In re: Thelen LLP.BriefN.Y.June 4, 2014To be Argued by: HOWARD P. MAGALIFF (Time Requested: 30 Minutes) CTQ-2013-00009 Court of Appeals of the State of New York YANN GERON, as Chapter 7 Trustee of the Estate of Thelen LLP, Plaintiff-Appellant, – v. – SEYFARTH SHAW LLP, Defendant-Respondent. –––––––––––––––––––––––––– ON APPEAL FROM THE QUESTIONS CERTIFIED BY THE U.S. COURT OF APPEALS FOR THE SECOND CIRCUIT IN DOCKET NO. 12-4138-BK BRIEF FOR PLAINTIFF-APPELLANT HOWARD P. MAGALIFF RICH MICHAELSON MAGALIFF MOSER, LLP Special Litigation Counsel for Plaintiff-Appellant 340 Madison Avenue, 19th Floor New York, New York 10173 Tel.: (212) 220-9402 Fax: (212) 913-9642 Date completed: February 6, 2014 i TABLE OF CONTENTS Page TABLE OF AUTHORITIES ................................................................................... iii JURISDICTIONAL STATEMENT .......................................................................... 1 QUESTIONS PRESENTED ...................................................................................... 1 PRELIMINARY STATEMENT ............................................................................... 4 STATEMENT OF THE CASE .................................................................................. 7 A. Factual Background ............................................................................... 7 B. Procedural History ................................................................................. 8 SUMMARY OF ARGUMENT ............................................................................... 10 STANDARD OF REVIEW ..................................................................................... 13 ARGUMENT ........................................................................................................... 14 I HOURLY FEE MATTERS ARE PARTNERSHIP PROPERTY UNDER NEW YORK LAW .................................................................................................. 14 A. The Partnership Law Should be Interpreted According to its Plain Meaning ...................................................................................... 14 B. Client Matters are Partnership Assets ................................................. 18 C. New York Follows the No Compensation Rule .................................. 20 D. New York Follows UPA Jurisdictions ................................................ 24 E. Recognizing Unfinished Business Claims for Hourly Matters Is Consistent With Public Policy ......................................................... 28 F. The Partnership Law Has Precedence Over the Rules of Professional Conduct ........................................................................... 35 II CLIENT MATTERS ................................................................................................ 37 A. What is a Client Matter? ...................................................................... 37 ii B. Is the New Firm Entitled to a Share of the Profit on Unfinished Matters of the Dissolved Firm? ........................................ 39 1. Under Stem and the Partnership Law, a Partner Who Completes Unfinished Business is Subject to The “No Compensation” Rule ................................................................. 40 2. The Measure Of Damages Permitted Under Kirsch And Its Progeny Is Inconsistent With Partnership Law §§ 40(6) and 43(1) .......................................................................... 41 CONCLUSION ........................................................................................................ 44 iii TABLE OF AUTHORITIES Page(s) Cases: Adler v. Deegan, 251 N.Y. 467 (1929) ...................................................................................... 16 Aurnou v. Greenspan, 161 A.D.2d 438 (1st Dep’t 1990) .................................................................. 13 Bader v. Cox, 701 S.W.2d 677 (Tex. App. 1985) ................................................................ 42 Beckman v. Farmer, 579 A.2d 618 (D.C. Ct. App. 1990) .............................................................. 25 Benjamin v. Koeppel, 85 N.Y.2d 549 (1995) .................................................................................... 37 Burke v. Clifton, Budd, & DeMaria, Index No. 1454/91-002 (N.Y. Sup. Ct. Dec. 9, 1991) ................................... 32 Burke v. Clifton, Budd, & DeMaria, Index No. 1454/91-003 (N.Y. Sup. Ct. July 27, 1992) ................................. 32 Caldwell v. Leiber, 7 Paige (N.Y.) 483 ......................................................................................... 20 Cohen v. Lord Day & Lord, 551 N.Y.S.2d 157 (1989) ......................................................................... 30, 31 Conolly v. Thuillez, 26 A.D.3d 720 (3d Dep’t 2006) ..................................................................... 22 Consaul v. Cummings, 222 U.S. 262 (1911)....................................................................................... 40 DaimlerChrysler Corp. v. Spitzer, 7 N.Y.3d 653 (2006) ...................................................................................... 14 Dawson v. White & Case, 88 N.Y.2d 666 (1996) .................................................................................... 19 DelCasino v. Koeppel, 207 A.D.2d 374 (2d Dep’t 1994) ................................................................... 22 iv Denberg v. Parker Chapin Flattau & Kimpl, 604 N.Y.S.2d 900 (1993) ......................................................................... 30, 31 Denver v. Roane, 99 U.S. 355 (1878) ................................................................................... 20, 40 Development Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP, # 08-01490-rdd, Modified Bench Ruling on Motions to Dismiss, Jan. 19, 2010) ....................................................................................... 6, 37, 44 Development Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP, 480 B.R.154 (S.D.N.Y. 2012) ................................................................passim Development Specialists, Inc. v. Akin, Gump, et al., 2012 WL 2952929 (S.D.N.Y. July 18, 2012) ................................................ 44 Diamond v. Pillsbury Winthrop Shaw Pittman, LLP, et al. (In re Howrey LLP), Adv. Pro. # 13-3095, Memorandum Decision on Motions to Dismiss (Bankr. N.D.Ca. Feb. 7, 2014) .................. 33 Dwyer v. Nicholson, 193 A.D.2d 70 (2d Dep’t 1993) ..................................................................... 22 Eaton v. New York City Conciliation and Appeals Board, 56 N.Y.2d 340 (1982) .................................................................................... 15 Ederer v. Gursky, 9 N.Y.3d 514 (2007) ...................................................................................... 14 Farrington v. Pinckney, 1 N.Y.2d 74 (1956) .................................................................................. 16, 24 Geist v. Burnstine, 19 N.Y.S.2d 76 (Sup. Ct. 1940) ............................................................... 23, 41 Geron v. Robinson & Cole LLP, 476 B.R. 732 (S.D.N.Y. 2012) ...............................................................passim Gottlieb v. Greco, 298 A.D.2d 300 (1st Dep’t 2002) .................................................................. 22 Grant v. Heit, 263 A.D.2d 388 (1st Dep’t 1999) .................................................................. 22 Greenspan v. Orrick Herrington & Sutcliffe, LLP (In re Brobeck, Phleger & Harrison LLP), 408 B.R. 318 (Bankr. N.D. Cal. 2009) .................................................... 25, 38 v Hammes v. Frank, 579 N.E.2d 1348 (Ind. Ct. App. 1991) .......................................................... 25 Heller Ehrman LLP v. Jones Day (In re Heller Ehrman LLP), 2013 WL 951706 (Bankr. N.D. Calif. Mar. 11, 2013) .................................. 39 Hurwitz v. Padden, 581 N.W.2d 359 (Minn. Ct. App. 1998) ....................................................... 34 In re Coudert Brothers, LLP, Docket # CTQ-2013-00010 ......................................................................... 1, 5 In re Labrum & Doak, 227 B.R. 391 (Bank. E.D. Pa. 1998) ................................................. 25, 33, 34 In re Thelen LLP, 736 F.3d 213 (2d Cir. 2013) ...................................................................passim Kabir v. County of Monroe, 16 N.Y.3d 217 (2011) .................................................................................... 15 King v. Leighton, 100 N.Y. 386 (1885) .................................................................... 19, 23, 39, 40 Kirsch v. Leventhal, 181 A.D.2d 222 (3d Dep’t 1992) ............................................................passim Liddle, Robinson & Shoemaker v. Shoemaker, 304 A.D.2d 436, (1st Dep’t 2003) ................................................................. 22 Maresca v. Cuomo, 64 N.Y.2d 242 (1984) .................................................................................... 16 Matter of Greene, 54 N.Y.2d 118 (1981) .................................................................................... 36 McDonald v. Fenzel, 233 A.D.2d 219 (1st Dep’t 1996) .................................................................. 22 McGee v. Korman, 70 N.Y.2d 225 (N.Y. 1987) ........................................................................... 17 Murov v. Ades, 12 A.D.3d 654 (2d Dep’t 2004) ..................................................................... 22 Neisig v. Team I, 76 N.Y.2d 363 (N.Y. 1990) ........................................................................... 36 vi Paterson v. University of State of New York, 14 N.Y.2d 432 (1964) .................................................................................... 16 Patrolmen’s Benev. Ass’n of City of New York v. City of New York, 41 N.Y.2d 205 (1976) .............................................................................. 14-15 People v. Bright, 71 N.Y.2d 376 (N.Y. 1988) ........................................................................... 17 People v. Shepard, 50 N.Y.2d 640 (1980) .................................................................................... 