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 REPLY 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: May 7, 2014 i TABLE OF CONTENTS Page TABLE OF AUTHORITIES .................................................................................... ii PRELIMINARY STATEMENT ............................................................................... 1 ARGUMENT ............................................................................................................. 7 A. This Court Cannot Ignore the Partnership Law .................................... 7 B. A Law Firm’s Client Matters Are Partnership Property ..................... 10 1. Partnership Law and Thelen’s Partnership Agreement Confirm the Hourly Matters Are Partnership Property ............ 11 2. Stem and its Progeny Confirm that Hourly Matters Are Partnership Property .................................................................. 14 3. The Termination of Thelen’s Engagement Contracts With its Clients does not Transform the Nature of the Partnership Property .................................................................. 16 4. Thelen’s Attorney-Client Relationships Survived its Dissolution ................................................................................ 17 5. Seyfarth’s Response Is Fatally Flawed Because of Its Reliance on Sheresky and Welman ........................................... 19 C. A Partner’s Fiduciary Duty To Account does not Impact Client Choice or Affect Lawyer Mobility ........................................... 21 D. Because the Issue of Successor Firm Liability Under Fraudulent Transfer Law Is not One of the Certified Questions, this Court Should Ignore Seyfarth’s Repeated Protestations that it Is Not Liable to the Trustee ................................. 27 E. Seyfarth’s Response Fails to Provide any Basis for this Court To Reject the “No Compensation Rule” ............................................. 28 CONCLUSION ........................................................................................................ 29 ii TABLE OF AUTHORITIES Page(s) Cases: Beckman v. Farmer, 579 A.2d 618 (D.C. 1990) ............................................................. 8, 12, 15, 16 Caldwell v. Leiber, 7 Paige (N.Y.) 483 ........................................................................................... 4 Cohen v. Lord, Day & Lord, 75 N.Y.2d 95 (1989) ................................................................................ 22, 23 Collins v. Shayne, No. 78AP-50, 1978 WL 217287 (Ohio App. Dec. 28, 1978) ......................... 8 Dawson v. White & Case, 88 N.Y.2d 666 (1996) .................................................................................... 12 Denburg v. Parker, Chapin, Flattau & Klimpl, 82 N.Y.2d 375 (1993) .............................................................................. 22, 23 Denver v. Roane, 99 U.S. 355 (1978) ........................................................................................... 4 Development Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP, 480 B.R. 145 (S.D.N.Y. 2012) .................................................... 12, 15, 22, 23 Diamond v. Pillsbury Winthrop Shaw Pittman LLP (In re Howrey LLP), Adv. No. 13-3095DM, 2014 WL 507511 (Bankr. N.D. Cal. Feb. 7, 2014) .............................................................. 24-25 Ederer v. Gursky, 9 N.Y.3d 514 (2007) ................................................................................ 13, 20 Ellerby v. Spiezer, 485 N.E.2d 413 (Ill. App. 1985) .................................................... 8, 16, 17, 25 Frates v. Nichols, 167 So. 2d 77 (Fla. App. 1964) ................................................................. 8, 16 Geist v. Burnstine, 19 N.Y.S.2d 76 (Sup. Ct. 1940) ............................................................... 4, 7, 8 Geron v. Robinson & Cole LLP, 476 B.R. 732 (S.D.N.Y. 2012) ...............................................................passim iii Greenspan v. Orrick, Herrington & Sutcliffe (In re Brobeck, Phleger & Harrison LLP), 408 B.R. 318 (Bankr. N.D. Cal. 2009) ...................................................... 9, 20 Heller Ehrman LLP v. Jones Day (In re Heller Ehrman LLP), Adv. No. 10-3221DM, 2013 WL 951706 (Bankr. N.D. Cal. Mar. 11, 2013) .............................................................. 9, 27 Hurwitz v. Padden, 581 N.W.2d 359 (Minn. App. 1998) ............................................................. 25 In re Mondale and Johnson, 437 P.2d 636 (Mont. 1968) .............................................................................. 8 In re Thelen LLP, 736 F.3d 213 (2d Cir. 2013) ...................................................................passim Jewel v. Boxer, 156 Cal. App. 3d 171 (1984) ..................................................................... 8, 16 Johnson v. Hartshorne, 52 N.Y. 173 ...................................................................................................... 4 King v. Leighton, 100 N.Y. 386 (1885) ........................................................................ 1, 7, 12, 15 Kirsch v. Leventhal, 181 A.D.2d 222 (3d Dep’t 1992) ......................................................... 4, 26, 28 Matter of Brown, 242 N.Y. 1 (1926) .......................................................................................... 11 Matter of Greene, 54 N.Y.2d 118 (1981) .............................................................................. 10, 22 Mooney v. Shaw, 4 N.Y.S.2d 563 (Sup. Ct. 1938) ............................................................... 13-14 Murov v. Ades, 12 A.D.3d 654 (2d Dep’t 2004) ..................................................................... 26 Niesig v. Team I, 76 N.Y.2d 363 (1990) ................................................................................ 3, 22 Nishman v. DeMarco, 62 N.Y.2d 926 (1984) .................................................................................... 13 iv Nixon Peabody LLP v. de Senilhes, Valsamdidis, Amsallem, Jonath, Flaicher Associes, No. 2008/10374, 2008 WL 4256476 (Sup. Ct., Monroe County Sept. 16, 2008) .................................................... 23 Official Comm. of Unsecured Creditors v. Ashdale (In re Labrum & Doak, LLP), 227 B.R. 391 (Bankr. E.D. Pa. 1998) .............................................. 8, 9, 23, 25 Platt v. Henderson, 361 P.2d 73 (Or. 1961) .................................................................................... 8 Resnick v. Kaplan, 434 A.2d 582 (Md. App. 1981) ................................................................. 