In re: Coudert Brothers LLP, Debtor. -------------------------------- Development Specialists, Inc., Respondent-Appellant, -------------------------------- K&L Gates LLP et al., Appellants-Respondents, -------------------------------- Akin Gump Strauss Hauer & Feld LLP, et al., Appellants-Respondents.BriefN.Y.June 4, 2014To Be Argued By: DAVID J. ADLER Time Requested: 30 Minutes CTQ-2013-00010 USCOA Docket No. 12-4916-bk Court of Appeals STATE OF NEW YORK IN THE MATTER OF: COUDERT BROTHERS LLP, Debtor. DEVELOPMENT SPECIALISTS, INC., Respondent-Appellant. (caption continued on inside cover) ON QUESTIONS CERTIFIED BY THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT (USCOA DOCKET NO. 12-4916-BK) REPLY BRIEF FOR RESPONDENT-APPELLANT d DAVID J. ADLER JOSEPH R. SCHOLZ EDUARDO GLAS MCCARTER & ENGLISH, LLP 245 Park Avenue, 27th Floor New York, New York 10167 Telephone: (212) 609-6800 Facsimile: (212) 609-6921 Attorneys for Respondent-Appellant Date Completed: May 16, 2014 GEOFFROY DE FOESTRAETS, JINGZHOU TAO, Defendants, —and— K&L GATES LLP, MORRISON & FOERSTER LLP, Appellants-Respondents. JONES DAY, ARENT FOX LLP, DLA PIPER LLP, DORSEY & WHITNEY LLP, DECHERT LLP, SHEPPARD MULLIN RICHTER & HAMPTON, LLP, SCOTT JONES, DUANE MORRIS LLP, AKIN GUMP STRAUSS HAUER & FELD LLP, Appellants-Respondents. i CORPORATE DISCLOSURE STATEMENT Pursuant to New York Court of Appeals Rule 500.1(f), Respondent- Appellant Development Specialists, Inc. (“DSI”) states that it has no parent corporations and there are no publicly held companies that own ten percent or more of its stock. STATEMENT OF RELATED LITIGATION Pursuant to Rule 500.13, DSI states that the certified questions accepted by this Court in this matter, set forth below, are the same the questions certified from the United States Court of Appeals for the Second Circuit (the “Second Circuit”) on November 15, 2013 in I re Thelen LLP, 736 F.3d 213 (2d Cir. 2013) and accepted by this Court on December 12, 2013. See In re Thelen LLP, 22 N.Y.3d 1017 (2013). Appdx. A11.1 The Thelen case has been docketed in this Court as CTQ-2013-00009. 1 “Appdx.” refers to the Law Firms’ Appendix; “RA.” refers to DSI’s Respondent Appendix. i TABLE OF CONTENTS TABLE OF AUTHORITIES ............................................................................. ii PRELIMINARY STATEMENT .......................................................................... 1 ARGUMENT..................................................................................................... 5 I. THE CLIENT MATTERS ARE PENDING BUT UNFINISHED ENGAGEMENTS ............................................................ 5 II. THE LAW FIRMS MUST ACCOUNT FOR ALL PROFITS ON THE CLIENT MATTERS ................................................................. 7 A. Judge McMahon Determined That The Law Firms Are Jointly Liable with the Coudert Partners ...................................... 7 B. The Kirsch Rule (Partnership Law § 73) Does Not Apply ................. 8 C. The No Compensation Rule Applies ................................................ 14 D. The Duty to Account Does Not End When the Client Enters Into a New Engagement With A Former Partner ................... 17 E. Profits Under The No Compensation Rule Are Not Speculative ...................................................................................... 19 III. APPLICATION OF THE PARTNERSHIP LAW TO ALL CLIENT MATTERS WILL NOT BE INEQUITABLE ............................ 20 CONCLUSION .......................................................................................... 24 ii TABLE OF AUTHORITIES Page(s) FEDERAL CASES Denver v. Roane, 99 U.S. 355 (1878) .................................................................................. 5 Heller Ehrman LLP v. Jones Day (In re Heller Ehrman LLP), 2014 WL 323068 (Bankr. N.D.Cal. Jan 28, 2014) ........................................... 20 RLS Associates, LLC v. United Bank of Kuwait PLC, 417 F.Supp.2d 417 (S.D.N.Y. 2006) ................................................................ 16 Robinson v. Nussbaum, 11 F. Supp. 2d 1 (D.C. 1997) ................................................................. 5, 20 Santalucia v. Sebright Transportation, Inc., 184 F.Supp. 2d 224 (N.D.N.Y. 2002)......................................................... 13 Santalucia v. Sebright Transportation, Inc., 232 F.3d 293 (2d Cir. 2000) ....................................................... 5, 12, 13, 17 STATE CASES Beckman v. Farmer, 579 A.2d 618 (D.C. 1990) ............................................................................. 7 Bushard v. Reisman, 800 N.W.2d 373 (Wis. 2011) ................................................................... 7, 8, 21 Castle v. Marks, 50 App. Div. 320 (1st Dep’t 1900) ............................................................... 17 Dwyer v. Nicholson, 89 A.D.2d 597 (2d Dep’t 1982) ........................................................................ 5 Ederer v. Gursky, 9 N.Y.3d 514 (2007) ................................................................................... 23 iii Frates v. Nichols, 167 So.2d 77 (Fla. Dist. Ct. 1964) ............................................................. 17 Geist v. Burnstine, 19 N.Y.S.2d 76 (Sup. Ct. 1940) ................................................................. 5 Gottlieb v. Greco, 298 A.D.2d 300 (1st Dep't 2002) ............................................................... 11 King v. Leighton, 100 N.Y. 386 (1885) ..................................................................................... 5 Kirsch v. Leventhal, 181 A.D.2d 222 (3rd Dep’t 1992) ...................................................... 