16 Platt v. Henderson, 361 P.2d 73 (Or. 1961) .................................................................................. 25 Reiner v. North American Newspaper Alliance, 259 N.Y. 250 (1932) ...................................................................................... 14 Rhein v. Peeso, 194 A.D. 274 (1st Dep’t 1920) .................................................... 23, 24, 40, 41 Robinson v. Nussbaum, 11 F. Supp. 2d 1 (D.D.C. 1997) ......................................................... 22, 24-25 Rothman v. Dolin, 20 Cal. App. 4th 755 (Cal. App. 1993) ......................................................... 25 Santalucia v. Sebright Transportation, Inc., 232 F.3d 293 (2d Cir. 2000) ...................................................................passim Shandell v. Katz, 217 A.D.2d 472 (1st Dep’t 1995) ...................................................... 22, 41, 43 Sheresky v. Sheresky Aronson Mayefsky & Sloan, LLP, No. 150178/10, 35 Misc. 3d 201(A), 2011 WL 7574999 (N.Y. Sup. Ct. Sept. 13, 2011) ................................................................passim Slayko v. Security Mutual Insurance Co., 746 N.Y.2d 289 (2002) ...................................................................... 29-30, 35 Smith Keller & Assoc. v. Dorr & Assoc., 875 P.2d 1258 (Wyo. 1994) ........................................................................... 25 Stem v. Warren, 227 N.Y. 538 (1920) ...............................................................................passim vii Sufrin v. Hosier, 896 F. Supp. 766 (N.D. Ill. 1995) .................................................................. 34 Young v. Delaney, 647 A.2d 784 (App. D.C. 1994) .............................................................. 23, 25 Statutes & Other Authorities: 11 U.S.C. § 101(54)(D) ............................................................................................ 39 11 U.S.C. § 544(b) ..................................................................................................... 2 11 U.S.C. § 544(b)(1)................................................................................................. 9 11 U.S.C. § 548(a) ..................................................................................................... 9 11 U.S.C. § 548(a)(1)(B) ................................................................................. 2, 8, 39 11 U.S.C. § 550(a) ............................................................................................... 2, 39 28 U.S.C. § 157(d) ..................................................................................................... 9 22 NYCRR Part 500.27 ............................................................................................. 1 Fed. R. Civ. P. 12(c) ................................................................................................... 9 Minnesota Rule of Professional Conduct 1.5(e) ...................................................... 34 Model Rules of Prof’l Conduct R. 1.5 cmt. 8 (2013) .............................................. 34 N.Y. Rules of Prof’l Conduct R. 1.5(g) cmt. 8 (2012) ............................................ 34 N.Y. Rules of Prof’l Conduct R. 1.6(g) ................................................................... 28 Partnership Act, UNIFORM LAW COMMISSION, http://www.uniformlaws.org/Act.aspx?title=Partnership%20Act (last visited Feb. 5, 2014) ................................................................................ 3 Partnership Law § 1 ................................................................................................. 12 Partnership Law § 2 ........................................................................................... 14, 21 Partnership Law § 4(4) ......................................................................................passim Partnership Law § 10 ............................................................................................... 19 Partnership Law § 12 ............................................................................................... 14 Partnership Law § 12(1) ........................................................................................... 18 viii Partnership Law § 40 ............................................................................................... 14 Partnership Law § 40(6) ....................................................................................passim Partnership Law § 43 ............................................................................................... 14 Partnership Law § 43(1) ....................................................................................passim Partnership Law § 69(1) ........................................................................................... 29 Partnership Law § 73 ......................................................................................... 41, 42 UPA § 18(f) .............................................................................................................. 24 1 {00005873v2 } JURISDICTIONAL STATEMENT On December 12, 2013 this Court accepted two questions certified by the United State Court of Appeals for the Second Circuit in the case of Geron v. Seyfarth Shaw, LLP, # 12-4138 (In re Thelen, LLP), pursuant to an order issued on November 15, 2013 (the “Certification Order”).1 See In re Thelen LLP, 736 F.3d 213 (2d Cir. 2013). This Court has jurisdiction pursuant to Part 500.27 of the Rules of Practice, 22 NYCRR Part 500.27. QUESTIONS PRESENTED 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? Answer. Yes. All client matters, regardless of the billing method, are assets of a law firm. Upon dissolution, the former firm is entitled to all profits generated from completion of the firm’s unfinished business, including uncompleted contracts which are partnership assets, as this Court held in Stem v. Warren, 227 N.Y. 538 (1920). This rule arises from the former partners’ fiduciary duties to each other including the duty to account, see New York Partnership Law 1 On January 14, 2014 the Court accepted the same two certified questions from the Second Circuit in the case of In re Coudert Brothers, LLP, Docket # CTQ-2013-00010. 2 {00005873v2 } (“Partnership Law”) § 43(1), and in the absence of an agreement to the contrary the “no compensation” rule found in Partnership Law § 40(6) governs. This means that the former partners are not entitled to any compensation for completing the firm’s unfinished business. Kirsch v. Leventhal, 181 A.D.2d 222 (3d Dep’t 1992), which holds that any law partner who completes unfinished firm business is entitled to retain so much of the profit earned as reflects the lawyer’s “post- dissolution efforts, skill and diligence,” id. at 226, is inconsistent with the “no compensation” rule, and wrongly decided. In bankruptcy, the unfinished business of a law firm is asserted as a direct claim by the debtor against its former partners (i) for an accounting and turnover of profits under either under the Partnership Law, or (ii) for recovery of a constructive fraudulent transfer under section 548(a)(1)(B) of the Bankruptcy Code, 11 U.S.C. § 548(a)(1)(B), or state law under section 544(b), 11 U.S.C. § 544(b). The new law firm is liable to the estate as a transferee under section 550(a) of the Bankruptcy Code, 11 U.S.C. § 550(a). It is not a direct claim against the law firm to recover profits the firm earns on its own business. 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? 3 {00005873v2 } Answer. A client matter for purposes of the unfinished business doctrine is an unfinished matter that the former firm – in this case, Thelen – was handling at the time of its dissolution. It does not include new matters that are unrelated to the prior unfinished matters. Under the Partnership Law and the Uniform Partnership Act (“UPA”)2 , the question of whether the partner performing the winding up is entitled to compensation depends on the reason the partnership was dissolved. If the dissolution was not caused by the death of a partner, the winding up partner is not entitled to retain any of the profit derived from completing an unfinished matter. While RUPA, now enacted in some states, might permit the winding up partner to receive some compensation in connection with the completion of unfinished partnership matters, RUPA has not been enacted in New York. Thus, the winding up partner cannot retain any portion of the profit. This Court need not address further how the term “profit” should be construed, except as follows: the Trustee submits that this Court should make clear that Kirsch v. Leventhal, 181 A.D.2d 222 (3d Dep’t 1992), which held that a law partner who completes unfinished business is entitled to retain so much of the profit earned as reflects the lawyer’s “post-dissolution efforts, skill and diligence,” 2 The partnership law of 12 states, including New York, is based on the original UPA from 1914, while the partnership law of 37 states and the District of Columbia is based on the Revised Uniform Partnership Act (“RUPA”). See Partnership Act, UNIFORM LAW COMMISSION, http://www.uniformlaws.org/Act.aspx?title=Partnership%20Act (last visited Feb. 5, 2014). Louisiana is the only state whose partnership law is not based on the UPA or RUPA. Id. 4 {00005873v2 } id. at 225, and the cases that have followed Kirsch, are inconsistent with the “no compensation” rule enunciated by this Court in Stem and codified in the Partnership Law, and therefore not a proper basis on which to determine profits. PRELIMINARY STATEMENT In Stem, this Court made clear that an uncompleted contract for services is an asset of the dissolved service provider partnership, which is entitled to the profits from its completion. Stem, 227 N.Y. 538. In the law firm context, it is likewise well-settled that the unfinished business of a dissolved law partnership includes contingent fee matters that were pending on the date of dissolution. See, e.g., Geron v. Robinson & Cole LLP, 476 B.R. 732, 739 (S.D.N.Y. 2012) (“Geron”); see also Santalucia v. Sebright