ORDER ON APPEAL
Eight law firms that provided legal services to former clients of debtor How-rey LLP appeal the bankruptcy court’s denial of their motions to dismiss. The debtor’s trustee filed complaints in the bankruptcy court seeking to recover profits from the eight firms after they hired former Howrey partners and were engaged by former Howrey clients. Some of the defendants acquired the partners before Howrey dissolved, others both before and after. Interpreting the law of the District of Columbia, where Howrey operated as a limited liability partnership (“LLP”), the bankruptcy court held that the trustee could pursue profits associated with the partners who left post-dissolution under a fraudulent transfer theory, and profits associated with the pre-disso-lution partners through an unjust enrichment claim.
The Court acknowledges the analysis of an esteemed colleague on the bankruptcy court in this district, but comes to different conclusions on these legal issues, which are not specific to bankruptcy law. Whether a bankrupt partnership has a property interest in substantively new representations of its former clients by competing firms has not been directly addressed in District of Columbia case law. The Court finds that the highest court in the District, the District of Columbia Court of Appeals, is likely to join recent state and federal decisions holding that the third-party firms’ representations are new matters and not partnership property, and that the partnership cannot recover profits associated with the post-dissolution partners earned by the new firms. Since the new matters are not the bankrupt partnership’s property, unjust enrichment theories cannot apply to seize profits associated with the pre-disso-lution partners, either. Consequently, the motions to dismiss are granted and the matters are dismissed with prejudice.
FACTUAL BACKGROUND
In 2011, Howrey LLP, a large and well-known national law firm, collapsed. As Howrey’s troubles began to mount, a number of partners left to join new law firms. See Jones Day’s Excerpts of Record (“ER”) 107 at ¶¶ 114-15, Dkt. No.14-1.
At the time of the dissolution vote, How-rey’s partners approved a “Jewel waiver,” named after the California Court of Appeal case of Jewel v. Boxer,
The law firms appealing the bankruptcy court’s order took on one or more former Howrey partners, some of whom left before Howrey’s dissolution, and some after-wards.
The bankruptcy court sustained the pre- and post-dissolution claims on different grounds. For the post-dissolution claims, the bankruptcy court held that the trustee could pursue a fraudulent transfer theory because the client matters pending at the time of dissolution were Howrey’s partnership property and the Jewel waiver improperly transferred this property to the partners without reasonably equivalent value provided in return. See id. Since Howrey was insolvent at the time of the transfer, the trustee could “avoid” or nullify the transfer under 11 U.S.C. § 548(a)(1)(B). Howrey I,
For the pre-dissolution claims, the court allowed the trustee to go forward on an unjust enrichment theory. For this* claim, the trustee alleges that partners who left pre-dissolution conferred an unfair benefit on the law firm defendants by transferring to them the right to profits associated with client matters Howrey had been handling, and that allowing the firms to keep profits generated by the ex-partners would be unjust. Howrey II,
Defendants each filed timely notices of appeal and motions for leave to appeal. The Court granted leave to appeal in each case, see Dkt. No. 9, and has jurisdiction pursuant to 28 U.S.C. § 158(a)(3).
The Court reviews the bankruptcy court’s legal conclusions de novo. Kontrabecki v. Oliner,
The trustee argues that two cases from the District of Columbia Court of Appeals, Beckman v. Farmer,
Young also involved a small partnership that fell apart. Three partners in a four-person firm decided to cut the remaining partner out and continue on their own. See Young,
Neither Beckman nor Young involved an attempt by a bankrupt law partnership to claim the profits earned by preexisting third-party firms subsequently hired by its former clients. It is undisputed that the Court of Appeals has not yet directly confronted this issue. Other courts have, and the emerging consensus is that trustees have no right to those profits under general principles of partnership law.
The New York Court of Appeals addressed this issue under New York partnership law in In re Thelen LLP,
The New York Court of Appeals expressly held that “pending hourly fee matters are not partnership ‘property’ or ‘unfinished business’ ” under New York partnership law. Thelen,
The New York Court of Appeals also discussed the “numerous perverse effects” that would attend to treating a client matter as partnership property. Id. at 31,
Because the case involved a California partnership, the court analyzed Jewel in detail and concluded that the California Supreme Court was unlikely to treat that intermediate appellate court decision as good law. Id. at 26. The court also distinguished Jewel on several grounds, including the fact that Jewel involved successor firms consisting entirely of partners from the defunct firms who continued to work on existing client matters under the old firms’ fee agreements. Id. at 29. That contrasted to the situation with Heller, where the new firms were “preexisting third-party” firms with substantial resources and service capabilities unrelated to Heller, and which took on former Heller clients under new engagement letters. Id. The court also found that the Revised Uniform Partnership Act, which California adopted after Jewel was decided, has no provision “that gives the dissolved firm the right to demand an accounting for profits earned by its former partner under a new retainer agreement with a client.” Id. at 29-30.