5, 11, 13 Levy v. Leavitt, 257 N.Y. 461 (1931) ................................................................................... 14 Palladino v. CNY Centro, Inc., 2014 WL 1356239 (N.Y. April 8, 2014) .............. ....................................... 21 Rothman v. Dolin, 20 Cal. App. 4th 755 (1993) .................................................................... 6 Ruby v. Abington Memorial Hosp., 50 A.3d 128 (Pa. Super. 2012) ............................................................ 17, 18 Shandell v. Katz, 217 A.D.2d 472 (1st Dep’t 1995) ................................................................. 11 Stem v. Warren, 227 N.Y. 538 (1920) ................................................................................. passim STATE STATUTES Partnership Law § 4(4) ............................................................................... 22 Partnership Law § 24 ........................................................................... 1, 2, 8 Partnership Law § 40(6) ............................................................................... 1 Partnership Law § 43(1) ......................................................................... 1, 14 Partnership Law § 66(1)(a) .......................................................................... 5 iv Partnership Law § 72 ................................................................................... 8 Partnership Law § 73 ........................................................................... passim Prefatory Note to the Uniform Partnership Act of 1914, www.uniformlaws.org/Shared/Docs/Partnership/upa1914.doc ........................ 19 REGULATIONS NYC Eth. Op. 1988-4, 1988 WL 490014 (June 3, 1988). ...... ............................... 16 OTHER AUTHORITIES Alan R. Bromberg & Larry E. Ribstein, Bromberg on Partnership, 2014 ....................................................................... 10 Robert W. Hillman, Hillman On Lawyer Mobility, The Law And Ethics Of Partner Withdrawal And Law Firm Breakups, § 4.6.1.2 (2d Ed. Supp. 2014) ............. 6, 9 W. R. Habeeb, Rights as to business unfinished or fees uncollected upon withdrawal or death of partner in law firm 78 A.L.R.2d 280 (1961). ............................................................................... 5 1 PRELIMINARY STATEMENT Respondent-Appellant DSI1 respectfully submits this brief in further support of its appeal on the second certified question before the Court.2 In its opening brief, DSI established that (i) “Client Matters” consist of the pending engagements to perform legal services unfinished on the dissolution date; (2) Partnership Law §§ 40(6) and 43 apply in a dissolution and liquidation and the winding up partners are required to complete the Cli nt Matters and account for all profits on those matters; (3) Partnership Law § 73 is inapplicable to a dissolution and liquidation; and (4) the Law Firms in this case are jointly liable for an accounting under Partnership Law § 24, as Judge McMahon determined. In their Reply and Opposition Brief (the “Law Firm Opposition”), the Law Firms ignore these principles, and assert that DSI is not entitled to an accounting for profits on hourly matters because: (1) the term “Client Matter” cannot be readily defined; (2) DSI did not provide a method fr determining how profits should be calculated, and, according to the Law Firms, the calculation of profits would be unfair and uncertain; (3) that in an accounting, the winding-up partner should be permitted to retain all fees on unfinished business because post- dissolution “skills, effort and diligence” are necessarily equal to the fees; and (4) it 1 Capitalized terms not defined herein shall have the meanings ascribed in DSI’s Brief of Respondent-Appellant dated April 21, 2014. 2 DSI’s arguments in this Reply Brief are limited to certified question 2. 2 would be inequitable and contrary to New York policy to require the Law Firms to provide an accounting on the Client Matters. None of those assertions have merit. First, the definition of a Client Matter is drawn from decisions of this and other Courts, which have defined unfinished business for which the dissolved firm has a right to an accounting. Defining what those Cli nt Matters consist of is a straightforward exercise in this case. Second, while the Law Firms suggest that only the Coudert Partners, and not the Law Firms, could be required to account for profits on Client Matters, the Law Firms (other than Jones Day) ignore Judge McMahon’s factual finding in this case that the Law Firms are jointly liable under Partnership Law § 24. Jones Day, in its Reply Brief (“JD Reply”), seeks to evade the clear language of Partnership Law § 24. Judge McMahon’s factual finding is not before this Court. Third, under the Partnership Law, in a dissolution followed by a liquidation, the duty to account extends to all proceeds received on account of client matters. That duty is consistent with this Court’s decision n Stem v. Warren, 227 N.Y. 538, 546-47 (1920), notwithstanding the strained and unpersuasive reading of this case proffered by the Law Firms. Only in a dissolution in which a successor firm continues the business after dissolution (and otherwis satisfies the criteria under Partnership Law § 73) is the duty to account potentially subject to a claim for post- 3 dissolution compensation. Fourth, the Law Firms mischaracterize the holdings from the Contingency Cases that have permitted a credit to the winding up partner. These cases make clear that (a) the dissolved firm retains an interest in client matters even though the dissolved firm has been replaced by the client (either by a partner in the dissolved firm or a law firm that she joins); (b) any setoff for “skills, efforts and diligence” is limited to