At last, the California Supreme Court can decide whether profit earned on unfinished hourly business after a law firm dissolves is property of the “old” firm and cannot be retained by the new firm that completes the work.
In the liquidation of the law firm Heller Ehrman LLP, the Ninth Circuit certified the question to the California Supreme Court on July 27.
The issue for California’s highest court stems from Jewel v. Boxer, a 1984 decision by an intermediate California appellate court holding that profit earned on unfinished business belongs to the “old” firm. The Jewel court allowed the new firm to recover only its overhead and rejected arguments based on clients’ rights to select attorneys of their choice.
The issue is important for lawyers. If Jewel is good law, lawyers in California and perhaps elsewhere (other than New York) would be less marketable when their existing firms go out of business. If “old” lawyers cannot be paid for their work at their “new” firms, clients with ongoing business might have difficulty retaining counsel or incur higher fees if forced to employ lawyers unfamiliar with the matters.
On a certified question from the Second Circuit, the New York Court of Appeals held in July 2014 that Jewel is not the law in New York. The New York court ruled that there is no property interest in hourly unfinished business because it is “too contingent in nature and speculative to create a present or future property interest.” The New York decision stemmed from the bankruptcies of Coudert Brothers LP and Thelen LLP.
In the Heller Ehrman case, a trust under the liquidating chapter 11 plan sued 16 firms for income that lawyers from the liquidated firm earned at their new firms in completing hourly matters. All but four settled. The bankruptcy court granted summary judgment against the four firms.
Later, District Judge Charles R. Breyer of San Francisco withdrew the reference. Reviewing the bankruptcy court’s rulings de novo, he granted summary judgment for the law firms.
The Ninth Circuit held oral argument on June 13, after the appeal was fully briefed, including amicus briefs by the American Bar Association and two state bar groups. The appeals court issued an order on July 27 certifying the question to the California Supreme Court.
The Ninth Circuit pointed out that California’s highest court has never directly addressed the Jewel issue. In addition to citing the New York decision, the Ninth Circuit pointed out that California revised its partnership law in 1996, 12 years after Jewel.
Judge Breyer is not the only district judge to undermine Jewel. Granting an interlocutory appeal, District Judge James J. Donato of San Francisco reversed the bankruptcy court and held in favor of lawyers who went to new firms. He ruled that they could retain what they bill at their new firms.
Judge Donato issued his decision in the liquidation of Howrey LLP. The appeal from his decision has been fully briefed in the Ninth Circuit.