Transportation, Inc., 232 F.3d 293, 297 (2d Cir. 2000). Decisional law from this Court and New York appellate courts interpreting the Partnership Law for nearly a century has never treated differently a dissolved partnership’s business based on the manner in which the partnership billed its clients, nor have those cases distinguished law partnerships from other types of partnerships. Similarly, since the enactment of the Partnership Law, the Legislature has never carved out exceptions from the law’s applicability for law partnerships, even while the statute has been amended over the years, and has never said that the public policies promoting lawyer mobility and a client’s right to choose counsel take precedence over the fiduciary duties of partners to each other 5 {00005873v2 } and their dissolved partnerships (law firms or otherwise) under the Partnership Law. Nonetheless, Appellee Seyfarth Shaw LLP (“Seyfarth”) (as well as the appellant law firm defendants in the companion Coudert Brothers case), relying on decisions that interpret the scope of the lawyer-client relationship in cases where there has been no dissolution of the partnership and where partnership law is neither implicated nor an issue, urges this Court to do precisely what the Legislature and the Courts have declined to do in almost 100 years of jurisprudence: create an exception to partnership law solely for lawyers from dissolved partnerships who take their firms’ unfinished hourly matters, while other lawyers working on contingency matters remain subject to the statute. In the Coudert Brothers case, Bankruptcy Judge Drain and District Judge McMahon exhaustively analyzed the Partnership Law, and, consistent with Partnership Law § 4(4) which instructs courts to interpret and construe the statute “as to effect its general purpose to make uniform the law of those states which enact it,” the law of other states that have enacted the UPA , to determine if the unfinished business doctrine applies to hourly matters. Judge Drain concluded: “There is no decision in New York that directly addresses this contention. However, there is well-reasoned authority from other jurisdictions applying the same underlying ‘unfinished business’ theory to hourly fee matters. Based on those highly persuasive precedents, I conclude that to the extent that DSI is seeking 6 {00005873v2 } to assert claims based on the unfinished business doctrine with respect to hourly fee matters, in addition to contingency fee matters or hybrids of the two billing methods, it may do so.” Development Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP, # 08-01490-rdd, Modified Bench Ruling on Motions to Dismiss, Jan. 19, 2010 at p. 38) (“Coudert I”). After the reference was withdrawn to the District Court, Judge McMahon granted DSI’s motion for partial summary judgment, concluding that “the New York Court of Appeals would, if confronted with the issue, conclude that all client matters pending on the date of dissolution are assets of the firm – regardless of how the firm was to be compensated for the work.” Development Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP, 480 B.R. 145, 159 (S.D.N.Y. 2012) (“Coudert II”). District Judge Pauley in Thelen rejected this analysis and held that recognizing a property right in unfinished hourly fee matters “conflicts with New York’s strong public policy in favor of client autonomy and attorney mobility,” Geron, 476 B.R, at 742-43, and that “applying the unfinished business doctrine to pending hourly fee matters would result in an unjust windfall for the Thelen estate, as ‘compensating a former partner out of that fee would reduce the compensation of the attorneys performing the work.’” Id. at 740, quoting Sheresky v. Sheresky Aronson Mayefsky & Sloan, LLP, No. 150178/10, 35 Misc.3d 201(A), 2011 WL 7574999, at * 5 (N.Y. Sup. Ct. Sept. 13, 2011). 7 {00005873v2 } STATEMENT OF THE CASE A. Factual Background Thelen was a registered limited liability partnership governed by California law. Geron, 476 B.R. at 736; In re Thelen LLP, 736 F.3d at 216. On or about October 28, 2008, Thelen’s partners voted to dissolve the firm and adopted and approved the Fourth Amended and Restated Limited Partnership Agreement of Thelen LLP (the “Fourth Partnership Agreement”). In re Thelen LLP, 736 F.3d at 216. In connection with the Fourth Partnership Agreement, Thelen’s partners voted to wind up the Debtor’s business under a written Plan of Dissolution. Id. Section 2.3 of the Fourth Partnership Agreement provides that “all cash and all property received by or for the benefit of the Partnership on account of legal services performed … for clients, shall belong to the Partnership …”. Similarly, section 1.8 provides: “All assets owned by Thelen, together with all assets which have been and which may hereafter be acquired by the Partnership, shall belong to the Partnership.” When the Fourth Partnership Agreement was approved on the eve of dissolution, the partners of Thelen waived their rights to unfinished business. Section 7.4.4 provides that: Neither the Partners nor the Partnership [Thelen] shall have any claim or entitlement to clients, cases or matters ongoing at the time of dissolution of the Partnership other than the entitlement for collection of amounts due for work performed by the Partners and other Partnership personnel prior to their departure from the Partnership. The provisions of this Section 7.4.4 are 8 {00005873v2 } intended to expressly waive, opt out of and be in lieu of any rights any Partner or the Partnership may have to “unfinished business” of the Partnership, as the term is defined in Jewel v. Boxer, 156 Cal.App.3d 171 (Cal. App. 1 Dist. 1984, or as otherwise might be provided in the absence of this provision through interpretation or application of the [California Uniform Partnership Act of 1994, as amended and in effect from time to time]. In re Thelen LLP, 736 F.3d at 216. The foregoing is referred to as the “Unfinished Business Waiver.”3 The Unfinished Business Waiver was a transfer by Thelen of an interest in its property, made when Thelen was insolvent and is therefore avoidable as a constructive fraudulent transfer under section 548(a)(1)(B) of the Bankruptcy Code. See 11 U.S.C. § 548(a)(1)(B). Following Thelen’s dissolution, Seyfarth hired eleven Thelen partners, ten in the New York office and one in California. In re Thelen LLP, 736 F.3d at 217. The former partners transferred to Seyfarth unfinished matters from Thelen (the “Client Matters”). Seyfarth billed clients for services on the Client Matters. Id. B. Procedural History Thelen filed for bankruptcy on September 18, 2009 and the Trustee was appointed. The Trustee commenced an adversary proceeding on September 15, 2011 against Seyfarth to avoid as a constructive fraudulent transfer the 3 In the proceedings in District Court, the Unfinished Business Waiver is referred to as the “Jewel Waiver.” 9 {00005873v2 } execution by Thelen’s partners and the partnership of a waiver of Thelen’s right to recover the value of its unfinished business upon dissolution, pursuant to 11 U.S.C. §§ 544(b)(1) and 548(a) and California state law. (A 7).4 The District Court (Pauley, J.) withdrew reference to the Bankruptcy Court pursuant to 28 U.S.C. § 157(d). (A 36). The Trustee asserted, and the District Court concluded, that “[a]ssuming that pending hourly fee matters are assets, Thelen fraudulently transferred those assets when its partners adopted the Unfinished Business Waiver on the eve of dissolution without consideration.” Geron, 476 B.R. at 743. Seyfarth moved for judgment on the pleadings pursuant to Fed. R. Civ. P. 12(c). (A 39). Seyfarth asserted, and the District Court found, that New York law applies, and that New York law does not recognize a claim for unfinished hourly fee matters. The Trustee argued that a New York or federal court interpreting New York partnership law, when there is no controlling law from the state’s highest court, must interpret New York law to be consistent with the law in other Uniform Partnership Act jurisdictions, see Partnership Law § 4(4), and that such an analysis must lead to the conclusion that this Court would also determine that all client matters pending on the date of dissolution are assets of the firm. Judge Pauley rejected this analysis. 4 References are to the Appendix. 10 {00005873v2 } The District Court issued its Memorandum and Order granting Seyfarth’s motion (the “Decision”) on September 4, 2012 and entered final judgment on September 21, 2012. (A 661); Geron, 476 B.R. 732. The Trustee appealed the Decision to the United States Court of Appeals. (A 662 ). On November 15, 2013 the Second Circuit issued the Certification Order certifying to this Court the two questions that are the subject of this appeal. SUMMARY OF ARGUMENT This appeal raises the question of whether unfinished client matters that are billed on an hourly basis, as opposed to the clients themselves, are assets of a dissolved law firm on the date of dissolution under the New York Partnership Law. Judge Pauley ruled that the client matters were not property of the partnership. In contrast, Judge McMahon of the same court concluded two months earlier that the unfinished client matters were property of the partnership. See Coudert II, 480 B.R. at 154 (“Under the Partnership Law, the Client Matters are presumed to be Coudert’s assets on the Dissolution Date.”). All unfinished client matters were Thelen’s property under its partnership agreement. Under New York law, unfinished matters pending as of the date of dissolution are “partnership property.” The Partnership Law provides that partners, including lawyers, have a fiduciary duty to account to their partners for 11 {00005873v2 } profits from all matters that are pending but incomplete at the time of dissolution of the partnership. Partnership Law § 43(1). As this Court made clear in the seminal case of Stem v. Warren, 227 N.Y. 538 (1920), the business of a partnership that is unfinished on the date of dissolution is an asset of the partnership and must be concluded for the benefit of the dissolved partnership. Id. at 547 (“Upon the death of Mr. Reed it was the duty of the survivors of the firms (sic) to take possession of the firm’s assets, extinguish the firm’s liabilities, and close the business for the interest of all concerned, and the representatives of Reed were entitled to share in the profits of all unfinished business though subsequently completed.”) (citation omitted). There are no exceptions for law firms from these obligations under the Partnership Law. In the law firm context, the overwhelming body of cases decided by the New York Appellate Division that have addressed contingency cases have concluded that these cases are assets (i.e. property) of the dissolved firm. New York courts and this Court have expressly rejected the argument that the dissolved law firm’s recovery on such cases is limited to quantum meruit for work performed pre-dissolution. The rationale employed by the New York courts in applying the unfinished business doctrine to contingency cases – rooted in all partners’ fiduciary duty to account to the dissolved firm – applies equally to hourly cases. Indeed, there are no exceptions in the Partnership Law for hourly cases or law firms. 