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, 2014CTQ-2013-00010 Court of Appeals STATE OF NEW YORK IN THE MATTER OF: COUDERT BROTHERS LLP, Debtor. DEVELOPMENT SPECIALISTS, INC., Respondent-Appellant. GEOFFROY DE FOESTRAETS, JINGZHOU TAO, Defendants, and K&L GATES LLP, MORRISON & FOERSTER LLP, Appellants-Respondents. (Additional Caption on the Reverse) >> >> BRIEF FOR APPELLANTS-RESPONDENTS MILLER & WRUBEL P.C. Attorneys for Appellant-Respondent Dechert LLP 570 Lexington Avenue, 25th Floor New York, New York 10022 212-336-3500 Of Counsel: Joel M. Miller S. Christopher Provenzano Nicholas Cutaia Date Completed: March 7, 2014 On Questions Certified by the United States Court of Appeals for the Second Circuit (USCOA Docket No. 12-4916-bk) To Be Argued By: Joel M. Miller Time Requested: 30 Minutes (Additional Counsel on the Reverse) 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. K&L GATES LLP 599 Lexington Avenue New York, New York 10022 212-536-4891 Attorneys for Appellants- Respondents K&L Gates LLP and Morrison & Foerster LLP ARENT FOX LLP 1675 Broadway New York, New York 10019 212-484-3915 Appellant-Respondent Pro Se MEISTER SEELIG & FEIN LLP 140 East 45th Street, 19th Floor New York, New York 10017 212-655-3500 KRAMON & GRAHAM, P.A. 1 South Street, Suite 2600 Baltimore, Maryland 21202 410-752-6030 Attorneys for Appellant-Respondent DLA Piper LLP DORSEY & WHITNEY LLP 51 West 52nd Street, 10th Floor New York, New York 10019 212-415-9243 Appellant-Respondent Pro Se SHEPPARD MULLIN RICHTER & HAMPTON LLP 30 Rockefeller Plaza, 39th Floor New York, New York 10112 212-653-8700 Appellant-Respondent Pro Se DUANE MORRIS LLP 1540 Broadway New York, New York 10036 212-979-1514 Appellant-Respondent Pro Se QUINN EMANUEL URQUHART & SULLIVAN, LLP 51 Madison Avenue, 22nd Floor New York, New York 10010 212-849-7200 Attorneys for Appellant-Respondent Akin Gump Strauss Hauer & Feld LLP i Disclosure Statements Appellant-Respondent Dechert LLP is a limited liability partnership organized under the laws of Pennsylvania for the practice of law, and has no corporate parent or subsidiary. Dechert LLP has affiliated business entities in various locations outside the United States that are organized as required by applicable local legislation or regulations pertaining to the practice of law. Appellant-Respondent DLA Piper LLP (US) (“DLA Piper”) is a limited liability partnership organized under the laws of Maryland and has no corporate parent or subsidiary. DLA Piper has affiliated business entities in various locations outside the United States that are organized as required by applicable local legislation or regulations pertaining to the practice of law. Appellant-Respondent K&L Gates LLP is a limited liability partnership organized under the laws of Delaware for the practice of law, and has no corporate parent or subsidiary. K&L Gates LLP has affiliated business entities in various locations outside the United States that are organized as required by applicable local legislation or regulations pertaining to the practice of law. Appellant-Respondent Arent Fox LLP is a District of Columbia limited liability partnership. Arent Fox LLP has no corporate parents, subsidiaries, or affiliates. ii Appellant-Respondent Dorsey & Whitney LLP is a limited liability partnership organized under the laws of Minnesota for the practice of law, and has no corporate parent. Dorsey & Whitney LLP has affiliated business entities in States other than Minnesota and in various locations outside the United States that are organized as required by applicable local legislation or regulations pertaining to the practice of law. Dorsey & Whitney LLP has two subsidiary business entities not organized for the purpose of practicing law, Dorsey & Whitney Trust Company LLC and Dorsey & Whitney Health Strategies LLC. Appellant-Respondent Sheppard, Mullin, Richter & Hampton LLP is a limited liability partnership organized under the laws of California for the practice of law, and has no corporate parent or subsidiary. Sheppard, Mullin, Richter & Hampton LLP has an affiliate, Sheppard Mullin (UK) LLP, a New York Limited Liability Partnership with an office in London. Appellant-Respondent Duane Morris LLP is a limited liability partnership organized under the laws of Delaware for the practice of law. Duane Morris LLP has affiliated entities for the practice of law outside of the United States, namely (i) Duane Morris MNP, a multinational partnership authorized and regulated by the Solicitors’ Regulation Authority operating under the laws of England and Wales, (ii) Duane Morris & Selvam LLP, a limited liability partnership registered under the laws of Singapore, (iii) Duane Morris Vietnam LLC, a Vietnamese limited iii liability company, and (iv) Dr. Said Al Mashaikhi and Partner Law Firm, an Omani civil law firm. Duane Morris LLP holds its interests in Duane Morris & Selvam LLP and Duane Morris Vietnam LLC through Duane Morris Singapore LLC, a Delaware limited liability company, and Duane Morris Singapore LLP, a limited liability partnership registered under the laws of Singapore. In addition, Duane Morris LLP conducts various non-legal businesses through Wescott Holding Company LLC, a Delaware limited liability company, which has interests in Capitol Corporate Services, Inc., Duane Morris Government Strategies LLC, New Jersey Corporate Services, Inc., RG/2 Claims Administration LLC, American Healthcare Providers Insurance Services Company, LLC, HCP Insurance Services Company, LLC, HPIX LLC, and various other entities with names that include the Wescott designation. Appellant-Respondent Akin Gump Strauss Hauer & Feld LLP is a limited liability partnership organized under the laws of Texas for the practice of law, and has no corporate parent or subsidiary. Akin Gump Strauss Hauer & Feld LLP has affiliated business entities in various locations outside the United States that are organized as required by applicable local legislation or regulations pertaining to the practice of law. Appellant-Respondent Morrison & Foerster LLP is a limited liability partnership organized under the laws of California for the practice of law and has iv no corporate parent. The following entities are affiliated with, or subsidiaries of, Morrison & Foerster LLP: • Morrison & Foerster (UK) LLP, a Delaware limited liability partnership, which in turn has three subsidiaries: (a) MoFo Notices, Limited; (b) MoFo Nominees, Limited; and (c) MoFo Secretaries, Limited, which are English corporations organized under the English Companies Act. • Morrison & Foerster (Singapore) LLP, a Singaporean limited liability partnership. • Morrison & Foerster, a Hong Kong general partnership, which in turn has three service subsidiaries: (a) MoFo China Nominee Limited (a British Virgin Islands corporation); (b) MoFo China Corporate Services Limited (a HK corporation); and (c) MoFo China Notices Limited (a HK corporation). • Morrison & Foerster Gaikokuho Jimu Bengoshi Jimusho, a Japanese general partnership. In addition, the following legal entities serve Morrison & Foerster’s Tokyo office: (a) Morrison & Foerster Asia Services LLP, a California limited liability partnership; v (b) Morrison & Foerster Zeirishi Hoijin, a Japanese tax corporation; and (c) Ito & Mitomi, a Japanese general partnership. • Summit Privacy Resources, LLC, a Delaware limited liability company (inactive). • Morrison & Foerster, Inc., a California corporation. • Morrison & Foerster Investments, LLC, a Delaware limited liability company. • Morrison & Foerster Foundation, a California nonprofit public benefit corporation. • Girvan Peck Memorial Fund, a California nonprofit public benefit corporation. vi Related Litigation This case presents the same certified questions as In re Thelen LLP, 736 F.3d 213 (2d Cir. 2013); Appdx. A2 – A10. This Court accepted certification of In re Thelen LLP on December 12, 2013, and it has been docketed as CTQ- 2013-00009. See In re: Thelen LLP, 2013 N.Y. Slip Op. 93845; Appdx. A11. vii TABLE OF CONTENTS Page Jurisdictional Statement ............................................................................................. 1 Questions Certified to this Court ............................................................................... 2 Factual Background ................................................................................................... 4 Statement of the Case ................................................................................................. 6 A. Coudert’s Dissolution and Bankruptcy ................................................. 6 B. Proceedings in the Bankruptcy Court ................................................... 6 C. Proceedings in the District Court .......................................................... 7 D. Proceedings in Geron v. Robinson & Cole LLP ................................... 9 E. Proceedings in the United States Court of Appeals for the Second Circuit ..................................................................................... 10 Summary of Argument ............................................................................................ 12 Argument ................................................................................................................. 15 I. THE FORMER CLIENT MATTERS ARE NOT COUDERT’S PROPERTY ....................................................................................................................... 15 A. This Court Should Not Follow the Jewel Line of Cases ..................... 15 B. Dissolved Law Partnerships Have No Property Interest in Unfinished Hourly Client Matters under New York Law ................... 17 1. The Former Client Matters Are Not Presumed to be Property under the Partnership Law ......................................... 17 viii 2. A Law Partnership Has a Property Interest Only in Being Paid for Work It Has Performed ............................................... 18 3. The Only New York Decisions to Consider Hourly Fee Matters Have Correctly Concluded that they Are Not Property ..................................................................................... 22 C. Recognizing a Property Interest in the Former Client Matters Is Contrary to New York Law and Policy Governing the Attorney- Client Relationship .............................................................................. 25 D. The Former Client Matters Are Not Executory Contracts .................. 