Case Information
*1 FOR PUBLICATION
UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT I N THE M ATTER OF H ELLER No. 14-16314 E HRMAN LLP,
Debtor , D.C. No. 3:14-cv-01236-CRB H ELLER E HRMAN LLP,
Liquidating Debtor,
Plaintiff-Appellant , v.
D AVIS W RIGHT T REMAINE
LLP,
Defendant-Appellee. I N THE M ATTER OF H E HRMAN ELLER No. 14-16315 LLP, Debtor D.C. No. 3:14-cv-01237-CRB *2 H ELLER E HRMAN LLP,
Liquidating Debtor,
Plaintiff-Appellant , v.
J ONES D AY ,
Defendant-Appellee. I N THE M ATTER OF H ELLER No. 14-16317 E HRMAN LLP,
Debtor , D.C. No. 3:14-cv-01238-CRB H ELLER E HRMAN LLP,
Liquidating Debtor,
Plaintiff-Appellant , v.
F OLEY & L ARDNER LLP,
Defendant-Appellee. I N THE M ATTER OF H ELLER E HRMAN H ELLER No. 14-16318 E HRMAN LLP,
Debtor , D.C. No. 3:14-cv-01239-CRB H LLP, ORDER CERTIFYING
Liquidating Debtor, Plaintiff-Appellant QUESTION TO THE CALIFORNIA SUPREME COURT v. O RRICK ERRINGTON &
S UTCLIFFE LLP,
Defendant-Appellee. *3 Appeal from the United States District Court for the Northern District of California Charles R. Breyer, Senior District Judge, Presiding Argued and Submitted June 13, 2016 San Francisco, California Filed July 27, 2016 Before: Richard R. Clifton, and Sandra S. Ikuta, Circuit
Judges, and Royce C. Lamberth, [*] District Judge.
Order
[*] The Honorable Royce C. Lamberth, United States District Judge for the District of Columbia, sitting by designation.
SUMMARY [**]
Bankruptcy
The panel certified the following question to the California Supreme Court:
Under California law, does a dissolved law firm have a property interest in legal matters that are in progress but not completed at the time the law firm is dissolved, when the dissolved law firm had been retained to handle the matters on an hourly basis?
ORDER
We ask the California Supreme Court to resolve a question of state law: whether a dissolved law firm has a property interest in legal matters that are in progress but not completed at the time the law firm is dissolved, where the dissolved law firm had been retained to handle the matters on an hourly basis. This question resolves the bankruptcy appeal before us because if a dissolved law firm does not have a property interest in such matters, the transfer of those matters to a new law firm does not constitute a fraudulent transfer under the Bankruptcy Code. Although California courts of appeal have applied pre-1996 partnership law to address this issue, we have found no published California state court *4 opinion addressing it after the California legislature revised [**] This summary constitutes no part of the opinion of the court. It has been prepared by court staff for the convenience of the reader. the applicable state partnership law in 1996. Accordingly, pursuant to Rule 8.548 of the California Rules of Court, we certify the following question to the California Supreme Court:
Under California law, does a dissolved law firm have a property interest in legal matters that are in progress but not completed at the time the law firm is dissolved, when the dissolved law firm had been retained to handle the matters on an hourly basis?
Our phrasing of this question should not restrict the Court’s consideration of the issues involved. The Court may rephrase the question as it sees fit in order to address the contentions of the parties. If the Court agrees to decide this question, we agree to accept its decision. We recognize that the Court has a substantial caseload, and we submit this question only because of its significance to the bankruptcy administration of dissolved law firms in the state of California.
I
We start by providing a brief history of the development of the California doctrine of dissolved law firms’ rights to pending legal matters, and then provide the facts of the particular appeal before us.
A
While it has long been established that partners have
fiduciary duties towards each other,
see Gorman v. Russell
The common law partnership rules enunciated in
Osment
and
Little
were superseded in 1929, when the California
legislature adopted the Uniform Partnership Act (UPA),
see
Jacobson v. Wikholm
,
The California Court of Appeal relied on § 15018(f) in
holding that each former partner had a duty to the rest of their
former partners to share in attorneys’ fees from a dissolved
law firm’s unfinished business. In
Jewel v. Boxer
, a four-
partner law firm dissolved, and the former partners
[1]
The National Conference of Commissioners on Uniform State Laws
(the Uniform Law Commission, or ULC) publishes model codes, such as
UPA, which are frequently adopted by state legislatures. The California
legislature adopted the majority of UPA in 1929, effective August 14,
1929. The ULC subsequently published a revision to UPA, the Uniform
Partnership Act of 1994 (termed the Revised Uniform Partnership Act, or
RUPA), which the California legislature also adopted in 1996, and which
governed all partnerships as of January 1, 1999.