extraordinary efforts and enhanced results that increase the value of the case after the dissolution date; and (c) any setoff is not ipso facto equal to all post- dissolution fees. Fifth, Jones Day’s contention that the Client Matters were “wound up” once the clients retained Jones Day finds no support in the Partnership Law or any applicable precedent. Winding up partners cannot terminate their fiduciary duty to account to the dissolved firm by joining a new firm. Allowing them to do so would eviscerate the fiduciary duties of the winding up partners codified in the Partnership Law and create a moral hazard. Sixth, the manner in which profits would be ascertained wasnot part of the second certified question to this Court which simply asked “what proportion of the profit derived from an ongoing hourly matter may the new law firm retain.” DSI has provided the correct answer to that question as set forth in the Partnership Law, which is that the winding up partner, and in this ca e, his new firm, may not retain 4 any portion of the profit on unfinished Client Matters. The actual amount of pr fit to be remitted will be calculated by the trial court based on its consideration of the appropriate factors which, according to Judge McMahon, would be relatively straightforward. Seventh, application of the Partnership Law will not be inquitable or contrary to New York policy. In fact, interpreting the Partnership Law in the manner suggested by the Law Firms – exempting only law ers handling hourly matters – would be far more inequitable than applying the statute uniformly to all matters. An exception for hourly cases would result in different fiduciary duties for lawyers – even within the same firm – depending o the type of matters they handle. The far more consistent, and equitable, result is to require lawyers to account for post-dissolution profits on all unfinished matters. Finally, because the Partnership Law sets only default rules, the Law Firms (and other law partnerships) can readily amend their partnership agreements to provide that their partners have no duty to account for unfinished business. The Law Firms do not deny that proposition or provide any reason why law firms cannot do so. Thus, the policy questions in this matter are not primarily about client choice, as the Law Firms contend, but about the choices that partners themselves make. Unless partners address the issue in their agreements, they remain bound by their obligations under the Partnership Law. 5 ARGUMENT I. THE CLIENT MATTERS ARE PENDING BUT UNFINISHED ENGAGEMENTS As explained in DSI’s opening brief, “client matters” consist of the pending engagements to perform legal services that are unfinished on the dissolution date. (DSI Br. at 2, 12, 64-65); see also Partnership Law § 66(1)(a) (“transactions unfinished at dissolution”). While the Law Firms describe this definition as “circular”, courts around the country, including those in New York, have held that unfinished engagements, including unfinished legal representations, are the unfinished business of the partnership for which partners must account. See King v. Leighton, 100 N.Y. 386, 393-94 (1885); Denver v. Roane, 99 U.S. 355 (1878); Stem, 227 N.Y. at 546-47; Kirsch v. Leventhal, 181 A.D.2d 222, 225-226 (3rd Dep’t 1992); Santalucia v. Sebright Transportation, Inc., 232 F.3d 293, 300-301 (2d Cir. 2000); see also W. R. Habeeb, Rights as to business unfinished or fees uncollected upon withdrawal or death of partner in law firm, 78 A.L.R.2d 280 (1961). In this case, Client Matters include all pending matters, including those billed on an hourly basis. See Geist v. Burnstine, 19 N.Y.S.2d 76 (Sup. Ct. 1940); Dwyer v. Nicholson, 89 A.D.2d 597 (2d Dep’t 1982); Robinson v. Nussbaum, 11 F. Supp. 2d 1, 6 (D.C. 1997); see also Robert W. Hillman, Hillman On Lawyer 6 Mobility, The Law And Ethics Of Partner Withdrawal And Law Firm Breakups, § 4.6.1.2, p. 4:70 (2d Ed. Supp. 2014) (accounting for unfinished business involves “straightforward application of partnership law” and “there is no basis under partnership law for treating a matter billed on an hourly basis as something other than the unfinished business of the partnership.”)(emphasis in original).3 While the Law Firms claim that a “client matter” cannot be readily defined for purposes of applying the Partnership Law’s duty to account, it is a straightforward analysis to determine whether the dissolved firm had been retained in a matter (regardless of whether the retainer is mbodied in writing) which was pending at the time of dissolution. Rothman v. Dolin, 20 Cal. App. 4th 755, 759 (1993)(what constitutes unfinished business must be det rmined on the date of dissolution of the partnership, not based on events occurring thereafter). By way of example, if the unfinished matter involves a trans ctional matter (e.g. corporate, real estate transaction), the client matter would be that particular transaction and would extend until the transaction was concluded. Similarly, if the uncompleted matter was a litigation, arbitration or other contested proceeding, the client matter would be that specific proceeding and would extend u til the proceeding was concluded. 3 If the Client Matters are determined to be the “partnership business” of Coudert, the same fiduciary obligations apply and the first certified question should be answered in the affirmative. 