28 E. Decisions from other Jurisdictions Are neither Consistent nor Persuasive ............................................................................................ 33 II. THE LAW FIRMS ARE ENTITLED TO RETAIN THEIR PROFITS BECAUSE THOSE PROFITS ARE ATTRIBUTABLE TO THEIR EFFORTS, SKILL AND DILIGENCE ......................................................... 38 A. New York Law, Rules and Public Policy Require that the Law Firms Retain All Fees, Including Profits ............................................. 38 B. If this Court Determines Profits Must Be Paid to the Prior Firm, It Should Narrowly Define Client Matters to Include Only those Services Agreed to and Unfinished Prior to Dissolution .................... 44 Conclusion ............................................................................................................... 46 ix Table of Authorities Case Page Bader v. Cox, 701 S.W.2d 677 (Tex. App. Dist. 5 1985) 36, 43, 44 Beckman v. Farmer, 579 A.2d 618 (D.C. 1990) 35 Burke v. Clifton, Budd & DeMaria, Index No. 1454/91-002 (Sup. Ct. N.Y. County 1991) 24, 25 Campagnola v. Mulholland, Minion & Roe, 76 N.Y.2d 38 (1990) 33 Cohen v. Grainger, Tesoriero & Bell, 81 N.Y.2d 655 (1993) 20 Cohen v. Lord, Day & Lord, 75 N.Y.2d 95 (1989) 26 Demov, Morris, Levin & Shein v. Glazer, 53 N.Y.2d 553 (1981) 33 Denburg v. Parker, Chapin, Flattau & Klimpl, 82 N.Y.2d 375 (1993) 26, 39 Dev. Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP et al., 462 B.R. 457 (S.D.N.Y. 2011) 7 Dev. Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP et al., 477 B.R. 318 (S.D.N.Y. May 24, 2012) passim Diamond v. Pillsbury Winthrop Shaw Pittman, LLP 2014 Bankr. LEXIS 527 (Bankr. N.D. Cal. 2014) 35 Essay v. Essay, 123 N.W.2d 648 (Neb. 1963) 34, 36 Geron v. Robinson & Cole LLP, 476 B.R. 732 (S.D.N.Y. Sept. 4, 2012) passim Gramercy Equities Corp. v. Dumont, 72 N.Y.2d 560 (1988) 31 x Graubard Mollen Horowitz Pomeranz & Shapiro v. Moskovitz, 149 Misc. 2d 481 (Sup. Ct. N.Y. County 1990) 27, 39 Greenspan v. Orrick, Herrington & Sutcliffe LLP, 408 B.R. 318 (Bankr. N.D. Cal. 2009) 35 Heller Ehrman LLP v. Arnold & Porter LLP, 2011 Bankr. LEXIS 1497 (Bankr. N.D. Cal. Apr. 22, 2011) 35, 45 Hughes v. Aycock, 598 S.W.2d 370 (Tex. Civ. App. Houston 14th Dist. 1980) 36, 37, 44 In re Cooperman, 83 N.Y.2d 465 (1994) 32, 33, 39 In re Mondale & Johnson, 150 Mont. 534 (1968) 34, 36 In re Thelen LLP, 736 F.3d 213 (2d Cir. 2013) 11 Jewel v. Boxer, 156 Cal. App. 3d 171 (Cal. App. 1st Dist. 1984) passim Johnson v. Ravitch, 113 A.D. 810 (2d Dep’t 1906) 29, 39 Kelly v. Smith, 611 N.E.2d 118 (Ind. 1993) 34 Kenford Co. v. County of Erie, 67 N.Y.2d 257 (1986) 46 Kirsch v. Leventhal, 181 A.D.2d 222 (3d Dep’t 1992) passim Martin v. Camp, 219 N.Y. 170 (1916) 29, 39 Meehan v. Shaughnessy, 404 Mass. 419 (Mass. 1989) 33 Messina v. Calandro, 214 Conn. 596 (1990) 33 Murov v. Ades, 12 A.D.3d 654 (2d Dep’t 2004) 18, 44 xi Nixon Peabody LLP v. de Senilhes, 20 Misc. 30 1145(A), 2008 N.Y. Misc. LEXIS 5770 (Sup. Ct. Monroe County 2008) 27 Rhein v. Peeso, 194 A.D. 274 (1st Dep’t 1920) 32 Santalucia v. Sebright Transp., Inc., 232 F.3d 293 (2d Cir. 2000) 18, 20 Scholastic, Inc. v. Harris, 259 F.3d 73 (2d Cir. 2001) 31, 32 Sexter v. Kimmelman, Sexter, Warmflash & Leitner, 19 A.D.3d 298 (1st Dep’t 2005) 18, 19, 44 Shandell v. Katz, 217 A.D.2d 472 (1995) 19, 20 Shandell v. Katz, 95 A.D.2d 742 (1983) 8, 18, 44 Sheresky v. Sheresky Aronson Mayefsky & Sloan, LLP, 35 Misc. 3d 1201A, 2011 N.Y. LEXIS 6588 (Sup. Ct. N.Y. Cnty. 2011) passim Stem v. Warren, 227 N.Y. 538 (1920) 30, 31, 32 Stern v. Marshall, 564 U.S. — , 131 S. Ct. 2594 (2011) 7 Timmermann v. Timmermann, 272 Ore. 613 (1975) 34 Vowell & Meelheim, P.C. v. Beddow, Erben & Bowen, P.A., 679 So. 2d 637 (Ala. 1996) 33, 36 Weisbrod v. Ely, 767 P.2d 171 (Wyo. 1989) 34, 36 Welman v. Parker, 328 S.W.3d 451 (Mo. Ct. App. 2010) 37 xii Other Authorities Black’s Law Dictionary, 7th Ed. (1999) .................................................................. 29 New York Partnership Law § 40(6) ........................................................................... 5 New York Partnership Law § 43(1) ........................................................................... 5 New York Rule of Professional Conduct 1.5(g) ................................... 23, 28, 41, 42 New York Rule of Professinal Conduct 1.5(g)(1) ................................................... 41 New York Rule of Professional Conduct Rule 1.5(g)(2) ........................................ 42 New York Rule of Professional Conduct Rule 1.5(h) ............................................. 41 New York Rule of Professional Conduct 1.17 ................................................. 26, 28 New York Rule of Professional Conduct 5.6(a)(1) ................................................. 26 New York State Constitution Article 6, §3(b)(9) ...................................................... 1 Rules 22 NYCRR 1210.1 ................................................................................................... 33 22 NYCRR 500.27 ..................................................................................................... 1 Jurisdictional Statement This Court has jurisdiction over the certified questions relating to the parties’ appeal and cross-appeal pursuant to New York State Constitution Article 6, §3(b)(9), which permits the New York Court of Appeals to accept questions of law certified by “a court of appeals of the United States.” By order dated December 2, 2013, the United States Court of Appeals for the Second Circuit (the “Second Circuit”) certified to this Court the questions stated below pursuant to Local Rule 27.2 of that Court. By order dated January 14, 2014, this Court accepted the certified questions pursuant to 22 NYCRR 500.27. 2 Questions Certified to this Court The Court has accepted certification of the following questions of law: 1. Under New York law, is a client matter that is billed on an hourly basis the property of a law firm, such that, upon dissolution and in related bankruptcy proceedings, the law firm is entitled to the profit earned on such matters as the “unfinished business” of the firm? This Court should answer this certified question in the negative. 2. If so, how does New York law define a “client matter” for purposes of the unfinished business doctrine and what proportion of the profit derived from an ongoing hourly matter may the new law firm retain? If the Court answers question 1 in the affirmative, this Court should determine that the new firm may retain all profits because they are attributable to its own effort, skill and diligence. This result will protect a client’s choice of counsel and avoid payment of legal fees to a firm which has not provided services. This obviates the need to define “client matter.” If the Court defines “client matter,” it should do so narrowly, limiting it to include only specific tasks agreed to between the client and the dissolved firm which were continuing when the client 3 retained the new firm, and to exclude any expansion of the scope of services based on changed circumstances. 4 Appellants-Respondents Akin Gump Strauss Hauer & Feld, LLP, Arent Fox, LLP, Dechert LLP, DLA Piper (US) LLP,1 Dorsey & Whitney LLP, Duane Morris LLP, K&L Gates LLP, Morrison & Foerster LLP, and Sheppard Mullin Richter & Hampton, LLP (collectively, the “Law Firms”) respectfully submit this brief in support of their position with respect to the certified questions. Factual Background After Coudert Brothers LLP (“Coudert”) dissolved, one or more former partners of Coudert (the “Former Coudert Partners”) joined each of the Law Firms. Some clients who had been represented by a Former Coudert Partner then engaged the Law Firm that partner joined to perform legal services related to engagements that were commenced at Coudert, but which remained “unfinished” at the time the client retained one of the Law Firms. In the engagements at issue here (the “Former Client Matters”), the clients’ engagement agreements both at Coudert and at the relevant Law Firm provide for billing on an hourly basis, to be invoiced periodically after the work requested by the client has been performed— traditional hourly billing. DSI, as representative of the bankrupt Coudert estate, sued each of the Law Firms, seeking an accounting of the “profits” earned by the Law Firm on the 1 Although sued as DLA Piper (US) LLP, the correct legal name of this entity is DLA Piper LLP (US). 5 Former Client Matters on the ground that those matters remain “property” of Coudert, based on the so-called unfinished business doctrine. DSI’s claims are predicated on New York Partnership Law §§ 43(1) and 40(6). New York Partnership Law § 43(1) provides that a partner must account to the partnership for profits from the use of partnership “property.” New York Partnership Law § 40(6) provides that absent an agreement to the contrary, a partner is not entitled to compensation for “acting in the partnership business” (known as the “no- compensation rule”). The New York Partnership Law does not define “property.” DSI contends that the Law Firms must account for the Former Client Matters as “property” they have received from Coudert, and are not entitled to retain any of the profits earned in respect of those matters. Because of similar proceedings relating to the bankruptcies of Coudert and Thelen LLP (“Thelen”), two judges of the United States District Court for the Southern District of New York were independently called upon to decide whether client engagements such as the Former Client Matters can constitute partnership property at all, and, if so, how that property should be accounted for. As discussed infra, these two judges reached opposite conclusions. The United States Court of Appeals for the Second Circuit certified the questions stated supra in both the Thelen and Coudert matters to this Court for definitive resolution. 