Opinion
Bankruptcy Case No. 11-31376DM Adversary Proceeding No. 13-3093DM
11-14-2014
In re HOWREY LLP, Debtor. ALLAN B. DIAMOND, Chapter 11 Trustee for Howrey LLP, Plaintiff, v. JONES DAY LLP, Defendant.
DIAMOND MCCARTHY LLP Andrew B. Ryan, Esq. (pro hac vice) James D. Sheppard, Esq. (pro hac vice Michael Fishel, Esq. (pro hac vice) 1201 Elm Street, Suite 3400 Dallas, TX 75270 Telephone: 214-389-5300 Facsimile: 214-389-5399 aryan@diamondmccarthy.com jsheppard@diamondmccarthy.com mfishel@diamondmccarthy.com Counsel for Allan B. Diamond, Chapter 11 Trustee for Howrey LLP KORNFIELD, NYBERG, BENDES & KUHNER, P.C. Eric A. Nyberg, Esq. (Bar No. 131105) Chris D. Kuhner, Esq. (Bar No. 173291) 1970 Broadway, Suite 225 Oakland, CA 94612 Telephone: 510-763-1000 Facsimile: 510-273-8669 Local Counsel for Allan B. Diamond, Chapter 11 Trustee for Howrey LLP
Chapter 11 MEMORANDUM REGARDING CERTIFICATION FOR DIRECT APPEAL TO COURT OF APPEALS I. INTRODUCTION
This Memorandum Regarding Certification For Direct Appeal To Court Of Appeals is issued concurrently with the Court's Certification For Direct Appeal To Court of Appeals and is the document required by Fed. R. Bankr. P. 8001(f)(4)(A).
The Certification and this Memorandum, with changes only in the caption of each, are being filed in eight separate adversary proceedings that have not been consolidated; the motions that lead to the orders that are the subject of the Certification were argued together.
The order that is the subject of this Certification was entered on September 29, 2014 and defendant filed a timely Notice Of Appeal and a Motion For Leave To Appeal on October 14, 2014 (Dkt. Nos. 52 and 55).
Plaintiff, Allan B. Diamond, Chapter 11 Trustee ("Trustee"), filed an opposition to the Motion For Leave To Appeal (Dkt. No. 58) on October 29, 2014 and thereafter the clerk transmitted the matter to the United States District Court for the Northern District of California. As of the date of this Memorandum, the district court has not granted or denied the Motion For Leave To Appeal. Accordingly, this court is the court to make and file the certification for direct appeal. Fed. R. Bankr. P. 8001(f)(2).
Fed. R. Bankr. P. 8001(f)(4)(A) requires that the court making a certification on its own shall provide in an accompanying memorandum the information required by Fed. R. Bankr. P. 8001(f)(3)(C)(i)-(iv). That subdivision provides that a request for certification shall include the following:
(i) the facts necessary to understand the question presented;
(ii) the question itself;
(iii) the relief sought;
(iv) the reasons why the appeal should be allowed and is authorized by statute or rule, including why a circumstance specified in 28 U.S.C. § 158(d)(2)(A)(I)-(iii) exists; and
(v) a copy of the judgment, order or decree complained of and any related opinion or memorandum.
Attached are copies of the court's Order Granting In Part, Denying In Part Motion To Dismiss Adversary Proceeding and the court's Memorandum Decision On Motions To Dismiss filed on September 9, 2014, which is also reported at In re Howrey LLP, 515 B.R. 624 (Bankr. N.D. Cal. 2014). The facts necessary to understand the question presented, the question itself, the relief sought, and the reasons why the appeal should be allowed follow. II. BACKGROUND
Howrey LLP ("Howrey") was a well known, large law firm headquartered in the District of Columbia when an involuntary petition under chapter 7 was filed against it in this court in 2011. By a series of events that followed that are not material to the issues at hand, venue was left in the Northern District of California, Howrey converted its case to chapter 11, and Trustee was appointed.