See
Cal. Corp. Code
§ 16111. The ULC’s official comments to the model codes are considered
by California courts for guidance.
See, e.g.
,
Rappaport v. Gelfand
197 Cal. App. 4th 1213, 1227 (2011);
Rosenfeld, Meyer & Susman v.
Cohen
,
subsequently formed two new firms.
Subsequent court of appeal decisions consistently applied
Jewel
’s interpretation of § 15018(f) to contingency fee matter
*7
cases.
See, e.g.
,
Fox v. Abrams
, 163 Cal. App. 3d 610,
612–13 (1985) (applying rule that former partners had a right
to share in attorneys’ fees from a dissolved law firm’s
unfinished contingency fee cases);
Rosenfeld
, 191 Cal. App.
3d at 1063 (same). In 1993, a California court for the first
time expressly applied
Jewel
’s interpretation of § 15018(f) to
matters that the dissolved law firm had been handling on an
hourly basis.
See Rothman v. Dolin
,
Although the California Supreme Court has not directly
addressed the question of dissolved law firms’ interest in
legal matters pending at the time of dissolution, the Court
acknowledged
Jewel
’s interpretation of § 15018(f) in one
case,
Howard v. Babcock
,
In 1996, the California legislature revised its partnership law by replacing UPA with RUPA. See Cal. Corp. Code § 16100 et. seq.; see also 9 Witkin, Summary Partnership § 15, 590 (10th ed. 2005). Among its other modifications, RUPA clarified the fiduciary duties of partners after the dissolution of the partnership. It replaced former section § 15021(1), which had provided that partners had a fiduciary *8 10 I N THE M ATTER OF H ELLER E HRMAN LLP duty to account for benefits and profits to the other partners, with § 16404(b)(1), which sets forth a partner’s fiduciary duty “[t]o account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property or information, including the appropriation of a partnership opportunity.” Cal. Corp. Code § 16404(b)(1). But at the same time, RUPA changed the rule regarding partners’ post- dissolution rights to reasonable compensation; it replaced § 15018(f), which had provided that only a “surviving partner is entitled to reasonable compensation for his or her services in winding up the partnership affairs,” with § 16401(h), which provides that all partners are entitled to “reasonable compensation for services rendered in winding up the business of the partnership.” Cal. Corp. Code § 16401(h). [2] According to the official comment to RUPA § 401(h) (which is identical to § 16401(h) of the California Corporations Code), this revision was intended to provide that “any partner winding up the business is entitled to compensation, not just a surviving partner winding up after the death of another partner.” RUPA § 401 cmt. 9.
California’s adoption of RUPA is material to the question raised in this case. Jewel had primarily based its conclusion that lawyers had to account to their former partners for all income generated from a dissolved law firm’s unfinished business on the language in § 15018(f) that precluded former partners from earning extra compensation for winding up [2] Section 16401(h) provides in full: “A partner is not entitled to remuneration for services performed for the partnership, except for reasonable compensation for services rendered in winding up the business of the partnership.”
*9
partnership business.
Jewel
,
Despite the significance of this legislative change, no California court has considered (in a published opinion [3] ) whether there remains a basis for holding that a partnership has a property interest in legal matters pending at the time the firm is dissolved, when the firm was retained on an hourly basis, now that the California legislature has repealed § 15108(f) and replaced it with § 16401(h).
B
We now explain
Jewel
’s continuing impact on bankruptcy
law. In 2009, a bankruptcy court determined that the rule
enunciated in
Jewel
, that former partners of a dissolved law
firm had a right to share in attorneys’ fees received on cases
that had been pending when the law firm dissolved, had
significance in a bankruptcy context.
See In re Brobeck,
Phleger & Harrison LLP
,
The reasoning in
Brobeck
relies on underlying principles
of bankruptcy law. Under 11 U.S.C. § 548, a bankruptcy
trustee has the power to set aside the debtor’s transfer of “an
interest of the debtor in property” to a third party when the
transfer was made within a specified period before the date of
filing a petition in bankruptcy, and the transfer was made
either with intent to “hinder, delay or defraud” creditors,
id
.
§ 548(a)(1)(A), or was constructively fraudulent because it
met certain criteria,
id
. § 548(a)(1)(B). For purposes of
§ 548, the debtor has an interest in any property “that would
have been part of the estate had it not been transferred before
the commencement of bankruptcy proceedings.”
Begier v.
