Dissolved Law Firm Has No Right to Profits Generated by Former Partners' Work on Pending Hourly Fee Matters.
In Heller Ehrman LLP v. Davis Wright Tremaine LLP (2018) 4 C.5th 467, 229 C.R.3d 371, 411 P.3d 548, a dissolved law firm claimed that it was entitled to profits from work its former partners took with them to their new firms.
The dissolved firm's bankruptcy estate had filed adversary proceedings against the former partners' new firms, seeking to recover profits generated by the pending matters that were brought to the new firms. A federal district court ruled that the dissolved firm had no property interest in the pending hourly fee matters, rejecting the firm's fraudulent transfer claim.
On appeal, the Ninth Circuit Court of Appeals asked the California Supreme Court to resolve whether a dissolved law firm retains a property interest in legal matters that are in progress but not completed at the time of dissolution. Held, a dissolved law firm has no property interest in the profits generated by its former partners' work on hourly fee matters that were pending at the time of the firm's dissolution.
(a) The circumstances giving rise to a property interest include certain sufficiently reliable expectations, such as unvested retirement benefits. (4 C.5th 553.) A law firm's expectation that it may continue to work on hourly fee matters is speculative, given a client's right to remove its business. As such, the firm's expectation cannot constitute a property interest. Dissolution does not change that fact. (4 C.5th 555.) "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." (4 C.5th 551.)
(b) "A dissolved law firm … never owned [unfinished hourly fee] matters, and upon dissolution, cannot claim a property interest in the income streams that they generate. This is true even when it is the dissolved firm's former partners who continue to work on these matters and earn the incomeas is consistent with … partnership law." (4 C.5th 555.)
(c) Recognizing a property interest in hourly matters would risk impinging on the client's right to discharge an attorney at will. Client matters belong to the clients, not the law firms, and firms may not assert an ongoing interest in the matters once they have been paid and discharged. (4 C.5th 555.)
(d) Under the Revised Uniform Partnership Act, the process of winding up a law partnership's hourly fee matters extends no further than to certain acts, including those necessary to preserve legal matters for transfer to the client's new counsel or to the client, to effectuate the transfer, and to collect on work done before the transfer. (4 C.5th 557.)
(e) Here, the dissolved firm can bill and be paid for the time its lawyers spent filing motions for continuances, giving notice of withdrawal as counsel, packing and shipping client files to former clients or to new counsel, and getting new counsel up to speed on pending matters. But the former partners had no duty to account for substantive legal work done on hourly fee matters to continue what was formerly the business of the dissolved firm. (4 C.5th 557.)
(f) Rothman v. Dolin (1993) 20 C.A.4th 755, 24 C.R.2d 571, 1 Cal. Proc. (5th), Attorneys, §22, is disapproved to the extent that it is inconsistent with this analysis. (4 C.5th 557.)
On dissolution of law partnership, see 1 Cal. Proc. (5th), Attorneys, §21.
On what constitutes unfinished business of law partnership, see 1 Cal. Proc. (5th), Attorneys, §22.
On dissolution and winding up of partnership, generally, see 9 Summary (11th), Partnership, §51 et seq.
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