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Dissolved Firm Has 'Narrow Interest' in Fees From Exiting Partners

In a lawyerly-watched case, the California Supreme Court said dissolving law firms have no right to fees for unfinished hourly matters that partners take to new firms.

Heller Ehrman v. Davis Wright Tremaine is a significant bankruptcy case because it involved a dispute between a bankrupt law firm and its departing partners. A bankruptcy administrator made claims for fees against more than a dozen other law firms in the case.

The court decision may be more important to lawyers who leave their firms than to bankruptcy attorneys, however. The last thing most lawyers want to do is pay their old law firms.

"Unfinished Business"

The American Lawyer called it the "unfinished business" case. It started with the dissolution of Heller Ehrman ten years ago.

In October 2008, the firm notified its clients that it would no longer provide legal services. The dissolution plan included a provision to waive any claim to legal fees general in hourly fee cases after lawyers left the firm, the ABA Journal reported.

That should have resolved the issue, but the bankruptcy administrator sought to set aside the waiver, claiming it was a fraudulent transfer. A federal judge threw out that claim, but the administrator challenged that ruling in the U.S. Ninth Circuit Court of Appeals.

The state supreme court, resolving the issue at the request of the Ninth Circuit, said a dissolved law firm has a "narrow interest" in departing partners' hourly work. The firm's interests would be limited to "those associated with transferring the pending legal matters, collecting on work already performed, and liquidating the business."

"Never Owned"

The justices said clients have the right to choose new law firms "unburdened by the reach of the dissolved firm that has been paid in full and discharged." Contingency cases could be different; however, that was not the issue in the bankruptcy proceeding.

The court said it was not ruling on other issues, such as "the extent of partners' fiduciary obligations to their firm or the efforts partners make to secure business on behalf of their firm." However, it left open some questions about firm ownership of clients.

"A dissolved law firm therefore has no property interest in the fees or profits associated with unfinished hourly fee matters," Justice Mariano-Florentino Cuellar wrote. "The firm never owned such matters , and upon dissolution, cannot claim a property interest in the income streams that they generate."

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