Thelen Lawyers Urge Second Circuit To Allow Clawbacks
An attorney for the bankruptcy estate of defunct law firm Thelen urged a three-judge federal appellate panel in New York on Monday to rule that it and other failed firms be allowed to assert ownership rights to hourly matters their ex-partners take to new professional homes as their former firms collapse.
Like the estates of such other bankrupt firms as Brobeck, Phleger & Harrison; Coudert Brothers, Heller Ehrman; and Howrey, the Thelen estate has sought to claw back money from assignments lawyers took with them when moving from the dissolving entity to their next jobs. Those pushing for the authority to undertake clawbacks base their argument largely on legal precedent established in a California case known as Jewel v. Boxer.
Jewel's application to New York cases has had mixed success so far. In May 2012, Coudert won a key ruling from U.S. District Judge Colleen McMahon, who determined the firm's estate does have a property interest in so-called unfinished business matters. Four months later, U.S. District Judge William Pauley released a decision related to Thelen that the unfinished business doctrine does not include pending hourly fee matters of a bankrupt law firm.
The dueling opinions "suggest there’s considerable confusion on what New York law is," Judge Gerard Lynch of the U.S. Court of Appeals for the Second Circuit said during Monday's oral arguments. The confusion has been highlighted by a 2011 suit brought by Thelen trustee Yann Geron against Seyfarth Shaw, a firm that hired 12 Thelen partners following Thelen's September 2008 dissolution (The firm filed for Chapter 7 bankruptcy a year later). In addition to seeking an unspecified amount of money for work taken to Seyfarth, Geron argues in the underlying suit now on appeal that a waiver the partners signed once the firm knew it was dissolving to shield them from Jewel claims should be considered a constructive fraudulent transfer.
Circuit Judge Denny Chin asked during Monday's hearing why a dissolved firm should have a stake in a matter taken as it collapsed when firms that are still operating have no similar ownership interest if they lose an assignment. "A client has a right to terminate an engagement at any time," Chin said. He added that, under ordinary circumstances, if a client decides to fire its attorneys in favor of new ones, "that's the end of it."
The panel asked Geron's lawyer, Howard Magaliff of Rich Michaelson Magaliff Moser, as well as Thompson Hine partner Thomas Feher, who represents Seyfarth Shaw, whether applying unfinished business laws to hourly work would create a financial disincentive for attorneys to take work with them, a position Seyfarth argues would be the case.
At times, the judges questioned the very definition of an unfinished hourly business matter, asking Magaliff how to define billable work that, for instance, is more of a continuing relationship between client and attorney than a finite assignment. “Where does the fiduciary relationship start and end?” Circuit Judge Susan Carney asked.
Magaliff responded that any open, billable matter with ongoing work should fall under the purview of the law and becomes "an asset of the firm." Magaliff also pointed to New York case law that clearly allows fees to be split between a defunct firm and a successor firm in relation to contingency fee cases, arguing that if those matters can be split into a before-and-after arrangement, hourly cases should too. "You can’t simply say it's easy to value a contingency and not an hourly matter," Magaliff said, adding that if the laws differ between the two types of cases, it could create two classes of partners with different fiduciary duties.
During his time at the podium, Feher argued that when it comes to hourly matters, unlike contingency cases, the successor firms aren't getting paid for the full value of their work. Under the contingency fee precedent, firms deserve money stemming from the "post-dissolution efforts, skill and diligence," of the attorneys they hire—something that, he said, gets muddied in hourly cases. "No one is entitled to the fruits of someone else’s labor without their consent," Feher told the judges, calling the very idea of unfinished business in hourly cases "a misnomer."
In pre-argument filings, Seyfarth also argues that "The fatal flaw in the Trustee’s argument is his mistaken assumption that unfinished business in the form of clients’ legal matters was owned by Thelen"—a point Feher emphasized Monday.