The unfinished business doctrine: it can happen to you. And it's happening to the now-defunct Heller Ehrman.
When the firm disbanded and filed for bankruptcy three years ago, partners took their business and fled to new firms. But now the bankruptcy trustee is going after those partners and their firms, seeking payment for Heller's debt.
Turns out that the unfinished business doctrine prevents debt from disappearing even when a law firm no longer exists.
At its most basic level, the doctrine allows a bankruptcy trustee to sue former partners for earnings connected to work started at the old firm. By extension, the trustee can sue the new firm to recover those profits.
The unfinished business doctrine allows bankruptcy trustees to treat each client, and the connected partner, as an asset. Therefore, profits generated from ongoing representations rightfully belong to creditors.
The Heller trustee has settled with 40 former partners and firms, according to the Wall Street Journal. That's about $8 million for Heller's creditors.
But a number of large firms are fighting back, pointing to the Supreme Court's recent decision involving Anna Nicole Smith. That decision requires common law tort claims to be heard by a district court, as opposed to a bankruptcy judge. The firms believe the rule applies to a trustee's unfinished business doctrine claims.
However, this fight is not dissuading Howrey's bankruptcy trustee, who told the Journal that he is considering similar claims against former partners. Those, too, are likely to rake in big money.
You don't have to be a mega-firm to be affected by the unfinished business doctrine. So be sure to consider its implications should the time come for your firm to dissolve.
- The Unfinished Business of Law Firm Collapses (Wall Street Journal)
- Law Firm Lifeboat: What to Do if Your Firm is About to Fold (FindLaw's Greedy Associates)
- Law Firms May Soon Have More Access to Credit, but Is That the Answer? (FindLaw's Strategist)