8, 16 Rhein v. Peeso, 194 A.D. 274 (1st Dep’t 1920) .................................................................. 7, 15 RLS Assoc., LLC v. United Bank of Kuwait, PLC, 417 F. Supp. 2d 417 (S.D.N.Y. 2006) ........................................................... 17 Robinson v. Nussbaum, 11 F. Supp. 2d 1 (D.D.C. 1997) ........................................................... 9, 12, 15 Rosenfeld, Meyer & Susman v. Cohen, 146 Cal. App. 3d 200 (1983) ..................................................................... 8, 16 Rothman v. Dolin, 20 Cal. App. 4th 755 (1993) ............................................................................ 8 Santalucia v. Sebright Transportation, Inc., 232 F.3d 293 (2d Cir. 2000) .................................................................... 26, 29 Shandell v. Katz, 217 A.D.2d 472 (1st Dep’t 1995) .................................................................. 26 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 Stem v. Warren, 227 N.Y. 538 (1920) ...............................................................................passim Surfin v. Hosier, 896 F. Supp. 766 (N.D. Ill. 1995) .................................................................. 25 Talley v. Lamb, 100 N.Y.S.2d 112 (Sup. Ct. 1940) ................................................................ 13 v Zimmerman v. Harding, 227 U.S. 489 (1913)....................................................................................... 12 Statutes & Other Authorities: Partnership Law § 4(4) ............................................................................................. 19 Partnership Law § 12(1) ..................................................................................... 11, 14 Partnership Law § 12(2) ........................................................................................... 11 Partnership Law § 40(6) ................................................................................. 4, 28, 29 Partnership Law § 73 ............................................................................................... 28 Code of Professional Responsibility, DR 2-107(B) ................................................ 13 New York Rules of Professional Conduct 1.5 ......................................................... 21 New York Rules of Professional Conduct 5.4 ......................................................... 23 New York Rules of Professional Conduct 5.6 ..................................................passim New York Rules of Professional Conduct 5.6(a) .................................................... 23 UPA § 42 .................................................................................................................. 28 A. Bromberg and L. Ribstein, Bromberg and Ribstein on Partnership, § 6.07(C) ........................................................................................................ 12 D. Richmond, Migratory Law Partners and the Glue of Unfinished Business, 39 N. KY. L. REV. 359 (2012) ........................................................ 25 Geoffrey C. Hazard, Jr. & W. William Hodes, The Law of Lawyering § 47.4 (3d ed. 2001) ....................................................................................... 23 1 {00006650v2 } PRELIMINARY STATEMENT This case raises no novel issues that would require this Court to upend over a century of precedent. Much as defendant-appellee Seyfarth Shaw LLP (“Seyfarth”) strives to convince this Court otherwise, the unfinished business doctrine does not impact a client’s choice of its counsel. Far from it. This case is entirely about a partner’s fiduciary duty to account to his or her partners when the firm dissolves. The New York Legislature confirmed these fiduciary principles in the New York Partnership Law (“Partnership Law”), just like this Court recognized them in King v. Leighton, 100 N.Y. 386 (1885) and Stem v. Warren, 227 N.Y. 538 (1920). In this sense, the primary certified question before the Court – whether upon dissolution and in related bankruptcy proceedings, client matters billed on an hourly basis are a law firm’s property – is a narrow one. But Seyfarth’s Response tries to distract this Court from the relevant issues in four ways. First, Seyfarth contends the Partnership Law – and the voluminous case law from other Uniform Partnership Act jurisdictions – is irrelevant. The reason for making this argument (the Partnership Law and the overwhelming weight of persuasive authority supports the Trustee) is as obvious as the flaw in its reasoning: to reach the conclusion that law firm partners had a fiduciary duty to account for the profits of ongoing matters, each of the cases interpreting the 2 {00006650v2 } Partnership Law (or its identical provisions in sister states) concluded that ongoing client matters were partnership property. Because the Legislature directed this Court to construe the Partnership Law consistent with that of New York’s sister states, the same result is compelled here. Second, a law firm’s ongoing matters are its property. Consistent with the Partnership Law, Thelen and its partners agreed – just like the partners in Stem and its progeny – that ongoing matters were partnership property to be collected for the benefit of Thelen and its partners. This covenant, enshrined in Thelen’s partnership agreement and the Partnership Law’s duty to account, did not terminate upon dissolution, but instead extends through Thelen’s winding up. Thus, in the absence of the Unfinished Business Waiver, the Thelen partners who left the firm for greener pastures – such as Seyfarth – would have had a fiduciary duty to hold in trust and account for all profits earned on Thelen’s ongoing client matters. Third, Seyfarth places the majority of its argument on what it calls “bedrock issues of client choice” as it tries to create a law firm exception to the Partnership Law. See Response at p. 15. Numerous courts have already concluded that the unfinished business doctrine does not impact – much less impede – a client’s right to hire or fire counsel. Although Seyfarth trumpets Rule 5.6 of the New York Rules of Professional Conduct (“NY RPC”) for its client choice 3 {00006650v2 } argument, this Court has already recognized that an attorney-client ethical rule “does not have the force of law.” See Niesig v. Team I, 76 N.Y.2d 363, 369 (1990). Indeed, several of the amici briefs1 rest entirely on the notion that Rule 5.6 controls here – but this Court in Niesig confirmed it simply does not. Fourth, Seyfarth’s argument that any duty under the Partnership Law does not apply to the firm because it was not a partner in Thelen is a non sequitur. This dispute