6 Statement of the Case A. Coudert’s Dissolution and Bankruptcy Coudert was a limited liability law partnership organized under New York law, and headquartered in New York. On August 16, 2005, the equity partners of Coudert voted to dissolve the partnership, and on September 22, 2006, Coudert commenced a bankruptcy case under the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. See In re Coudert Brothers LLP, Chapter 11 Case No. 06-12226 (Bankr. S.D.N.Y.) (Drain, J.). A plan of liquidation was confirmed by the Bankruptcy Court in August 2008, and became effective in September 2008. Pursuant to the Plan, DSI was appointed Plan Administrator. B. Proceedings in the Bankruptcy Court In 2008 and 2009, DSI commenced adversary proceedings in the Bankruptcy Court, claiming that the Law Firms each received property from Coudert, for which that Law Firm must account to the Coudert estate.2 The Law Firms moved to dismiss DSI’s claims in the Bankruptcy Court. These motions were denied by Bankruptcy Judge Drain’s ruling on August 7, 2009; this ruling was subsequently amended and superseded in a ruling 2 With the exception of certain claims against Dechert LLP not before the Second Circuit, DSI’s claims against the Law Firms consist exclusively of claims related to unfinished business. 7 dated January 19, 2010, that did not alter the Court’s holding. Appdx. A12 – A64. Following the Supreme Court’s decision in Stern v. Marshall, 564 U.S. — , 131 S. Ct. 2594 (2011), which limited the power of the Bankruptcy Courts to render final judgment in certain cases, the Law Firms moved in the United States District Court for the Southern District of New York (the “District Court”) to withdraw the reference to the Bankruptcy Court. C. Proceedings in the District Court On November 2, 2011, the District Court (Colleen McMahon, J.) granted the Law Firms’ motions to withdraw the reference to the Bankruptcy Court. See Dev. Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP et al., 462 B.R. 457 (S.D.N.Y. 2011), Appdx. A65 – A77. The Law Firms then moved for summary judgment. The District Court granted the Law Firms’ motions in part, dismissing DSI’s claims for conversion, unjust enrichment and turnover, but denied the motions with respect to DSI’s claim for an accounting. The District Court stated that “under the [New York] Partnership Law, the [Former] Client Matters are presumed to be Coudert’s assets on the Dissolution Date.” Dev. Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP et al., 477 B.R. 318, 350 (S.D.N.Y. May 24, 2012). Appdx. A78 – A131. 8 Judge McMahon assumed that, as a matter of New York law, unfinished hourly rate client matters are the “property” of a dissolved law partnership, like a “Jackson Poll[o]ck painting” hung in the firm’s “reception area.” Id. at 329, Appdx. A94. The Court reached this result by the “general principle of partnership law that partners are expected to devote their efforts to partnership business not to individual endeavors. Thus, the presumption must be that the firm’s business belongs to the firm, and not any individual partner.” Appdx. 98. The Court did not consider whether a client matter can constitute “property” at all, or whether it belongs to the client who engages the law firm, rather than to either the firm or its partners. Judge McMahon also concluded that the New York courts had interpreted the New York Partnership Law to exclude from unfinished business the value of “post-dissolution efforts, skill and diligence.” Id. at 347, Appdx. A124 – 125 (citing, inter alia, Kirsch v. Leventhal, 181 A.D.2d 222) (quotation omitted). Although Judge McMahon expressed “serious doubts whether the New York Court of Appeals would adopt the rationale of cases like Kirsch and Shandell [v. Katz, 217A.D.2d 472] either in the contingency fee context or in the billable hours 9 context,” the Court recognized that the “Kirsch rule” had been “applied by three of the four Appellate Divisions, and by the Second Circuit.” Id.3 Judge McMahon subsequently reaffirmed her decision and granted the Law Firms’ motion for certification of an interlocutory appeal. Dev. Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP et al., 2012 Dist. LEXIS 100827 (S.D.N.Y. July 18, 2012). Appdx. A132 – A141. D. Proceedings in Geron v. Robinson & Cole LLP Just a few months later, the Thelen bankruptcy presented a different judge of the Southern District of New York with the same issue of New York law. In Geron v. Robinson & Cole LLP, 476 B.R. 732 (S.D.N.Y. Sept. 4, 2012), Appdx. A142 – 150, Judge Willam H. Pauley III expressly disagreed with Judge McMahon’s conclusions and reasoning, holding that “under New York law, a dissolved law firm’s pending hourly fee matters are not partnership assets.” Id. at 743, Appdx. A148. In Geron, Judge Pauley examined the history of the unfinished business doctrine, the treatment of contingent fee matters in New York law, and New York policy regarding the regulation of the attorney-client relationship. Judge Pauley recognized the difference between “partners’ duties regarding 3 The District Court also held that the Law Firms are “jointly liable” with the Former Coudert Partners for an accounting. This issue is before the Second Circuit, but has not been certified to this Court. 10 partnership property,” which are defined by the New York Partnership Law, and “the scope of such property,” which is not. Id. at 742, Appdx. A147 – A148. Judge Pauley explained the difference between law firms and other partnerships. He found that applying the “unfinished business doctrine to hourly rate matters would result in an unjust windfall for the Thelen estate” and reduce the compensation of the attorneys doing the work. This result would “violate New York’s public policy against restrictions on the practice of law” and “clash directly with New York’s Rules of Professional Conduct.” He concluded that “New York law does not recognize a debtor law firm’s property interest in pending hourly fee matters.” Id. at 741, Appdx. A146. Because “a dissolved law firm’s pending hourly fee matters are not partnership assets,” the Partnership Law does not require that they be accounted for. Id. at 743, Appdx. A148. The defendant’s motion for judgment on the pleadings was granted, and Judge Pauley sua sponte certified his order for interlocutory appeal. E. Proceedings in the United States Court of Appeals for the Second Circuit The Second Circuit subsequently granted leave to appeal in both Geron (sub nom In re: Thelen LLP), and in this case (with respect to both the Law Firms’ appeal and DSI’s cross-appeal) (sub nom In re: Coudert Brothers LLP). 11 Appdx. A151 – A152. The Second Circuit consolidated the Law Firms’ individual appeals. Appdx. A153. The Second Circuit denied a motion to hear In re: Coudert Brothers LLP in tandem with In re: Thelen LLP (Appdx. A154), but granted a motion by the Law Firms requesting that, should the Second Circuit certify In re: Thelen LLP to this Court, it also certify In re Coudert Brothers LLP. Appdx. A155. The appeal in Geron was argued on October 7, 2013, at which time the appeal in In re: Coudert Brothers LLP was fully briefed and awaiting argument. The Second Circuit then adjourned argument in In re: Coudert Brothers LLP pending disposition of In re: Thelen LLP. Appdx. A156. Recognizing that two judges of the Southern District of New York had reached opposite conclusions with respect to the same issue of New York law, and mindful of the public policy implications of a resolution of the issues presented, on November 15, 2013, the Second Circuit certified the questions stated supra to this Court. See In re Thelen LLP, 736 F.3d 213 (2d Cir. 2013); Appdx. A2 – A10. This Court accepted the certification on December 12, 2013. See In re: Thelen LLP, 2013 N.Y. Slip Op. 93845, Appdx. A11. On December 2, 2013, the Second Circuit certified the same questions to this Court in In re: Coudert Brothers LLP (Appdx. A159 – A160), and this Court accepted that certification on January 14, 2014. Appdx. A157 – A158. 12 Summary of Argument 1. This Court should not follow the Jewel line of cases because Former Client Matters do not constitute firm property under New York law. The Appellate Division has considered unfinished client matters in the contingent fee context. The Appellate Division cases point to a simple and correct rule—the “asset” of a dissolving law firm is not the client matter itself, but the dissolving firm’s right to be paid for the work it has already performed. Applying that logic to the situation here, where Coudert has been paid for the services it rendered, the Coudert estate has no ground for an accounting. Supreme Court recently considered this issue in the hourly fee context. In Sheresky v. Sheresky Aronson Mayefsky & Sloan, LLP, 35 Misc. 3d 1201A, 2011 N.Y. LEXIS 6588 (Sup. Ct. N.Y. Cnty. 2011) (Bransten, J.), Supreme Court considered the precise issue presented by the first certified question. Sheresky expressly determined that the Court would not “recognize a cause of action for unfinished business for hourly fee cases which has, hitherto, not been recognized by the New York courts.” Id. at **15. This conclusion is fair to all concerned. The dissolved firm has been paid in full for its services, and the new firm will be fully compensated for its services. See Points I(A) – I(B). 13 2. Treating attorney-client engagements as law firm property is inconsistent with the attorney-client relationship. Treating a client matter itself as a form of law firm property—as opposed to recognizing a firm’s right to be paid for completed work—is inconsistent with New York law, public policy, and the ethical rules unique to lawyers. Law partnerships are different from ordinary commercial partnerships, and attorney-client relationships are different from ordinary commercial contracts. Such differences may not be disregarded. A client’s legal matter always belongs to the client, and it is moved from one firm to another by the client, not by a firm or any of its partners. New York law and public policy in many ways recognize the primacy of a client’s control of its legal matters, including New York’s strict protection of a client’s right to select and terminate counsel freely, and the express prohibition on fee-splitting. Allowing a firm in dissolution to treat a client matter as its property, and to receive fees in connection with an engagement on which it is no longer working and for which it takes no responsibility, is inconsistent with the nature of the attorney-client relationship. See Point I(C). 