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Cases Under Review: California Supreme Court Rules On Whether Dissolved Law Firm Retains Property Interest In Hourly Fee Matters In Progress
Answer: The Law Firm Does Not Retain Such Interest -- Because It Is Not A Property Interest -- Except On Very Limited Basis.
On July 30, 2016, we posted that the Ninth Circuit certified as a question to the California Supreme Court whether a dissolving law firm has any property interest in unfinished hourly business. Now we have the answer. Heller Ehrman LLP v. Davis Wright Tremaine LLP and Related Cases, S236208 (Cal. Sup. Ct. 3/5/18) (Cuéllar, author).
The Supreme Court holds "that under California law, a dissolved law firm has no property interest in legal matters handled on an hourly basis, and therefore, no property interest in the profits generated by its former partners' work on hourly fee matters pending at the time of the firm's dissolution."
There remains, however, a limited exception to account to the dissolved law firm: "Any 'property, profit, or benefit' accountable to a dissolved law firm derives only from a narrow range of activities: those associated with transferring the pending legal matters, collecting on work already performed, and liquidating business."
As the Court explains, "the firm's expectation -- a mere possibility of unearned, prospective fees -- cannot constitute a property interest." This ruling arises in the context of a bankruptcy administrator who "filed adversary proceedings in bankruptcy court on behalf of Heller against the law firms where Heller's former shareholders had found work," claiming a fraudulent transfer of Heller's rights to postdissolution fees had occurred, and that a so-called Jewel waiver had to be set aside.
Earlier, the case of Jewel v. Boxer, 156 Cal.App.3d 171 (1984) had held that, absent a contrary agreement, attorney fees generated from matters pending when a law firm dissolved were "to be shared by the former partners according to their right to fees in the former partnership, regardless of which former partner provides legal services in the case after the dissolution." Id. at 174. In the case of the Heller Ehrman law firm, the partners had signed a "Jewel waiver," allowing former partners to take hourly fee matters with them, without having to compensate partners who stayed on with the firm from work done by the departing partners on a going-forward basis.
The Ninth Circuit explains that the rule in Heller Ehrman will protect the clients' choice of counsel and encourage labor mobility.
COMMENT: Does Heller Ehrman overrule Jewel v. Boxer? No. The Heller Ehrman court explains that Jewel v. Boxer is limited to contingency fee matters, "and whether our conclusion in this case extends to such matters is a question we need not address here." So a Jewel-like waiver, in the context of hourly fee matters, should be effective.
Posted at 05:58 PM in Cases: Cases Under Review | Permalink