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Dissolved Firm Can't Claw Back Fees From Exiting Partners

The California Supreme Court said dissolving law firms cannot claw back fees on unfinished hourly matters that departing partners take to new firms.

It was a closely-watched case, especially since it involved the bankruptcy of a BigLaw firm and the administrator's claims against more than a dozen other law firms for profits in ongoing cases. The decision may help settle similar disputes between law firms and exiting partners.

But it was also a lesson for the bankruptcy administrator who could not get several law firms to settle in the case. As Inspector Callahan said, "Man's got to know his limitations."

"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 generated 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 the ruling in the U.S. Ninth Circuit Court of Appeals.

The Ninth Circuit passed the question to the state supreme court to answer under California law. In Heller Ehrman v. Davis Wright Tremaine, the court said "a dissolved law firm has no interest in legal matters handled on an hourly basis."

"Quite Narrow"

The justices said the dissolved firm's property interest in ongoing cases was "quite narrow." 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."

The limitations protect clients, who may choose new law firms "unburdened by the reach of the dissolved firm that has been paid in full and discharged." It also encourages "labor mobility," the court said, allowing departing partners to work elsewhere.

Contingency cases could be different; however, that was not the issue in the bankruptcy proceeding.

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