7 II. THE LAW FIRMS MUST ACCOUNT FOR ALL PROFITS ON THE CLIENT MATTERS The second certified question asks what portion of pr its the new law firm retain in a dissolution and liquidation. Under the UPA and the Partnership Law, the no compensation rule and the duty to account apply in a dissolution and liquidation. This methodology has been applied by this Court and other New York courts in liquidations of professional service partne ships. DSI’s Brief at 22-26. Likewise, the high courts of other states have consistently applied these provisions in dissolutions and liquidations governed by the UPA. Bushard v. Reisman, 800 N.W.2d 373, 384-385 (Wis. 2011); Beckman v. Farmer, 579 A.2d 618, 634-636 (D.C. 1990). A. Judge McMahon Determined That The Law Firms Are Jointly Liable With The Coudert Partners While Jones Day suggests that only the Coudert Partners, and not the Law Firms can be required to account for profits on Client Matters (JD Reply at pp. 16- 17), the Law Firms ignore the fact that Judge McMahon made a factual determination that the Law Firms are jointly liable with the Coudert Partner4 4 Unlike other law firms that have filed for bankruptcy in recent years, the Coudert Partnership Agreement did not contain an unfinished business waiver. As such, DSI can assert direct claims against the Coudert Partners for unfinished busines without having to avoid the waiver as a fraudulent transfer. 8 pursuant to Partnership Law § 24. Based on the undisputed facts, Judge McMahon found as follows: The Former Coudert Partners' duty to account to Coudert arose as they completed the Client Matters and earned fees thereon, and these actions were within the scope of the business of the Firms they joined. Thus, the Firms are jointly liable for an accounting . . . Here, by contrast, the Former Coudert Partners owed fiduciary duties to Coudert with respect to winding up the Client Matters, and the Firms where the Former Coudert Partners landed are jointly liable under Partnership Law § 24 for those Partners' failures as fiduciaries. Appdx. A130, A140. Jones Day’s suggestion that Judge McMahon erred in making that determination is without merit.5 In any event, Judge McMahon’s factual determination is not subject to review here. B. The Kirsch Rule (Partnership Law § 73) Does Not Apply As noted in DSI’s opening brief, Partnership Law § 73 applies only where a partner dies or retires and the business is continued and the successor is liable for the debts of the dissolved partnership. See Partnership Law §§ 72, 73. If these conditions are satisfied, the interest of the withdrawing partner is valued as of the date of dissolution and the partner is entitled to ei her interest or profits at her election. If these conditions are not satisfied, the no compensation rule applies. Bushard, 800 N.W.2d at 384-85 (“[w]hen there is a continuation, the departing 5 Jones Day’s contention that a Coudert’s partner’s duty to account is not part of the “ordinary course of [Jones Day’s] partnership” (JD Reply at p. 20, fn. 2) is based on a misreading of Partnership Law § 24. A Jones Day partner is clearly acting in the firm’s business in handling a case brought from Coudert. 9 partner’s interest in the partnership is valued on the date of dissolution. When there is a wind-up, by contrast, the value of the partnership on the date of dissolution is less significant. The important date is the date of termination, when the winding up of the partnership’s affairs has been completed.”); see also Hillman, Lawyer Mobility, § 4.3.6 at 4:35 (“[Partnership Law 73] applies only when the business is continued without a winding up and liquidation”). The Law Firms do not dispute that the conditions for the application of Partnership Law § 73 have not been satisfied.6 Nonetheless, the Law Firms cling to the position, with no supporting analysis, that t e valuation methodology under Partnership Law § 73 should apply without regard to the nature of the winding up and liquidation or continuation of the business. Law Firm Opposition at pp. 32- 33.7 Starting from the incorrect premise that in a dissolution, a law firm is entitled to be paid only for the value of its pre-dissolution services, the Law Firms argue that in any accounting, the partners are permitted a credit for their post-dissolution skills, efforts and diligence and that credit is equal to the fees they receive for their 6 Jones Day actually concedes this point: “[t]here was no identifiable successor firm [to Coudert].” JD Reply at p. 16. 7 Although the Law Firms fail to provide any support for the application of Partnership Law § 73, they nonetheless argue that the essential question i what portion of any fee is “attributable to the use of” the client matter (quoting Partnership Law §73). Law Firm Opposition at p. 30. That referenced calculation applies only under Partnership Law § 73 to determine the value of the withdrawing partner’s payout after withdrawal when he is no longer a partner. That payout is treated as that “of an ordinary creditor” superior to the interests of the remaining partners who continue the business. Thus, the inapplicability of Partnership Law § 73 is further demonstrated by the fact that the Coudert Partners remain partners i Coudert as of today and still have capital accounts (RA. A5). 10 post-dissolution services. Law Firm Opposition at p. 33. These arguments should be rejected for at least three reasons. First, because Partnership Law § 73 does not apply, the accounting methodology that permits a credit for “skills efforts and diligence” is not permitted. Bromberg on Partnership, §7.13(f), at 7:214 (“[In a continuation case], [some courts have approved compensation for the post-dissolution services of the continuing partners. . . . no compensation is allowed hen the partnership is wound up after dissolution . . .”). Second, the Contingency Cases make clear that (a) the dissolved and discharged firm retains an interest in its client matters even after the client retains a winding up partner or a law firm that she joins8; and (b) any setoff for “skills, efforts and diligence” is limited to extraordinary efforts and enhanced results that increase the value of the case after the dissolution date; and (c) any setoff is not ipso facto equal to all post-dissolution fees.9 Rather, the Contingency Cases suggest that this standard is equivalent to providing the partner winding up the matter with a credit from the value of the case for a partner’s extraordinary efforts. 