12 {00005873v2 } Judge Pauley’s Decision nevertheless created an exception for law firms and held that “[u]nder New York law, a dissolved law firm’s pending hourly fee matters are not partnership assets.” As the Second Circuit recognized, “[t]o the extent that the unfinished business doctrine applies in contingent fee matters, creating a different rule for hourly fee matters might mean that a law partner’s fiduciary obligations to his firm would vary based on the manner in which clients are billed. Such a rule would undoubtedly encourage the view, now prevailing among many, that an individual partner’s book of business is not an asset of the firm, but instead a piece of personal property to be guarded with a Cerberus‐like ferociousness.” In re Thelen LLP, 736 F.3d at 222. Partnership law does not create separate classes of fiduciary duties among partners, although partners are free to alter those duties by agreement. The New York Partnership Law, a codification of the Uniform Partnership Act, see Partnership Law § 1, was enacted by the New York Legislature with the proviso that the law be applied and construed uniformly with the other states that have adopted the UPA. Partnership Law § 4(4) states: This chapter shall be so interpreted and construed as to effect its general purpose to make uniform the law of those states which enact it. Partnership Law § 4(4) (McKinney 2011). In addition to Judge McMahon, virtually every court outside of New 13 {00005873v2 } York that has considered this issue has applied the unfinished business doctrine to hourly cases. See In re Thelen LLP, 736 F.3d at 222 (“A substantial majority of cases from such jurisdictions have applied the unfinished business doctrine to hourly rate cases.”). New York’s Appellate Division has cited to Partnership Law § 4(4) in following out-of-state decisions interpreting the UPA concerning the unfinished business doctrine, and has in fact rejected another New York decision that was inconsistent with those out-of-state decisions. See Kirsch v. Leventhal, 181 A.D.2d at 225, which rejected the Appellate Division’s decision in Aurnou v. Greenspan, 161 A.D.2d 438 (1st Dep’t 1990) that limited recovery to quantum meruit and in doing so relied on Partnership Law § 4(4). The Second Circuit in Santalucia has likewise followed the “majority” of out-of-state decisions in determining that a contingency case was an asset of a dissolved law firm. Nonetheless, Judge Pauley did not follow those decisions as required by Partnership Law § 4(4). STANDARD OF REVIEW Since this Court has been asked by the Second Circuit to answer questions of New York State law, the standard of review is de novo. 14 {00005873v2 } ARGUMENT I HOURLY FEE MATTERS ARE PARTNERSHIP PROPERTY UNDER NEW YORK LAW The Partnership Law applies to every trade, occupation or profession, id. at § 2 and sets “default requirements that come into play in the absence of an agreement.” In re Thelen LLP, 736 F.3d at 220, citing Ederer v. Gursky, 9 N.Y.3d 514, 526 (2007). These default rules define partnership property, Partnership Law § 12, and define the rights and duties of partners, id. at §§ 40, 43. A. The Partnership Law Should be Interpreted According to its Plain Meaning A court may refuse to enforce an ordinary contract as contrary to an established public policy. See, e.g., Reiner v. North American Newspaper Alliance, 259 N.Y. 250, 256 (1932) (“A court will not lend aid to a party who has committed a tort to recover from another the price agreed to be paid for his wrongful act.”). This does not amount to a license for courts to ignore the stated public policy of the State of New York, as embodied in the statutes enacted by the Legislature. This Court has consistently held that “[t]he statutory text is the clearest indicator of legislative intent and courts should construe unambiguous language to give effect to its plain meaning.” DaimlerChrysler Corp. v. Spitzer, 7 N.Y.3d 653, 660 (2006) (citations omitted); Patrolmen’s Benev. Ass’n of City of 15 {00005873v2 } New York v. City of New York, 41 N.Y.2d 205, 208 (1976) (“where the statutory language is clear and unambiguous, the court should construe it so as to give effect to the plain meaning of the words used.”) (citations omitted). For the same reason, when the Legislature chooses to make exceptions to a general rule, it clearly knows how to do so by drafting them into the statute. See Kabir v. County of Monroe, 16 N.Y.3d 217, 225 (2011) (“The Legislature certainly knew how to create the safe harbor from ordinary negligence envisioned by defendants and the dissent. For example, the Legislature might simply have structured section 1104(a) and (b) along the lines of section 1103(b).”). Indeed, as this Court noted in Eaton v. New York City Conciliation and Appeals Board, 56 N.Y.2d 340, 346 (1982): Had the Legislature intended to extend the exemption [from rent-stabilization laws] to religious institutions, it could have chosen to do so through appropriately worded legislation … In view of the Legislature’s failure to include religious institutions generally within the exemption provisions of the statute an “irrefutable inference” arises that housing accommodations owned or operated by religious institutions are outside the scope of this statute. Id. at 346. Likewise, in this case, the Legislature elected not to exempt law partnerships from the general rules regarding the dissolution of partnerships under the Partnership Law. Accordingly, an “irrefutable inference” arises that the Legislature did not intend to exempt law partnerships from the general application 16 {00005873v2 } of the Partnership Law, and instead intended, in accordance with the plain words of the statute, for the dissolution of law partnerships to be governed by the same rules that govern the dissolution of all other partnerships. “[N]othing but a clear violation of the Constitution will justify a court in overruling the legislative will.” Farrington v. Pinckney, 1 N.Y.2d 74, 78 (1956); id. at 94 (“The wisdom of the statute is not a subject of judicial concern.”); Adler v. Deegan, 251 N.Y. 467, 480 (1929) (“The well-recognized principle controls that all legislative power remains in the state Legislature, except as the Constitutions, state and federal, have limited such power.”); Paterson v. University of State of New York, 14 N.Y.2d 432, 438 (1964) (“Questions as to the wisdom, need or appropriateness are for the Legislature . . . Courts strike down statutes only as a last resort . . . and only when unconstitutionality is shown beyond a reasonable doubt.” (Internal citations omitted). Thus, even when the Legislature makes a controversial distinction regarding public policy, the courts are duty bound to enforce it. Maresca v. Cuomo, 64 N.Y.2d 242, 249 (1984) (upholding mandatory retirement age for New York State judges, noting that “[t]his court is fully cognizant of the arguments that can be made against the wisdom of the challenged provisions; however, for repeal of such provisions, appeal lies to the ballot and the legislative processes of democratic government, not to the courts.”) (citations omitted); People v. Shepard, 50 N.Y.2d 640, 645 (1980) (upholding a statute 17 {00005873v2 } outlawing private possession of marijuana, noting that “[t]ime and further study may prove the Legislature wrong, but the Legislature has the right to be wrong.”). As noted above, “[a]n enactment of our Legislature is presumed to be valid and the heavy burden of demonstrating that a statute is unconstitutional rests with the one seeking to invalidate the statute.” People v. Bright, 71 N.Y.2d 376, 382 (N.Y. 1988) (citations omitted). Furthermore, even if there were some constitutional basis for challenging the Partnership Law in this case, it has been waived by Seyfarth’s failure to raise it in any of the lower courts. McGee v. Korman, 70 N.Y.2d 225, 231 (N.Y. 1987) (“A determination of invalidity – with ramifications beyond the parties – necessarily must be founded upon an adequate record, the parties having properly raised their contentions and presented their proof in the lower courts.”). In this case, the there has never even been a suggestion that any aspect of the New York Partnership Law runs afoul of either the New York or United States Constitutions. Mere public policy considerations – however worthy or important the policy – are insufficient justification to invalidate or read exceptions into a statute that the Legislature did not. Accordingly, Seyfarth’s challenge to the plain wording of the New York Partnership Law must be rejected. 