A federal appeals court has agreed to weigh in on whether or not the Coudert Brothers estate is entitled to profits earned from so-called unfinished business taken by former Coudert partners to new employers in the wake of the New York firm’s 2006 collapse.
The U.S. Court of Appeals for the Second Circuit granted petitions for interlocutory appellate review Tuesday filed by 10 law firms and three individuals being sued by Coudert, as well as cross-petitions filed by Coudert plan administrator Development Specialists Inc. All of the petitions took issue with aspects of a May decision issued by U.S. District Judge Colleen McMahon that was widely heralded as a win for the Coudert estate.
In granting in part and denying in part a summary judgment motion in the 13 consolidated cases, McMahon ruled that the Coudert estate does indeed have the right to collect money from hourly fee work taken by its former partners to their new firms because the estate retained the property rights to such engagements. The suits in question target Akin Gump Strauss Hauer & Feld; Arent Fox; Dechert; DLA Piper; Dorsey & Whitney; Duane Morris; Jones Day; K&L Gates; Morrison & Foerster; Sheppard Mullin Richter & Hampton; and three individual partners.
In September, another federal district court judge’s reading of New York laws resulted in a decision with the complete opposite implications. Ruling in two cases stemming from Thelen’s Chapter 11 bankruptcy, Judge William Pauley III found that ongoing hourly fee matters do not belong to the estate of a bankrupt firm, and that passing on fees from such work would “result in an unjust windfall” for Thelen. (Both judges agree that work done on contingency fee matters should be split based on how much work was completed at each firm.)
Pauley’s decision stems from suits against Robinson & Cole and Seyfarth Shaw filed by Thelen’s trustee in 2009, a year after the firm voted to dissolve.
With those two cases also on appeal, the Second Circuit now has the opportunity to settle the discrepancies in the Thelen and Coudert decisions. The appeals court’s eventual ruling on how unfinished business claims should be handled in law firm bankruptcies could well have implications for the Dewey & LeBoeuf estate, as well as East Coast law firm implosions yet to come.
Dewey’s advisers said over the summer that the bankrupt firm’s estate is in talks with successor firms to settle unfinished business claims. At the time, chief restructuring officer Joff Mitchell pegged the total amount at issue in the preliminary negotiations at between $60 million and $70 million. (Those talks are separate from a settlement reached with 450 former partners to return some $71.5 million in payments made while the firm was likely insolvent.)
So far, no firms or former partners have been sued by the Dewey estate, which hopes to see its Chapter 11 plan confirmed in Manhattan bankruptcy court by the end of February. Mitchell had no comment Wednesday on how the Thelen and Coudert appeals could affect the Dewey case or those settlement talks.
Claire Huene, a Miller & Wrubel partner who represents Dechert in the suit brought against the firm by Coudert, says she looks forward to seeing the law clarified in New York.
“We’re very pleased that they are going to resolve this issue now, given the disagreement in the district court decisions,” she says. The ruling is not likely to come anytime soon. Briefs are due March 8 in the Thelen case, according to Howard Magaliff of DiConza Traurig Magaliff, who is serving as litigation counsel to Thelen trustee Yann Geron of Fox Rothschild. A briefing schedule hasn’t been set yet in the Coudert case.
David Adler of McCarter & English, the lead attorney for Coudert administrator DSI, declined to comment when contacted Wednesday.
In California, the estates of bankrupt law firms including Howrey, Heller Ehrman, and Brobeck, Phleger & Harrisonall of which are the subject of ongoing Chapter 11 cases in the statehave had an easier time collecting on unfinished business because of precedent established in a 1984 state case, Jewel v. Boxer, that resulted from a partnership breakup. (At the same time, sibling publication The Recorder recently reported that lawyers in the Heller and Brobeck bankruptcies have been aggressively challenging Jewel as a precedent.)
The American Lawyer reported in its November issue that a total of more than $35.5 million in unfinished business claims have been collected in the Brobeck, Coudert, Heller, Howrey, and Thelen cases.