8 Both the Law Firms and Jones Day incorrectly argue that if DSI’s analysis were accepted, it could pursue any law firm who took over a client matter. Law Firm Opposition at p. 26, fn 4; JD Reply at p. 2. This is entirely incorrect. As explained in DSI’s brief, it is the fiduciary obligation of the former partner to wind up and account for the partnership property/partnership business that forms the basis to assert an accounting claim. 9 If skills, efforts and diligence were always equal to post-dissolution fees received, the courts rendering those decisions would have simply said the firm was not entitled to any portion of post-dissolution fees. They did not, and instead found that the cases were assets of the dissolved partnership for which partners had to account and offered a method of valuing those cases. 11 In Kirsch, the partner who took the case asserted that her extraordinary efforts after dissolution led to the result, and that the Plaintiff had little involvement in the matter. Kirsch, 181 A.D.2d at 225-226. The Appellate Division found that the contingency case was nonetheless unfinished business for which the partner had to account, and permitted the partner to seek a credit for those extraordinary post-dissolution efforts. Because “skills, effort and diligence” are merely a potentially applicable and not necessarily complete setoff, the Contingency Cases (to the extent they are even germane to the damages analysis in an hourly cases) stand for the propositions that (1) notwithstanding the client’s entry into a new engagement, the dissolved firm has an interest in any post-dissolution fees as a re ult of the former partner’s obligation to account; and (2) the credit allowed for post dissolution efforts, skills and diligence is not for the entirety of the partne’s post-dissolution work. Thus, the Law Firms’ attempt to distort the holdings of the Contingency Cases to conclude that an hourly case has no value is without merit. Third, the Law Firms ignore that the Kirsch rule requires a valuation of the case as of the dissolution date. See e.g. Shandell v. Katz, 217 A.D.2d 472 (1st Dep’t 1995) (value of contingency cases to be determined as of dissolution date pursuant to Partnership Law §73); Gottlieb v. Greco, 298 A.D.2d 300 (1st Dep't 2002) (same). The Law Firms incorrectly assert that t e valuation is not of the 12 case itself but of the value of the services rendere to the client.10 Law Firm Opposition at 19. Santalucia is instructive on this point. In that case, the winding up partner (Premo) argued that he had no duty to account to the dissolved law firm (Mackrell) because the client had terminated Mackrell and retain d Premo following dissolution. Santalucia, 232 F.3d at 297-98. Premo argued that because the client had terminated Mackrell, it could only recover the value of its pre-dissolution services (quantum meruit). Id. at 297. The Second Circuit rejected this argument and stated that the execution of a new retainer was irrelevant in an accounting action between the partners. Id. The Second Circuit thus concluded that Premo’s winding-up obligation was not completed when the client entered into the new retain r with Premo. Id. The Court also rejected Premo’s argument that the value of the case to the dissolved firm was the value of pre-dissolution services rendered to the client (quantum meruit), and remanded the matter to the district court to determine the “value of the case to the dissolved partnership at the time of the dissolution.” Id. at 301 (emphasis added). 10 With respect to hourly cases, a similar analysis could be utilized, by which a court could determine the value of the case to the partnership on the dissolution date. However, given that Partnership Law §73 does not apply here, this is not the appropriate measure of recovery in this case. In addition, the Law Firm’s premise that an hourly case has no value at the dissolution date ignores the daily occurrence of the lateral partner who is awarded a rich (and often guaranteed) compensation package upon joining a new firm based on a book of ongoing hourly cases. The new firm must perceive some value in the client matters for which it pays, in essence, up front. 13 On remand, the district court determined that on the date of dissolution the case had a settlement value of $225,000, and that the value of the case to Mackrell was $75,000 (one third of the settlement value). Santalucia v. Sebright Transportation, Inc., 184 F.Supp. 2d 224, 226 (N.D.N.Y. 2002). The court determined that the value of the case increased dramatically after dissolution due to the skill and efforts of Premo. In ascertaining the value of the case, the court did not consider either the number of hours expended either by Mackrell pre- dissolution or Premo post-dissolution. Id. at 226-27. Thus, the value of the case to the partnership was determined without consideration of the value of services rendered to the client. Santalucia reflects that in a partnership accounting, the value of the case as of dissolution is the expected value to the dissolved firm. It bears little to no relationship to the value of the services rendered to the client.11 Lastly, the Law Firms contend that application of the no compensation rule to hourly cases would result in impermissible disince tives for firms to accept partners with cases subject to unfinished business claims and/or for partners to devote sufficient efforts to such cases. But these pot ntial disincentives exist to an even greater degree in contingency cases. In Santalucia, for example, if the district 11 To further illustrate, if a lawyer was retained in a personal injury case the day before dissolution of his law firm with an expected value to the firm of $5 million, Kirsch would value that case at $5 million even if little or no services had been provided prior to dissolution. 