18 {00005873v2 } B. Client Matters are Partnership Assets Absent an agreement to the contrary, unfinished matters are partnership property. Thelen’s partners agreed among themselves that all client matters would be partnership property. The Fourth Partnership Agreement clearly states, at section 2.3, that “all cash and all property received by or for the benefit of the Partnership on account of legal services performed … for clients, shall belong to the Partnership …”. Similarly, section 1.8 provides: “All assets owned by Thelen, together with all assets which have been and which may hereafter be acquired by the Partnership, shall belong to the Partnership.” See also Partnership Law § 12(1): “All property originally brought into the partnership stock or subsequently acquired, by purchase or otherwise, on account of the partnership is partnership property.” As Judge McMahon recognized in Coudert II, All executory contracts for the provision of client services by a partnership are presumed to belong to the partnership, rather than individual partners. “A law partnership not only possesses fixed assets in the form of typewriters, bookcases, etc., it possesses assets in the form of cases and legal matters.” Matter of Lester (Berman), 61 A.D.2d 935, 936, 403 N.Y.S.2d 33 (1st Dep’t 1978) (emphasis added). For that reason alone, their status as assets should not depend on how the client pays the firm. The payment on the contract could be upfront, on completion, intermittent, or any combination thereof. 480 B.R. at 160. “The alternative would be that, even while the firm was in active operation, client matters – i.e., the firm’s business – would presumptively be, not 19 {00005873v2 } firm property, but the personal property of individual partners (most likely, whatever partner originated the client representation). This alternative leads to results that are contrary to the most basic provisions of the Partnership Law. Indeed, such an arrangement would not fit within the definition of a ‘partnership at all,’ because the business would not be carried on by ‘co-owners.’” Id. at 159-160, citing Partnership Law § 10 (“A partnership is an association of two or more persons to carry on as co-owners a business for profit.”). As far back as Stem v. Warren, New York law has recognized that business commenced, but not yet finished, as of the date of a partnership’s dissolution remains property of the partnership, subject to all of the partnership’s liabilities. “The general rule is that the business of a partnership that is unfinished on the date the partnership dissolves is an asset of the partnership and must be concluded for the benefit of the dissolved partnership.” Stem, 227 N.Y. at 541. Even a contract that is terminable at will by the client is still a partnership asset, unless the parties indicate a contrary intent. King v. Leighton, 100 N.Y. 386, 393- 94 (1885) (upon dissolution “it is the [d]uty of the surviving … members to take possession of the firm assets and perform its contracts, extinguish its liabilities, and … share in the profits of all business unfinished at the dissolution, but completed afterwards”); see also Dawson v. White & Case, 88 N.Y.2d 666, 671 (1996). Notably, Stem has never been overruled, nor has its continuing vitality been called 20 {00005873v2 } into question prior to Judge Pauley’s Decision. C. New York Follows the No Compensation Rule Upon dissolution, Partnership Law §§ 40(6) and 43(1) require a partner to complete any unfinished business of the partnership as of the date of dissolution and only receive as compensation the amounts provided for in the partnership agreement. The “no compensation” rule arises from the fiduciary nature of a partnership and has been applied to dissolved partnerships, including law firms, for over a century. Indeed, the Supreme Court of the United States has applied the no compensation rule to dissolving law partnerships and in doing so has cited to New York law. See Denver v. Roane, 99 U.S. 355, 358 (1878) (“As there is an implied obligation on every partner … to devote his services and labors for the promotion of the common benefit of the concern, it follows that he must do it without any rewards or compensation, unless there be an express stipulation for compensation.” Story, Partn., sects. 182, 331; Caldwell v. Leiber, 7 Paige (N.Y.), 483. So … [if there is no] “‘agreement for compensation to a surviving partner for settling up the partnership business, he is entitled to no compensation.’”). Denver v. Roane was decided more than 30 years before the Legislature enacted the Uniform Partnership Act in New York. The Partnership Law does not distinguish between law partnerships and other kinds of partnerships. To the contrary, its provisions are applicable 21 {00005873v2 } generally to partnerships engaged in any business or profession. See Partnership Law § 2 (“‘Business’ includes every trade, occupation, or profession.”). See also Coudert II, 480 B.R. at 158. Judge Pauley disagreed, finding that “the Trustee’s reading of [Stem v. Warren] is overbroad.” Geron, 476 B.R. at 741. Stem is directly on point. One of the four questions presented to this Court was: “Are the firm of Warren & Wetmore to be held accountable to the plaintiff in this action for the profits made out of the prosecution of the joint enterprise in so far as it related to unfinished work which had been assigned to them prior to the death of Charles A. Reed?” 227 N.Y. at 546. Contrary to Seyfarth’s argument in the District Court that Stem was “not a case of obligations to account for unfinished business when a partnership dissolved,” (A 199), the Stem briefs reflect that this Court was aware of the purported “wrongful conduct” of the former partner, yet analyzed the case in terms of fundamental partnership law and the fiduciary obligations of partners upon dissolution. Id. at 546-47. The Stem Court did not limit the duty to account to dissolutions involving wrongful post-dissolution conduct; rather, this Court made clear that the no compensation rule applies in all partnership dissolutions. Courts in New York have routinely held that under the Partnership Law, contingency cases are assets of a dissolved law firm and therefore subject to the no compensation rule: 22 {00005873v2 } If the partners do not specify whether a particular representation is intended to be an asset of the partnership subject to distribution on dissolution, courts treat their silence as signifying an intention that it should: “In the absence of an agreement to the contrary, pending contingency fee cases of a dissolved partnership are assets subject to distribution.” Coudert II, 480 B.R. at 164, citing Murov v. Ades, 12 A.D.3d 654, 655 (2d Dep’t 2004); see also Conolly v. Thuillez, 26 A.D.3d 720 (3d Dep’t 2006); Liddle, Robinson & Shoemaker v. Shoemaker, 304 A.D.2d 436, 441 (1st Dep’t 2003); Gottlieb v. Greco, 298 A.D.2d 300 (1st Dep’t 2002); Grant v. Heit, 263 A.D.2d 388 (1st Dep’t 1999); McDonald v. Fenzel, 233 A.D.2d 219, 220 (1st Dep’t 1996); Shandell v. Katz, 217 A.D.2d 472 (1st Dep’t 1995); DelCasino v. Koeppel, 207 A.D.2d 374 (2d Dep’t 1994); Dwyer v. Nicholson, 193 A.D.2d 70 (2d Dep’t 1993); Kirsch, 181 A.D.2d at 222. In Coudert II, Judge McMahon observed that because the obligation to account for unfinished business is based on partners’ fiduciary duties and not on principles of quantum meruit (as the Second Circuit held in Santalucia), there was no meaningful difference between legal business that is billed by the hour and legal business handled on a contingency for purposes of determining property of a law firm debtor’s estate. Coudert II, 480 B.R. at 163. See also, e.g., Robinson v. Nussbaum, 11 F.Supp.2d 1, 5-6 (D.D.C. 1997) (“The Partnership Act … requires that former partners share all profits earned from completing client matters that were pending at the time of dissolution. As explained below, how the firm’s 23 {00005873v2 } clients were billed – either at an hourly rate or on a contingency fee basis – does not change the status of their work as partnership property.”) (Emphasis in original); Young v. Delaney, 647 A.2d 784, 789 (App. D.C. 1994) (“Profits derived from the completion of legal cases or uncompleted transactions after dissolution of a law partnership are assets of the partnership, subject to distribution after dissolution. Under the Uniform Partnership Act, these fees are shared on dissolution in accordance with the rights of the partners in fees in the former partnership.”). The “no compensation” rule has been applied by New York courts to partnerships of all types. See, e.g. King v. Leighton, 100 N. Y. at 393 (partnership for building bridges). If the pre-existing contract happens to be with a law firm partnership, the former partners who work on those matters “do so as fiduciaries for the benefit of the dissolved partnership.” Geist v. Burnstine, 19 N.Y.S.2d 76, 77 (Sup. Ct. 1940) (“the general rule [is] that no partner in the absence of a special agreement was entitled to compensation for his services in winding up the [cases] of a partnership”). The Geist court made no distinction between hourly or contingency cases, nor did the court permit any credit to the former partner for skills, efforts and diligence. In Rhein v. Peeso, 194 A.D. 274 (1st Dep’t 1920), the Appellate Division applied the “no compensation” rule in the context of a dental practice. The Appellate Division reversed the trial court’s “allowance for the 24 {00005873v2 } reasonable value of the defendant’s services” in performing dental work on a patient post-dissolution and permitted the defendant to deduct only “the materials reasonably used by the defendant in said work.” Id. at 277, citing Stem. The Legislature codified the “no compensation” rule in Partnership Law § 40(6): “No partner is entitled to remuneration for acting in the partnership business, except that a surviving partner is entitled to reasonable compensation for his services in winding up the partnership affairs.” (Emphasis added). Under the statute, only the surviving partner of a partnership that dissolves by the death of another partner may be compensated for winding up the partnership’s affairs. If the Legislature had intended for partners in all dissolved partnerships to be compensated for winding up the partnership’s affairs, it could have accomplished that by excluding a single word – surviving – from the statute. There is no reason for this Court to now do what the Legislature has not.5 See Farrington v. Pinckney, 1 N.Y.2d at 78 (“nothing but a