arises out of the Thelen partners’ decision to amend the firm’s partnership agreement – on the eve of dissolution – to explicitly waive “any rights any Partner or [Thelen] may have to ‘unfinished business’ of [Thelen].” See In re Thelen LLP, 736 F.3d 213, 216 (2d Cir. 2013). The Trustee contends this so-called Unfinished Business Waiver constitutes a fraudulent transfer under the Bankruptcy Code because it relinquished a valuable property interest that was enshrined in the Partnership Law and Thelen’s Partnership Agreement – the waiver being for the exclusive benefit of Thelen’s former partners and their new law firms, including Seyfarth, and of no benefit to Thelen and its creditors – at a time when Thelen was insolvent. The fact that Seyfarth was not a partner in Thelen is wholly irrelevant. The primary issue for this Court to decide here is whether Thelen’s client matters 1 Motions for leave to submit amicus briefs in support of Seyfarth’s position were filed by: (1) 12 law firms; (2) The New York State Bar Association, The Association of the Bar of the City of New York, and the New York County Lawyers’ Association; and (3) Attorneys’ Liability Assurance Society, Inc., a Risk Retention Group. The American Bar Association filed a proposed amicus brief only in the Coudert Brothers case, # CTQ-2013-00010. 4 {00006650v2 } were partnership property; the remaining issues of fraudulent transfer law will be decided by the federal courts. Finally, Seyfarth has almost no response to the “no compensation” rule enacted in Partnership Law § 40(6), which governs the second Certified Question. The Supreme Court of the United States, relying on New York law, summarized the “no compensation rule” more than 135 years ago: “[W]here partnerships are equal … and there is no stipulation in the partnership agreement for compensation to a surviving partner for settling up the partnership business, he is entitled to no compensation.” Denver v. Roane, 99 U.S. 355, 358 (1978), citing Caldwell v. Leiber, 7 Paige (N.Y.), 483 and Johnson v. Hartshorne, 52 N.Y. 173. See also 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”). Yet, instead of addressing this rule, Seyfarth merely proposes that this Court should adopt a lower New York court decision, Kirsch v. Leventhal, 181 A.D.2d 222 (3d Dep’t 1992), which is irrelevant to an unfinished business analysis because it erroneously applied law regarding the death or retirement of a partner, not the dissolution of a partnership. Lost amid the protestations of Seyfarth and the universal rebuff of the Trustee’s arguments by the amici who condemn the application of well-settled 5 {00006650v2 } partnership law is the irrefutable truth that recognizing the validity of unfinished business claims for hourly matters interferes with the law firms’ economic self- interest. This is at the heart of their opposition, one which Judge Pauley accepted with his conclusion that “‘compensating a former partner out of that fee would reduce the compensation of the attorneys performing the work.’” Geron v. Robinson & Cole LLP, 476 B.R 732, 740 (S.D.N.Y. 2012), 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). Judge Pauley incorrectly elevated a lawyer’s right to earn maximum fees over his or her fiduciary obligations to the former partners and law firm. In the guise of contending that recognizing a dissolved law firm’s entitlement to the profits from unfinished hourly matters interferes with a client’s right to choose counsel, Seyfarth and its allies urge this Court to adopt the same erroneous reasoning. The arguments of Seyfarth and amici are thoroughly disingenuous. Seyfarth argues that client matters are not law firm assets because the client can always terminate the relationship and because the indicia of property ownership do not attach to client matters. Response, p. 1. However, law firms depend on revenues, the overwhelming predominance of which derives from working on client matters, and law firms zealously guard these matters. Thus Thelen, like many law firms, had a provision in its partnership agreement that provided: “all 6 {00006650v2 } 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 …”. See Fourth Partnership Agreement, § 2.3 (emphasis added); see also § 1.8, which 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.” Moreover, Thelen’s adoption of the Unfinished Business Waiver was precisely to allow the partners to retain all profits on Thelen matters that were taken to the new firms. So, while arguing on the one hand that client matters are not partnership property, saying that contingent fee matters should be treated differently than hourly fee matters upon dissolution ignores the practical reality, that law firms do, in fact, treat client matters as their property. Seyfarth and the amici are afraid that the partners who join them from dissolved firms will have to give back a portion of their earnings to the former firms as required by the Partnership Law and their fiduciary duties, thus decreasing the firms’ revenues, and they don’t like it. For these reasons, as fully detailed below, Seyfarth’s Response provides no valid reason why this Court should not answer the Certified Questions in favor of the Trustee. 7 {00006650v2 } ARGUMENT A. This Court Cannot Ignore the Partnership Law The central theme of Seyfarth’s Response is that this Court should look past the Legislature’s directive that partners of all types have a duty to account for unfinished business in a dissolution because the “the intent of the [New York] legislature is not at issue” since the Partnership Law is “irrelevant” to and “has no bearing” on the Certified Questions. See Response at pp. 9, 10, 11, 16 n.4. This is a baseless argument. Because the duty to account is governed by the Partnership Law, the question of whether a law firm’s hourly matters are partnership property to which the duty to account must attach has been resolved by New York’s sister states in a long line of cases that support the Trustee’s position. Seyfarth acts as if none of those cases exist. Tellingly, Seyfarth even closes its eyes to a trilogy of New York cases cited by the Trustee that confirm an unfinished contract is partnership property. King v. Leighton (bridge partnership); Rhein v. Peeso, 194 A.D. 274 (1st Dep’t 1920) (dental partnership); Geist v. Burnstine (law partnership).2 The Geist court applied the unfinished business doctrine to a law partnership and noted: “[o]ne of the main questions in the case is as to whether the 2 Seyfarth is not alone in ignoring Geist as none of the law firm parties in the certified questions in the Coudert appeal (CTQ-2013-00010) (or