3. Attorney-client engagements are not executory contracts that survive dissolution. The unfinished business doctrine is predicated on the idea that client matters are executory contracts that the parties can be required to perform until 14 they are complete. This fundamentally misunderstands the attorney-client relationship. The Former Client Matters are not executory contracts because no future performance is required on the part of the client. As a matter of law, the client cannot be required to do anything but pay for services already rendered. Further, under New York law, an executory contract does not survive a partnership’s dissolution unless the parties so intend. Law firms and clients cannot intend that a client engagement will survive dissolution without violating the client’s absolute right to freely choose and terminate counsel. See Point I(D). 4. Decisions from other jurisdictions regarding partnership law are neither consistent nor persuasive. The unfinished business doctrine and its application to the hourly fee cases of law firms are not supported by a consensus view, and are based on unsound reasoning. Most of the recent decisions as to the doctrine have been the product of a single California bankruptcy judge assigned to three major law firm bankruptcies. See Point I(E). 5. The Law Firms are entitled to retain all profits. Even if this Court determines the dissolved firm has a property interest in the Former Client Matters, the subsequent firm is entitled to retain all profits it earns. The relationship between lawyer and client is one of special trust, and is accordingly subject to special regulation, through statutes, common law, and 15 ethical rules. A client has a strongly protected right to his choice of lawyer. The requirement to remit profits to the prior firm impinges on this right and violates ethical rules. The New York rule is that fees are paid to the lawyer whose “effort, skill and diligence” earned the fees, not to a prior firm which provided no services. See Point II(A). 6. If the prior firm is entitled to profits, the definition of “client matter” must be narrow. To avoid providing the prior firm with fees not related to its property, the Court should define “client matter” narrowly to include only those specific tasks requested by a client of the prior firm that were unfinished at the time the client retained the new firm and were subsequently completed by the new firm. See Point II(B). Argument I. THE FORMER CLIENT MATTERS ARE NOT COUDERT’S PROPERTY A. This Court Should Not Follow the Jewel Line of Cases In 1977, a four-partner general practice law firm in California dissolved. The firm handled both contingent and hourly fee cases, and had no written partnership agreement. The former partners formed two two-partner firms, which then engaged in protracted litigation over how to account for partnership 16 assets. Relying on a few confusing decisions by state trial and intermediate appeals courts, in 1984 a California intermediate appeals court concluded that regardless of the expectations of the affected clients, or who actually did the work, the firm’s open matters at the time of dissolution constituted partnership property, and the former partners were required to complete those matters for the benefit of the partnership. See Jewel v. Boxer, 156 Cal. App. 3d 171, 174 (Cal. App. 1st Dist. 1984). By treating client matters as property, and conflating the fiduciary duties of partners inter se with this concept of property, Jewel has been causing mischief and confusion for thirty years. As Judge Pauley observed in Geron: “Over the last three decades, courts have cited Jewel reflexively and uncritically. Thus, from modest beginnings in a dispute involving a small Alameda County general practice firm, the Jewel doctrine has grown to ensnare some of the largest law firms in the United States.” Geron, 476 B.R. at 739 n.2, Appdx. A145. As a matter of law and policy, this Court should decline to recognize that a law firm has any property interest in a client matter beyond collecting fees earned in connection with services the firm itself has performed. As discussed infra, this will harmonize the treatment of client matters in the context of dissolving and continuing firms, and in the hourly and contingent fee contexts. It 17 will also obviate the grave ethical and policy concerns raised by treating client matters as the property of a law firm. B. Dissolved Law Partnerships Have No Property Interest in Unfinished Hourly Client Matters under New York Law 1. The Former Client Matters Are Not Presumed to be Property under the Partnership Law In her decision, Judge McMahon wrote that: “Under the Partnership Law, the client matters are presumed to be Coudert’s assets on the Dissolution Date.” Appdx. A89. The basis for this presumption was that the “alternative” would be that client matters would be “personal property of individual partners.” Appdx. A98. Obviously, there is another alternative: client matters are the client’s property. A law firm only has a right to be paid for services it has actually rendered. If client matters were firm property, then a client would not be free to move that property to a new firm. In New York, a client has an absolute right to engage or discharge a firm at will, demonstrating that a client matter, unlike the “Pollock on the wall” referred to by Judge McMahon, Appdx. A94, is not firm property. The New York Partnership Law contains no “presumption” that “client matters” can constitute law firm property. As Judge Pauley recognized, that statute does not define partnership property, on dissolution or any other date; rather, it defines partners’ duties with respect to partnership property in the absence 18 of a contrary agreement. Geron, 476 B.R. at 742, Appdx. A147 – A148. The first task is therefore to determine what property interest—if any—Coudert has in the Former Client Matters. A correct analysis of New York law demonstrates that Coudert has no property interest in the Former Client Matters, and there is no “property” for which Former Coudert Partners must account. 2. A Law Partnership Has a Property Interest Only in Being Paid for Work It Has Performed The Appellate Division decisions on unfinished contingent fee cases have created confusion by sometimes referring to such cases as an “asset” of a dissolved law firm. Sexter v. Kimmelman, Sexter, Warmflash & Leitner, 19 A.D.3d 298, 299 (1st Dep’t 2005); Murov v. Ades, 12 A.D.3d 654, 655 (2d Dep’t 2004); Shandell v. Katz, 217 A.D.2d 472, 473 (1st Dep’t 1995); Kirsch v. Leventhal, 181 A.D.2d 222, 224 (3d Dep’t 1992). Following these cases, the Second Circuit adopted a similar view in Santalucia v. Sebright Transp., Inc., 232 F.3d 293, 297 (2d Cir. 2000) (“pending contingent fee cases of a dissolved partnership are assets subject to dissolution”). These cases, however, uniformly treat as an “asset” of a dissolving or predecessor firm only that portion of the fee attributable to the work it has actually performed. No New York case recognizes 19 that a dissolved law firm has a generalized property interest in the contingent fee case itself. The New York cases consistently hold that a dissolved law firm has “no cognizable property interest” in the portion of a post-dissolution contingent fee obtained by a former partner to the extent such fee was due to that partner’s “post- dissolution efforts, skill and diligence.” Shandell, 217 A.D.2d at 473. The unfinished contingent fee case is not treated as an “asset” or as “property.” Instead, when a successor law firm completes a contingent fee case, the dissolved law firm has not yet been paid for its own pre-dissolution services; it therefore has earned that portion of the fee ultimately recovered that is attributable to its pre- dissolution efforts. The “asset” is a claim to compensation for its own services, not a payment in exchange for the successor firm’s use of the dissolved firm’s property. This is the reasoning underlying the New York contingent fee cases. As explained in Sexter, an unfinished contingent matter is a “firm asset” because “valuable work . . . was performed prior to the dissolution,” and therefore “at least some of the fee realized by defendants should have been credited to the firm.” Sexter, 19 A.D.3d at 299 (emphasis added)). As Kirsch recognizes, a dissolved partnership is not entitled to the entire contingent fee earned by its former partner, because “[t]o the extent that the ultimate successful settlement of the [contingent 20 fee] case was due . . . to her post-dissolution efforts, skill and diligence, the firm’s fee in the . . . case proportionally would not be attributable to the use of [the plaintiff’s] right in the property of the dissolved partnership.” (Emphasis added.) See also Shandell, 217 A.D.2d at 473 (1st Dep’t 1995) (the New York “rule” is that where a successful settlement is due to the former partner’s post-dissolution “efforts, skill and diligence,” the fee is not attributable “to the use” of partnership property (internal quotation marks omitted)).4 This reasoning is consistent with the treatment of contingent fee cases where a predecessor firm is discharged, and the contingent fee matter is completed by a wholly unrelated attorney. See, e.g., Cohen v. Grainger, Tesoriero & Bell, 81 N.Y.2d 655, 658 (1993) (law firm terminated by client in contingent fee case has a claim to share in a fee ultimately obtained by another law firm, based on the discharged law firm’s “proportionate share of the work performed on the whole case”). The successor firm is not accounting for property received from the 4 In the Geron decision, Judge Pauley correctly understood the distinction that the New York cases draw: Although New York cases deem pending contingent fee matters to be ‘assets’ of a dissolved firm, they hold that a dissolved firm has “no cognizable property interest” in the portion of a fee due to the former partner’s “post-dissolution efforts, skill and diligence.” Geron, 476 B.R. at 740, Appdx. A146 (quoting Santalucia, 232 F.3d at 298 (quoting Shandell, 217 A.D.2d at 473)). Geron reached the correct conclusion: “recognizing a property interest in pending hourly fee matters would contravene New York law’s treatment of post-dissolution contingent fee matters.” Id. 21 predecessor firm (with which it has no fiduciary relationship in any event), but is remitting to the predecessor firm that portion of the fee it had already earned before the client changed law firms. This is an important point, because if unfinished business were treated as the “property” of an insolvent firm, it would presumably be recoverable in bankruptcy as a fraudulent conveyance even if the client retained a firm that took on no former partners of the dissolved