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 DLA Piper.

But Seyfarth Shaw and Robinson & Cole have held out, pushing for a district court review and for Pauley to dismiss the cases against them.

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 California law.

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 said.

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 arguments.

"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 & Fein.

(Reporting By Nate Raymond) 

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