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Who has the right to unfinished business revenue from a failed law firm: Lawyers or creditors?

A New York appeals court will hear arguments in cases involving Coudert Brothers LLP and Thelen LLP

Although law firm Dewey & LeBoeuf failed in 2012 (see IC’s full timeline for more information), trustees, creditors and all sorts of sources are still trying to divide up the failed firm’s pie. On docket this week in a New York court is a question for an important piece of that pie: Do creditors or attorneys have rights to continued attorney’s fees from work that originated at a failed firm?

On June 4, arguments will begin in the New York Court of Appeals over cases stemming from the failures of Coudert Brothers LLP and Thelen LLP. Those two firms closed in 2005 and 2008, respectively, but the creditors in charge of the bankruptcy estate for each firm believe they have a stake in the continued work that the firms’ former lawyers took to new firms.

If the appeals court decides that the creditors do indeed have a stake in unfinished business, law firms would incur serious financial risk if they recruit lateral talent from other firms that were undergoing bankruptcy. As support for the position, lawyers for the creditors cite the 1984 case deciding how to split assets of the failed Jewel, Boxer & Elkind, which held that unfinished business should generally be paid back to the firm.

Bankruptcy firms dealing with other failed law firms have filed briefs in support of that interpretation of the law. The Wall Street Journal noted that bankruptcy trustees overseeing the dissolution of not only Dewey, but also failed firms Howrey LLP and Heller Ehrman LLP, wrote a brief saying, “If a partner understands that his fiduciary duty to his or her dying law firm does not end by him simply walking out the door…the partner will be incentivized to address the underlying problems at his firm rather than flee at the first sign of trouble.”

Naturally, law firms do not agree with the creditors’ assertions.  Nine of the law firms cited in the Coudert case issued a brief saying that treating client matter as property “is inconsistent with New York law, public policy, and the ethical rules unique to lawyers.”

Seyfarth Shaw, meanwhile, filed a brief in the Thelen case, saying, “Because the court's conclusion will have a significant impact on lawyer mobility and clients' ability to hire the lawyers of their choosing, the court should examine New York courts' long history striking down restrictions on the practice of law and upholding clients' absolute right to choose counsel and conclude that client matters are not law firm property.”


For InsideCounsel’s past coverage of the Dewey & LeBoeuf bankruptcy, check out these articles:

Dewey trustee sues to recover money from creditors

Judge OKs $19.5 million Dewey mismanagement deal

Former Dewey & LeBeouf chairman agrees to settle mismanagement claims

Dewey liquidation plan wins court approval

Dewey will pay to shred old client files

Dewey creditors can pursue claims against firm execs, judge rules

Assistant Editor

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Zach Warren

Zach Warren is Assistant Editor of InsideCounsel magazine, where he oversees online content submissions and administers InsideCounsel's enewsletters. Zach specializes in new media and multimedia...

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