The "unfinished business doctrine" as applied to defunct law firms is dead.
Recent Posts, for Context
As we wrote on June 12 in "Unfinished Business Doctrine: Federal Judge Gets it Right!", a federal court judge in California killed the doctrine last month; this week, in an opinion issued in an appeal we wrote about on June 11 in "Unfinished Business Doctrine in NY", New York's highest court nailed the coffin shut and buried it.
Background of the Two Cases Presented to the NY Court of Appeals
In the Thelen and Coudert bankruptcies, the trustee/administrator of each debtor had sought to recover for the debtors' estates — and ultimately for the benefit of creditors of those estates — legal fees paid by former clients to law firms where former Thelen and Coudert attorneys had jumped, after the Thelen and Coudert firms had started to dissolve, and taken their clients with them. The basis for the claims was the "unfinished business doctrine" — the argument that the attorneys who had departed Thelen and Coudert in effect had absconded with "unfinished business" (pending client legal work) belonging to those dying firms, thereby breaching their fiduciary duties to those law firms and to their fellow partners there, and the way to remedy the breach was for those scoundrel attorneys and their new law firms to turn over to the bankruptcy trustee/administrator all of the fees earned on those matters at the new firms.
The NY Court's Holding
The claim had been advanced in the bankruptcy court cases of both Thelen and Coudert, working its way through the US District Court and the US Court of Appeals of the Second Circuit, and the Second Circuit had certified to the NY Court of Appeals the exact question of New York law:
whether, for purposes of administering [a] … related bankruptcy, New York law treats a dissolved law firm's pending hourly fee matters as its property.
The NY Court of Appeals was starkly clear in its answer:
We hold that pending hourly fee matters are not partnership "property" or "unfinished business" within the meaning of New York's Partnership Law. A law firm does not own a client or an engagement, and is only entitled to be paid for services actually rendered.
The NY Court Explains the Logical Error Underlying the Trustees' Claim
The court in effect said that the trustee/administrator in both cases had begged the question when they contended that "departing partners owe a fiduciary duty to the dissolved firm and their former partners to account for benefits obtained from use of partnership property [that is, pending client legal matters] in winding up the partnership's business." Their error was assuming that pending client matters constitute partnership property.
Because clients always have the "unqualified right to terminate the attorney-client relationship at any time without any obligation other than to compensate the [law firm] for the fair and reasonable value of the completed services," it follows that
no law firm has a property interest in future hourly legal fees because they are "too contingent in nature and speculative to create a present or future property interest" given the client's unfettered right to hire and fire counsel.
In short, "client matters are not partnership property…."
The court went on to apply the same analysis to contingent fee matters, correcting the trustee/administrator's arguments that even if hourly fee work isn't subject to the unfinished business doctrine, contingent work is.
[S]tatements [in prior court opinions] that contingency fee cases are "assets" of the partnership subject to distribution simply means that, as between the departing partner and the partnership, the partnership is entitled to an accounting for the value of the cases as of the date of the dissolution. [Those] decisions involving contingency fee arrangements do not suggest that law firms own their clients' legal matters or have a property interest in work performed by former partners at their new firms.
NY Court Goes Further to Proclaim Trustee's Argument Against Public Policy
The judges went on at add, at the conclusion of their opinion, that the whole doctrine pushed by the trustee/administrator violates the public policy of the state:
Treating a dissolved firm's pending hourly fee matters as partnership property, as the trustees urge, would have numerous perverse effects, and conflicts with basic principles that govern the attorney-client relationship under New York law and the Rules of Professional Conduct. By allowing former partners of a dissolved firm to profit from work they do not perform, all at the expense of a former partner and his new firm, the trustees' approach creates an "unjust windfall"…. Next, because the trustees disclaim any basis for recovery of profits from the pending client matters of a former partner who leaves a troubled law firm before dissolution, their approach would encourage partners to get out the door, with clients in tow, before it is too late…. And attorneys who wait too long are placed in a very difficult position. They might advise their client that they can no longer afford to represent them, … a practical restriction on a client's right to choose counsel. [And] these attorneys would simply find it difficult to secure a position in a new law firm.
In a final shot at the absurdity of the trustee/administrator's position, the court unleashed two comments:
The notion that law firms will hire departing partners [from collapsing firms] or accept client engagements [brought along with those departing partners] without the promise of compensation ignores commonsense and marketplace realities. Followed to its logical conclusion, the trustees' approach would cause clients, lawyers and law firms to suffer, all without producing the sought-after financial rewards for the estates of bankrupt firms….
[If] a client's pending matter is partnership property, why doesn't every lawyer whose clients follow him to a new firm breach fiduciary duties owned his former law firm and partners? In the end, the trustees' theory simply does not comport with our profession's traditions and the commercial realities of the practice of law today….
THAT'S LOWERING THE BOOM!