Howrey was the third major law firm bankruptcy case in this court in the past several years. The first was Brobeck, Phleger & Harrison LLP (Case No. 03-32715) that began in 2003 when an involuntary chapter 7 petition was filed against the firm. There the trustee sued several law firm defendants under a fraudulent transfer theory based upon the seminal California case of Jewel v. Boxer, 156 Cal. App. 3d 171 (1984) and the fraudulent transfer provisions of the Bankruptcy Code and applicable state law. In short, he contended that as part of the firm's dissolution, the firm and the partners executed a Jewel Waiver, whereby the firm waived the right to profits under the Unfinished Business rule that might be earned in the future by the departing partners. Because the Jewel Waiver was a fraud on creditors, the law firms who took on those partners and completed the Unfinished Business could be held liable. The court's decision in 2009 spells out in detail many of the issues that were presented. See Greenspan v. Orrick Herrington & Sutcliffe (In re Brobeck, Phelger & Harrison LLP), 408 B.R. 318 (Bankr. N.D. Cal. 2009). All Brobeck adversary proceedings were resolved without a ruling by any appellate court.
This court has applied the following definition of the Unfinished Business rule in all three law firm bankruptcies: The unfinished business rule provides that, in the absence of an agreement to the contrary, partners have a duty to account to the dissolved firm and their former partners for profits they earn on the dissolved firm's "unfinished business," after deducting for overhead and reasonable compensation.
Greenspan v. Orrick Herrington & Sutcliffe (In re Brobeck, Phelger & Harrison LLP), 408 B.R. 318, 326 (Bankr. N.D. Cal. 2009)(footnote omitted).
The second case was a voluntary chapter 11 case filed by Heller Ehrman LLP (Case No. 08-32514) that began in 2008. In that case the chapter 11 plan administrator filed actions similar to those that had been filed in the Brobeck case against several law firm defendants. Four defendants did not settle and the court's published and unpublished rulings, which were consistent with the Brobeck decision, were rejected by the district court after the reference was withdrawn. See Heller Ehrman LLP v. Davis, Wright, Tremaine, LLP, --- B.R. ---, 2014 WL 2609743 (N.D. Cal. June 11, 2014). That decision is on appeal to the United States Court of Appeals for the Ninth Circuit (Case Nos. 14-16314, 14-16315, 14-16317, 14-16318).
In the present case, the Trustee has filed adversary proceedings which largely mirror the Brobeck and Heller litigation strategies (applying District of Columbia law), but add new theories in an attempt to recover profits earned on Unfinished Business taken from Howrey by partners who left prior to its dissolution and the execution of a Jewel Waiver. In its September 9 decision, the court agreed with the Trustee's theory of unjust enrichment under District of Columbia law and said that he could proceed under that theory against law firms that completed Howrey's Unfinished Business (the "Pre-Dissolution Claims"). The court also determined that, notwithstanding the district court's Heller ruling applying California law and other developments construing New York law, the Trustee could maintain his Jewel Waiver claims under District of Columbia and applicable fraudulent transfer law against law firms which completed Howrey Unfinished Business (the "Post-Dissolution Claims"). III. QUESTIONS PRESENTED
In the actions against defendants Jones Day LLP (A.P. No. 13-03093), Pillsbury Winthrop Shaw Pittman LLP (A.P. No. 13-03095) and Perkins Coie LLP (A.P. No. 14-03032), Trustee seeks to recover on Pre-Dissolution Claims and Post-Dissolution Claims. In the actions against defendants Neal, Gerber & Eisenberg LLP (A.P. No. 13-03057), Kasowitz Benson Torres & Friedman LLP (A.P. No. 13-03060), Sheppard Mullin Richter & Hampton LLP (A.P. No. 13-03062), Hogan Lovells US LLP (A.P. No. 13-03094) and Seyfarth Shaw LLP (A.P. No. 13-03254), he seeks to recover only on Pre-Dissolution Claims.
Thus, as to the Post-Dissolution Claims, his claims are virtually the same as those prosecuted to settlement in the Brobeck case and which are the subject of the pending appeals to the Ninth Circuit in the remaining Heller matters. The only material difference is the underlying legal principle that a law firm's Unfinished Business is a property right under California law (a principle rejected by the district court in the Heller decision) and that it is also a property right under District of Columbia law, as this court has ruled (and no court has addressed on appeal).
As to Pre-Dissolution Claims, Trustee sought against all eight defendants Unfinished Business profits under the Bankruptcy Code, a turnover of those profits, also under the Bankruptcy Code, an equitable accounting and a recovery based upon a theory of unjust enrichment. The court rejected the first three theories, but sustained the Trustee's contention that he could recover Pre-Dissolution Claims under an unjust enrichment theory.