14 court had determined that the value of the case on the dissolution date was more than what was ultimately received, Premo would have rec ived no recovery other than that provided for in the Mackrell partnership agreement (his percentage interest in the dissolved firm’s profits). In addition, if there were no recovery, Premo’s overhead and other expenses incurred in prosecuting the case would not be paid – an additional risk that does not exist in the hourly matter. Despite these added disincentives, partners who complete contingency cases are required to account and courts have not regarded that duty as an impermissible threat to client choice. There is no principled reason or policy justification to afford lawyers who complete hourly cases better treatm nt than the lawyers who complete contingency cases. C. The No Compensation Rule Applies Because Partnership Law § 73 in inapplicable when a partnership dissolves and liquidates, the Partnership Law requires that te dissolved firm’s partners are obligated to complete the client matters and account for their use of partnership property under Partnership Law § 43(1) without extra compensation. See Levy v. Leavitt, 257 N.Y. 461 (1931). Contrary to the Law Firm’s contention, that duty is confirmed by this Court’s decision in Stem, 227 N.Y. at 546-47. The Law Firms suggest that this Court’s ruling in Stem imposing a duty to account may have been influenced by the Wetmore’s conduct post-dissolution, and 15 that the duty to account is limited to situations ivolving breaches of fiduciary duty. This Court made no such ruling in Stem. Instead, this Court found that the duty to account arose by virtue of: (i) the Association’s dissolution by Reed’s death (question 1) and (ii) the Employment Agreement not being terminated as a result of the dissolution (question 2). Based on these two findings, W&W were required to account. Stem, 227 N.Y. at 546-547. While this Court could have limited the duty to account to instances where a partner has engaged in wrongful conduct (either pre or post-dissolution), it did not – nor does the Partnership Law, or the multitude of other unfinished business cases in New York and other states. As a result, Stem confirms that the duty to account is premised on basic principles of partnership law that apply whether or not there is wrongful conduct.12 Also without merit is the Law Firms’ assertion that the intent of the Railroad and the Association that the Employment Contract survive dissolution somehow distinguishes Stem. The Employment Contract gave the Railroad the unr stricted right to terminate “without rhyme or reason.” The intent that the Employment 12 Jones Day argues that the Former Partners have no duty to account because of the financial condition of Coudert and its assertion that Coudert “was unable to handle any client matters. JD Reply at p. 19. This is incorrect. DSI submitted evidence to the District Court showing that the Former Partners continued to record significant billa le hours and serve the firm’s clients long after dissolution. See RA. A302, A308. Additionally, even if the fact was not disputed, there is no support for Jones Day’s assertion that the ability (or lack thereof) of the dissolved partnership to complete unfinished matters alters the duty to account. Nothing in the Partnership Law, Stem, or any other accounting case supports the argument that he duty to account is limited to situations where the dissolved partnership can continue to perform the work after dissolution. 16 Agreement survive dissolution therefore meant only that the Railroad could choose to continue and the Association would be required to perform, just as with any legal engagement. RLS Associates, LLC v. United Bank of Kuwait PLC, 417 F.Supp.2d 417, 420 (S.D.N.Y. 2006); NYC Eth. Op. 1988-4, 1988 WL 490014 at *2 (June 3, 1988). Thus, the same two determinations that triggered th duty to account in Stem are present in this case: (i) Coudert dissolved and (ii) its engagements with its clients were not terminated as a result of dissolution. Accordingly, the result in this case should be the same as in Stem. Finally, the Court’s discussion of the Biltmore project confirms the analysis that a terminable at will contract is partnership property. With respect to the Biltmore project, the Court found that because the Association “had been awarded no contract for the Hotel Biltmore at the time of [dissolution],” that a reasonable expectation of securing a contract was not an asset of the Association. Stem, 227 N.Y. at 550. Because this expectancy was not an asset, W&W was only required to account for those fees that were set forth in the Employment Agreement for drawing up the preliminary plans. Id. This is consistent with DSI’s position that the Coudert Partners are required to account for the profits received in connection with the existing client matters (i.e. unfinished business) but not for any future engagements (i.e. new business). 