clear violation of the Constitution will justify a court in overruling the legislative will.”). D. New York Follows UPA Jurisdictions Nearly every case that has interpreted the UPA has applied the unfinished business doctrine to hourly rate cases. See Robinson v. Nussbaum, 11 5 RUPA modified UPA §18(f) (the parallel to Partnership Law § 40(6)) to permit any partner winding up the business to receive compensation, not just a surviving partner winding up after the death of another partner. The New York Legislature has elected not to enact RUPA. 25 {00005873v2 } F.Supp.2d 1 (D.D.C. 1997); Young v. Delaney, 647 A.2d 784 (D.C. Ct. App. 1994); Beckman v. Farmer, 579 A.2d 618 (D.C. Ct. App. 1990); Greenspan v. Orrick Herrington & Sutcliffe, LLP (In re Brobeck, Phleger & Harrison LLP), 408 B.R. 318 (Bankr. N.D. Cal. 2009); In re Labrum & Doak, 227 B.R. 391, 409 (Bank. E.D. Pa. 1998); Smith Keller & Assoc. v. Dorr & Assoc., 875 P.2d 1258 (Wyo. 1994); Platt v. Henderson, 361 P.2d 73 (Or. 1961); Hammes v. Frank, 579 N.E.2d 1348 (Ind. Ct. App. 1991). See also Rothman v. Dolin, 20 Cal.App.4th 755, 758 (Cal. App. 1993) (“the policy reasons for the rule announced in Jewel … apply with equal force to both contingency and hourly rate cases.”). A New York or federal court interpreting the New York Partnership Law, when there is no controlling law from this Court, must interpret New York’s law to be consistent with the law in other UPA jurisdictions. See Partnership Law § 4(4). Judge McMahon engaged in a comprehensive analysis of the law of other UPA jurisdictions to conclude that “the New York Court of Appeals would, if confronted with the issue, conclude that all client matters pending on the date of dissolution are assets of the firm – regardless of how the firm was to be compensated for the work.” Coudert II, 480 B.R. at 159 (emphasis added). As Judge McMahon stated: The fact that New York courts must harmonize their rulings with those of other UPA jurisdictions by statute, Partnership Law § 4(4), is powerful reason to conclude that the New York Court of Appeals would reach the same result. 26 {00005873v2 } Id. at 164. See also Kirsch, 181 A.D.2d at 225 (noting the appropriateness of considering such cases given that they were decided in states which, like New York, have adopted the Uniform Partnership Act, upon which the unfinished business doctrine rests). Judge Pauley rejected this analysis and held that recognizing a property right in unfinished hourly fee matters “conflicts with New York’s strong public policy in favor of client autonomy and attorney mobility.” Geron, 476 B.R. at 742-43. In reaching this conclusion, Judge Pauley relied in large part on a trial court decision in Sheresky v. Sheresky Aronson Mayefsky & Sloan LLP, 35 Misc. 3d 1201(A), 2011 WL 7574999 (N.Y. Sup. Ct. 2011). As Judge Pauley acknowledged, Sheresky is not binding but nonetheless concluded that it was entitled to “great weight”. Geron, 476 B.R. at 740. The Sheresky decision should be accorded no precedential weight due to significant flaws in its analysis. Among other things, Sheresky contains no analysis of the New York Partnership Law, the fiduciary duties of partners to account to the dissolved firm, or whether the rationale adopted by New York courts in determining that unfinished contingency cases are assets of a dissolved firm applies with equal force to hourly cases.6 While the Sheresky court stated that Appellate Division decisions have applied the unfinished business doctrine only in 6 See Coudert II, 480 B.R. at 160 (the “status [of cases and matters] as assets should not depend on how the client pays the firm.”). 27 {00005873v2 } contingency cases, the court ignores the decisions in Stem and its progeny finding that (a) unfinished representations are assets of the dissolved partnership, and (b) partners must account to the dissolved for all profits from unfinished partnership business. Further, the Sheresky court did not consider or assign any precedential weight to the numerous decisions from other jurisdictions which have interpreted the same statute in applying the unfinished business doctrine to hourly cases as required by Partnership Law § 4(4) and Kirsch v. Leventhal, 181 A.D.2d at 225. Nonetheless, Judge Pauley found Sheresky “persuasive,” and stated: Unlike in the contingency fee context, applying the unfinished business doctrine to pending hourly fee matters would result in an unjust windfall for the Thelen estate, as “compensating a former partner out of that fee would reduce the compensation of the attorneys performing the work.” Sheresky, 2011 WL 7574999, at *5. Geron, 476 B.R. at 740. This reasoning completely ignores the fact that an unfinished business claim is a claim against the former partner based upon fiduciary duties, not a claim against the new firm and new attorneys performing the work. More to the point, this reasoning elevates the new lawyer’s compensation to a position of primacy over the former partner’s statutory and fiduciary obligations. There is simply no articulable basis in law or policy for making the amount of money a lawyer can earn the central focus of inquiry and in 28 {00005873v2 } so doing eradicating over a hundred years of jurisprudence. As Judge McMahon observed, The unfinished business doctrine does not exist to assure that a law firm is paid for the value of work it has performed prior to dissolution. It exists to settle accounts among partners upon dissolution of their business. The fact that the client agreed to make payments for services rendered by giving his lawyer a percentage of any winnings realized as opposed to paying him by the hour does not alter the fundamental proposition, codified in Partnership Law § 43, that every partner must account to her former partners for profits realized from the use of what was, on the date of dissolution, a partnership asset. Coudert II, 480 B.R. at 166. E. Recognizing Unfinished Business Claims for Hourly Matters Is Consistent With Public Policy New York is a UPA jurisdiction, and the “no-compensation” rule applies by statute. See Partnership Law § 40(6). Judge McMahon, as well as numerous other courts that have considered the issue, found that recognizing unfinished hourly fee matters as partnership property, which would require the former partners and their new firms to remit all profit from the unfinished client matters to the dissolved firm, posed no ethical problems. See Coudert II, 480 B.R. at 172-73. Judge Pauley, on the other hand, concluded that recognition of the Trustee’s cause of action would somehow run afoul of New York’s public policy against fee splitting. Geron, 476 B.R. at 740. Judge Pauley principally relied on Rule 1.6(g) of the New York Rules of Professional Conduct and a very brief 29 {00005873v2 } discussion of the issue in Sheresky. Neither Sheresky nor Judge Pauley’s Decision, however, examines the implications of Partnership Law §43(1), which expressly provides: Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property. Partnership Law, §43(1) (emphasis added). This statute speaks directly to the obligations that partners owe to one another with respect to partnership property, regardless of the method in which the client chooses to pay. Section 69(1) of the Partnership Law likewise provides: When dissolution is caused in any way, except in contravention of the partnership agreement, each partner, as against his copartners and all persons claiming through them in respect of their interests in the partnership, unless otherwise agreed, may have the partnership property applied to discharge its liabilities, and the surplus applied to pay in cash the net amount owing to the respective partners. Partnership Law, § 69(1) (emphasis added). The New York Legislature has thus already contemplated, and expressly provided for the distribution of, partnership property upon the dissolution or liquidation of a partnership. And, as this Court has stated, “the ‘public policy of this state when the legislature acts is what the legislature says it shall be.’” Slayko 30 {00005873v2 } v. Security Mutual Insurance Co.,746 N.Y.2d 289, 295 (2002) (citation and internal quotation marks omitted). Decisions such as Cohen v. Lord Day & Lord, 551 N.Y.S.2d 157 (1989) and Denberg v. Parker Chapin Flattau & Kimpl, 604 N.Y.S.2d 900 (1993) were premised on the lawyer-client relationship and simply have no bearing on these issues. In Cohen, the partnership agreement required a partner who voluntarily withdrew to forfeit his interest in accounts receivable if he competed with the firm. This Court acknowledged that while the provision did not prohibit a partner from practicing law, the monetary penalty restricted the practice of law because it would discourage a withdrawing partner from continuing to represent any clients. In Denburg, this Court refused to enforce a provision in a law firm partnership agreement that required a former partner to either return a portion of profits he had previously been allocated or pay a portion of fees that his new firm would bill clients of the old firm. However, Cohen and Denberg are not applicable here for at least four reasons. First, those cases involved partner withdrawals, not dissolution and winding up of the law firm’s affairs. Second, the unfinished business doctrine was not implicated: Cohen involved the forfeiture of a partner’s future compensation if he left the firm, while Denburg required the partner who withdrew to share future earnings from new, as opposed to unfinished, business. Third, as Judge McMahon 31 {00005873v2 } noted, the financial disincentives are the same, whether unfinished business is billed by the hour or on contingency, because the amount earned must be shared with the partners of the dissolved firm. Coudert II, 480 B.R. at 172. She reasoned that because relevant New York decisions have held that contingency cases are assets of the dissolved firm, and no opinion had ever held that the financial- disincentive rationale of Cohen and Denburg is reason not to apply the unfinished business doctrine, applying the unfinished business doctrine to pending hourly matters does not