In summary, therefore, the questions presented are (1) may Trustee rely District of Columbia law to recover profits on Unfinished Business taken from Howrey and brought to defendants by partners who left Howrey prior to its dissolution and (2) may Trustee recover as property transferred in fraud of creditors, the profits on Unfinished Business brought to the defendants by partners who left Howrey as of or after dissolution and the execution of the Jewel Waiver. IV. RELIEF SOUGHT
In the eight adversary proceedings the Trustee seeks money damages. As to the Post-Dissolution Claims, Trustee hopes to recover the value of the profits on Unfinished Business transferred in fraud of creditors under 11 U.S.C. § 550(a). As to the Pre-Dissolution Claims, he seeks to recover the profits on the Unfinished Business under the unjust enrichment theory.
The Trustee has not yet sought appellate review of the court's dismissal of his other claims for recovery on Pre-Dissolution Claims.
The amounts he seeks are not quantifiable at the present time but the court estimates them to be potentially millions of dollars. This observation is made from the court's own experience with the settlements (some confidential) against law firms in the Brobeck case and settlements and prayers for relief and other information under seal in the Heller case. V. REASONS WHY APPEAL SHOULD BE ALLOWED
The United States Court of Appeals for the Ninth Circuit should grant leave to appeal. The statutory authority for doing so is found in 28 U.S.C. § 158(a)(3) and (d)(2)(A) as the order on appeal is an interlocutory order. The circumstances set forth in 28 U.S.C. § 158(d)(2)(A)(i) and (iii) are present.
First, this court is not aware of any controlling decision of the United States Court of Appeals for the Ninth Circuit or the Supreme Court of the United States that construes any state law to identify profits earned on Unfinished Business of a law firm as a property interest that can be or cannot be the subject of recovery of its value under the state or Bankruptcy Code fraudulent transfer laws or under principles of unjust enrichment.
At the same time, the matter is of significant public importance to the legal community. Whether or not law firms who take on members of failed law firms, and complete Unfinished Business formerly handled by the failed firm, are at risk under the Trustee's theories is an unsettled and serious question affecting those law firms and the attorneys who seek to join them. For example, see generally, Ashley Sorrell, Covering Your Assets: The Unfinished Business Rule and Bankrupt Law Firms, 30 Ga. St. U. L. Rev. 825 (Spring 2014); Peter Rogers, Who Gets the Jewels When a Law Firm Dissolves? The Unfinished Business Doctrine and Hourly Matters, 108 NW. U. L. Rev. 311 (Fall 2013); Rachel M. Earthnut, Ripping the Jackson Pollock Off of the Wall: Reconciling Jewel v. Boxer with the Modern Law Firm, 26 Go. J. Legal Ethics 557 (Fall 2013); Michael Debacle & Victoria Guilfoyle, Law Firm Dissolutions: When the Music Stops, Does Anyone Need to Account for Any Unfinished Business?, 14 Del. L. Rev. 41 (2013); Douglas Richmond, Migratory Law Partners and the Glue of Unfinished Business, 39 N. Ky. L. Rev. 359 (2012).
Next, 28 U.S.C. § 158(d)(2)(A)(ii) ("the judgment, order or decree involves a question of law requiring resolution of conflicting decisions") is not directly on point. Yet the United States Court of Appeals for the Ninth Circuit will be resolving the matter as applicable to California law in due course in the Heller appeals. The United States Court of Appeals for the Second Circuit, after certification to the New York Court of Appeals, appears to have resolved the similar question under New York law following the bankruptcies of two other prominent law firms. Dev. Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP, 480 B.R. 145, 159 (S.D.N.Y. 2012), perm. app. granted, 2012 WL10234967 (2d Cir. Dec. 18, 2012), appeal to 2013 WL 9363394 (2d Cir. Dec. 2, 2013), certifying questions to 24 N.Y.3d 16 (2014), rev'd in part and vacated in part on other grounds 574 F.App'x 15 (2d Cir. 2014); see also Geron v. Robinson & Cole LLP, 476 B.R. 732, 739 (S.D.N.Y.2012), appeal to 736 F.3d 213 (2d Cir. 2013), certifying questions to 24 N.Y.3d 16 (2014), aff'd, 762 F.3d 157 (2d Cir. 2014).
A prompt resolution by direct appeal of this matter will settle the issue under District of Columbia law. While the disposition under the laws of only two states and the District of Columbia is not specifically a situation involving conflicting decisions, resolution of the issues is important for management and planning by major law firms, particularly given the ever present possibility of the failure of other law firms in the future.