*10
IRS
,
Brobeck
involved a national law firm partnership that
experienced serious financial difficulties.
The bankruptcy court agreed. It first held that under Jewel , the dissolved law firm had a property interest in the profits from the legal matters that were pending at the time of the dissolution, whether those cases were billed on an hourly or contingent fee basis. Id. at 338–39. It did not address the question whether RUPA affected the applicability of Jewel to such profits. Id. at 337–38. It then held that the law firm waived its interests in these profits when its partners entered into the dissolution agreement. Id. at 338. This waiver “gave what was otherwise property of [the law firm] to the [former law firm] partners.” Id . The bankruptcy court then concluded that the trustee had established that the law firm had transferred the profits in the pending legal matters to the former partners, and this transfer could be challenged as a fraudulent transfer under § 548(a). Id. at 339–40.
After Brobeck was decided, the Second Circuit addressed *11 a similar issue arising under New York law. See In re Thelen LLP , 736 F.3d 213 (2d Cir. 2013). Thelen considered “whether, for purposes of administering the firm’s related bankruptcy, New York law treats a dissolved law firm’s pending hourly fee matters as its property.” Id . at 216. The court certified the question to the New York Court of Appeals. Id. at 225.
The New York Court of Appeals held that a dissolved law
firm does not have a property interest in income generated
from unfinished hourly legal matters.
In re Thelen LLP
,
II
This is an appropriate case in which to seek the California Supreme Court’s guidance because, as in Brobeck and Thelen , it raises the question whether hourly fee matters pending at the time of the law firm’s dissolution are property
I N THE M ATTER OF H ELLER E HRMAN LLP 15 of the dissolved law firm in the context of an adversary action in bankruptcy.
Heller was a global law firm with more than 700 attorneys. The partnership was comprised of professional corporations, each of which employed attorneys as shareholders. The shareholders controlled Heller through shareholder votes and management committees. By August 31, 2008, Heller experienced financial distress. Its balance sheet reflected around $5 million in cash and nearly $55 million in bank debt. On September 19, 2008, Bank of America, acting as an agent for itself and Citibank, declared Heller in default. Soon after, Heller’s shareholders voted to approve a dissolution plan.
The dissolution plan included a waiver by the law firm of
any rights and claims “under the doctrine of
Jewel v. Boxer
In the following months, Heller’s former shareholders joined at least sixteen other law firms, and many of Heller’s former clients signed new fee agreements with those law firms to continue to receive representation.
In December 2008, Heller filed a petition under Chapter 11 of the Bankruptcy Code. In August 2010, Heller’s joint plan of liquidation was approved, and the plan became effective in September 2010. A plan administrator was appointed and became responsible for pursuing claims to recover assets for the benefit of Heller’s creditors.
In December 2010, the plan administrator filed adversary proceedings in bankruptcy court on behalf of Heller against the sixteen law firms, seeking to avoid the dissolution agreement’s waiver of Heller’s rights to post-dissolution legal fees as a fraudulent transfer under 11 U.S.C. § 548(a)(1)(B) or under California Civil Code § 3439.05 (which has essentially the same elements as § 548(a)(1)(B)). Basing its action on Brobeck (which had been decided by the same bankruptcy judge hearing Heller’s case), Heller alleged that it had a property right in legal fees generated by work on hourly matters after its dissolution, that the waiver of this right in the dissolution agreement constituted a transfer of Heller’s interest in property (presumably to the shareholders), and that the new law firms were the subsequent transferees of such transfers. Heller further alleged that such transfers met the additional statutory criteria in § 548(a)(1)(B) to be avoidable as fraudulent transfers.
After the bankruptcy court denied the new law firms’ motions to dismiss, all but four of the sixteen firms settled with Heller. In June 2012, Heller and the four non-settling law firms (Davis Wright Tremaine LLP; Jones Day; Orrick, Herrington & Sutcliffe LLP; and Foley & Lardner LLP) filed cross motions for summary judgment on whether the waiver in the dissolution agreement constituted a transfer of Heller’s property to the defendants and whether any such transfer was a fraudulent transfer under 11 U.S.C. § 548. Relying on its earlier decision in Brobeck , the bankruptcy court granted Heller’s motion.
