By Nate Raymond
NEW YORK, Sept 4 (Reuters) - A federal judge in Manhattan
ruled Tuesday that the estate of bankrupt law firm Thelen can't
claw back profits from legal matters Thelen partners took with
them to one firm, but allowed a lawsuit involving similar claims
against a second firm to proceed.
The decision by U.S. District Judge William Pauley further
clouds the debate over whether failed law firms can treat hourly
billed lawsuits pending at the time of their closing as assets
of their estates. It could also impact other law firm
bankruptcies, including that of Dewey & LeBoeuf.
The first lawsuit was brought by California-based Thelen
against Seyfarth Shaw, whose New York office hired 11 former
Thelen partners. In dismissing those claims, Pauley found that
"under New York law, a dissolved law firm's pending hourly fee
matters are not partnership assets."
However, Pauley also acknowledged the controversy over
hourly fees and certified the matter for an appeal to the 2nd
Circuit Court of Appeals.
That court already is mulling whether to accept an appeal of
a May ruling in a clawback lawsuit brought by the failed law
firm Coudert Brothers against several big firms. In the suit,
U.S. District Court Judge Colleen McMahon found that Coudert
could recoup profits earned on its former partners' cases.
Brian Kiefer, a spokesman for Seyfarth, said the firm was
"very pleased and believe that the court came to the right
In ruling on a second case brought by Thelen -- this one
against Robinson & Cole, which hired nine Thelen partners --
Pauley allowed the lawsuit to proceed under California law,
which "may still" recognize hourly fee cases as a dissolved
firm's assets, he said.
A spokesman for Robinson & Cole declined to comment.
Yann Geron, the trustee for Thelen's bankruptcy estate and a
partner at Fox Rothschild, said in a statement that while he was
pleased Pauley's holding regarding Robinson & Cole, he was
"disappointed" about Seyfarth Shaw's win.
"We recognize the differences noted by Judge Pauley between
New York and California law, and differences in viewpoints even
between judges in the Southern District of New York in recent
decisions," he said, noting that it will be up to the appeals
court to sort the issues out.
Pauley's decision could have repercussions for other failed
law firms, including Dewey & LeBoeuf, which filed for Chapter 11
in May. Dewey's advisers have estimated they have $60 million in
potential claims they could assert related to unfinished
business that partners took with them to other law firms.
Thelen, a 400-lawyer law firm founded in San Francisco,
dissolved in 2008 and filed for Chapter 7 bankruptcy a year
later in U.S. Bankruptcy Court in Manhattan.
It has sought to claw back profits on unfinished business
taken from a number of firms, including Pillsbury Winthrop Shaw
Pittman, Holland & Knight and DLA Piper. The estate has to date
recovered $1.32 million from 20 law firms, court records show.
But Seyfarth and Robinson & Cole resisted settling, arguing
that neither New York nor California law today treat hourly fee
cases as partnership assets, unlike contingency fee matters.
In his decision Tuesday, Pauley said under New York law a
bankrupt law firm does not have a property interest in pending
hourly fee matters. Recognizing a property interest would
"violate New York's public policy against restrictions on the
practice of law," Pauley wrote.
A ruling to the contrary would create "bizarre
consequences," he added, as under the bankruptcy code a bankrupt
law firm might auction off its pending cases to the highest
"These unworkable results militate powerfully against
extending the unfinished business doctrine to hourly fee
matters," Pauley wrote.
The cases are Yann Geron, as Chapter 7 Trustee of Thelen v.
Seyfarth Shaw et al, U.S. District Court for the Southern
District of New York, Nos. 12-01364, 11-08967.
For Geron: Howard Magaliff, Diconza Traurig Magaliff.
For Seyfarth Shaw: Thomas Feher, Thomson Hine.
For Robinson & Cole: Christopher Major, Meister Seelig &
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