As Dewey & LeBoeuf spirals downward, more than 40 law firms are
placing bets that their rival's one-time partners will help
boost their revenues in a stagnant legal market. There's just
one catch: Those profits might be eroded by clawback suits if
Dewey goes into Chapter 11.
Clawback claims over so-called unfinished business have
become a regular feature of the bankruptcies of large law firms,
as trustees seek to recover billings by former partners in order
to pay the bankrupt firm's creditors. But those claims are
almost universally based on a 1984 decision by a state court in California in a case called Jewel v. Boxer. In New York, the law
isn't as clear. So former Dewey partners and their new firms
will want to look closely at what happens in the bankruptcies of
two New York firms -- Coudert Brothers and Thelen.
Some of the firms that hired partners from Coudert and
Thelen are now fighting to hold onto billings by laterals who
brought clients with them. Seyfarth Shaw, for instance, hired 11
lawyers from Thelen when the firm went under in October 2008. In
a brief filed Monday in federal district court in Manhattan,
Seyfarth contended that Thelen's trustee, Yann Geron of Fox
Rothschild, "cannot be right" that the dead law firm is owed
fees for work its partners billed after it collapsed.
Almost all of the other firms that hired Thelen lawyers,
however, caved to the trustee's demands. Seyfarth is one of only
two firms challenging the trustee's claims, Geron said. The
others have either settled or entered agreements to toll the
statute of limitations. Courtdocuments show Geron has so far
recovered $904,086 from 16 firms, including O'Melveny & Myers
and Troutman Sanders. That sum, the documents state, represent
nearly 70 percent of the profits those firms earned from Thelen
laterals' unfinished business, less expenses.
"Most of (the claims) are being settled because the majority
of the law firms are recognizing that the claims are
legitimate," Geron said. Thelen was a California partnership,
and Geron said its partnership agreement calls for claims to be
interpreted under California law, which means California's Jewel
Not according to Seyfarth, which contends that Thelen's
preponderance of New York lawyers and clients means New York law
should apply to claims in the bankruptcy. And, under New York
precedent, Geron doesn't have a right to go after profits on
work billed by the hour, Seyfarth partner Robert Dremulk argued.
Dremulk and lawyers at Thomson Hine are representing Seyfarth in
the Thelen clawback litigation.
Seyfarth's brief pointed to a September 2011 ruling in a
case stemming from the breakup of Sheresky Aronson Mayefsky & Sloan, a prominent Manhattan divorce firm that represented the
ex-wives of James Gandolfini and Dustin Hoffman. In a 26-pageopinion in the Sheresky case, New York State Supreme Court
Justice Eileen Bransten concluded that, under New York law,
unfinished business claims apply only to pending contingency-fee
work, not to hourly billings. U.S. District Judge William Pauley
of Manhattan federal court withdrew Seyfarth's case from
bankruptcy court in March. He's scheduled to hear Seyfarth's
argument for dismissal on July 13.
If Geron is right about California law applying in the
Thelen case, Coudert clawbacks may turn out to be a more helpful
test case for Dewey laterals. Seven firms that hired Coudert
lawyers when that firm dissolved in 2005 are challenging
unfinished business claims by Coudert's administrator. U.S.
Bankruptcy Judge Robert Drain denied a motion to dismiss those
clawback claims in August 2009. But thanks to the U.S. Supreme
Court's 2011 ruling in Stern v. Marshall, which limits the
authority of bankruptcy judges to interpret uncharted areas of
the law, the law firm clawback defendants succeeded in moving
their cases to federal court in Manhattan in November. A motion
for summary judgment in the Coudert case has been fully briefed
before U.S. District Judge Colleen McMahon.
"We think the (Jewel) theory is unworkable and shouldn't be
enforced in New York," said Joel Miller of Miller & Wrubel, who
is defending Dechert in the Coudert clawback litigation.
David Adler of McCarter & English, counsel to Coudert
liquidation plan administrator Development Specialists Inc,
declined to comment.
(Reporting by Nate Raymond)
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