even many of the amici briefs filed in support of the law firms) attempt to distinguish or explain why Geist – a case about law firm dissolution and accounting for all unfinished matters – does not control here. 8 {00006650v2 } [two law partners] are each entitled to be paid for the work that each did after the dissolution which resulted in fees.” Id. at 76 (emphasis added). Significantly, the Geist court made no distinction between hourly or contingent fee cases. For decades, and just like in Geist, courts in UPA jurisdictions have concluded that an unfinished legal representation, however it is billed, is an asset of a dissolved law firm. To counter this great weight of authority, Seyfarth asserts that a 2009 decision in the Brobeck bankruptcy “appears to mark the genesis” of the rule that a law firm’s pending matters are partnership property. See Response at p. 13. This is plainly false: Geist was issued almost 70 years before the Brobeck bankruptcy, and New York’s sister states have long confirmed that a law firm’s pending matters are partnership property to which the duty to account must attach.3 And when faced with the supposed distinction between contingent and hourly matters, numerous courts applying the UPA have confirmed that the unfinished business doctrine applies equally to hourly matters. See, e.g., Rothman v. Dolin, 20 Cal. App. 4th 755, 759 (1993) (“That one matter is to be compensated at an hourly rate and another on a contingency basis is of no consequence in determining 3 See, e.g., Platt v. Henderson, 361 P.2d 73, 81-82 (Or. 1961); Frates v. Nichols, 167 So.2d 77, 80-81 (Fla. App. 1964); In re Mondale and Johnson, 437 P.2d 636, 640-41 (Mont. 1968) Collins v. Shayne, No. 78AP-50, 1978 WL 217287, at *2 (Ohio App. Dec. 28, 1978); Resnick v. Kaplan, 434 A.2d 582, 587 (Md. App. 1981); Rosenfeld, Meyer & Susman v. Cohen, 146 Cal. App. 3d 200, 219 (1983); Jewel v. Boxer, 156 Cal. App. 3d 171 (1984); Ellerby v. Spiezer, 485 N.E.2d 413, 416 (Ill. App. 1985); Beckman v. Farmer, 579 A.2d 618, 639 (D.C. 1990); Official Comm. of Unsecured Creditors v. Ashdale (In re Labrum & Doak, LLP), 227 B.R. 391, 405-06 (Bankr. E.D. Pa. 1998). 9 {00006650v2 } whether a matter is unfinished business.”); Greenspan v. Orrick, Herrington & Sutcliffe LLP (In re Brobeck, Phleger & Harrison LLP), 408 B.R. 318, 333 (Bankr. N.D. Cal. 2009) (same); Heller Ehrman LLP v. Jones Day (In re Heller Ehrman LLP), Adv. No. 10-3221DM, 2013 WL 951706, at *4 (Bankr. N.D. Cal. Mar. 11, 2013) (same); Robinson v. Nussbaum, 11 F. Supp. 2d 1, 5 (D.D.C. 1997) (same, applying D.C. law); In re Labrum & Doak, LLP, 227 B.R. at 405 (same, applying Pennsylvania law). Indeed, UPA courts had – until Judge Pauley – universally determined that the Unfinished Business Rule also applied to a law firm’s hourly matters. See, e.g., In re Thelen LLP, 736 F.3d at 222 n.10 (collecting cases). This is why the Trustee has argued – and Seyfarth cannot credibly refute – that the firm can only prevail if this Court exempts law partnerships from the general application of the New York Partnership Law. But the Partnership Law applies to all partnerships, including law firms, and there are no exceptions from the fiduciary duty of the partner in a dissolving law firm to account for the unfinished business of the partnership. Seyfarth’s counter is that “the attorney- client relationship is unique and subject to particular rules and policies that do not apply to other sorts of relationships.” Response at pp. 35-36. But, as explained below, the application of the Partnership Law to a law firm does not violate New York’s Rules of Professional Conduct, and even if it did, those rules are “an enactment of the New York Bar Association rather than the Legislature or any 10 {00006650v2 } court … [and] cannot, either directly or through incorporation in a court rule, amend or limit a statute adopted by the Legislature.” See Matter of Greene, 54 N.Y.2d 118, 124-25 (1981). Accordingly, this Court should not accept Seyfarth’s numerous invitations to craft a judicial exception to the Partnership Law for law firms and should instead apply the Partnership Law consistent with the will of the New York Legislature and the decisions of New York’s sister states interpreting the same statutory provisions. B. A Law Firm’s Client Matters are Partnership Property Seyfarth argues that client matters cannot be partnership property because law firms cannot buy or sell matters, they do not have the exclusive right to possession or use of client matters, and such matters do not have other indicia of property ownership. Response, p. 1. This misses the point. The Trustee does not assert that law firms “own” client matters, only that the client matters are partnership property such that, upon dissolution, the former partners are required to account pursuant to the Partnership Law. Clients retain law firms to represent them. The engagement agreement is a contract, subject to termination at will without cause at any time by the client. The contract is a partnership asset and, pursuant to the partnership agreement, the partnership (rather than any individual attorney) is entitled to the revenues. 11 {00006650v2 } Judge Pauley (and now Seyfarth) contend that “under New York law, a dissolved law firm’s pending hourly fee matters are not partnership assets [because] … the Trustee identifies no provision of UPA that addresses whether pending hourly fee matters are partnership property.” See Geron v. Robinson & Cole LLP, 476 B.R. at 743. Judge Pauley was wrong on both counts. Both the New York Legislature (in the Partnership Law) and this Court (in Stem and its progeny) support the Trustee’s position. Neither the termination of Thelen’s engagement contracts with its clients or the dissolution of the firm change the character of this partnership property. And the two cases Seyfarth relies upon – Sheresky and Welman – are fatally flawed and provide no basis to reject the Trustee’s partnership property contentions. 