17 D. The Duty to Account Does Not End When the Client Enters Into a New Engagement With A Former Partner Jones Day’s argument that the obligations of the winding up partners were completed when the clients entered into a new engagement agreement with the Law Firms is without basis. JD Reply at p. 16. First, this argument has been rejected where the winding up partner obtains a benefit from the new engagement agreement. See Santalucia, 232 F.3d at 297-98; Castle v. Marks, 50 App. Div. 320, 323-24 (1st Dep’t 1900); see also Frates v. Nichols, 167 So.2d 77, 80 (Fla. Dist. Ct. 1964)(“All these clients, who signed [new] retainer agreements with [the winding up partner], did, was to manifest their inte tion of retaining [the winding up partner] to fulfill the continuing obligation ofthe [dissolved firm] to them”). Second, even when a new engagement agreement has been ent red into with a new firm, courts have still required that firm to turn over fees received on account of the completion of unfinished business. See Ruby v. Abington Memorial Hosp., 50 A.3d 128 (Pa. Super. 2012). In Ruby, the partner, Erbstein, left The Beasley Firm, LLC and joined the law firm of Young, Ricchiuti, Caldwell & Heller, LLC (“YRCH”), a firm that had no affiliation to Beasley. Erbstein and Beasley had previously agreed that Beasley would receiv 25% of the net fee on any cases he took with him on departure. Id. at 131. Despite the client’s choice to discharge Beasley and retain YRCH, the appellate court in Pennsylvania (a UPA jurisdiction) determined that the matter 18 was unfinished business and enforced the agreement: [a]s there is no dispute that the Rubys’ case was in the midst of litigation at the time of Erbstein's departure, there can be no doubt that it indeed constituted unfinished business. Consequently, Erbstein, and in turn YRCH, “cannot cut off the rights of the other partners in the dissolved partnership by the tactic of entering into a ‘new’ contract to complete such business.” (citations mitted) Id. at 135 (emphasis added). For the same reasons, the obligations of the Coudert Partners were not discharged when the clients entered into a new engagement agreement with the Law Firms. Finally, from a policy perspective, Jones Day’s argument makes no sense. Accepting this argument would create disparate treatm nt between partners from mega law firms (whose partners are more likely to join other mega firms after dissolution) and partners from small firms (where th partners may complete their winding up obligations without affiliating with a new firm). Moreover, this argument would create disparate treatment among partners of the same law firm. If the law firm of Abbey and Bob dissolve and Abbey decides to wind up the pending matters by herself and Bob joins another firm, Abbey would be required to account but Bob would not. See JD Reply at 14. If adopted, Jones Day’s argument would insulate the mega law firm (and its partners) from obligations under the Partnership Law ( nd potential claims for unfinished business) while lawyers at small law firms would remain subject to those obligations. The uncertainty and unpredictabli y that would result from this 19 ad hoc application of the Partnership Law is in stark contrast to the concerns expressed by the drafters of the UPA: Uniformity of the law of partnerships is constantly becoming more important . . . . [t]here is probably no other subject connected with our business law in which a greater number of instances can be found where . . . the law is uncertain. . . .The existence of a statute stating in detail the rights of the partners inter se during the carrying on of the partnership business, and on the winding up of partnership affairs, will be a real practical advantage of moment to the busines world. See Prefatory Note to the Uniform Partnership Act of 1914.13 E. Profits Under The No Compensation Rule Are Not Speculative While the Law Firms assert that calculating profits would be too speculative for a court to do (Law Firm Opposition at p. 32), the issue of how profits would be calculated was not part of the Second Question Certified to this Court, which asked “what proportion of the profit derived from an ongoing hourly matter may the new law firm retain.” DSI has answered that the winding up partner, and, in this case, the Law Firms, may not retain any portion of the profit on Client Matters. In any event, the Law Firms’ assertion that the calcul tion of profits would be speculative is incorrect. As Judge McMahon noted, the application of the no- compensation rule would not be complicated: An accounting under a “no compensation” scenario would, therefore, be relatively straightforward: the Forme Coudert Partner and his/her new Firm would disclose how much profit the 13 See www.uniformlaws.org/Shared/Docs/Partnership/upa1914.doc (last visited on May 15, 2014). 20 new Firm made on the Client Matter, measured as the amount collected from the client less the expense to the Firm of handling the matter; and that amount would be turned over Coudert's estate. While I can anticipate that the Firms would bicker over what constituted a deductible expense, the question is not at all daunting: in a partnership, profit equals partner compensation . . . Cert. Decision, Appdx. A137-38. The Law Firms’ reference to the damages calculation in Heller Ehrman LLP v. Jones Day (In re Heller Ehrman LLP), 2014 WL 323068 (Bankr. N.D.Cal. Jan 28, 2014) is inapplicable because it involves, among other things, damages where the winding up partner is entitled to reasonable compensation under RUPA, a situation not present here. III. APPLICATION OF THE PARTNERSHIP LAW TO ALL CLIENT MATTERS WILL NOT BE INEQUITABLE As explained in Section II supra, in a dissolution and liquidation, the provisions of the Partnership Law do not permit the Law Firms to assert a credit for their “post-dissolution efforts, skill and