Finally Finishing Unfinished Business?

'Heller Ehrman'

Heller was a global partnership with more than 700 attorneys. In 2008, it was in financial distress, and, on Oct. 31, 2008, it informed its clients that it would no longer provide them with legal service. Heller included a Jewel waiver (see, Jewel v. Boxer, 156 Cal. App. 3d 171 (First District, 1984)) in its dissolution plan in which Heller waived any rights to seek payment of legal fees generated after the firm's dissolution for hourly or contingent matters. Heller Ehrman at 2-3. In the ensuing months, Heller partners joined numerous (at least 16) law firms who performed services on an hourly basis on which Heller had previously been counsel. Thereafter, Heller filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. The administrator filed adversary proceedings against the law firms in which former Heller partners were now partners claiming that the Jewel waiver was a fraudulent transfer and should be set aside. The Bankruptcy Court found in favor of the administrator and the district court reversed. Id. at 3-4. Heller appealed to the U.S. Court of Appeals for the Ninth Circuit which asked the Supreme Court of California to provide guidance. The “certified question” addressed to California's highest court was: “what property interest, if any, a dissolved law firm has in the legal matters, and therefore the profits, of cases that are in progress but not completed at the time of dissolution.”

The court succinctly answered the question and then went on to present its analysis of both the property interests of law firms and the impact on clients' right to counsel of their choice. The court's holding is as follows:

What we hold is that under California law, a dissolved law firm has no property interest in legal matters handled on an hourly basis, and therefore, no property interest in the profits generated by its former partners' work on hourly fee matters pending at the time of the firm's dissolution. The partnership has no more than an expectation that it may continue to work on such matters, and that expectation may be dashed at any time by a client's choice to remove its business. As such, the firm's expectation — a mere possibility of unearned, prospective fees — cannot constitute a property interest. To the extent the law firm has a claim, its claim is limited to the work necessary for preserving legal matters so they can be transferred to new counsel of the client's choice (or the client itself), effectuating such a transfer, or collecting on work done pretransfer.

The court, to a large extent, based its conclusion on what it perceived as a law firm's “narrow” and “limited” property interest in client matters. The court explained:

What we conclude is that a dissolved law partnership is not entitled to profits derived from its former partners' work on unfinished hourly fee matters. Any expectation the law firm had in continuing the legal matters cannot be deemed sufficiently strong to constitute a property interest allowing it to have an ownership stake in fees earned by its former partners, now situated at new firms, working on what was formerly the dissolved firm's cases. Any “property, profit, or benefit” accountable to a dissolved law firm derives only from a narrow range of activities: those associated with transferring the pending legal matters, collecting on work already performed, and liquidating the business.

The limited nature of the interest accorded to the dissolved law firm protects clients' choice of counsel. It allows the clients to choose new law firms unburdened by the reach of the dissolved firm that has been paid in full and discharged. The rule also comports with our policy of encouraging labor mobility while minimizing firm instability. It accomplishes the former by making the pending matters, and those that work on them, attractive additions to new firms; it manages the latter by placing partners who depart after a firm's dissolution at no disadvantage to those who leave earlier.

Finally, in this regard, the court concluded that: “The firm never owned such matters, and upon dissolution, cannot claim a property interest in the income streams that they generate.” Id. at 12.

The California high court also identified a “host of difficulties” if it ruled otherwise. These difficulties included the impediment to lawyer mobility as well as the negative impact to clients' choice of counsel.

The court ruled that diverting fees to a former partnership, rather than to the lawyers who actually handle a particular matter, would not only disincentivize lawyers who wished to exercise their right to lawyer mobility, but, in doing so, would also threaten clients' right to choice of counsel and the stability of law firms. The court opined that, by limiting the billable business lawyers can take to new firms, partners will be disadvantaged in their search for employment. Moreover, this would also affect associates and staff who often migrate to a new firm in tandem with a partner. Indeed, the court stated, it was to prevent injury to such associates and staff that Heller Ehrman executed the Jewel waiver.

What is more, clients would be disadvantaged by such fee divisions, the court stated, for, by having to pay both a lawyer and the lawyer's former partnership, a client will not have as much money to compensate new counsel. This may, the court determined, inhibit clients' right to choice of counsel as money and not quality of representation could become the primary issue.

Finally, the court concluded that the fact Heller was in the process of winding up did not alter its finding. To the contrary, the court limited the rights and duties of law firms in dissolution. In so doing the court held:

We read these provisions [concerning winding up] to indicate that the process of winding up a law partnership's hourly fee matters extends no further than to certain acts. These include those acts necessary to: 1) preserve legal matters for transfer to the client's new counsel or the client itself; 2) effectuate such a transfer; and 3) collect on work done pretransfer.

“Heller should bill and be paid for the time its lawyers spent filing motions for continuances, noticing parties and courts that it was withdrawing as counsel, packing up and shipping client files back to the clients or to new counsel, and getting new counsel up to speed on pending matters.” (Heller, supra, 527 B.R. at p. 32.) These are activities necessary to “preserve the partnership business” (Corp. Code, §16803, subd. (c))

But the duty extends no further. Specifically, it does not extend to substantive legal work done on hourly fee matters to continue what was formerly the business of a dissolved partnership. Such work falls outside of the definition of winding up … .

Conclusion

The California high court's decision in Heller correctly confirms that “[c]lients are not merchandise” and “lawyers are not tradesmen.” New York County Lawyers' Association, Opinion 109 (1943). Neither lawyers nor law firms own their clients' matters, and laws which erode lawyer mobility and/or client choice of counsel should not be enforced. The decision is generally in accord with the New York Court of Appeals decision in Thelen, and, it is submitted, well serves both the purpose of our profession, and our clients.

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Arthur J. Ciampi is the coauthor of the treatise “Law Firm Partnership Agreements” and is the managing member of Ciampi LLC. Maria Ciampi, Of Counsel to Ciampi LLC, assisted in the preparation of this article. This article also appeared in our ALM sibling, the New York Law Journal.