In re Thelen LLP, 24 N.Y.3d 16 (2014)
Under New York law, a dissolved law firm’s pending hourly fee matters are not partnership property or unfinished business entitling the firm to profits earned on those matters after dissolution; a law firm only owns the right to be compensated for services already rendered.
Summary
The New York Court of Appeals addressed certified questions from the Second Circuit regarding whether a dissolved law firm has a property interest in hourly fee matters pending at the time of dissolution, such that the firm is entitled to profits earned on those matters as unfinished business. The court held that pending hourly fee matters are not partnership property under New York law. The court reasoned that clients have the unfettered right to choose their counsel and terminate the attorney-client relationship at any time. A law firm’s expectation of future business is too contingent to create a property interest. The court emphasized public policy considerations, including client autonomy and attorney mobility, which would be negatively impacted by treating pending hourly matters as firm property.
Facts
The law firm Thelen LLP dissolved in 2008 and filed for bankruptcy in 2009. Prior to dissolution, Thelen’s partners adopted an “Unfinished Business Waiver” intending to waive any rights to unfinished business of the partnership. After Thelen’s dissolution, several partners joined Seyfarth Shaw LLP, taking pending client matters with them. Seyfarth billed clients for their services on these matters. The bankruptcy trustee for Thelen’s estate sued Seyfarth, arguing that the unfinished business waiver was a fraudulent transfer and seeking to recover the profits earned by Seyfarth on the former Thelen matters.
Procedural History
The United States District Court for the Southern District of New York granted judgment on the pleadings to Seyfarth, holding that the unfinished business doctrine does not apply to pending hourly fee matters under New York law. The District Court certified its order for interlocutory appeal. The Second Circuit agreed that New York law governed the dispute and certified two questions to the New York Court of Appeals regarding the applicability and scope of the unfinished business doctrine under New York law.
Issue(s)
1. Under New York law, is a client matter that is billed on an hourly basis the property of a law firm, such that, upon dissolution and in related bankruptcy proceedings, the law firm is entitled to the profit earned on such matters as the ‘unfinished business’ of the firm?
2. If so, how does New York law define a ‘client matter’ for purposes of the unfinished business doctrine and what proportion of the profit derived from an ongoing hourly matter may the new law firm retain?
Holding
1. No, because clients have the unqualified right to terminate the attorney-client relationship at any time, and a law firm’s expectation of future hourly legal fees is too contingent to create a property interest.
2. This question was not answered because the first question was answered in the negative.
Court’s Reasoning
The court reasoned that the Partnership Law provides default rules for dividing property upon dissolution, but does not define what constitutes property. The court cited Verizon New England Inc. v Transcom Enhanced Servs., Inc., stating that the “expectation of any continued or future business is too contingent in nature and speculative to create a present or future property interest.” The court emphasized the client’s unfettered right to choose counsel and terminate the attorney-client relationship, citing Matter of Cooperman, which establishes that clients are only obligated to compensate the attorney for “the fair and reasonable value of the completed services.” The court distinguished cases involving contingency fee arrangements, noting that those cases involved disputes between a dissolved partnership and a departing partner, not outside third parties, and only entitled the partnership to an accounting for the value of the cases as of the date of dissolution. The Court distinguished Stem v. Warren, stating it was a breach of fiduciary duty case and not a case that defines what makes up partnership property. The court also considered public policy implications, noting that treating pending hourly fee matters as partnership property would create an “unjust windfall” and discourage partners from remaining to bolster a struggling firm. The court highlighted New York’s strong public policy encouraging client choice and attorney mobility, citing Cohen v Lord, Day & Lord. The court also noted that clients are not merchandise. Lawyers are not tradesmen. They have nothing to sell but personal service. The court concluded that the trustees’ theory does not comport with the legal profession’s traditions and commercial realities, and that a Jewel waiver could not cure this deficiency.