Finally, as to 28 U.S.C. § 158(d)(2)(A)(iii), an immediate disposition of this question will clearly "advance the progress of the case or proceeding in which the appeal is taken." If the direct appeal is taken and decided favorably for the appellants, the litigation will come to an end without the parties having to engage in what no doubt will be very expensive and time consuming discovery and other pre-trial activity and the subsequent trials, judgments and appeals. If the matters are resolved favorably to the Trustee, that quite likely will facilitate prompt consensual resolution of these disputes.
While no doubt the Trustee and the law firm defendants will develop more fully their reasons if they decide to file a petition for permission to appeal as provided in Fed. R. Bankr. P. 8001(e)(5), the court urges the United States Court of Appeals for the Ninth Circuit to grant any such petition for the reasons set forth above.
Signed and Filed: November 14, 2014
/s/ _________
DENNIS MONTALI
U.S. Bankruptcy Judge
**END OF MEMORANDUM**
DIAMOND MCCARTHY LLP
Andrew B. Ryan, Esq. (pro hac vice)
James D. Sheppard, Esq. (pro hac vice
Michael Fishel, Esq. (pro hac vice)
1201 Elm Street, Suite 3400
Dallas, TX 75270
Telephone: 214-389-5300
Facsimile: 214-389-5399
aryan@diamondmccarthy.com
jsheppard@diamondmccarthy.com
mfishel@diamondmccarthy.com
Counsel for Allan B. Diamond,
Chapter 11 Trustee for Howrey LLP
KORNFIELD, NYBERG, BENDES & KUHNER, P.C.
Eric A. Nyberg, Esq. (Bar No. 131105)
Chris D. Kuhner, Esq. (Bar No. 173291)
1970 Broadway, Suite 225
Oakland, CA 94612
Telephone: 510-763-1000
Facsimile: 510-273-8669
Local Counsel for Allan B. Diamond,
Chapter 11 Trustee for Howrey LLP
UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA SAN FRANCISCO DIVISION
ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT'S MOTION TO DISMISS
For the reasons stated in the Court's Memorandum Decision on Motions to Dismiss issued on September 9, 2014 (ECF No. 48), Defendant's Motion to Dismiss is GRANTED without leave to amend as to the First Amended Complaint's Count V (Accounting pursuant to 11 U.S.C. § 542), Count VI (Turnover), and Count VII (Equitable Accounting); and the Motion to Dismiss is DENIED IN ALL OTHER RESPECTS.
A status conference in this matter will be held on October 22, 2014 at 9:30 a.m.
Signed and Filed: September 28, 2014
/s/ _________
DENNIS MONTALI
U.S. Bankruptcy Judge
### End of Order ###
APPROVED AS TO FORM
AND CONTENT:
/s/ Jason McDonell
Jones Day
51 Louisiana Ave. N.W.
Washington, DC 20001-2113
MEMORANDUM DECISION ON MOTIONS TO DISMISS I. INTRODUCTION
Plaintiff Allan B. Diamond, chapter 11 Trustee ("Trustee") for debtor Howrey LLP ("Howrey" or "Debtor"), filed multiple nearly identical complaints for avoidance and recovery of actual and constructive fraudulent transfers and for an accounting and turnover and other relief, seeking to recover from several law firm defendants the value of profits received by them with respect to unfinished business that previously had been handled by Debtor. Relying on District of Columbia law which in turn relies on Jewel v. Boxer, 156 Cal. App. 3d 171 (1984), Trustee seeks to recover profits realized or to be realized by the defendant law firms from Debtor's unfinished business ("Howrey Unfinished Business"). Trustee alleges that pre-petition waivers executed by Howrey partners relieving them of their duty to account for profits made on the Howrey Unfinished Business (the "Jewel Waiver") constituted fraudulent transfers, and that the defendant law firms are liable as subsequent transferees. Several defendants moved for dismissal of the complaints, and on February 7, 2014, this court issued a memorandum decision ("First MTD Decision") explaining why it was denying the motions in part and granting them in part, with leave to amend. See Diamond v. Pillsbury Winthrop Shaw Pittman, LLP, 2014 WL 507511 (Bankr. N.D. Cal. Feb. 7, 2014).
