislature.
Fourth, Judge Pauley did not give any weight to NYPL § 4(4), a provision
where the New York Legislature required that the state's partnership law "shall be
8 See also People v. Herr, 86 N.Y.2d 638, 641-42 (1995) (citing Neisig with approval, rejecting defendant's reliance on a New York State Bar Professional Ethics opinion because "such opinions - like the [Rules of Professional Conduct] on which they are based - do not have the effect oflaw"); People v. Martynov, No. 199/2010, 2012 WL 2899027, at *3 (Sup. Ct., Kings County Mar. 6, 2012) ("The Rules of Professional Conduct, are a disciplinary rule, not a statute.").
16
so interpreted and construed as to effect its general purpose to make uniform the
law of those states which enact it." Instead, Judge Pauley claimed that the
overwhelming and consistent authority from multiple jurisdictions did "not
represent the consensus view," and instead sided with two wrongly decided cases
to justify his holding. Thelen I, 476 B.R. at 742. NYPL § 4(4) instructs this Court
to put New York on the side of uniformity, not with a cast of outliers. As Judge
McMahon found in Coudert III, NYPL § 4(4) is a "powerful reason to conclude
that the New York Court of Appeals would reach the same result [as other UP A
jurisdictions]." 480 B.R. at 164. By deciding to have New York cast its lot with a
single intermediate Missouri appellate court instead of its sister courts in over a
dozen states, Judge Pauley's decision in Thelen I eviscerates NYPL § 4(4). If
upheld, Judge Pauley's holding would have a devastating impact on the
administration of the estates of bankrupt law firms.
C. Uniform Application of the Unfinished Business Rule Strengthens Law Partnerships and Fairly Compensates Creditors, While a Disjointed Application of the Rule Would Lead to Absurd Results.
The purpose of a uniform act like the UP A is to "promote the peaceable,
consistent resolution of ... disputes." See Lingle v. Norge Div. of Magic Chef,
Inc., 486 U.S. 399, 404 (1988).9 Here, New York's joining of its sister states in the
9 See also N.Y. EXEC. LAW § 165 (establishing commission on uniform state laws "to examine various statutes and fields of law and to consult and cooperate with similar commissions
17
uniform application of the Unfinished Business Rule promotes the consistent
resolution of dispute and benefits the legal profession in three ways. First, the
universal application of the Unfinished Business Rule to a law firm's hourly
matters strengthens law partnerships, incentivizes partners to weather tough times
together, and creates a way to fairly compensate creditors whose essential
functions allow firms to operate. Second, exempting hourly matters from the
Unfinished Business Rule would result in disorderly law firm dissolutions, with
partners competing for lucrative hourly matters while abandoning contingent ones.
Third, absurd results will follow if this Court makes New York the only
commercial center in the U.S. that does not apply the Unfinished Business Rule to
a law firm's hourly matters - the Rule would apply only in some states, to some
partners, and to some matters, even though the firm's practice may be national or
international in scope.
First, uniform application of the Unfinished Business Rule is good for the
legal profession. Stated simply, modem law firms are unstable. Rather than
continuing as general partnerships where each partner is liable for the entire firm's
debt, law firms have adopted a limited liability structure that, ironically, was the
result of the 1980's savings and loan crisis that saw bank after bank fail. See Alan
R. Bromberg & Larry E. Ribstein, BROMBERG & RIBSTEIN ON LIMITED LIABILITY
in other states with a view to promoting uniform legislation throughout the United States whenever practicable").
18
PARTNERSHIPS AND THE REVISED UNIFORM PARTNERSHIP ACT, § 1.01 (2008 ed.)