firm. This is inconsistent with the absolute right of clients to commence or terminate attorney-client relationships without limitation. See infra Point I(C). It also demonstrates that the Jewel line of cases arises from the inappropriate conflation of two separate legal concepts—the fiduciary duties of partners inter se and the concept of “property.” The fact that the Former Coudert Partners may owe certain fiduciary duties to one another does not create a property interest where none existed before, any more than the dissolution or insolvency of a firm creates a property interest that did not previously exist. The principle that emerges from the New York contingent fee cases therefore is not that a successor firm or lawyer is a fiduciary obligated to compensate former partners for the use of partnership property in the form of a client matter. A client matter is not property to be conveyed from one firm or partner to another, and any payment obligation does not arise from the fiduciary 22 relationship among former partners, or from a duty to account from partnership property. It arises only because the predecessor firm did not get paid for its completed work. Each firm or lawyer has an interest only in being paid for those services it has actually performed on behalf of the client. In a contingent fee case, some allocation between the firms is necessary, and the New York caselaw has developed mechanisms to deal with that situation. In an hourly fee matter, like the Former Client Matters, it is simple to determine who has done the work: the firm that billed the client. This rule comports with common sense, the interests of clients and their attorneys, and with the ethical rules that govern lawyers. Recognizing a property interest in the Former Client Matters would be contrary to existing New York law, and there is no sound reason for this Court to depart from that law. 3. The Only New York Decisions to Consider Hourly Fee Matters Have Correctly Concluded that they Are Not Property The conclusion that the Former Client Matters are not property under New York law flows from the reasoning of the Appellate Division cases on contingent fee matters. Although the Appellate Division has not considered the specific questions certified to this Court, the trial courts have, and have rejected the proposition that client matters can constitute property for which a dissolved firm must account. 23 The most relevant New York decision is Sheresky v. Sheresky Aronson Mayefsky & Sloan, LLP, 2011 N.Y. LEXIS 6588. In Sheresky, Supreme Court dismissed claims for post-dissolution profits on unfinished hourly rate matters. Sheresky was decided after the Bankruptcy Court’s disposition of the Law Firm’s motions to dismiss in this case, and the Sheresky court therefore had the benefit of that analysis when reaching its decision. Id. at **12 – 15.5 The Sheresky court specifically rejected the conclusion that hourly fee matters can be considered the property of a dissolved firm. Sheresky noted that the “New York decisions dealing with a cause of action for unfinished business have uniformly involved contingent fee cases” and that it “is logical to distinguish between contingent fee arrangements and cases which are billed on the basis of hourly work.” Id. It also noted that allowing a dissolved law firm to be paid for work done by another firm would violate New York Rule of Professional Conduct (the “Rules”) 1.5(g) (22 N.Y.C.R.R. § 1200.0 Rule 1.5(g)), New York’s rule on division of legal fees. Id. The Sheresky court— aware of the Bankruptcy Court’s analysis and the non-New York cases on which it was based—expressly ruled that it was “not inclined to recognize a cause of action 5 Sheresky cites the decision of the District Court (Marrerro, J.) denying an interlocutory appeal from Judge Drain’s decision: Dev. Specialists, Inc. v. Akin Gump Strauss Hauer & Feld, LLP (In re Coudert Bros. LLP Law Firm Adversary Proceedings), 447 B.R. 706 (S.D.N.Y. 2011). 24 for unfinished business for hourly fee cases which has, hitherto, not been recognized by the New York Courts.” Id.6 The reasoning of an unreported decision, Burke v. Clifton, Budd & DeMaria, Index No. 1454/91-002 (Sup. Ct. N.Y. County 1991), Appdx. A161 – A163, also supports the conclusion in Sheresky. In Burke, a partner left a law firm to create a new firm, and then sued his former partnership for an accounting. Appdx. 462. The former partnership counterclaimed, alleging that the former partner had taken clients from his former firm and sought imposition of a constructive trust on “all profits received” by its former partner from such clients. Id. The Court dismissed the former partnership’s counterclaims, holding that it had no property interest in clients, and noting that it did not allege that the partner “removed any pending actions.” Appdx. A163. The former partnership then amended its counterclaims to allege that “pending cases” had in fact been transferred to the new firm and to add claims for unjust enrichment. Burke v. Clifton, Budd & DeMaria, Index No. 1454/91-003 (Sup. Ct. N.Y. Cnty. 1992), Appdx. A165. None of the pending cases was alleged to be a contingent fee case. Appdx. A166. The former partner moved to dismiss a 6 Judge Pauley correctly recognized that the Sheresky decision was consistent with the weight of New York authority. Geron, 476 B.R. at 740, Appdx. A146. Judge McMahon did not address Sheresky at all. 25 second time, arguing that there was no unjust enrichment because the former partnership “was compensated for all work it performed on these files up until the transfer.” Id. The Court agreed, and dismissed the former partnership’s amended counterclaims. Appdx. A167. The Court distinguished cases involving pending contingent fee cases, because in such cases, the “entire fee” may be received by the new firm, resulting in the dissolved firm not receiving any compensation for the services it actually performed. Id. The Court held that the dissolved law firm only had a cognizable claim if it “rendered services for which [it] was not compensated,” and allowed the dissolved law firm to serve a “further amended complaint setting forth a cause of action for compensation for services actually rendered on specified cases, with sufficient particularity to define the subject matter and the triable issues,” if it could do so. Id. Both of these cases reflect the basic principle underlying the Appellate Division cases discussed supra in Point I(B)(2): a law firm is only entitled to receive payment for work it has done. This is sound policy, and should be reaffirmed by this Court. C. Recognizing a Property Interest in the Former Client Matters Is Contrary to New York Law and Policy Governing the Attorney-Client Relationship Unlike other commercial partnerships, law partnerships are subject to unique legal and ethical rules, particularly with respect to how they deal with 26 clients and client matters. Treating a client matter as an article of property has obvious implications with respect to the unique duties owed by lawyers to their clients. As a matter of well-established New York law and policy, a law firm’s clients and their legal matters cannot be treated as “an ordinary article of commerce.” Geron, 476 B.R. at 742 (citing Cohen v. Lord, Day & Lord, 75 N.Y.2d 95, 98 (1989)). The ethical rules governing lawyers support this view. For example, comment [1] to Rule 1.17 observes: “The practice of law is a profession, not merely a business. Clients are not commodities that can be purchased and sold at will.” It is the client who chooses the lawyer; the right to choice of counsel is strongly protected in New York. This is reflected in the restriction of agreements that would limit this right. Rule 5.6(a)(1) forbids any partnership agreement that “restricts the right of a lawyer to practice after termination of the [partnership] relationship, except an agreement concerning benefits upon retirement.” This and other New York courts have interpreted this Rule broadly to prohibit non-competition agreements, or forfeiture or penalty clauses in partnership agreements, that could discourage departing attorneys from continuing to represent clients of their former firm. See, e.g., Denburg v. Parker, Chapin, Flattau & Klimpl, 82 N.Y.2d 375 (1993); Cohen, 75 N.Y.2d at 100; Nixon Peabody LLP v. de 27 Senilhes, 20 Misc. 30 1145(A), 2008 N.Y. Misc. LEXIS 5770 (Sup. Ct. Monroe County 2008) (“the rationale for the rule is to protect the autonomy of lawyers and the ability of clients to freely choose counsel” (citation, quotation omitted)); Graubard Mollen Horowitz Pomeranz & Shapiro v. Moskovitz, 149 Misc. 2d 481, 485 (Sup. Ct. N.Y. County 1990) (“[r]estrictive covenants are limited in the case of attorneys in order to serve the greater social purpose of providing clients with full and free choice of counsel”). A rule requiring a former partner to remit to her former firm future profits earned on an engagement would certainly discourage a lawyer and her new firm from accepting that engagement, even though the client would prefer that they do so. New firms will not be eager to take on partners whose engagements are not going to generate profits, and the dissolved firm’s clients would find themselves deprived of the attorney of their choice. This result is contrary to New York law and policy.7 In Geron, Judge Pauley correctly perceived that recognizing a property interest in hourly cases would “have bizarre consequences”; if client matters are “property,” a firm presumably “could sell its pending hourly fee 7 This concern is consistent with the policy expressed in Rule 1.17, governing the sale of a law practice. As Comment 6 to that Rule notes: “The Rule requires that the seller’s entire practice be sold. The prohibition against sale of less than an entire practice protects those clients whose matters are less lucrative and who might find it difficult to secure other counsel if a sale could be limited to substantial fee-generating matters.” 