The court entered the First MTD Decision and separate orders in the following adversary proceedings: A.P. No. 13-3056 (Haynes & Boone LLP); A.P. No. 13-3057 (Neal, Gerber & Eisenberg LLP); A.P. No. 13-3060 (Kasowitz Benson Torres & Friedman LLP); A.P. No. 13-3093 (Jones Day LLP); A.P. No. 13-3094 (Hogan Lovells US); and A.P. No. 13-3095 (Pillsbury Winthrop Shaw Pittman LLP).
In the First MTD Decision, the court relied in part on its prior decisions in Greenspan v. Orrick Herrington & Sutcliffe (In re Brobeck, Phelger & Harrison LLP), 408 B.R. 318 (Bankr. N.D. Cal. 2009) ("Brobeck"); Heller Ehrman LLP v. Arnold & Porter LLP (In re Heller Ehrman LLP), 2011 WL 1539796 (Bankr. N.D. Cal. Apr. 22, 2011) ("Heller I"); Heller Ehrman LLP v. Jones Day (In re Heller Ehrman LLP), 2013 WL 951706 (Bankr. N.D. Cal. Mar. 11, 2013) ("Heller II"); and Heller Ehrman LLP v. Jones Day (In re Heller Ehrman LLP), 2014 WL 323068 (Bankr. N.D. Cal. Jan. 28, 2014). The Brobeck and Heller actions pertained to unfinished business that was acquired by defendant law firms after the dates of dissolution of the debtor law firms. In the Howrey case, however, Trustee is also seeking recovery of profits made by several defendant law firms on Howrey Unfinished Business brought to them by partners who departed before dissolution.
After the First MTD Decision, Trustee amended his complaints in his actions against various law firms, including seven of the eight defendant law firms that have filed the underlying motions to dismiss: Neal, Gerber & Eisenberg LLP (A.P. No. 13-3057) ("Neal"); Kasowitz Benson Torres & Friedman LLP (A.P. No. 13-3060) ("Kasowitz"); Sheppard Mullin Richter & Hampton LLP (A.P. No. 13-3062) ("Sheppard"); Jones Day LLP (A.P. No. 13-3093) ("Jones Day"); Hogan Lovells US (A.P. No. 13-3094) ("Hogan"); Pillsbury Winthrop Shaw Pittman LLP (A.P. No. 13-3095) ("Pillsbury"); and Seyfarth Shaw LLP (A.P. No. 13-3254)("Seyfarth"). He filed a new action against Perkins Coie LLP (A.P. No. 14-3032) ("Perkins"). Five of these eight firms (Neal, Kasowitz, Sheppard, Hogan, and Seyfarth) solely acquired Howrey partners prior to dissolution; the other three (Jones Day, Pillsbury, and Perkins) acquired Howrey partners both pre- and post-dissolution.
Trustee asserts four claims against all of the defendants based on their acquisition of Howrey Unfinished Business from partners who departed prior to dissolution: (1) for an accounting of unfinished business under 11 U.S.C. § 542; (2) for a turnover of profits under 11 U.S.C. § 542; (3) for an equitable accounting; and (4) for unjust enrichment. Trustee asserts an additional four claims for profits on Howrey Unfinished Business against the three firms that acquired post-dissolution partners: (1) for avoidance and recovery of the Jewel Waiver as an actual fraudulent transfer under 11 U.S.C. §§ 548(a)(1)(A) and 550; (2) for avoidance and recovery of the Jewel Waiver as an actual fraudulent transfer under 11 U.S.C. §§ 544 and 550 and D.C. Code § 28-3104(a); (3) for avoidance and recovery of the Jewel Waiver as a constructively fraudulent transfer under 11 U.S.C. §§ 548(a)(1)(B) and 550; (4) for avoidance and recovery of the Jewel Waiver as a constructively fraudulent transfer under 11 U.S.C. §§ 544 and 550 and D.C. Code § 28-3104(a).
The motions to dismiss the various complaints filed by the eight identified defendant law firms focused primarily on the claims relating to the pre-dissolution partners. However, after the motions to dismiss were filed, the United States District Court for the Northern District of California issued a decision in four "unfinished business" adversary proceedings in Heller Ehrman, LLP, holding that the defunct law firm could not recover profits generated by hourly rate matters brought by departing attorneys to new firms. Heller Ehrman LLP v. Davis, Wright, Tremaine, LLP, --- B.R. ---, 2014 WL 2609743 (N.D. Cal. June 11, 2014) (the "Heller USDC Decision"). In addition, the New York Court of Appeals, in response to certifications of questions by the Second Circuit in the cases of Thelen LLP and Coudert Brothers LLP, held that a dissolved law firm's pending hourly fee matters are not partnership "property" or "unfinished business" within the meaning of New York partnership law. In re Thelen LLP, — N.E.3d —, 2014 WL 2931526 (N.Y. July 1, 2014) ("Thelen"). As a consequence of the intervening case law, Trustee and the three movants who acquired post-dissolution partners expanded the scope of the briefing to address the new decisions and their applicability in the Howrey case.