(discussing the history of limited liability partnerships); see also Susan Fortney,
Seeking Shelter in the Minefield of Unintended Consequences - the Traps of
Limited Liability Law Firms, 54 WASH. & LEE L. REV. 717, 724-26 (1997). This
new limited liability structure has allowed firms to gamble with a growth strategy
that results in high overhead, but revenue that is dependent upon retaining partners
- yet, perversely, permits the partners to jump ship without concern for the firm's
liabilities. See Larry E. Ribstein, The Death of Big Law, at p. 15 (2010)
(University of Illinois College of Law) (available at:
http://works.bepress.com/ribstein/22). Law firms built by free agency further
destabilize limited liability partnerships: when the bonds of partnership are no
stronger than last year's IRS Form K-1 statement, the essential attributes of
partnership are missing. Steven J. Harper, The Lawyer Bubble: A Profession in
Crisis xiii (2013).10 "Traditional partnership principles of mutual respect and
support yield to unrestrained self-interest. Eventually, everyone loses ... [and]
firms lose the stability that comes with loyal partners and clients." Id. at 190.
Uniform application of Unfinished Business Rule blunts - but admittedly
cannot reverse - this weakening of partnership bonds. Dying law firms plunge into
10 See also Thelen II, 736 F.3d at 222 n.11 ("The portability of the partner's 'book' has weakened the bonds that hold firms together and threatens the identity of the law firm as we know it.") (citing Mark Harris, Why More Law Firms Will Go The Way of Dewey & LeBoeuf, Forbes, May 8, 2012); see also Coudert III, 480 B.R. at 159 (same).
19
dissolution and bankruptcy as partners scramble to leave the weakened firm with
"their" books of business (forgetting, perhaps, that "their" books were built with
the capital, support, and reputation of their fellow partners). If a partner
understands that his fiduciary duty to his or her dying law firm does not end by
him simply walking out the door, the partner will be incentivized to address the
underlying problems at his firm rather than flee at the first sign of trouble. The
partnership would be strengthened, orderly dissolution would be promoted, and
law firm creditors would be repaid in whole or in greater part.
Second, uniform application of the Unfinished Business Rule to both hourly
and contingent matters is beneficial to partners and their clients because all matters
would be treated equally. It is bad public policy to subject certain cases
(contingent fee matters) to the Unfinished Business Rule while exempting others
(hourly cases). Such a distinction would incentivize partners to scramble to solicit
clients or obtain hourly matters rather than contingency fee cases upon dissolution.
See, e.g., Jn re Labrum & Doak, LLP, 227 B.R. at 415 (noting unfinished business
doctrine has "discouraged former partners from scrambling to take [files] and
seeking personal gain by soliciting a firm's existing clients upon dissolution").11
ll Coudert III, 480 B.R. at 165 (discussing public policy to prevent "scrambling" of partners to obtain hourly matters rather than contingency fee cases upon dissolution) (citing Rohman v. Dolin, 20 Cal. App. 4th 755, 758 (1993)); LaFond, 2012 WL 503655, at *11 (citing "important policy reasons" to treat contingent fees as assets of firm to prevent partners of a dissolving law
firm to "scramble" to seize client files and solicit clients); Heller Ehrman LLP v. Arnold &
20
Many other courts follow this rationale expressed in Jewel that it is fair to both
lawyers and clients to prevent scrambling for work in process as the law firm
breaks up. See Fox v. Abrams, 163 Cal. App. 3d 610, 616 (1985) (citing Jewel).
Indeed, if partners of a struggling firm are considering plans for the future (or even
dissolution), exempting hourly matters will create a deep divide between attorneys
(or entire practice groups) based solely upon how the clients choose to compensate
the law firm. Likewise, treating hourly fee cases the same as contingency matters
thus prevents partners from angling to get the hourly cases rather than the
contingency cases upon dissolution. See Coudert III, 480 B.R. at 165
Third, a disjointed application of the Unfinished Business Rule would lead
to absurd results. If New York refuses to join its sister states in uniformly applying
the Unfinished Business Rule, large law firms will have some partners that are
exempt from a duty to account while others that are bound by their fiduciary duty
under the UP A. A partnership cannot effectively manage itself during a crisis
when some partners (in New York) believe that they are immune from the
Unfinished Business Rule while their fellow partners (in California, D.C., Illinois,
and elsewhere) must account back to the firm.
Porter LLP (In re Heller Ehrman LLP), Adv. No. 10-3203DM, 2011 WL 1539796, at *2 (Bankr. N.D. Cal. Apr. 22, 2011) (noting that "sound public policy" in Jewel "discourages former members of the firm from scrambling to take [files or clients]").