violate public policy. Id. Fourth, the issues addressed in Cohen and Denburg were not, unlike the issue before the Court now, governed by a comprehensive statutory scheme (i.e., the Partnership Law). In neither case did this Court have reason to comment on the application of the specific dissolution provisions of the Partnership Law or the question of partnership dissolutions generally. Those decisions were properly decided under the particular facts of the cases. In fact, in Cohen, this Court specifically characterized its holding as “narrow.” Cohen, 551 N.Y.S.2d at 160. Likewise, in Denberg, this Court ultimately concluded that “an agreement to settle a dispute involving a forfeiture- for-compensation provision may be enforced even though the clause itself is unenforceable.” Denberg, 604 N.Y.S.2d at 906-7. Thus, even assuming that this Court could overrule the provisions of the Partnership Law as contrary to public 32 {00005873v2 } policy, it has never attempted to do so in the context of law firm dissolutions, and should not do so now. Seyfarth relied on two unpublished and non-final opinions issued by the Supreme Court for New York County in the matter of Burke v. Clifton, Budd, & DeMaria, Index No. 1454/91-002 (N.Y. Sup. Ct. Dec. 9, 1991) (“Burke I”) and Index No. 1454/91-003 (N.Y. Sup. Ct. July 27, 1992) (“Burke II”). (A 85). The Burke decisions are wholly inapposite, however, since: (i) Burke I dismissed a claim for imposition of a constructive trust by a not-yet-dissolved partnership, and contains no analysis of the application of the Partnership Law to dissolved partnerships; and (ii) Burke II expressly recognized that plaintiff had stated a claim for breach of fiduciary duty for defendants’ solicitation of firm clients prior to seeking dissolution of the partnership. Recognizing the viability of unfinished business claims for hourly matters would not prohibit a client at any time from terminating the relationship with his or her lawyer. Nor would requiring the Thelen partners to comply with their fiduciary obligations to their former partners in any way restrict these lawyers from continuing to represent clients in such matters. Indeed, those lawyers’ duties to represent their clients, just as their fiduciary duties to account to Thelen for profits derived from those clients, would remain entirely unchanged. 33 {00005873v2 } In Labrum & Doak, the court rejected this very same argument in applying the unfinished business doctrine to hourly matters: [T]he former clients of the Debtor were free to be represented by any member of the dissolved partnership or by other attorneys of their choice. This right of the client is distinct from and does not conflict with the rights and duties of the partners between themselves with respect to profits from unfinished partnership business since, once the fee is paid to an attorney, it is of no concern to the client how the fee is distributed among the attorney and his or her partners. Labrum, 227 B.R. at 415. See also Diamond v. Pillsbury Winthrop Shaw Pittman, LLP, et al. (In re Howrey LLP), Adv. Pro. # 13-3095, Memorandum Decision on Motions to Dismiss (Bankr. N.D.Ca. Feb. 7, 2014) (“Diamond”) at p. 14 (“The duty to account for profits on unfinished business (a duty flowing between partners and their firm) and a lawyer’s fee sharing obligations (the duty to inform a client if sharing fees with another firm) are distinct and do not offend each other.”). Judge Pauley disagreed with this analysis and determined that “compensating a former partner out of [the] fee would reduce the compensation of the attorneys performing the work,” Geron, 476 B.R. at 740, citing Sheresky, 2011 WL 7574999, at *5, and would provide an “unjust windfall” to Thelen’s bankruptcy estate. Id. This conclusion is a non-sequitor, and in any event irrelevant. A lawyer’s compensation is simply not connected with the client’s right to choose a lawyer. Indeed, Judge McMahon exhaustively considered these issues and rejected them as a basis for not recognizing a property interest in hourly fee 34 {00005873v2 } matters. Coudert II, 480 B.R. at 168-172. Moreover, it completely ignores the lawyer’s fiduciary responsibility to his or her former partners. Judge Pauley’s finding that applying the “no compensation” rule to hourly cases would constitute impermissible fee splitting also misses the mark. Courts have almost unanimously rejected fee-splitting claims in the unfinished business doctrine context. See, e.g., Labrum, 227 B.R. at 414 (applying Pennsylvania law); Sufrin v. Hosier, 896 F. Supp. 766, 769 (N.D. Ill. 1995) (interpreting Illinois law); Hurwitz v. Padden, 581 N.W.2d 359, 363 (Minn. Ct. App. 1998) (discussing Minnesota Rule of Professional Conduct 1.5(e)).7 Enforcing the duty of partners of a dissolving partnership to account for the profits of unfinished business of the firm, whether contingent or hourly, neither impairs a client’s choice of counsel, nor an attorney’s freedom of movement. Clients remain free to select counsel of their choice, and attorneys remain free to change law firms, subject to the satisfaction of their fiduciary duties to the firms and partners they leave behind. The unfinished business doctrine merely recognizes and gives life to this “fiduciary relationship of trust and 7 Judge Pauley concluded that the unfinished business doctrine as applied to hourly matters “clash[es]” with New York’s Rules of Professional Conduct because Rule 1.5(g) restricts a lawyer’s ability to share fees with a lawyer who is not part of the same firm. Geron, 476 B.R. at 740. Judge Pauley apparently overlooked the comments to the ethics rule, which state that the rule “does not prohibit or regulate division of fees to be received in the future for work done when lawyers were previously associated in a law firm.” N.Y. RULES OF PROF’L CONDUCT R. 1.5(g) cmt. 8 (2012) (emphasis added); accord MODEL RULES OF PROF’L CONDUCT R. 1.5 cmt. 8 (2013). 35 {00005873v2 } confidence that partners have from time immemorial shared with one another.” Santalucia, 232 F.3d at 300. The Trustee’s claims do not threaten any of Seyfarth’s past, present or future clients and his claims have neither been asserted against former clients of Thelen nor seek to enforce any obligations the former clients of Thelen may owe under their respective engagement agreements. Instead, as in the Second Circuit’s decision in Santalucia, this case is solely concerned with the fiduciary duties that the former partners of Thelen owed to Thelen before they executed the Unfinished Business Waiver. Id. at 297 (“This case is not about [the client’s] obligations to the Firm; the Firm seeks no recovery from [the client]. This case concerns [the partner’s] obligations to the Firm.”). F. The Partnership Law Has Precedence Over the Rules of Professional Conduct The generic public policy considerations cited by Seyfarth are thus simply inapposite. And, even if they were for some reason applicable in this case, the New York Legislature has already contemplated, and expressly provided for the distribution of, partnership property (including causes of action) upon the dissolution or liquidation of a partnership. See Slayko, 98 N.Y.2d at 295 (“The ‘public policy of this state when the legislature acts is what the legislature says it shall be.’”) (citation and internal quotation marks omitted). 36 {00005873v2 } Any attempt to use the Rules of Professional Conduct to circumvent the express statutory provisions of the Partnership Law regarding post-dissolution distribution of partnership property is unavailing since the Rules, even if applicable, are not promulgated by the New York Legislature and do not have the force of law. In Matter of Greene, 54 N.Y.2d 118 (1981), this Court made clear that the Code of Professional Responsibility cannot trump a statute: The Code of Professional Responsibility is, however, an enactment of the New York State Bar Association rather than the Legislature or any court. Its provisions have been incorporated by reference in the rule defining professional misconduct … adopted by each of the Appellate Divisions pursuant to statute . … But the code cannot, either directly or through incorporation in a court rule, amend or limit a statute adopted by the Legislature…. Id. 124-25 (emphasis supplied). See also Neisig v. Team I, 76 N.Y.2d 363, 369 (N.Y. 1990) (“While unquestionably important, and respected by the courts, the [Rules of Professional Conduct] do not have the force of law.”). Instead, when applied in litigation, courts “are not constrained to read the rules literally or effectuate the intent of the drafters, but to look to the rules as guidelines to be applied with due regard for the broad range of interests at stake.” Id. Thus, even if the Rules of Professional Conduct’s prohibition against fee-splitting were not superseded by the express provisions of the Partnership Law, they would remain mere guideposts rather than fixed rules of law. 37 {00005873v2 } And this Court has been “especially skeptical of efforts by clients or customers to use public policy ‘as a sword for personal gain rather than a shield for the public good.” Benjamin v. Koeppel, 85 N.Y.2d 549, 553 (1995). In fact, in Koeppel, this Court refused to void a fee-sharing arrangement between a group of lawyers and a lawyer who had allowed his license to practice expire due to the failure to file his biennial registration statement, noting that: [I]t ill becomes defendants, who are also bound by the Code of Professional Responsibility, to seek to avoid on “ethical” grounds the obligations of an agreement to which they freely assented and from which they reaped the benefits. Id. at 556. In this case, the Trustee respectfully submits that the former Thelen partners who clearly reaped the benefits of their fiduciary relationship with Thelen should not be able to walk away from their residual fiduciary duties to Thelen on supposed “ethical” grounds. II CLIENT MATTERS A. What is a Client Matter? A client matter for purposes of the unfinished business doctrine is an unfinished matter that the former firm was handling at the time of its dissolution. Coudert