In A.P. No. 13-3095, Trustee asserts various claims against certain former Debtor partners who joined Pillsbury. Those claims are not part of Pillsbury's motion to dismiss and are not dealt with in this memorandum decision.
On July 29, 2014, the court held a hearing on the motions to dismiss. For the reasons stated below, the court is granting the motions to dismiss the section 542 accounting and turnover claims and the equitable accounting claims arising from pre-dissolution acquisition of former Howrey partners. It is denying the balance of the motions to dismiss. II. DISCUSSION
The eight adversary proceedings have not been consolidated but the motions were argued together. This Memorandum Decision is being filed in each of those adversary proceedings, with changes only in the caption of each.
A. Trustee Has Asserted Cognizable Claims Relating to Unfinished Business Acquired Post-Dissolution
The Heller USDC Decision holds that under California law the "unfinished business rule" of Jewel and its progeny is inapplicable when attorneys from a dissolving law firm join other law firms and bring with them work that the dissolving law firm necessarily could not complete. The Thelen decision deals with New York law and holds that the unfinished business rule does not apply to hourly rate matters.
Here, however, the law of the District of Columbia governs, and the District of Columbia courts have applied the unfinished business rule to hourly and contingency fee cases, have rejected the position that "new retention agreements" executed by former clients preclude enforcement of the unfinished business rule, and have overruled policy objections similar to those underlying the Heller USDC Decision. See, Beckman v. Farmer, 579 A.2d 618 (D.C. 1992) and Robinson v. Nussbaum, 11 F. Supp. 2d 1, (D. D.C. 1997)(both discussed in more detail in the First MTD Decision).
Notwithstanding the interpretation of California law in the Heller USDC Decision and the change in New York law by the Thelen decision, no party has cited, and the court has not found, any change in the law of the District of Columbia since the First MTD Decision. Therefore, the court will adhere to District of Columbia law as set forth in that decision. The motions to dismiss the claims based on Howrey Unfinished Business acquired post-dissolution will be DENIED.
B. Trustee Has Not Asserted Cognizable Claims Relating to Unfinished Business Acquired Pre-Dissolution Under Bankruptcy Code Section 542
In the First MTD Decision, the court rejected the Trustee's attempt to use fraudulent transfer laws to recover profits on pre-dissolution matters that "no longer belonged to Debtor on the date of the critical transfer" (i.e., March 9, 2011, the date that the Howrey partners voted to dissolve the firm and adopted the Jewel Waiver). First MTD Decision at 20. The court continued:
Stated otherwise, when partners left Debtor prior to dissolution, taking Howrey Unfinished Business with them, that business itself and any future profits to be realized on it was no longer property of Debtor that could have been subsequently disposed of by the Jewel Waiver, a fraudulent transfer. Heller II, 2013 WL 951706 at *5; Heller I, 2011 WL 1539796 at *5; Brobeck, 408 B.R. at 338.Id. (emphasis added).
As the "business itself and any future profits" from it were not property of the Debtor as of the date of dissolution, the court held that the Trustee's section 542 claims were unsustainable. Id. at 24-25. The court also observed that "on the date of the Jewel Waiver the Howrey Unfinished Business that had already been taken by previously departed partners did not belong to Debtor and thus there was no transfer"). Id. Trustee still has not demonstrated how the business taken by pre-dissolution partners was property of Debtor at the time of dissolution, and the court will abide by its prior holdings in the First MTD. The motions to dismiss the section 542 claims will be GRANTED without leave to amend.
C. Trustee Has Not Asserted Cognizable Claims For An Equitable Accounting Relating to Unfinished Business Acquired Pre-Dissolution
Trustee alleges that when the pre-dissolution partners left Debtor, they had a duty to account for and turn over any profits generated on account of pre-dissolution matters pursuant to D.C. Code §§ 33-104.04(b)(1) and 33-106.03(b)(3). This is based on the premise that those pre-dissolution partners had a duty of loyalty to Debtor under that law to account to the partnership and hold as trustee any property, profit or benefit derived by the partner in the conduct and winding up of the partnership business.