After further proceedings in bankruptcy court, the bankruptcy court certified to the district court that the case could proceed to bench and jury trials for factual determination of the amount of damages in the four cases. The district court entered an order withdrawing the reference from the bankruptcy court, but instead of proceeding to trial, the court asked for briefing on the waiver issue. Reviewing the bankruptcy court’s rulings de novo, the district court granted summary judgment in favor of the four defendants. Among other things, the district court reasoned that RUPA undermined the legal foundation on which Jewel rests because RUPA contains no provision giving dissolved law firms the right to demand an accounting for profits earned by its former partners under a new retainer agreement, but allows partners to obtain “reasonable compensation” for helping to wind up partnership businesses. Because Jewel did not apply, the court held that Heller did not have a property interest in *14 its pending hourly matters at dissolution. Therefore, it did not reach the issue whether the Jewel waiver constituted a fraudulent transfer.
On appeal, Heller argues that RUPA did not abrogate the rule in Jewel , and under California law, a dissolved law firm has a property interest in the profits from the firm’s unfinished business. Heller notes that two unpublished California cases [4] and two legal commentaries [5] have reached [4] See supra note 3.
[5] The legal commentaries cited by Heller indicate that RUPA did not alter the fiduciary duties of partners. See 9 Witkin, Summary Partnership § 30, 604 (10th ed. 2005) (“Although [RUPA] treats the topic of fiduciary duties extensively, the Partnerships Committee of the State Bar, in reviewing California cases dealing with the fiduciary duties of partners, concluded that none would have been decided differently under the same conclusion. According to Heller, § 16401(h) does not undermine Jewel because it merely allows former partners to receive some compensation for completing the dissolved law firm’s unfinished business. To the extent that completion of the work generated profits beyond such “reasonable compensation,” the former partners would continue to have a fiduciary duty to account for such profits to the former partnership. Accordingly, Heller argues, the former partners continue to have a fiduciary duty to account for the legal fees generated from the hourly matters that were pending when Heller dissolved, and Heller continues to have a property interest in such fees.
In response, the four defendant law firms argue, among other things, that partners completing the firm’s unfinished hourly fee matters are entitled under § 16401(h) to their hourly rate for such work, so Heller has no ongoing property interest in the matters that have been transferred to other firms. As a policy matter, they argue that giving dissolved law firms a property interest in hourly fee matters that have been transferred to third party law firms would discourage such firms from representing clients of a dissolved firm because they would have no ability to profit from that representation.
III
We are bound by decisions of the state’s highest court in analyzing questions of that state’s law, Glendale Assocs., Ltd. *15 [RUPA].”); see also Donald J. Weidner, Cadwalader, RUPA and Fiduciary Duty , 54 Wash. & Lee L. Rev. 877, 913 (1997) (discussing fiduciary duties under RUPA and noting that no change in current law was intended).
v. N.L.R.B. , 347 F.3d 1145, 1154 (9th Cir. 2003), but the California Supreme Court has not addressed the question (either before or after RUPA was enacted) whether a dissolved law firm has a property interest in unfinished business where the law firm had been retained on an hourly basis. Indeed, the Court expressly held this issue open some 130 years ago, and has not revisited it since. See Osment , 68 Cal. at 470. “When the state’s highest court has not squarely addressed an issue,” we predict “how the highest state court would decide the issue using intermediate appellate court decisions, decisions from other jurisdictions, statutes, treaties and restatements for guidance.” Glendale Assocs. , 347 F.3d at 1154 (quoting N.L.R.B. v. Calkins 187 F.3d 1080, 1089 (9th Cir. 1999)). But the California Legislature’s replacement of § 15018(f) with 16401(h) has substantially affected the basis for the court’s conclusion in Jewel , and none of the California Courts of Appeal have applied Jewel in a published opinion after the enactment of RUPA.
For the reasons stated above, we need guidance from the California Supreme Court to determine whether Heller has a property interest in its unfinished hourly fee matters upon dissolution. The Court’s decision determines the outcome of this appeal. If Heller has no such property interest then Heller cannot claim that the dissolution agreement constituted a transfer of the property interest. If Heller did have a property interest in its unfinished hourly fee matters, then we will remand to the district court to determine the remaining issues, namely whether the transfer met the criteria in § 548(a)(1) to constitute a fraudulent transfer that is avoidable by the plan administrator.