diligence” against profits on Client Matters. Contrary to the Law Firms’ contention, this accounting is neither inequitable, nor contrary to New York policy. There are a multitude of sound reasons for reaching t is conclusion. First, as noted by the district court in Robinson v. Nussbaum, enforcement of the duty to account for hourly matters will not be in quitable if the duty is applied to all former partners. Robinson, 11 F. Supp. 2d 1, 6 (D.D.C. 1997). In fact, 21 application of the Partnership Law in the manner suggested by the Law Firms – exempting lawyers handling hourly matters by providing them with additional compensation not permitted by the Partnership Law -- ould be far more inequitable than applying the statute uniformly to all matters. If the Court accepts the Law Firms’ position, lawyers handling contingency cases after dissolution would be required to account to their dissolved firm, while lawyers handling hourly matters – even lawyers at the same firm – would not be required to account. The Partnership Law does not make an exception to the duty to account based on the manner in which a matter is billed the type of matter, or for large law firms that typically handle hourly matters. Additionally, if the Court creates an exception to the no compensation rule for hourly cases, other types of partnerships, like dentists and architects, would remain subject to the no compensation rule. That is an unfair result.14 Second, creating an exception for hourly cases would be contrary to the express intent of the Legislature in enacting a uniform partnership law and providing that it applies to all professional partnerships and should be interpreted 14 Although the Law Firms claim that the no-compensation rule is unfair, that would not be a valid reason to refuse to apply the statute (even if the Law firms were correct). See Bushard, 800 N.W.2d at 384 (“if the rule against extra compensation is to be modified, we believe the legislature must revise § 178.15(6), Stats. . . . a court should decline from fashioning an after-the- fact remedy in pursuit of an equitable result when that remedy contravenes the public policy choices established by the legislature.”); Palladino v. CNY Centro, Inc., 2014 WL 1356239 (N.Y. April 8, 2014)(“[T]his court does not revise tatutes, in an effort to eliminate seeming injustices, or to bring the law into accord with modern fact…. Whatever reasons be pressed on us for such changes, the power to change is not ours. It is for the Legislature to decide . . . .”) 22 consistent with the UPA decisions in other jurisdictions. Likewise, law firms operating outside of New York would have different du ies than partners in New York firms, and partners in New York would be receive compensation for post- dissolution services that is not permitted in other UPA states. That would run directly contrary to the express direction of the Legislature in Partnership Law § 4(4) to interpret the law uniformly with other states. In fact, partners at dissolved firms with lawyers in different states that include N w York may have different duties depending on which state’s law applies to the dissolution. The far simpler, and more equitable, result is to require lawyers to account for post-dissolution profits on all unfinished matters. Third, while the Law Firms contend that it would be inequitable if they cannot retain the profits on the Client Matters brought to those firms by Coudert Partners, the Law Firms ignore the undisputed fact that those matters were developed using the resources, support, reputation nd goodwill of Coudert developed by it over the course of a century. If the Coudert Partners are not required to account for the Client Matters, only the partners completing those matters, and the Law Firms, will receive the benefits from those matters. Thus, contrary to Jones Day’s contention, there is no windfall for the dissolved firm if the Law Firms are required to account. Fourth, application of the Partnership Law to hourly matters is not 23 inequitable because the Partnership Law only sets default rules which law partnerships can opt out of by agreement. The Law Firms do not deny that proposition, or set forth any valid reason why law partnerships cannot address these issues in their partnership agreements.15 Indeed, this Court has encouraged partners to address such matters in written agreements. See Ederer v. Gursky, 9 N.Y.3d 514, 526 (2007). Their failure to address these issues results in the default application of the Partnership Law. Viewed this way, the policy questions at play here are not primarily about client choice, as the Law Firms contend, but about the choices that the lawyers themselves make. 15 In fact, only Jones Day even bothers to address thi crucial point; its response, that the default rule provided in the statute is unfair, is inaccurate for the reasons set forth above, and in any case, does not rebut the fact that law partnerships have the power to avoid application of the duty to account by agreement if they wish. CONCLUSION For the foregoing reasons, the Court should answer the first certified question in the affirmative, unless the partners have agreed otherwise. As to the second certified question, the Court should define a client matter as all pending but unfinished ·engagements to pe~form legal services on the dissolution date, and hold that a partner of the dissolved partnership (and in this case, the partner's new law firm) must account for all profits on such unfinished hourly matters. Date Completed: May 16, 2014 Joseph R. Scholz Eduardo Glas McCARTER & ENGLISH LLP 245 Park A venue New York, New York 10167 (212) 609-6847 Counsel for Respondent-Appellant Development Specialists, Inc.