I at 22; Coudert II, 480 B.R. at 161 (“[b]etween “finished business” and “new business” lies unfinished business: executory contracts to perform services, 38 {00005873v2 } begun but not fully performed by the partnership on the date of its dissolution.”); see also Greenspan v. Orrick Herrington & Sutcliffe (In re Brobeck, Phelger & Harrison LLP), 408 B.R. 318, 333 (Bankr. N.D. Cal. 2009) (“[t]he unfinished business of a law partnership is any business covered by retainer agreements between the firm and its clients for the performance of partnership services that existed at the time of dissolution.”). It does not apply to new, unrelated matters created after dissolution, even if that business comes from a client of the dissolved partnership. Coudert II at 160 (“[n]ew business that is contracted for and undertaken only after a partnership dissolves – even business from a client of the dissolved firm – is not an asset of the dissolved firm, because a partnership has no more than an expectation of obtaining future business from a client.”); Brobeck, 408 B.R. at 333. In the bankruptcy context, and in particular in the Thelen case, the claim that the Trustee brought was for a constructive fraudulent transfer. The Trustee asserted that when Thelen executed the Unfinished Business Waiver and released the partners from their duties to account to the partnership and complete the unfinished business for Thelen’s benefit, the law firm transferred a property interest in the unfinished business matters, at a time when the firm was insolvent 39 {00005873v2 } and for no consideration.8 See 11 U.S.C. § 548(a)(1)(B). The claim is asserted against the former partners as the initial transferees, and against the law firm – Seyfarth – as the subsequent transferee that received the unfinished business revenues.9 See, e.g., Heller Ehrman LLP v. Jones Day (In re Heller Ehrman LLP), 2013 WL 951706 (Bankr. N.D. Calif. Mar. 11, 2013), at *13 (“If a firm taking on a Shareholder could be held to account for profits earned on unfinished business, it follows that it could be liable under § 550(a)(2) as a subsequent transferee of that fraudulently transferred unfinished business.”). The claim does not seek to recover for work done on client matters that did not arise from the former Thelen partners’ fiduciary duties under century-old partnership law. This is the critical distinction. B. Is the New Firm Entitled to a Share of the Profit on Unfinished Matters of the Dissolved Firm? Under the Partnership Law and the decisions of this Court, the answer is quite clearly no. As explained above, where the dissolution is not caused by the death of a partner, partners who complete the unfinished business of the partnership do so as trustees and are not allowed compensation other than that which is provided in the dissolved firm’s partnership agreement. See Partnership Law §§ 40(6), 43(1); King v. Leighton, 100 N.Y. at 386; Stem, 227 N.Y. at 538. 8 A “transfer” is “each mode, direct or indirect, … of disposing of or parting with – (i) property; or (ii) an interest in property.” 11 U.S.C. § 101(54)(D). 9 A bankruptcy trustee may recover the value of fraudulently transferred property from “(1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee.” 11 U.S.C. § 550(a). 40 {00005873v2 } See also Rhein v. Peeso, 194 A.D. 274 (1st Dep't 1920); Denver v. Roane, 99 U.S. 355 (1878); Consaul v. Cummings, 222 U.S. 262 (1911). In such cases, the Partnership Law does not permit the new firm of the partners of a dissolved firm to share in that profit, and the so-called Kirsch Rule, which purports to provide compensation for the winding- p partner, is inconsistent with no compensation rule set forth by this Court in Stem and codified in the Partnership Law. 1. Under Stem and the Partnership Law, a Partner Who Completes Unfinished Business is Subject to The “No Compensation” Rule. Stem stands for the proposition that winding up partners who complete the work on pending unperformed contracts as of the dissolution date are required, consistent with their fiduciary duties, to account to the dissolved firm and turn over any profit they realize on account of the completion of the services that the dissolved partnership had originally contracted to perform. Stem, 227 N.Y. at 546- 47; see also King, 100 N. Y. at 393 (1885); Rhein, 194 A.D. at 274. This duty to account to the dissolved firm for unfinished business without compensation is codified in Partnership Law §§ 40(6) and 43(1), which bar a former partner who winds up a partnership’s affairs from receiving any compensation unless dissolution was the result of a partner’s death. Partnership Law § 40(6)) provides that only “surviving partners” (i.e. partners who perform services after the partnership is dissolved by death of a partner) are entitled to 41 {00005873v2 } “reasonable compensation” for services provided in winding up the partnership affairs. Thus, where a dissolution is not caused by the death of a partner, the partner who completes unfinished business must account for and turn over any profit. 2. The Measure Of Damages Permitted Under Kirsch And Its Progeny Is Inconsistent With Partnership Law §§ 40(6) and 43(1) While the “no compensation” rule has been applied to dentists (Rhein), architects (Stem), lawyers (Geist) and other professionals, New York courts, beginning with the decision in Kirsch v. Leventhal, permit the winding up partner a credit for efforts, skill and diligence to the extent that these efforts resulted in an increase in the value of the asset post-dissolution. Other intermediate appellate courts, and the Second Circuit Court of Appeals, have adopted that formulation. See, e.g. Shandell v. Katz, 217 A.D.2d 472 (1st Dep’t 1995); Santalucia, 232 F.3d at 297-98. As explained by Judge McMahon, these decisions are inconsistent with the “no compensation” rule embodied in Partnership Law §§ 40(6) and 43(1). See Coudert II, 480 B.R. at 176. The courts that have permitted a credit for post- dissolution skills, efforts and diligence have done so pursuant to Partnership Law § 73, which provides: When any partner retires or dies, and the business is continued . . . without any settlement of accounts as between him or his 42 {00005873v2 } estate and the person or partnership continuing the business, unless otherwise agreed, he or his legal representative as against such persons or partnership may have the value of his interest at the date of dissolution ascertained, and shall receive as an ordinary creditor an amount equal to the value of his interest in the dissolved partnership with interest, or, at his option or at the option of his legal representative, in lieu of interest, the profits attributable to the use of his right in the property of the dissolved partnership. Partnership Law § 73 applies only if a partner retires or dies and the remaining partners continue this business (i.e. a technical dissolution). Partnership Law § 73, on its face, does not apply where, as here, the partners decide to dissolve, wind up and liquidate the business. As such, the Kirsch court’s reliance on Partnership Law § 73 in establishing a post-dissolution credit was misplaced. Thus, Kirsch (and the New York decisions that have followed it) were wrongly decided, and should not be followed. It essentially instructs the courts to conduct a quantum meruit analysis that is not authorized by the Uniform Partnership Act’s “no compensation” rule. The concept of valuing a lawyer’s post- dissolution “efforts, skill, and diligence” comes from RUPA, which, unlike a UPA jurisdiction, permits a partner in a dissolved partnership to receive reasonable compensation for winding up the partnership’s affairs. Further, the case that Kirsch relied on – Bader v. Cox, 701 S.W.2d 677 (Tex. App. 1985) – is a case where the partnership was dissolved by death (i.e., the winding up partners were entitled to compensation under the Texas 43 {00005873v2 } equivalent of Partnership Law § 40(6)). If Kirsch is applied to hourly fee matters in partnerships dissolved by other than death, where the surviving partner is entitled to compensation for winding up the partnership’s affairs, it will be expressly contrary to what the Legislature intended when it enacted Partnership Law § 40(6). This rule … in effect treats the value of the partner’s “effort, skill and diligence” as an expense that can be added to the deduction from overhead, not as compensation to the partner. The result in cases like Kirsch and Shandell eviscerates the “no compensation” rule. In fact, the “efforts, skill and diligence” rule appears to read that provision right out of the statute in contravention of the Legislature’s intent, as plainly expressed in Partnership Law § 40(6).Coudert II, 480 B.R. at 176. Thus, the so-called “Kirsch rule” should not be considered when determining profits. This Court need not address further how the term “profit” should be construed, except to make clear that the so-called Kirsch rule is inconsistent with the “no compensation” rule enunciated by this Court in Stem and codified in the Partnership Law, and is not a proper basis on which to determine profits. A determination of how to measure the profit on an unfinished business matter that must be turned over is a straightforward matter which can be performed by the trial court. As Judge McMahon observed, An accounting under a “no compensation” scenario would, therefore, be relatively straightforward: the Former Coudert Partner and his/her new Firm would disclose how much profit the 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 [to] Coudert' s estate. Development Specialists, Inc. v. Akin, Gump, et al., Decision and Order Granting Defendants' Joint Motion for Certification of an Interlocutory Appeal, 2012 WL CONCLUSION The Court should answer the Certified Questions as suggested by the Trustee. Dated: New York, }Jevv York March 7, 2014 {00005873v2} Respectfully Submitted, RICH MICHAELSON MAGALIFF MOSER, LLP Special Litigation Counsel for Y ann Geron, Chapter 7 Trustee By: HOWARD P. MAG I;~FF 340 Madison A venue, 9th New York, NY 10173 212.220.9402 hmagaliff@r 3mlaw. com 44