527 B.R. 24
N.D. Cal.2014Background
- Heller Ehrman LLP, a large law firm, dissolved in 2008 after its lender seized control of firm accounts; clients were notified the firm could no longer provide services and many retained new counsel under new retainer agreements.
- Heller’s Shareholders executed a ‘‘Jewel Waiver’’ purporting to waive claims to fees generated after a shareholder’s departure for non-contingent matters; Heller later filed Chapter 11 and a Trustee was appointed.
- The Trustee sued third‑party firms (which hired former Heller lawyers and represented former Heller clients on hourly matters) seeking recovery of profits those firms earned on matters that were pending at dissolution.
- Defendants are preexisting outside firms that performed new work under new retainers and earned the disputed fees through their own labor and capital.
- The Bankruptcy Court and this district court considered (de novo) whether pending hourly fee matters at dissolution are partnership property subject to accounting and recovery by the dissolved firm’s estate.
Issues
| Issue | Trustee's Argument | Defendants' Argument | Held |
|---|---|---|---|
| Are hourly‑fee matters pending at dissolution partnership property/"unfinished business"? | Jewel establishes such matters can be partnership property and revenues recoverable. | Clients own matters; RUPA and practice mean pending hourly matters are not partnership property. | No — not partnership property under facts here; Jewel not controlling. |
| Can the Trustee recover profits earned by third‑party firms that hired former Heller lawyers? | Trustee: yes — estate entitled to profits via Jewel theory or fraudulent‑transfer claims (Jewel Waiver invalid). | Defendants: no — they performed new services under new retainers; fees are theirs; no duty to account. | No — Trustee has no claim against third‑party firms for those profits. |
| Does RUPA/Jewel Waiver change fiduciary duties and result? | Trustee: Jewel theory should apply despite RUPA and waiver. | Defendants: RUPA permits competition on winding up and limits pre‑dissolution fiduciary restraint; waiver legit given context. | RUPA undermines Jewel’s premise; Jewel distinguished on facts and likely not followed by CA Supreme Court. |
Key Cases Cited
- Jewel v. Boxer, 156 Cal. App. 3d 171 (Cal. Ct. App. 1984) (held departing partners who continued work under old firm retainers must account as to unfinished business)
- Fracasse v. Brent, 6 Cal. 3d 784 (Cal. 1972) (client’s absolute right to discharge attorney; discharged attorney limited to quantum meruit recovery)
- Lyon v. Lyon, 246 Cal. App. 2d 519 (Cal. Ct. App. 1966) (professional partnerships do not have goodwill as transferable partnership property)
- In re Thelen LLP, 736 F.3d 213 (2d Cir. 2013) (discussing policy reasons against treating hourly matters as partnership property)
- Executive Benefits Ins. Agency v. Arkison, 134 S. Ct. 2165 (U.S. 2014) (standards for bankruptcy‑related proceedings reviewed by district court)
- Stern v. Marshall, 131 S. Ct. 2594 (U.S. 2011) (distinguishing Article III adjudication rights in bankruptcy matters)
- Jalali v. Root, 109 Cal. App. 4th 1768 (Cal. Ct. App. 2003) (discharged attorney’s recovery is limited to quantum meruit)