NEW YORK, July 31 (Reuters) - Defunct law firm Thelen on
Tuesday urged a federal district judge in Manhattan to allow it
to claw back profits earned by some former partners on legal
business they took with them to other law firms.
But Seyfarth Shaw and Robinson & Cole, the two law firms
that hired former Thelen partners, urged U.S. District Judge
William Pauley not to treat profits earned on a client's
unfinished case as an asset in a bankruptcy like so many other
items an estate might own.
"This isn't a Jackson Pollack," said Thomas Feher, a lawyer
representing Seyfarth Shaw, which hired 11 partners from Thelen,
which dissolved in 2008. "It isn't a piece of furniture."
But Howard Magaliff, a lawyer for Thelen bankruptcy trustee
Yann Geron, said firms that hire former partners from a
dissolving law firm need to realize those lawyers "come with
baggage in the form of an unfinished business claim." While
clients have a right to pick their lawyers, an unfinished case's
profits belong to the bankruptcy estate, he said.
The afternoon hearing came amid a broader legal debate over
the extent to which bankrupt law firms can claim ownership of
the unfinished work former partners take with them to new firms.
In the wake of the May bankruptcy filing of Dewey & LeBoeuf,
the largest U.S. law firm to file for Chapter 11, dozens of
large law firms are facing the possibility of being dragged into
court after hiring former Dewey partners.
Dewey has an estimated $60 million in possible claims
against former partners and the firms that hired them for
unfinished business, said Joff Mitchell, the firm's chief
restructuring officer. Mitchell said last week he expects
settlement talks with successor law firms to begin "within the
next month or two."
Dewey's right to those profits could hinge on how judges
like Pauley overseeing cases involving other dead law firms
rule. U.S. District Judge Colleen McMahon in May held in a
similar case that the estate of the law firm Coudert Brothers
had a right to the profits earned on its unfinished business.
Thelen, a 400-lawyer law firm founded in San Francisco,
voted to dissolve in 2008 and filed for Chapter 7 bankruptcy a
year later in U.S. Bankruptcy Court in Manhattan.
Bankruptcy trustee Geron subsequently sought to claw back
profits earned on unfinished business taken by former Thelen
partners to their new firms. Bankruptcy records show Thelen has
recovered $1.32 million from 20 law firms, including most
recently Pillsbury Winthrop Shaw Pittman, Holland & Knight and
But Seyfarth Shaw and Robinson & Cole have held out, pushing
for a district court review and for Pauley to dismiss the cases
Much of the hearing in Thelen's case focused on whether New
York or California law applied. While Thelen filed for
bankruptcy in New York, its partnership agreement is governed by
Until McMahon issued her Coudert opinion, the law in New
York was unsettled on whether unfinished business belonged to a
dissolved law firm. In California, in contrast, a 1984 state
court decision called Jewel v. Boxer has become the bedrock of
lawsuits by bankrupt firms like Brobeck, Phleger & Harrison and
Heller Ehrman against other law firms.
Christopher Major, a lawyer for Robinson & Cole, which
hired nine Thelen partners, argued that even under California
law Robinson & Cole could not be sued by Thelen. He argued that
partnership law has changed substantially since the Jewel
decision, particularly with the adoption in California of the
Uniform Partnership Act of 1994.
"There's not a set of facts under which Robinson & Cole can
be held liable," Major said.
Feher, Seyfarth's lawyer, said if New York law controls,
Pauley should not adopt McMahon's reasoning in the Coudert case.
"The fact is Thelen has no right to the clients," Feher
Pauley lobbed questions at both sides and gave no clear
indication of his leanings. At one point, he questioned
Magaliff, the lawyer for the Thelen trustee, about the
ramifications of treating an unfinished lawsuit as property,
saying he was "intrigued" by some of Seyfarth and Robinson's
"If unfinished business could be property, could those
claims be sold to the highest bidder?" Pauley asked.
Magaliff said no, as the client would still have a right to
choose its lawyers.
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 &
(Reporting By Nate Raymond)
Follow us on Twitter @ReutersLegal | Like us on Facebook