28 matters to the highest bidder.” Geron, 476 B.R. at 741, Appdx. A146 – A147. Judge Pauley properly concluded that this “is inconsistent with a client’s right to choose attorneys.” Id. Judge Pauley was also correct in finding that the recognition of a property interest in post-dissolution hourly fees would “result in an unjust windfall” for the dissolved firm, and would violate New York’s prohibition on fee-sharing under Rule 1.5(g), as the Sheresky Court also held. Geron, 476 B.R. at 740, Appdx. A146; Sheresky, 2011 NY Slip Op 52504U, at 6. D. The Former Client Matters Are Not Executory Contracts The unfinished business doctrine treats each client matter as an executory contract in which the partnership has a property interest. It requires each of the partners of a partnership in dissolution to complete those executory contracts for the benefit of the partnership. As discussed supra, this is inconsistent with the treatment of client matters under New York law. It is also inconsistent with a correct understanding of an executory contract. Former Client Matters are not in any meaningful sense executory. An executory contract is one in which each party has bound itself to some as-yet unperformed obligation to the other. See, e.g., BLACK’S LAW DICTIONARY, 7th Ed. (1999) (defining “executory contract” as “[a] contract that remains wholly unperformed or for which there remains something to be done on both sides . . . .”). As a matter of settled New York law, a client cannot be bound to continue 29 employing a particular firm or lawyer, irrespective of the nature of the particular engagement. A client cannot be bound to any future performance at all. To do so would violate a client’s absolute right to terminate the attorney-client relationship at any time for any reason. Whatever the obligations of the lawyer toward a client, the only thing a client can be obligated to do is to pay for work actually completed. It has long been recognized that the duties of lawyer and client are asymmetrical. For example, this Court held, in 1916, that Every attorney enters into the service of his client subject to the rule that his client may dismiss or supersede him at will; and if he makes a contract for future services to his client, it is necessarily subject to such rule, and made with full knowledge that he may never perform such service, for the reason that his client may not keep him, and that in that event he will not be paid therefor, but will be entitled to compensation only for the services he has already rendered. Martin v. Camp, 219 N.Y. 170, 176 (1916) (quoting Johnson v. Ravitch, 113 A.D. 810, 811 (2d Dep’t 1906)). To treat client matters as executory contracts in this context, there would have to be some binding, prospective but unperformed obligation on the part of the affected clients to the dissolving law firm at the time of dissolution. As a matter of law, there can be no such obligation. This is so whether the matter is based on a contingent or an hourly fee, but the reasoning applies with even greater force to hourly fee situations such as the Former Client Matters. In a contingent fee arrangement, a client is bound to 30 pay a predecessor firm only for that portion of the work actually performed by that firm, as measured by the ultimate recovery. In an hourly fee engagement, the only performance to which a client is bound is to pay the bills for the work requested and actually completed as they become due. If the client who has entered into an hourly fee arrangement assigns no new work to a firm in a particular billing cycle, or withdraws existing assignments, the firm has no recourse without regard to the nature of the matter or the original contemplated scope of the engagement. Coudert may have hoped that its clients would continue to employ it while it was a going concern, but it could have no legally enforceable expectation that they would do so. It has no greater right or expectation in dissolution. DSI has relied heavily on a 1920 case, Stem v. Warren, 227 N.Y. 538 (1920), for the proposition that the Former Client Matters are executory contracts that must be completed for the benefit of the dissolved Coudert partnership. DSI misunderstands Stem. Stem involved a partnership formed by two architecture firms (each a partnership) for the purpose of obtaining and performing a contract with a railroad company to perform services for the construction of Grand Central Station. The agreement between the architecture firms and the client railroad expressly contemplated that the firms’ contract with the railroad would survive the death of one of the individual architects. Several years into the venture, one architect died, 31 dissolving the partnerships by operation of law. Without consulting the surviving member of the other firm, the architecture firm that had not suffered the death persuaded the railroad company to enter into a new contract with it alone. The trial court found a “breach of trust incident to the partnership relationship between the parties.” The Court of Appeals held that “the intention of the parties is manifest that the contract was to be performed notwithstanding the death.” Stem, 227 N.Y. at 547. The firm completing the work was therefore held to be doing so on behalf of the dissolved partnership and the partnership of the deceased “was entitled to share in the profits of all unfinished business though subsequently completed.” Stem held only that a contract remains a partnership asset after dissolution if the parties to the contract affirmatively so intend. In Stem, the railroad contract was itself an “asset” of the partnership because it was the parties’ “manifest” intention to continue performance notwithstanding the death and the automatic dissolution that followed. Stem, 546 – 547; see also Scholastic, Inc. v. Harris, 259 F.3d 73, 89 (2d Cir. 2001).8 Stem involved a breach of trust, which does not here exist, and a claim for a division of profits among the partners that would not exclude those actually doing the work from any of the profits realized 8 Scholastic involved a joint venture, which the court analyzed as if it were a partnership. See 259 F.3d 88 – 91; see also Gramercy Equities Corp. v. Dumont, 72 N.Y.2d 560, 565 (1988) (“it has long been recognized that the legal consequences of a joint venture are equivalent to those of a partnership”). 32 from that work. Here, in contrast, profits would flow to the dissolved firm and its creditors, rather than to the attorneys actually providing legal services. The rule that emerges from Stem is that “if an executory contract with a third party contemplates that it should survive dissolution,” it remains a partnership “asset” and the partners “have an obligation to perform.” Scholastic, 259 F.3d at 89. Accord Rhein v. Peeso, 194 A.D. 274 (1st Dep’t 1920) (recognizing a partner’s duty to complete an executory contract where “[t]he defendant wrote certain letters which apparently recognized an obligation on his part to the plaintiff”). This situation is not controlled by Stem. Coudert and its clients could not have contemplated post-dissolution survival of their obligations. “Contracts for legal services are categorically different from architecture contracts.” Geron, 476 B.R. at 741, Appdx. A147. An attorney’s obligations “transcend those prevailing in the commercial marketplace,” and the “contract under which an attorney is employed by a client has peculiar and distinctive features.” Id. (quoting In re Cooperman, 83 N.Y.2d 465, 472 (1994)). Attorney-client engagements are terminable at will by the client as a matter of law, and any agreement to provide legal services that purported to impair a client’s absolute right to terminate counsel, or that had the practical effect of doing so, would simply be unenforceable. New York protects the absolute right of a client to terminate a lawyer for any reason, at 33 any time and with or without cause. See In re Cooperman, 83 N.Y.2d 465, 472 – 73 (1994); Campagnola v. Mulholland, Minion & Roe, 76 N.Y.2d 38, 43 – 44 (1990); Demov, Morris, Levin & Shein v. Glazer, 53 N.Y.2d 553, 556 – 57 (1981); 22 N.Y.C.R.R. § 1210.1. As Judge Pauley recognized in Geron, the parties to a legal engagement—the attorney and the client—cannot contemplate “post- dissolution survival.” Geron, 476 B.R. at 741, Appdx. A147. E. Decisions from other Jurisdictions Are neither Consistent nor Persuasive Jewel was decided in 1984. Since then, only a few states’ high courts touched on Jewel and the unfinished business doctrine at all, and none discussed it in detail or expressly adopted it. See, e.g., Messina v. Calandro, 214 Conn. 596, 601 (1990) (citing Jewel in accounting claim related to oral partnership to develop real property); Meehan v. Shaughnessy, 404 Mass. 419 (Mass. 1989) (dealing with breach of fiduciary duty, citing Jewel in dictum footnote). However, several high courts citing Jewel or considering the unfinished business of a partnership adopted an approach similar to that applied by the Appellate Division in Kirsch, and required a division of fees between predecessor and successor firms in proportion to their efforts. See Vowell & Meelheim, P.C. v. Beddow, Erben & Bowen, P.A., 679 So. 2d 637 (Ala. 1996) (citing Jewel in connection with contingent fee case, but approving “equitable 34 adjustment” in light of “time spent” by attorneys); Kelly v. Smith, 611 N.E.2d 118, 122 (Ind. 1993) (citing and distinguishing Jewel on the facts, holding that law firm was entitled only to recover “the quantum meruit value as of the dissolution date against matters which left the [f]irm”); see also In re Mondale & Johnson, 150 Mont. 534, 542 (1968) (treating unfinished business generally as asset, but concluding that “the decision of the court to split the returns of unfinished business, two-thirds to the partner handling the business and one-third to the other is fair”). Similarly, although it did not discuss Jewel, the Wyoming Supreme Court has held that “when profits earned after dissolution and before a final accounting are attributable in part to the personal skill or services of a partner, it is a factor to be considered in apportioning the shares of the partners”; because “in a service business all that is sold to produce income are the services of the firm,” “there were no post-dissolution profits” to account for. Weisbrod v. Ely, 767 P.2d 171, 175 (Wyo. 1989); see also Timmermann v. Timmermann, 272 Ore. 613, 630 (1975) (retiring partner “should have no interest in profits attributable to the labor and management services of the continuing partners”); Essay v. Essay, 123 N.W.2d 648, 649 (Neb. 1963) (“if the partner claiming an interest in profits earned after the dissolution has no interest in the assets or capital of the partnership after dissolution, he is not entitled to share in such profits”). Only the District