21
For these policy reasons - as well as the legal reasons discussed at length
above - this Court should answer the first certified question in favor of Trustee
Geron and conclude that New York applies the Unfinished Business to Rule to a
law firm's hourly matters.
II. Under the No Compensation Rule, the New Law Firm Cannot Retain Any of the Profits Derived From Completing The Old Firm's Unfinished Business.
The Trustee Amici contend that another New York statute answers the
second certified question about the proportion of profit allocated to the
withdrawing partner or the successor law firm. 12 The simple answer is that a
partner in a dissolved partnership is not entitled to any compensation for winding
up the partnership business. Over 135 years ago, the Supreme Court summarized
the common law No Compensation Rule: "[W]here partnerships are equal, as was
true in the present case, and there is no stipulation in the partnership agreement for
compensation to a surviving partner for settling up the partnership business, he is
entitled to no compensation." Denver, 99 U.S. at 358. The No Compensation Rule
was later codified in Section 18(f) of the UPA, which the New York legislature
adopted without modification in Section 40( 6) of the New York Partnership Law.
NYPL § 40(6) states:
12 Thelen IL 736 F.3d at 225 ("[W]hat proportion of the profit derived from an ongoing hourly matter may the new law firm retain?").
22
No partner is entitled to remuneration for acting in the partnership business, except that a surviving partner is entitled to reasonable compensation for his services in winding up the partnership affairs.
Consistent with the common law and NYPL § 40(6), New York courts have long
affirmed the No Compensation Rule, including its application to law firms. See
Geist, 19 N.Y.S.2d at 77 ("[I]t is clear that the only partner who is entitled to
compensation for winding up the affairs of a partnership, in the absence of a
special agreement, is a surviving partner."); King, 100 N.Y. at 393 (applying No
Compensation Rule to bridge-building partnership); Rhein, 194 A.D. at 277
(applying No Compensation Rule to dental practice); accord Coudert III, 480 B.R.
at 158 (same). Despite its seemingly harsh consequences, courts in every other
UP A jurisdiction uniformly follow the No Compensation Rule. See Mark H.
Epstein & Brandon Wisoff, Winding Up Dissolved Law Partnerships: The No-
Compensation Rule and Client Choice, 73 Cal. L. Rev. 1597, 1613 & n.93 (1985)
("[T]he majority of courts considering [partner compensation] after adoption of the
[Uniform Partnership] Act have held that compensation is unavailable regardless
of the inequalities of winding-up burdens .... "); Jewel, 156 Cal. App. at 180
(acknowledging that while the No Compensation Rule might appear unfair, it
"prevent[ s] a partner from refusing to furnish any work and imposing this
obligation totally on the other partners, thus unfairly benefitting from [the other
partners] efforts while putting forth none of his or her own"); Beckman v. Farmer,
23
579 A.2d at 640 (confirming application of No Compensation Rule under D.C. law
because it "is a creature of statute and that attempts by courts to evade it are
inappropriate" and collecting similar cases in Maryland, Florida, Texas, and
Illinois).
Notwithstanding the well-settled history of the No Compensation Rule, its
uniform application under the UP A, and its codification in New York Partnership
Law, there is one aberrant decision by an intermediate appellate court - Kirsch v.
Leventhal - that has injected needless uncertainty into the unfinished business
discussion. 13 Kirsch, however, can be dispensed with easily because it is flawed in
one obvious and incontrovertible respect: it applied the wrong part of the NYPL to
the unfinished business dispute. As a result, Kirsch cannot be reconciled with -
and must yield to NYPL § 40( 6).
Faced with how to allocate a contingent fee earned from an unfinished
business matter, the Kirsch court permitted a partner to be compensated for his
post-dissolution "effort, skill, and diligence" in completing the case. Kirsch, 181
A.D.2d at 226. To reach this conclusion, Kirsch failed to cite or discuss the No
Compensation Rule codified in NYPL § 40( 6). Id. Instead, it relied on NYPL § 73
- a provision of the UP A that is inapplicable both to the facts in Kirsch and
13 See also Shandell, 217 A.D.2d at 473. Because Shandell relied on Kirsch without discussion or analysis, the Trustee Amici treat the decisions as one. If Kirsch fails, as it must, so goes Shandell.
