On November 15 and December 2, 2013, the Second Circuit Court of Appeals, in In re Thelen LLP and In re Coudert Brothers LLP, certified to the New York Court of Appeals the question of whether a client matter, billed on an hourly basis, constituted property of the law firm such that upon dissolution, the law firm is entitled to the profit earned on such matters as the ‘unfinished business’ of the firm.
On July 1, 2014, the New York Court of Appeals answered that question in the negative. In In re Thelen LLP, the chapter 7 bankruptcy trustee had relied upon the unfinished business doctrine, as set forth in Jewel v. Boxer, a 1984 California state court appellate decision, in an attempt to recover the value of the Thelen LLP law firm’s unfinished business for the benefit of the bankruptcy estate’s creditors.
Although the facts in Jewel are convoluted, that court found that “several courts in other states have held that after dissolution of a law partnership, income received by former partners from cases unfinished at the time of dissolution is to be allocated on the basis of the partners’ respective interests in the dissolved partnership.…” The Jewel defendants argued, among other things, that this interfered with a client’s absolute right to the attorney of his or her choice. The Jewel court reached the opposite conclusion: that the client’s right to an attorney of his or her choice “was irrelevant to the rights and duties between the former partners with regard to income from unfinished partnership business… Once a client’s fee is paid to an attorney, it is of no concern to the client how that fee is allocated among the attorney and his or her former partners.”
In the New York Court of Appeals’ unanimous decision in In re Thelen, the Court took a view quite different from that of the Jewel court.
The Court of Appeals rejected the premise upon which the unfinished business doctrine was based. Instead, the Court of Appeals reasoned that because a client has an ‘unfettered right’ to hire and fire legal counsel, no law firm has a property interest in hourly legal fees. In other words, “a client’s legal matter belongs to the client, not the lawyer.” With the firm having no property interest in an hourly legal fee matter, the Jewel unfinished business doctrine appears to have lost its relevance in New York and perhaps elsewhere.
The Court of Appeals noted that although the Appellate Division sometimes refers to a contingency fee case as an “asset” subject to distribution, a former partner is entitled only to the value of his interest in the contingency case as of the date of dissolution; the lawyer must remit to her former firm the settlement value, less the amount attributable to the lawyer’s efforts following the firm’s dissolution.
The Court of Appeals also noted in In re Thelen that a ruling to the contrary would have perverse public policy considerations. For example, if a dissolved firm’s hourly fee matters were to be considered partnership property, former partners of a dissolved firm could profit from work they did not perform. Also, such a policy would encourage partners to leave a troubled law firm well before it neared dissolution, thus discouraging lawyers from remaining with troubled firms in an attempt to bolster their firms’ odds of surviving.
As noted in this blog in May of 2012, the Trustee in In re Thelen had, at that point, reached settlements with several firms to which former Thelen partners had fled. These settlements, in excess of $700,000, were reached based on the Trustee’s assertion of claims under the unfinished business doctrine against the new firms and partners of the dissolved firms.
With the Court of Appeals’ decision in In re Thelen, trustees will no longer be able to extract such tribute from firms that have hired lawyers from dissolved firms. In fact, in reaching its holding, the Court even cited to public policy encouraging “attorney mobility.”
If there is a tag line that will emerge from the New York Court of Appeals’ decision in In re Thelen, it may be the one resurrected by Judge Read (the author of the unanimous In re Thelen decision) from a 1943 New York County Lawyers’ Association opinion:
“Clients are not merchandise, [and] lawyers are not tradesmen.”