1. Partnership Law and Thelen’s Partnership Agreement Confirm the Hourly Matters Are Partnership Property Partnership Law § 12(1) provides: “All property originally brought into the partnership stock or subsequently acquired, by purchase or otherwise, on account of the partnership is partnership property.” Pursuant to Partnership Law § 12(2), there is a presumption that partnership property includes property acquired with partnership funds or incidental to the partnership business, such as client matters. See Matter of Brown, 242 N.Y. 1, 6 (1926) (Cardozo, J.) (“[g]oodwill, when it exists as incidental to the business of a partnership, is presumptively an asset to be accounted for like any other by those who liquidate the business”); 12 {00006650v2 } Dawson v. White & Case, 88 N.Y.2d 666 (1996) (law firm’s goodwill subject to valuation). Contracts between the partnership and third parties related to the partnership business are presumptively partnership property. See Stem, 227 N.Y. at 546-47 (contract to provide architectural services is partnership property); King, 100 N.Y. at 393-94 (contracts related to the partnership business are partnership property). Contracts that are unfinished at the time of dissolution remain partnership property. Stem, 227 N.Y. at 546-47; Development Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP, 480 B.R. 145, 65 (S.D.N.Y. 2012) (“Coudert II”). Accord Robinson v. Nussbaum, 11 F.Supp.2d at 6; Beckman v. Farmer, 579 A.2d at 636. See Zimmerman v. Harding, 227 U.S. 489, 494 (1913) (“[t]he partnership property continue[s] to be partnership property after as well as before dissolution”); see also A. Bromberg and L. Ribstein, Bromberg and Ribstein on Partnership, § 6.07(C) at 6:136.7 (“[b]ecause the partners’ fiduciary duties continue … during the winding up period, a partner cannot take partnership property after dissolution, including a law firm’s case that is in process prior to dissolution and completed as part of the winding up of the firm or a partnership contract”). Of course, because the Partnership Law provides only default rules, law firms can opt out of the application of the provisions at issue by amending 13 {00006650v2 } their partnership agreements to provide that their partners are not subject to fiduciary duties to account and remit profits post-dissolution. This Court has, in fact, encouraged partners to address such matters in written agreements. See Ederer v. Gursky, 9 N.Y.3d 514, 526 (2007). Law firms can also agree on the allocation of post-dissolution fees in a manner different than what the default rules of the Partnership Law provide. See Nishman v. DeMarco, 62 N.Y.2d 926, 929- 930 (1984) (upholding trial court’s determination that there was an enforceable agreement to divide post-dissolution fees received on account of unfinished client matters as of dissolution).4 In Talley v. Lamb, 100 N.Y.S.2d 112 (Sup. Ct. 1940), the court enforced a dissolution agreement among partners to share equally all post- dissolution fees from matters in which the dissolved firm had been retained prior to dissolution. Id. at 114-15. The court noted that while after dissolution each “former partner was free to … accept retainers from persons who had been clients of the firm,” that right was subject to the obligation to account for the matters that existed as of the dissolution date. Id. at 118; see also Mooney v. Shaw, 4 N.Y.S.2d 4 In Nishman, this Court further confirmed that such an agreement does not violate New York’s Rules of Professional Conduct, including the rules on fee-splitting. Id. at 929-30 (“[T]here is no merit to the assertion that provisions of the Code of Responsibility preclude giving effect to … the agreement of the parties with respect to the division of fees received on matters pending at the time of dissolution of the partnership. Code of Professional Responsibility, DR 2-107[B]”). 14 {00006650v2 } 563 (Sup. Ct. 1938) (enforcing an agreement to allocate post dissolution fees for unfinished matters that existed at the date of the decedent’s death). These cases confirm that even if client matters are not presumptively partnership property, partners nonetheless can agree in their partnership agreement that such matters be treated as partnership property. See Partnership Law § 12(1). This is exactly why Thelen, like many law firms, included a provision in its partnership agreement that provided: “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 …”. See Fourth Partnership Agreement, § 2.3 (emphasis added); see also § 1.8 (“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”). Moreover, Thelen’s adoption of the Unfinished Business Waiver was precisely to allow the partners to take matters with them – should the client choose to follow – free and clear of this duty to account. So, despite Seyfarth’s argument that client matters are not property, both the perception and the practical reality – for both hourly and contingent fee matters – is that law firms do, in fact, treat client matters as their property. 2. Stem and its Progeny Confirm That Hourly Matters are Partnership Property Contracts between the partnership and third parties related to the partnership business are presumptively partnership property. See Stem v. Warren, 15 {00006650v2 } 227 N.Y. 538, 546-47 (1920) (contract to provide architectural services is partnership property); King, 100 N.Y. at 393-94 (contracts related to the partnership business are partnership property). Contracts that are unfinished at the time of dissolution remain partnership property. Stem, 227 N.Y. at 546-47; see also Coudert II, 480 B.R. at 165; Robinson, 11 F. Supp. 2d at 6; Beckman, 579 A.2d at 636. Seyfarth contends, however, that Stem does not stand for the proposition that law firms have a property interest in client matters. Response at p. 21. Seyfarth is wrong. In Stem, this Court made clear 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; Rhein, 194 A.D. at 274. Stem confirms that: (i) a continuing contract between a client and a professional service partnership that is terminable at will is not terminated by dissolution of the partnership; (ii) the unfinished contract remains a firm asset that the winding up partners have a fiduciary duty to complete; and (iii) if the client terminates the contract post-dissolution and separately enters into a new contract with one of the former partners, that former partner is obligated, consistent with his fiduciary 16 {00006650v2 } duties, to account to the dissolved firm and turn over any profit realized on completion of the services that the dissolved partnership had originally contracted to perform. Stem, 227 N.Y. at 546-47. 