New York Law Review

Tag: Law Firm Dissolution

  • In re Thelen LLP, 24 N.Y.3d 16 (2014): Law Firm Dissolution and “Unfinished Business” Doctrine

    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.

  • Dawson v. White & Case, 88 N.Y.2d 666 (1996): Accounting for Goodwill and Unfunded Pension Plans in Law Firm Dissolution

    Dawson v. White & Case, 88 N.Y.2d 666 (1996)

    Partnership agreements govern the distribution of assets upon dissolution, and if the agreement explicitly states that goodwill is not to be considered an asset, or if such an understanding can be implied from the partners’ conduct, then goodwill is not a distributable asset.

    Summary

    This case concerns the dissolution of the White & Case law firm and the subsequent accounting of partner Evan Dawson’s interest. The key issues are whether the firm possessed distributable goodwill and whether its unfunded pension plan constituted a liability. The Court of Appeals held that, based on the specific facts and the partnership agreement, goodwill was not a distributable asset because the partners had agreed it was of no value. The court also found that the unfunded pension plan was not a liability of the dissolved firm, but rather an operating expense of the successor firm contingent upon profitability. This decision emphasizes the importance of partnership agreements in determining asset distribution upon dissolution.

    Facts

    Evan Dawson was a partner at White & Case. The firm negotiated to have him withdraw, and when negotiations failed, the firm dissolved and re-formed without him. Dawson sued, seeking an accounting of his partnership interest. A Special Referee included goodwill as an asset and excluded the unfunded pension plan as a liability. The Supreme Court confirmed the report, and the Appellate Division affirmed.

    Procedural History

    Dawson initially sued alleging wrongful termination and other claims. The Supreme Court ordered an accounting. The Special Referee’s report valued assets, including goodwill, and excluded the pension plan as a liability. The Supreme Court confirmed. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    1. Whether the law firm of White & Case possessed distributable goodwill that should be included as an asset in the partnership accounting.

    2. Whether the law firm’s unfunded pension plan should be considered a liability of the firm for accounting purposes.

    Holding

    1. No, because the partnership agreement and the conduct of the partners indicated an intent that goodwill not be considered a distributable asset.

    2. No, because the pension payments were contingent operating expenses of the successor firm, not a liability of the dissolved firm.

    Court’s Reasoning

    Regarding goodwill, the Court relied on Partnership Law § 71(a)(I), which makes the distribution of assets “subject to any agreement to the contrary.” The Court emphasized that partners are free to exclude items from partnership property by agreement. The Court cited Matter of Brown, 242 N.Y. 1 (1926), and Siddall v. Keating, 8 A.D.2d 44 (1959), noting that a tacit understanding or course of dealing can indicate an agreement not to account for goodwill. Here, the White & Case partnership agreement explicitly stated that “no consideration has been or is to be paid for the Firm name or any good will of the partnership, as such items are deemed to be of no value.” The court rejected Dawson’s attempts to argue that these provisions were inapplicable. The court acknowledged evolving views on law firm goodwill, noting that “the ethical constraints against the sale of a law practice’s goodwill by a practicing attorney no longer warrant a blanket prohibition against the valuation of law firm goodwill when those ethical concerns are absent.”

    Regarding the pension plan, the Court deferred to the Appellate Division’s reasoning that the payments were operating expenses contingent on the successor firm’s profitability, not a liability of the dissolved firm. The firm had also never included the unfunded pension plan as a liability in its financial statements. The partnership agreement also specified that pension payments could only be made out of profits and could not exceed 15% of profits.