The duty to account for profits by those partners is found in D.C. Code § 33-106.03(b)(3), which states in relevant part:
Upon a partner's dissociation . . . [t]he partner's duty of loyalty under § 33-104.04(b)(1) [to account for partnership profits] . . . continue[s] only with regard to matters arising and events occurring before the partner's dissociation. . . .D.C. Code § 33-106.03(b)(3) (emphasis added).
Trustee argues that those pre-dissolution partners therefore had a statutory duty of loyalty to Debtor with respect to "matters arising" prior to their departure, and alleges that the law firm defendants have collected revenues and/or profits relating to the pre-dissolution matters. Without an accounting from those law firm defendants, Trustee allegedly cannot determine the amount of the revenue received or the status of those pre-dissolution matters. He asserts that because the partners themselves had fiduciary duties to account, the law firm defendants must provide an accounting or Trustee will not have an adequate remedy at law.
The court rejects the Trustee's theory as it attempts to impose fiduciary duties owed by individual departing partners on the defendant law firms, when no such duty exists. As stated in Heller II, the law firm defendants do not have fiduciary obligations to the Debtor or the Trustee. Heller II at *5 (Defendant firm contended "that it had no fiduciary duty to Heller. The court agrees.") Because an accounting is a remedy imposed upon fiduciaries, it cannot be imposed upon those defendants here.
While the Trustee cites scant authority for the proposition that an accounting can be acquired from a non-fiduciary, that principle does not hold up under further examination. Although this court relied on Development Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP (In re Coudert Brothers LLP), 480 B.R. 145, 160-61 (S.D.N.Y.2012) in the First MTD Decision, its reasoning was rejected in Thelen. Despite Trustee's reliance on Robinson, that case did not extend the duty to account to a third party not previously a member of the partnership formed by the litigants.
Further, older decisions that predate modern discovery seem out of date. More persuasive are the recent decisions relied upon by Defendants, including Haynes v. Navy Federal Credit Union, ___ F. Supp. 2d ___, 2014 WL 2591371 (D. D.C. June 10, 2014). There the district court rejected an aggrieved mortgagor's claim for an accounting, holding:
Plaintiff's request for an accounting in equity as part of the overall relief in this case also fails, as this is a remedy premised on a breach of fiduciary duty or contract that Plaintiff does not establish. 'An accounting is a detailed statement of debits and credits between parties arising out of a contract or a fiduciary relation.' Bates v. Nw. Human Servs., Inc., 466 F. Supp. 2d 69, 103 (D.D.C. 2006). Such relief may be obtained at the close of litigation ... as long as the plaintiff is able to show that the remedy at law is inadequate. (Quotation marks omitted; emphasis added.)Haynes, 2014 WL 2591371, *7.
Although the Trustee's claim under this theory must fail, as discussed below, he may have an adequate remedy at law on his remaining count.
D. Trustee Has Asserted Cognizable Claims For Unjust Enrichment Relating to Howrey Unfinished Business Acquired Pre-Dissolution
In the similar counts in the complaints under this theory, the Trustee alleges that when the pre-dissolution partners left Howrey and joined their respective law firms, they transferred or caused a transfer of revenue and/or profits on the Howrey Unfinished Business to their new law firms. He contends that because the partners failed to account for the revenue and/or profits, a benefit has been conferred upon the respective defendants and he has a superior claim to those profits because those pre-dissolution partners had a duty to hold profits in trust as required by District of Columbia law. Because he assets that if the defendants are allowed to retain those benefits the result will be unjust and inequitable, he seeks restitution of the amounts of profits collected and a judgment against the respective law firms in an amount of their gain.
Defendants argue that unjust enrichment under District of Columbia law requires that the plaintiff have parted with some value. They rely on cases such as Nevius v. Africa Inland Mission Intn'l, 511 F. Supp.2d 114 (D.D.C. 2007) and Oceanic Exploration Co. v. ConocoPhillips, Inc., 2006 W.L. 2711527 (D.D.C. Sept. 21, 2006).