of 35 Columbia Court of Appeals appears to have adopted the rationale of Jewel, but it is not clear that it has applied it to hourly fee matters. See Beckman v. Farmer, 579 A.2d 618, 639 (D.C. 1990). The Jewel doctrine therefore was largely dormant, and applied by state courts inconsistently (if at all) until it was resurrected in connection with the 2003 bankruptcy of the California firm Brobeck, Phleger & Harrison LLP, and later applied in the 2008 bankruptcy of Heller Ehrman LLP and the 2011 bankruptcy of Howrey LLP. Notably, all three bankruptcies have been assigned to Bankruptcy Judge Dennis Montali of the Northern District of California, San Francisco Division. Following his 2009 decision applying the unfinished business doctrine to hourly rate matters under California law in Greenspan v. Orrick, Herrington & Sutcliffe LLP (In re Brobeck, Phleger & Harrison LLP), 408 B.R. 318, 337 (Bankr. N.D. Cal. 2009), Judge Montali applied the same rationale in Heller Ehrman LLP v. Arnold & Porter LLP (In re Heller Ehrman LLP), 2011 Bankr. LEXIS 1497 (Bankr. N.D. Cal. Apr. 22, 2011). In Diamond v. Pillsbury Winthrop Shaw Pittman, LLP (In re Howrey LLP), 2014 Bankr. LEXIS 527, *12 – 13 (Bankr. N.D. Cal. 2014), Judge Montali concluded that the law of the District of Columbia was similar to that of California, and again applied the unfinished business doctrine regardless of the nature of the client engagement. Other decisions by Judge 36 Montali in each of these three bankruptcies have touched on unfinished business as well. Despite the recent attention it has gotten, the application of the unfinished business doctrine to client matters handled by a law firm (or indeed to any personal services partnership) is not a “consensus” position. See Geron, 476 B.R. at 742, Appdx. A147 (“the cases on which the [plaintiff] relies do not represent a consensus view”). Instead, it appears to be the law as stated by some intermediate state appeals courts and the District of Columbia, interpreted primarily by a single Bankruptcy Judge. Other courts have not followed the reasoning of Jewel. In Vowell, Kelly and In re Mondale & Johnson (discussed supra at 33 – 34), the high courts of Alabama, Indiana and Montana, respectively, adopted a method of allocating fees between firms similar to that of Kirsch. In Weisbrod, Timmermann, and Essay (discussed supra at 34 – 35), the high courts of Wyoming, Oregon and Nebraska rejected the idea that the personal services of a former partner can be attributable to the use of property of the dissolved partnership. Similarly, in Bader v. Cox, 701 S.W.2d 677 (Tex. App. Dist. 5 1985) and Hughes v. Aycock, 598 S.W.2d 370 (Tex. Civ. App. Houston 14th Dist. 1980) (discussed infra in Point II(A)), the intermediate Texas appeals courts concluded that any claim to a client matter as a form of partnership property must be “directly attributable to [the] capital 37 investment” of the predecessor partnership, and held that “the portion of the profits attributable to the [predecessor’s] ownership interest must be distinguished from the portion attributable to the skill, time, efforts, and diligence” of those who actually complete the work. Hughes, 598 S.W.2d at 376 – 377. Finally, in Welman v. Parker, 328 S.W.3d 451, 458 (Mo. Ct. App. 2010), the Court, emphasizing the autonomy of clients in selecting their attorneys, rejected entirely the idea that even a contingent fee matter is a firm asset; the Court concluded that a “contingent fee achieved from eventual judgment or settlement is not an asset of the dissolved firm,” and that the dissolved firm could only recover the value of its own pre-dissolution services. Id. at 457. Far from representing a consensus, the state cases interpreting Jewel and the unfinished business doctrine adopt different reasoning and reach different conclusions. New York’s law and public policy compel a result more in line with Welman, and other cases that reject a property interest in the client matter itself, than with Jewel. This Court should bring doctrinal clarity to this issue by rejecting the proposition that a law firm has a property interest in a client matter, rather than in the receivables it has already earned in respect of that matter. 38 II. THE LAW FIRMS ARE ENTITLED TO RETAIN THEIR PROFITS BECAUSE THOSE PROFITS ARE ATTRIBUTABLE TO THEIR EFFORTS, SKILL AND DILIGENCE If this Court concludes that the dissolved firm has no property interest in unfinished matters, it need not proceed further. If, however, this Court decides that a Former Client Matter constitutes property of a dissolved law firm, the laws, rules and policies that govern the attorney-client relationship prohibit the new firm from paying any of the fees it earns to the dissolved firm which has not provided services to the client. A. New York Law, Rules and Public Policy Require that the Law Firms Retain All Fees, Including Profits New York law as to a client’s right to choose counsel is well- established. This Court has observed that the relationship between client and lawyer is a special one, and one in which the client’s interest is paramount; further, a client has a particular interest in the nature of a lawyer’s fees: This unique fiduciary reliance, stemming from people hiring attorneys to exercise professional judgment on a client’s behalf—“giving counsel”—is imbued with ultimate trust and confidence. The attorney's obligations, therefore, transcend those prevailing in the commercial market place. The duty to deal fairly, honestly and with undivided loyalty superimposes onto the attorney-client relationship a set of special and unique duties, including 39 maintaining confidentiality, avoiding conflicts of interest, operating competently, safeguarding client property and honoring the clients’ interests over the lawyer’s. To the public and clients, few features could be more paramount than the fee—the costs of legal services. In re Cooperman, 83 N.Y.2d at 472. This Court prohibits agreements that could discourage departing attorneys from continuing to represent clients of their former firm “in order to serve the greater social purpose of providing clients with full and free choice of counsel.” Graubard Mollen Horowitz Pomeranz & Shapiro v. Moskovitz, 149 Misc. 2d at 485; see also Denburg, 82 N.Y.2d 375. A client also has an unfettered right to discharge counsel for any reason or no reason, in which case the lawyer may recover only for services actually performed, irrespective of the nature of the engagement between lawyer and client. See In re Cooperman, 83 N.Y.2d at 472; Martin v. Camp, 219 N.Y. at 176; Johnson v. Ravitch, 113 A.D. at 811. When a firm dissolves and the client selects a new firm, an affected client may choose to engage the lawyer who formerly represented the client or that lawyer’s new firm. The prior firm has been discharged, and should have no claim for fees beyond the work it has actually completed. Any other result will infringe on the client’s choice of counsel and violate the ethical prohibition against paying fees to a lawyer who has not provided services and takes no professional responsibility for the matter. Requiring the lawyer who formerly represented the 40 client to remit to the dissolving firm that part of the fees paid which are considered “profits” relating to the new engagement violates the principles that underlie the attorney client relationship. First, the requirement to remit profits may discourage that lawyer and his new firm from accepting the engagement despite the client’s wishes. Although the definition of a law firm’s “profits” has not been determined for this purpose in New York, the new firm would be aware that a significant part of the fees for the engagement will be paid to the dissolved firm. The new firm may decide to refuse the engagement rather than work “at cost.” Second, even if the new firm accepts the engagement, the client’s choice of counsel is infringed by the new firm not retaining all fees the client pays for its services. The client may fear the new firm will not spend the time and effort necessary for the representation if it knows its profits will be paid to the old firm. In that circumstance, the client may decide to forego his choice of counsel and instead hire another firm which will keep the full amount of the agreed-upon fee. Third, this arrangement violates the New York Rules of Professional Conduct. The Rules prohibit payment of fees to a lawyer not doing the work. If a matter continues to exist after the dissolution of the law firm that was originally engaged, and remains the same matter at a new firm, Rule 1.5(g) prohibits the new firm from paying part of its fees to the dissolved firm, except in certain cases: 41 A lawyer shall not divide a fee for legal services with another lawyer who is not associated in the same law firm unless: (1) the division is in proportion to the services performed by each lawyer or, by a writing given to the client, each lawyer assumes joint responsibility for the representation; (2) the client agrees to employment of the other lawyer after a full disclosure that a division of fees will be made, including the share each lawyer will receive, and the client’s agreement is confirmed in writing; and (3) the total fee is not excessive.9 Here the exceptions found in Rule 1.5(g) do not apply. The Rule 1.5(g)(1) exception does not apply because the old firm performed no services and does not assume joint responsibility. Similarly, the Rule 1.5(g)(2) exception does not apply. The client will have no right to agree to the fee splitting percentages or refuse to agree to a split which the client believes is not appropriate. The payment of profits would be mandatory. It is not in a client’s interest to agree to a fee split where all the profits are remitted to the firm not representing it and risk that the services provided by the new firm will be diminished as a result. Allocating fees received from clients between the Law Firms and the Coudert estate would violate both the text of Rule 1.5(g) and the 9 Rule 1.5(h) modifies Rule 1.5(g) by stating that: “Rule 1.5(g) does not prohibit payment to a lawyer formerly associated in a law firm pursuant to a separation or retirement agreement.” Here, no separation or retirement agreement is implicated. 