Small Enough To Fail

Bankruptcy Judge Dennis Montali in San Francisco said last week that he will allow a direct appeal to the Ninth Circuit from one of his rulings in the bankruptcy of Howrey LLP, skipping an intermediate appeal to the U.S. District Court. The judge relied on Jewel v. Boxer — a California state law case which holds that profit earned on unfinished business after dissolution belongs to the “old” firm, not to a newly-formed firm that completed the work. The case is of intense interest to attorneys who move to other firms when their existing firms go out of business. Judge Montali had allowed the Howrey trustee to sue several law firms including Jones Day and Seyfarth Shaw LLP for profits they made on work that began at the now-defunct firm. The New York Court of Appeals recently ruled to the contrary in response to a question by the New York-based Second Circuit Court of Appeals in litigation involving the failed law firms Thelen and Coudert Brothers. The New York Court of Appeals stated: “We hold that pending hourly fee matters are not partnership ‘property’ or ‘unfinished business’ within the meaning of New York’s Partnership Law. A law firm does not own a client or an engagement, and is only entitled to be paid for services actually rendered.”

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