Those cases state that an element of unjust enrichment is that the plaintiff confer a benefit. But those cases do not rule out the situation where a plaintiff has an expectation of the benefit that it loses to a third party. In Nevius and Oceanic, the parties who bestowed the benefit had no connection with the plaintiff, nor did they deprive the plaintiff of anything it was otherwise entitled to. In contrast, cases cited by the Trustee do not state the rule in the active voice, viz., plaintiff conferred a benefit; they do so in the passive voice, viz., a benefit was conferred upon the defendant. See, for example, State Farm Gen'l Ins. Co. v. Stewart, 288 Ill. App.3d 678 (1997) for the proposition that:
A plaintiff alleging an unjust enrichment may be seeking to recovery benefits which he gave directly to the defendant, or one which was transferred to the defendant by a third party.288 Ill. App.3d at 691, citing HPI Health Care Servs., 131 Ill. 2d 145, 137 Ill. Dec. 19, 545 N.E. 2d 672.
Under District of Columbia law, in Ellipso, Inc. v. Mann, 460 F. Supp.2d 99 (D.D.C. 2006), the court described an unjust enrichment action as a quasi-contract, a contract implied in law, when a person retains a benefit (usually money) which in justice and equity belongs to another. Id. at 104, citing 4934, Inc. v. District of Columbia Dept. Of Employment Servs., 605 A.2d 50, 55 (D.C. 1992).
The court recognized that the elements of unjust enrichment are similar to those of quantum meruit, with the added element that the plaintiff must show that it would be unjust for the recipient of a benefit to retain that benefit. Id., citing United States v. Ideal Electronics Security Co., Inc., 81 F.3d 240 (D.C. Cir. 1996) (internal quotation marks omitted). Similarly, the district court in Bates v. Nw. Human Servs., Inc., 466 F. Supp. 2d 69 (D.D.C. 2006), cited Ellipso and noted that the District of Columbia Court of Appeals requires that plaintiff bringing a claim for unjust enrichment show that the plaintiff had a reasonable expectation of payment, the defendant should reasonably have expected to pay, or society's reasonable expectations of person and property would be defeated by nonpayment, citing Heller v. Fortis Benefits Ins. Co., 142 F.3d 487, 495 (D.C. Cir. 1998).
The rule has been stated slightly otherwise in Lorazepan & Clorazepate Antitrust Litigation, 295 F. Supp. 2d 30 (D.D.C. 2003). There the court stated that to articulate a general claim for unjust enrichment, plaintiffs must establish that they conferred a legally cognizable benefit upon defendants; defendants possessed an appreciation or knowledge of the benefit; and defendants accepted or retained the benefit under inequitable circumstances.
This result is consistent with the Restatement of Restitution and Unjust Enrichment which states that if third party makes a payment to a defendant, a claimant with a better legal or equitable right is entitled to restitution from the defendant to prevent unjust enrichment. See, RESTATEMENT (THIRD) OF RESTITUTION AND UNJUST ENRICHMENT § 48 (2011).
Defendants argue that the District of Columbia has not adopted this section of the Restatement. The Trustee argues persuasively that other provision have been adopted and this one like would be adopted too.
Taking all of this together, the court is satisfied that the Trustee has the better argument here and that he has properly stated a claim for unjust enrichment.
The pre-dissolution partners who left Debtor abrogated their responsibility under applicable District of Columbia law and as alleged, deprived Debtor of pre-dissolution partnership profits with regard to "matters arising" (namely Howrey Unfinished Business) before the partners' dissociation.
See, D.C. Code § 33-106.03(b)(3), quoted, infra.
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With Debtor's expectations frustrated, it follows that the law firm defendants do not have a greater legal or equitable claim to the profits the pre-dissolution partners brought with them, away from Debtor.
Finally, the court will not conclude that, on the mere allegations of the complaints alone, that retention of such profits by the law firm defendants is "just" rather than what the Trustee contends is "unjust." Whether the Trustee may only recover profits on Howrey Unfinished Business attributed to the former Debtor partners themselves or he may recover all profits realized by the law firms may require the finder of fact to determine how much would be "just" to return to the Trustee and how much would be "unjust" to take from the defendants. The motions to dismiss this claim will be DENIED. III. CONCLUSION
Counsel for the Trustee should serve and upload orders disposing of the motions to dismiss in each adversary proceeding consistent with this Memorandum Decision. The court will hold status conferences in each adversary proceeding on October 22, 2014, at 9:30 a.m.
Signed and Filed: September 9, 2014
/s/ _________
DENNIS MONTALI
U.S. Bankruptcy Judge