42 policy that underlies it. See Geron, 476 B.R. at 741, Appdx. A146; Sheresky, 2011 NY LEXIS at **14 – 15.10 Kirsch v. Leventhal and other New York cases are consistent with the Rules by mandating that the lawyer who does the work receive the full payment for her services. Kirsch requires that the firm that performs the work receives the fees associated with its “efforts, skill and diligence.” Kirsch, 181 A.D.2d at 226. Adhering to this rule is not only consistent with current New York law, but resolves the ethical and policy issues which arise from this fee splitting. There can be no question that Kirsch prohibits any of the fees received by the new firm from being paid to the dissolved one. A lawyer’s “efforts, skill and diligence” are expended on everything she does. The Kirsch rule does not mean that the new firm retains only profits for work that is above the ordinary. Rather, it mandates that the lawyer who performs the service for the client—whose “efforts, skill and diligence” are used for the client’s benefit—is to be paid. The well-established Kirsch rule is consistent with a holding that a dissolved firm cannot have a property interest in unfinished client matters. This is because, however “unfinished business” or “client matter” are defined, profits 10 Some decisions, notably those issued by Judge Montali, discussed supra in Point I(E), reject without substantial analysis the assertion that the sharing of profits would constitute impermissible fee-splitting. Geron and Sheresky take the better view—treating client matters as property subject to an accounting between firms is contrary to the text and policy of Rule 1.5(g). 43 associated with the successor firm’s “efforts, skill and diligence” do not derive from the use of partnership property in the form of a “client matter,” but from the efforts of the successor firm. Even if the unfinished matter were property of the dissolved firm, the fees do not arise from the property but rather from the services performed by the lawyer for the client. A lawyer’s fees are not similar to interest on funds held or appreciation of stock, but rather are created by her work. The fees, which are the fruits of that effort, belong to the lawyer doing the work. Judge McMahon was critical of the Kirsch rule, but her analysis of Kirsch was flawed. She concluded that Kirsch relied on Bader v. Cox, 701 S.W.2d 677 (Tex. App. Dist. 5 1985), which applied the provisions of the Revised Uniform Partnership Act, rather than the Uniform Partnership Act that New York has adopted. See Dev. Specialists, Inc. 477 B.R. at 147, Appdx. A126 – A127. In fact, Bader did not depend on any provision of the Revised Uniform Partnership Act, but questioned whether a successor firm’s profits derived from its own work on a client matter could be attributable to its use of that client matter as property. Bader concluded that it was the plaintiff’s burden to show that the profits at issue were “attributable to the use of [firm’s] right in the property of the dissolved partnership,” rather than being the product of the subsequent attorney’s labor. Bader, S.W.2d at 684. 44 In this, Bader followed Hughes v. Aycock, 598 S.W.2d 370 (Tex. Civ. App. Houston 14th Dist. 1980), which held that the plaintiff must demonstrate what portion of those profits are directly attributable to his capital investment. This requires more than simply multiplying the percentage figure representing his contribution to capital by the total profits for the period in question. Rather, the portion of the profits attributable to the [predecessor’s] ownership interest must be distinguished from the portion attributable to the skill, time, efforts, and diligence of the remaining partners. Hughes, 598 S.W.2d at 376 – 377 (emphasis added). Thus, the two Texas cases illustrate a coherent rule not dependent on any difference between the Uniform Partnership Act and its Revised version. They conclude that profits associated with a “client matter” do not include profits gained as a result of the skill, time, efforts, and diligence of others, because those profits are not attributable to any property interest the former firm had in the client matter. This is consistent with the holdings of the New York Appellate Division cases, including Kirsch, Sexter, Murov and Shandell, and this Court should adhere to those cases. B. If this Court Determines Profits Must Be Paid to the Prior Firm, It Should Narrowly Define Client Matters to Include Only those Services Agreed to and Unfinished Prior to Dissolution If the Court accepts the foregoing analysis, it need not adopt a definition of client matter. If, however, this Court concludes that Coudert has a 45 right to profits earned by the successor firms from the Former Client Matters, it should define “client matter” narrowly to include only those specific tasks—not the entire “engagement”—requested by clients that the prior firm had agreed to perform, but which remained unfinished at the time the client retained the new firm, and which were subsequently completed by the new firm. Given the diverse and frequently-changing nature of the attorney-client relationship, and in light of the absolute right of a client to control the engagement and the paramount interest in protecting the welfare of clients, the definition must be narrow. Client matters should not include any expansion of the services based on changed circumstances. The profits from client matters, if they are to be paid to a predecessor, should therefore include only those specific, identifiable and discrete tasks that a client asked the prior firm to perform, but which were later performed by the new firm. Only such a definition, tied to discrete tasks requested by a client, will be workable.11 Otherwise, as circumstances change and the client instructs the new 11 A recent decision by Judge Montali denying cross-motions for summary judgment shows the difficulty of attempting to determine the profits to be remitted to the dissolved firm in hourly fee cases. In Heller Ehrman LLP v. Jones Day (In re Heller Ehrman LLP), 2014 Bankr. LEXIS 382 (Bankr. N.D. Cal. Jan. 28, 2014), Judge Montali noted that the law as to valuation remains “unsettled.” Id. at *5. Judge Montali determined that, under Jewel—which was decided under the Uniform Partnership Act—it is “net post-dissolution income, not gross income, that is to be allocated to the former partners.” Id. at *12 – 13 (quoting Jewel, 156 Cal. App. 3d at 179) (emphasis in original). Judge Montali accepted that any damages “should not exceed the amount [Heller] would have recovered if it had completed the Unfinished Business.” Id. Judge Montali then adopted the approach suggested by the Bankruptcy Court in this matter—determine the 46 firm to perform additional services arguably related to the “client matter,” but which were not assigned or contemplated by the client prior to dissolution, the new firm will be unsure whether it will get paid fully for its work. Defining a “client matter” to encompass an entire, perhaps ill-defined “engagement” will result in perpetual conflict between the old and new firms as to whether a particular billable item is or is not within the scope of the unfinished client matter. This will invariably be to the disadvantage of the client, who should not be caught between dueling counsel. Conclusion For the foregoing reasons, the Court should answer the first certified question in the negative, and decline to reach the second certified question as academic. Alternatively, the Court should answer the second certified question consistently with Kirsch v. Leventhal, 181 A.D.2d 222, 224 (3d Dep’t 1992) and the New York Rules of Professional Conduct, and hold that the lawyer who hypothetical profit margin of a firm “with Coudert’s characteristics,” and then make a hypothetical determination of the revenue of each matter that theoretically would have been earned by that firm for finishing the matter. Id. at *26 – 27. This hypothetical determination of profits that would have been earned by a dissolved firm that has no role in the representation is contrary to settled New York law that the determination of lost profits must be made with reasonable certainty. See Kenford Co. v. County of Erie, 67 N.Y.2d 257, 261 (1986) (“it must be demonstrated with certainty that such damages have been caused by the breach and . . . the alleged loss must be capable of proof with reasonable certainty”). 47 performs the work in respect of a “client matter” is entitled to retain all fees received. Dated: New York, New York March 7, 2014 MILLER & WRUBEL P.C. By: Joel M. Miller S. Christopher Provenzano Nicholas Cutaia 570 Lexington Avenue New York, New York 10022 Tel: (212) 336-3500 Fax: (212) 336-3555 Attorneys for Appellant-Respondent Dechert LLP MORRISON & FOERSTER LLP By: Brett H. Miller 1290 Avenue of the Americas New York, New York 10104 Tel: (212) 468-8000 Fax: (212) 468-7900 Attorneys for Appellant-Respondent Morrison & Foerster LLP 48 K&L GATES LLP By: Richard S. Miller Brian D. Koosed 599 Lexington Avenue New York, New York 10022 Tel: (212) 536-3922 Fax: (212) 536-3901 Attorneys for Appellant-Respondent K&L Gates LLP QUINN EMANUEL URQUHART & SULLIVAN LLP By: Eric J. Emanuel Susheel Kirpalani Eric M. Kay 51 Madison Avenue, 22nd Floor New York, New York 10010 Tel: (212) 849-7000 Fax: (212) 849-7100 Attorneys for Appellant-Respondent Akin Gump Strauss Hauer & Feld LLP 49 DUANE MORRIS LLP A Delaware Limited Liability Partnership By: Lawrence J. Kotler 1540 Broadway New York, NY 10036-4086 Tel: (212) 692-1000 Fax: (212) 692-1020 Attorneys for Appellant-Respondent Duane Morris LLP DORSEY & WHITNEY LLP By: Patrick J. McLaughlin 50 South Sixth Street, Suite 1500 Minneapolis, MN 55402-1498 Tel: (612) 340-2975 Attorneys for Appellant-Respondent Dorsey & Whitney LLP ARENT FOX LLP By: Allen G. Reiter 1675 Broadway New York, New York 10019 Tel: (212) 484-3900 Attorneys for Appellant-Respondent Arent Fox LLP 50 KRAMON & GRAHAM, P.A. By: James P. Ulwick (admitted pro hac vice) Jean E. Lewis (admitted pro hac vice) One South Street, Suite 2600 Baltimore, Maryland 21202 Tel: (410) 752-6030 - and - MEISTER SEELIG & FEIN LLP Jeffrey Schreiber Howard Davis 140 East 45th Street, 19th Floor New York, New York 10017 Tel: (212) 655-2500 Fax: (212) 655-3535 Attorneys for Appellant-Respondent DLA Piper LLP (US) SHEPPARD MULLIN RICHTER & HAMPTON LLP By: Daniel L. Brown 30 Rockefeller Plaza New York, New York 10112 Tel: (212) 653-8700 Fax: (212) 653-8701 Attorneys for Appellant-Respondent Sheppard Mullin Richter & Hampton LLP