24
unfinished business law. That is, Kirsch looked to NYPL § 73 which concerns the
valuation of a partnership interest "[ w ]hen any partner retires or dies" and the
business is continued. Id. But Kirsch was a dissolution case - it did not involve
the continuation of a law partnership after the retirement or death of one of the
partners.14 And even if it did, NYPL § 73 (the parallel to UPA § 42) would not
apply because it "is not the source of the duty of a lawyer to account to his former
partners." Santalucia, 232 F.3d at 300.15 On the other hand, NYPL § 40(6)
governs whether a partner is entitled to compensation for his efforts in winding up
unfinished business matters, and clearly adopts the No Compensation Rule.
Unsurprisingly, the New York Court of Appeals has never endorsed the
tortured logic in Kirsch to create a judicial exception to the No Compensation
14 Kirsch also cited to a Texas appellate court decision for the proposition that a partner is entitled to post-dissolution compensation. 586 N.Y.S.2d at 333 (citing Bader v. Cox, 701 S.W.2d 677, 681 (Tex. App.-Dallas 1985, writ refd n.r.e.)). The appeal in Bader involved the valuation of a deceased partner's interest in contingent fee cases under UPA § 42 (identical to NYPL § 73). 701 S.W.2d at 681. Thus, Bader discounted the interest of the deceased partner's estate "to the profits attributable to the labor and management of the remaining partners." Id. at 684 (citing Hughes v. Aycock, 598 S.W.2d 370, 372 (Tex. App.-Houston [14th Dist.] 1980, writ refd n.r.e.) (also applying UPA § 42)). This is because the Texas appellate court concluded that the estate of the deceased partner cannot recover profits resulting from the surviving partners that "expend a significantly greater effort winding up the pending cases than they would have if the decedent [partner] were still alive." Bader, 701 S.W.2d at 683. This rationale does not apply to dissolved law firms where every partner survives because all of the partners of the dissolved firm have a duty to account for profits earned when winding up the old firm's unfinished business. See generally, Jewel, 156 Cal. App. 3d at 176. 15 Similar to Kirsch, Bader, and Hughes, there are other inapposite decisions that rely on UPA § 42 in the context of a partnership dispute. See, e.g., Weisbrod v. Ely, 767 P.2d 171, 175 (Wyo. 1989) (citing Wyoming statute that mirrors UPA § 42); Timmerman v. Timmerman, 538 P.2d 1254, 1260 n.3 (Or. 1975) (citing Oregon statute that mirrors UPA § 42 and applicable only "[w]hen any partner retires or dies").
25
Rule. See Coudert III, 480 B.R. at 156. It should decline to do so here. As with
the Second Circuit's first certified question, uniformity among UP A jurisdictions
demands that this Court apply the No Compensation Rule as enacted by the New
York Legislature and implemented in every other UP A jurisdiction.
CONCLUSION
This Court should answer the certified questions in favor of Trustee Geron
and conclude that New York applies the Unfinished Business to Rule to a law
firm's hourly matters and, moreover, the New York Legislature affirmed the No
Compensation Rule for a partnership dissolution by enactment ofNYPL § 40(6).
Dated: April 25, 2014
Andrew B. Ryan, Esq. James D. Sheppard, Esq. Michael Fishel, Esq. DIAMOND McCARTHY LLP 1201 Elm Street, Suite 3400 Dallas, Texas 75270 Counsel for Allan B. Diamond, Chapter 11 Trustee for Howrey LLP
Respectfully submitted,
Allan B. Diamond, Esq. Howard Ressler, Esq. Andrew B. Ryan, Esq. DIAMOND McCARTHY LLP 620 Eighth Avenue, 39th Floor New York, New York 10018 Counsel for Alan M Jacobs, Liquidating Trustee for the Dewey & LeBoeuf Liquidation Trust
Christopher D. Sullivan, Esq. GREENFIELD SULLIVAN 150 California Street, Suite 220 San Francisco, CA 94111 Special Litigation Counsel/or Heller Ehrman LLP, by and through Michael Burkhart, Plan Administrator
26
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