3. The Termination of Thelen’s Engagement Contracts With its Clients Does Not Transform the Nature of the Partnership Property Consistent with Stem, other courts in UPA jurisdictions have confirmed that the termination of a law firm’s engagement contracts with its clients does not relieve the former partner of his duty to account. See Beckman, 579 A.2d at 636 (collecting cases from California, Florida, Illinois, and Maryland); see also Rosenfeld, 146 Cal. App. 3d at 219 (“It is clear that a partner completing unfinished business cannot cut off the rights of the partners in the dissolved partnership by the tactic of entering into a ‘new’ contract to complete such business.”); Jewel, 156 Cal. App. 3d at 178 (“[A] client’s retention of a new firm consisting of two former partners of the dissolved law firm that previously handled the client’s case did not transfer the case into new partnership business.”) (affirming Rosenfeld); Ellerby v. Spiezer, 485 N.E.2d at 416-17 (same); Frates, 167 So.2d at 80-81 (same); Resnick, 434 A.2d at 587-88 (same). Specifically, Seyfarth’s Response and the briefs of the amici ignore that the very constituents they claim to protect – clients – would be harmed if all that is required to release an attorney from his duty to account is to sign a new 17 {00006650v2 } engagement agreement: Second, the holding Spiezer suggests [releasing attorneys with new engagement letters from the duty to account] would encourage partners of a law partnership facing dissolution to make attempts to convince clients with cases having the most lucrative potential to hire them individually and discharge the partnership. This sort of case-chasing by attorneys should not be encouraged. Moreover, it places the clients of the dissolved law partnership precisely where they should not be placed; in the middle of a dispute among the partners over money. Ellerby, 485 N.E.2d at 417 (emphasis added). This problem is only solved if – consistent with their continuing fiduciary duties – all partners have a duty to account for all matters, regardless of the signing of new engagement agreements. 4. Thelen’s Attorney-Client Relationships Survived its Dissolution Lawyers’ fiduciary responsibilities continue after dissolution, and a law firm may not simply force its clients to leave by dissolving. While Seyfarth rightly notes that a client has the right to terminate its relationship with an attorney or law firm at any time, it does not follow that a law firm (or its partners) have a reciprocal right to terminate their representation of a client merely upon dissolution of their law firm. Rather, as the district court concluded in RLS Assoc., LLC v. United Bank of Kuwait, PLC, 417 F.Supp.2d 417 (S.D.N.Y. 2006), “considering that the mission of lawyers is to serve those persons or entities they accept as clients, one feels intuitively that the obligation of a law firm should not lapse with the subsequent dissolution of the firm.” Id. at 419. 18 {00006650v2 } The obligation to continue serving the needs of existing clients post- dissolution is further confirmed by a June 3, 1988 opinion of the Committee on Professional and Judicial Ethics of the Association of the Bar of the City of New York, which stated: Lawyers, therefore, have an ethical obligation to perform professional services they contract to provide until their completion, absent good cause for withdrawal. Even in the event of dissolution, every member of a law firm retained by a client is obligated to fulfill the retainer agreement. 1988 WL 490014, at *2 (citation omitted & emphasis added). Accordingly, there is simply no basis to suggest that Thelen’s hourly engagements magically disappeared upon its dissolution as a law firm. Instead, as a matter of law, unfinished legal matters for which Thelen (and its partners) had responsibility at the time of its dissolution – whether hourly or contingent fee matters – remained unfinished business of Thelen, which Thelen’s former partners had an affirmative ethical obligation to see through to completion for the benefit of the client and the firm unless and until they were discharged by the client, or withdrew from the representation in accordance with the applicable Rules of Professional Conduct. Thelen’s dissolution did not relieve its partners of the obligation to wind up the affairs of the partnership and conclude the representation of the firm’s clients. Whether that winding up occurred at Thelen’s offices or Seyfarth’s is 19 {00006650v2 } immaterial. The key fact is that the business that they were conducting was being performed in fulfillment of their fiduciary obligations as partners of Thelen. And, since the Unfinished Business Waiver was executed before the firm had dissolved, any matters that former Thelen partners may have taken with them to Seyfarth must necessarily have constituted “unfinished business” of Thelen for which they were duty-bound to account to Thelen, but for the execution of the Unfinished Business Waiver that is at the heart of the Trustee’s claims. 5. Seyfarth’s Response is Fatally Flawed Because of Its Reliance on Sheresky and Welman Seyfarth can only point to one New York decision – an unpublished trial court opinion – that rejects the application of the unfinished business doctrine to hourly fee matters: Sheresky. But Sheresky is a deeply-flawed opinion and also contrary to New York law.5 To counter the fact that Sheresky failed to consider any provision of the Partnership Law, Seyfarth suggests that the statutory provisions are “irrelevant” to the issues regarding fiduciary duties to account or partnership property. See Response at p. 16 n.4. And to the absence of Partnership Law § 4(4) in Sheresky, Seyfarth says (again) that uniform application of the UPA is not necessary since the Partnership Law does not apply. Id. at p. 12-13. But simply calling a statute 5 See, e.g., Trustee’s Opening Brief at pp. 26-28. 20 {00006650v2 } irrelevant (as Seyfarth does here) does not explain away its express and obvious application to the unfinished business doctrine or its absence from the trial court opinion in Sheresky. In addition, Sheresky incorrectly assumed that the unfinished business doctrine would only apply if the partners “had a partnership agreement which established principles to be applied in case of the partnership dissolution.” 2011 WL 7574999, at *5. But as stated in the Trustee’s Opening Brief, the Partnership Law sets “default requirements that come into play in the absence of an agreement.” See Trustee’s Brief at p. 14; see also In re Thelen LLP, 736 F.3d at 222 (“[T]he New York Partnership Law … sets only default rules”); Ederer, 9 N.Y.3d at 526 (“The Partnership Law's provisions are, for the most part, default requirements that come into play in the absence of an agreement.”).6 In other words, the unfinished business doctrine (that requires a duty to account) is the default rule; however, partners can amend or change their firm’s partnership agreement to negate any duty to account. It is therefore incorrect for Sheresky to claim that a partnership must affirmatively choose to have the unfinished business doctrine apply. To the contrary, it applies as a matter of law as the default rule 6 See also Brobeck, 408 B.R. at 334 (“Without an express agreement, especially in the context of a law partnership where completion of ongoing partnership business can be protracted, the default rules on unfinished business can result in undesirable consequences between partners and/or their former firm.”). 