20 I N THE M ATTER OF H ELLER E HRMAN LLP This issue is significant for California lawyers and law firms, as well as for their clients. Partners in California law firms need clarity regarding their obligations after a law firm dissolves. Absent guidance from the California Supreme Court, law firms will have difficulty predicting their entitlement to revenue from completing the unfinished business of dissolving law firms. Clients may also be disadvantaged by this ambiguity, as it may be unclear how their matters will be handled at a new law firm, if the hourly fees from their matters must be shared with a dissolved law firm. Moreover, lawyers in dissolving law firms may have difficulty providing accurate guidance to clients regarding the effect of a law firm dissolution on their matters. This may make compliance with Rule 3-700(A)(2) of the California Rules of Professional Conduct more difficult. See Cal. R. Prof. Conduct 3-700(A)(2) (requiring a withdrawing attorney, including an attorney withdrawing as a result of the dissolution of the attorney’s law firm, to take “reasonable steps to avoid reasonably foreseeable prejudice to the rights of the client, including giving due notice to the client, allowing time for employment of other counsel, complying with rule 3-700(D) [by returning the client’s papers and property], and complying with applicable laws and rules.”). The importance of this issue is underscored by the numerous amicus briefs this court received from bar associations and law firms in California.
We therefore respectfully ask that the California Supreme Court decide the certified question.
IV
The Clerk of Court is hereby directed to transmit forthwith to the California Supreme Court, under official seal of the Ninth Circuit, a copy of this order and request for certification and all relevant briefs and excerpts of record pursuant to California Rule of Court 8.548. Submission of this case is withdrawn, and the case will be resubmitted following receipt of the California Supreme Court’s opinion on the certified question or notification that it declines to answer the certified question. The panel shall retain jurisdiction over further proceedings in this court. The *17 parties shall notify the Clerk of this court within one week after the California Supreme Court accepts or rejects certification. In the event the California Supreme Court grants certification, the parties shall notify the Clerk within one week after the court renders its opinion.
The captions of these cases are:
14-16314
IN THE MATTER OF HELLER EHRMAN LLP,
Debtor
------------------------------------------------------- HELLER EHRMAN LLP, Liquidating Debtor, Plaintiff-Appellant v.
DAVIS WRIGHT TREMAINE LLP Defendant-Appellee and 14-16315 IN THE MATTER OF HELLER EHRMAN LLP,
Debtor
------------------------------------------------------- HELLER EHRMAN LLP, Liquidating Debtor, Plaintiff-Appellant v.
JONES DAY, Defendant-Appellee and 14-16317 IN THE MATTER OF HELLER EHRMAN LLP,
Debtor
------------------------------------------------------- *18 HELLER EHRMAN LLP, Liquidating Debtor Plaintiff-Appellant v.
FOLEY & LARDNER LLP, Defendant-Appellee and 14-16318 IN THE MATTER OF HELLER EHRMAN LLP,
Debtor
------------------------------------------------------- HELLER EHRMAN LLP, Liquidating Debtor Plaintiff-Appellant v.
ORRICK HERRINGTON & SUTCLIFFE LLP,
Defendant-Appellee
Counsel for the parties are as follows: For Plaintiff-Appellant Heller Erhman LLP:
Christopher D. Sullivan Diamond McCarthy LLP 150 California Street, Suite 2200 San Francisco, California 94111 Telephone (415) 692-5200 Jeffrey T. Makoff
Valle Makoff LLP
Two Embarcadero Center, Suite 2370 San Francisco, California 94111 Telephone (415) 986-8001 Kevin W. Coleman
Schnader Harrison Segal & Lewis LLP 650 California Street, 19th Floor San Francisco, California 94108 Telephone (415) 364-6700 *19 24 I N THE M ATTER OF H ELLER E HRMAN LLP For Defendant-Appellee Davis Wright Tremaine LLP:
Steven A. Hirsch
Keker & Van Nest LLP 633 Battery Street
San Francisco, California 94111-1809 Telephone (415) 391-5400 For Defendants-Appellees Davis Wright Tremaine LLP and Foley & Lardner LLP:
Peter P. Meringolo
Luther Orton
PMRK Law, LLP
One Sansome Street, Suite 3500 San Francisco, California 94104 Telephone (415) 964-4445 For Defendant-Appellee Jones Day:
Shay Dvoretzky
Jones Day
51 Louisiana Ave., N.W.
Washington, D.C. 20001 Telephone (202) 879-3939 For Defendant-Appellee Orrick, Herrington & Sutcliffe LLP:
Eric A. Shumsky
Orrick, Herrington & Sutcliffe LLP Columbia Center
1152 15th Street, N.W.
Washington, D.C. 20005 Telephone (202) 339-8400 *20 Rachel Wainer Apter Christopher J. Cariello Orrick, Herrington & Sutcliffe LLP 51 West 52nd Street
New York, New York 10019 Telephone (212) 506-5000 Pamela Phillips
Jonathan W. Hughes
Arnold & Porter LLP Three Embarcadero Center, 10th Floor San Francisco, California 94111 Telephone (415) 471-3100 CERTIFICATION REQUESTED; SUBMISSION VACATED.