21 {00006650v2 } under the Partnership Law. C. A Partner’s Fiduciary Duty to Account Does Not Impact Client Choice or Affect Lawyer Mobility This case does not implicate the Rules of Professional Conduct, and it does not involve (must less adversely interfere with) a client’s right to choose his or her lawyer. Seyfarth and two amici briefs try to assert that the unfinished business doctrine violates New York’s policy against restrictions on the practice of law, as set forth in Rules of Professional Conduct 1.5 or 5.6. See Response at pp. 31-33; ABA amicus brief at pp. 7-9, 11, 15, 17; Law Firm amici brief at p. 17. In short, Seyfarth posits that the unfinished business doctrine might: (a) impact a client’s right to hire or fire its counsel; (b) create an economic disincentive for a partner of a dissolved law from completing the unfinished matter at a new firm; or (c) create impermissible fee-splitting. Because of fundamental problems with these arguments, all of them have been repeatedly rejected by courts in UPA and RUPA jurisdictions. Generally, the unfinished business doctrine (duties between partners in a partnership) and a lawyer’s ethical obligations (duties owed by an attorney to a client) are separate and distinct and do not offend each other. Nevertheless, Seyfarth suggests the ethics rules are somehow a “necessary part” of this Court’s analysis. See Response at p. 26. This is wrong for at least four reasons. First, the New York ethics rules do not (and cannot) trump the will of 22 {00006650v2 } the Legislature in the Partnership Law. But Seyfarth says they should as it claims “the Rules of Professional Conduct, and public policy should inform this Court’s determination of the ‘property’ question.” See id. (emphasis added). But this Court has already rejected – many times – the argument that the ethics rules should supersede a statute enacted by the New York legislature. See, e.g., Niesig, 76 N.Y.2d at 369; Matter of Greene, 54 N.Y.2d at 124-25. Second, the unfinished business doctrine does not impede lawyer mobility, even though Seyfarth asks this Court to “examine New York’s long history of striking down restrictions on the practice of law.” See Seyfarth Response at p. 6. In making this lawyer mobility argument, Seyfarth primarily points to NY RPC 5.6 and two inapposite decisions in Cohen v. Lord, Day & Lord, 75 N.Y.2d 95 (1989) and Denburg v. Parker, Chapin, Flattau & Klimpl, 82 N.Y.2d 375 (1993). But as the Trustee explained in his opening brief,7 Cohen and Denburg merely addressed specific provisions in a partnership agreement that restricted competition for a withdrawing partner, either as a non-compete provision (in Cohen) or a provision for payments after withdrawal (in Denburg). The key difference here is that Rule 5.6 is meant to govern partnership agreement, prohibiting a lawyer from “offering or making” a clause or provision 7 See Trustee’s Opening Brief at pp. 30-31; see also Coudert II, 480 B.R. at 169-73 (citing at least four reasons why “it would be unwise to extrapolate too much from Denburg and Cohen”). 23 {00006650v2 } that “restricts the right of a lawyer to practice after” leaving the firm. New York courts have noted that Rule 5.6 was “designed, in part, to protect lawyers, particularly young lawyers, from bargaining away their right to open their own offices after they end an association with a firm or other legal employer.” See Nixon Peabody LLP v. de Senilhes, Valsamdidis, Amsallem, Jonath, Flaicher Associes, No. 2008/10374, 2008 WL 4256476, at *7 (Sup. Ct., Monroe County Sept. 16, 2008) (citing Geoffrey C. Hazard, Jr. & W. William Hodes, The Law of Lawyering § 47.4 (3d ed. 2001) (concluding an “out-right prohibition on the practice of law” would violate Rule 5.6)). Simply put, Rule 5.6 bars any agreement that restricts a lawyer’s right to practice. Other courts applying ethics rules analogous to Rule 5.6 have concluded that similar “lawyer mobility” arguments endorsed by Judge Pauley in Geron are “unimpressive.” See In re Labrum & Doak, LLP, 227 B.R. at 415 (rejecting application of the Model Rules of Professional Conduct 5.4 and 5.6(a) to unfinished business case); Coudert II, 480 B.R. at 169-70 (rejecting application of Rule 5.6(a) to unfinished business cases). In response, Seyfarth tries to draw a similarity between the financial disincentive (to the lawyers in Cohen and Denburg) to its self-interested claim that “the [successor] law firm faces a disincentive” in hiring a partner from a dissolved firm. See Response at p. 30. But again, Seyfarth confuses the issue. The 24 {00006650v2 } unfinished business doctrine concerns a partner’s fiduciary duty to account; that fiduciary duty does not vanish simply because a successor law firm fears that it might make less money. When a lawyer leaves a dissolving firm – such as Thelen – and brings unfinished hourly matters, absent an agreement among the former partners about how to treat unfinished business, the potential impact of an unfinished business claim is an economic matter between the lawyer and the new law firm. To hold otherwise would be to say, for example, that if the new law firm charged much higher hourly rates for its new lawyer than the client was willing to pay, somehow the client’s choice of counsel is being impermissibly interfered with or impacted. That notion is inane – and certainly not one that would be adopted by Seyfarth or its amici. Third, the purpose of the rule against fee-splitting is to ensure that lawyers at different firms inform their client about the nature of a joint representation and the sharing of fees. In short, Rule 1.5 is about client consent – not fee sharing between partners in accordance with their fiduciary duties. And every well-reasoned case to address the issue has held that a lawyer’s unfinished business duty (the duty to account between partners and their firm) and a lawyer’s fee splitting obligations (the duty to inform a client if splitting fees with another firm) are distinct and do not offend each other. See, e.g., Diamond v. Pillsbury Winthrop Shaw Pittman LLP (In re Howrey LLP), Adv. No. 13-3095DM, 2014 25 {00006650v2 } WL 507511, at **7-8 (Bankr. N.D. Cal. Feb. 7, 2014) (rejecting the fee-splitting argument as “unpersuasive”); Surfin v. Hosier, 896 F. Supp. 766, 769 (N.D. Ill. 1995) (applying Illinois law and finding fee-splitting argument to be “unpersuasive”); Hurwitz v. Padden, 581 N.W.2d 359, 363 (Minn. App. 1998) (applying Minnesota law); Ellerby, 485 N.E.2d at 416 (concluding it was “perfectly proper” for fees to be split among law partners).8 For example, in Labrum, the bankruptcy court held: [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 former 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. In re Labrum & Doak, 227 B.R. at 414 (emphasis added) (citing Surfin, 896 F.Supp. at 769). The only court to endorse the fee-splitting theory was Sheresky, yet that decision contradicted itself. On the one hand, Sheresky says sharing fees for post-dissolution hourly work would violate New York’s ethical rules, yet it also approves an alternative option that the law firm could have divided such post- 8 See also D. Richmond, Migratory Law Partners and the Glue of Unfinished Business, 39 N. KY. L. REV. 359, 386 n.288 (2012) (“[I]t should … come as no surprise that courts have almost unanimously rejected fee-splitting claims in the unfinished business doctrine context.”). 26 {00006650v2 } dissolution hourly fees under a partnership agreement – even though such an agreement would, according to Sheresky, violate ethics rules. That cannot be. Finally, unfinished business claims for hourly matters simply do not threaten the sanctity of the lawyer-client relationship. A client is always free to choose a particular lawyer, or a particular law firm, and to move a matter to a new firm. Partnership law is clear, however, that revenue generated by a matter concluded on behalf of a dissolved partnership retains its character as property of the firm. See, e.g., Santalucia v. Sebright Transportation, Inc., 232 F.3d 293,300- 301 (2d Cir. 2000) (“[U]nder New York law, when a [law firm] dissolves and a lawyer leaves with a contingent fee case, absent an agreement to the contrary, that case remains a firm asset”); see also Kirsch v. Leventhal, 181 A.D.2d 222, 224 (3d Dep’t 1992) (stating “the case would have constituted unfinished business of the firm,”); Shandell v. Katz, 217 A.D.2d 472 (1st Dep’t 1995) (same); Murov v. Ades, 12 A.D.3d 654 (2d Dep’t 2004) (same). Seyfarth tries to make it appear as if this dispute were about defending the sacrosanct nature of the attorney-client relationship, and the judicially-defined public policies governing attorney-client relationships and protecting clients’ choice of counsel. But the client’s choice of counsel has not been impacted. None of Thelen’s former clients were forced to continue employing the firm. The clients voluntarily selected Seyfarth as their new counsel. This change in counsel has 27 {00006650v2 } given rise to unfinished business liability, but the client’s right to hire and fire the counsel of its choosing was not affected. See, e.g., Heller Ehrman LLP v. Jones Day (In re Heller Ehrman LLP), Adv. P. No. 10-3221DM, 2013 WL 951706, at *5 (Bankr. N.D. Cal. Mar. 11, 2013). D. Because the Issue of Successor Firm Liability Under Fraudulent Transfer Law is not One of the Certified Questions, This Court Should Ignore Seyfarth’s Repeated Protestations that it is Not Liable to the Trustee Seyfarth’s Response is filled with protestations that it is not liable to the Trustee because “Seyfarth was never a partner in Thelen and, therefore, owes no duty” to account under the Partnership Law. Response at p. 24; see also id. at pp. 2, 5, 6, 12. But the Trustee has never argued that Seyfarth owed a fiduciary duty to Thelen; instead, the Trustee alleged – consistent with multiple reported decisions on the topic – that Seyfarth could be held liable under the fraudulent transfer provisions of the Bankruptcy Code as the subsequent transferee of the property interest in its unfinished business that Thelen relinquished through its Unfinished Business Waiver. See Geron, 476 B.R. at 736-37; In re Thelen LLP, 736 F.3d at 217. To paraphrase Seyfarth’s own Response, “the primary, narrow question certified to this Court” (Response at p. 9) only reaches the first element of a fraudulent transfer claim, whether “a client matter that is billed on an hourly basis [is] the property of a law firm.” In re Thelen LLP, 736 F.3d at 225. Whether Seyfarth would ultimately be held liable to the Trustee under this fraudulent 28 {00006650v2 } transfer theory, or whether Seyfarth could escape liability because of its lack of a fiduciary duty to Thelen, is not before this Court and should carry no weight in the resolution of the Certified Questions. E. Seyfarth’s Response Fails to Provide Any Basis For this Court to Reject the “No Compensation Rule” Seyfarth’s Response almost entirely fails to respond to the second Certified Question – whether the new law firm is entitled to retain any portion of the profit derived from the dissolved firm’s ongoing hourly matters. Seyfarth does not dispute that the “no compensation rule” has been the law governing partnerships for over one hundred years, or that the “no compensation rule” has been codified in the Partnership Law. Instead, Seyfarth asks this Court to “adopt … as its own” the “conclusion” reached in a New York Supreme Court decision, Kirsch v. Leventhal. See Response at p. 37. But the supposed conclusion from Kirsch was reached without citing or discussing the “no compensation rule,” as codified by the New York Legislature in Partnership Law § 40(6). Kirsch, 181 A.D.2d at 226. Instead, Kirsch relied on Partnership Law § 73 – a provision of the UPA that only concerns the valuation of a partnership interest “[w]hen any partner retires or dies” and the business is continued. Id. But Kirsch was a dissolution case – it did not involve the continuation of a law partnership after the retirement or death of one of the partners. And even if it had, Partnership Law § 73 (the parallel to UPA § 42) would not apply because it “is not the source of the duty of a lawyer to account to his former partners." Santalucia, 232 F.3d at 300. On the other hand, Partnership Law § 40(6) governs whether a partner is entitled to compensation for his efforts in winding up unfinished business matters, and clearly adopts the "no compensation rule." Thus, the sole authority cited by Seyfarth provides no basis for rejecting the "no compensation" rule and answering the second Certified Question in the firm's favor. CONCLUSION The Court should answer the Certified Questions as suggested by the Trustee. Dated: New York, New York May 7, 2014 {00006650v2 } Respectfully Submitted, RICH MICHAELSON MAGALIFF MOSER,LLP Special Litigation Counsel for Yann Geron, Chapter 7 Trustee 7L()61~ HOWARDP.MAG FF 340 Madison Avenue, 19th New York, NY 10173 212.220.9402 hmagalifJ@r3mlaw.com 29