Like the New York Court of Appeals, the court in Heller recognized many fairness and policy reasons to reject the unfinished business doctrine. As a starting point, the court noted that the “dozens of cases” relying on Jewel cited it “ ‘reflexively and uncritically,’ that is, without much analysis or consideration of the changes in law firm practice or law.” Id. (quoting Geron v. Robinson & Cole LLP,
While neither controlling nor prece-dential in this case, Heller and Thelen inform the context in which the Court decides this appeal. As “well-reasoned decisions from other jurisdictions,” Burns v. Int’l Ins. Co.,
DISCUSSION
I. POST-DISSOLUTION CLAIMS
The linchpin of the bankruptcy court’s orders is that a defunct partnership can assert a property interest in client matters handled by entirely different, preexisting firms under new retention agreements, based solely on the allegation that the new firms hired members of the old partnership. In the bankruptcy court’s view, the client may think that it
The bedrock of this conclusion is the universally-accepted truth that a firm does not own new client matters taken on by other firms. The bankruptcy court and the District of Columbia have recognized this principle. See In re Brobeck, Phleger & Harrison LLP,
But the District of Columbia Court of Appeals has not delineated precisely what a “new matter” is. Consequently, this Court is obliged to make its best prediction, as a matter of first impression under District law, whether the allegations in the trustee’s complaint are sufficient to state a claim because the defendants’ matters are not new.
The Court believes the Court of Appeals would adopt a rule that is faithful to the new matter principle and that is clear and practical in application. Clarity and simplicity are vital here because a vague rule would condemn the courts and litigants to endless speculation about when a client matter is new and when it is a carry-over of a prior engagement. Without a clear rule, defining a new matter would entail almost metaphysical inquiries such as: Are matters the same only when they involve the same client and court case? If so, what is the result for lawyers with counseling practices who are engaged on an open-ended basis by a client to handle issues as the come up? What if a client retained Howrey at the trial court level and switched to Jones Day on appeal after Howrey dissolved? What if the client would have switched even if Howrey had
The Court predicts that the District of Columbia Court of Appeals, informed by well-reasoned decisions from other jurisdictions, would want to avoid countless splintered inquiries in favor of the practical rule that client matters performed by pre-existing third-party firms pursuant to new retention agreements are at least presumptively new matters. See Heller,
Beckman itself indicates that continuity of a retention agreement is the touchstone under District of Columbia law for determining when an ex-partner usurped her former partnership’s matter. Beckman states that the rationale for "the “unfinished business rule” is that “dissolution does not terminate or discharge pre-exist-ing contracts between the partnership and its clients, and ex-partners who perform under such contracts do so as fiduciaries for the benefit of the dissolved partnership.” Beckman,
In addition to the logic of Beck-man, the Court finds that the District of Columbia Court of Appeals is likely to reach this holding because it fully captures a client’s unqualified right to hire and fire counsel whenever it chooses. The District of Columbia Court of Appeals has recognized “the client’s unbridled prerogative to walk away from the lawyer” and to “choose his or her counsel.” See, e.g., Mance,
The trustee also has no claim to the client matters handled by defendants because they are truly separate firms from, and not remnants of, Howrey itself. In Beckman and Young, the “new” firms came into existence only upon the dissolution of the old firm, and were composed entirely of former partners of the old firm. Beckman,
Beckman and Young contain occasional statements possibly implying that pending client matters may under certain circumstances be partnership property. See, e.g., Beckman,
The trustee raises two final considerations in favor of finding a claim on the law firm defendants’ profits. He suggested at the hearing that reading Beckman and other District of Columbia cases as grounded in their specific facts — small firms with continuity of engagement letters and attorney personnel — would unfairly afford special status to big firms like the defendants here. Not true. Large national firms are not entitled to any special consideration or treatment merely because of what they are. What drives the outcomes here are dispositive differences in the facts alleged in the trustee’s complaints, and the facts relied on in the District of Columbia cases for their holdings.
The trustee also suggests that the new-matter approach would allow unscrupulous lawyers to cut their partners out of lucrative cases by spinning off a new firm and inducing their clients sign new agreements with them. That fear is overblown. As a preliminary matter, there is no indication that this potential problem must necessarily be solved by creating a property right in client matters, or that that is the solution the District of Columbia courts would choose. See, e.g., Thelen,
Consequently, in light of these considerations, the Court parts company with the bankruptcy court. The motions to dismiss the post-dissolution claims are granted.
II. PRE-DISSOLUTION CLAIMS
The bankruptcy court’s order allowing the trustee to pursue pre-dissolution claims under unjust enrichment is also reversed. In Heller, the trustee conceded that a partner leaving a firm before dissolution had no obligation “to account for unfinished business being taken to another firm” unless the partner had breached a fiduciary duty. Heller,
In this case, the trustee has taken a different path and has sued to seize profits associated with client matters that former Howrey partners worked on at other firms even before Howrey collapsed. The bankruptcy court found that the District of Columbia allows an unjust enrichment claim “where a plaintiff has an expectation of the benefit that it loses to a third party” and allowed the trustee to proceed on that theory. Howrey II,
As an initial and dispositive matter, this claim- fails for the same reasons the post-dissolution claims fail. The fact that How-rey does not own substantively new representations undertaken by third-party firms is a definitive bar to the pre-dissolution claims because those claims depend on a property right that does not exist.
The unjust enrichment claims also fail for additional, independent reasons. First among these is that the District of Columbia Court of Appeals, in the very decision the trustee cites, has rejected the notion that the unfinished business rule applies when the partnership continues after a partner’s departure, as Howrey did when the pre-dissolution partners left. See Beckman,
The trustee, conceding the absence of any support in the governing case law for his position, relies solely on a misreading of D.C. Code § 33-106.03(b) (RUPA § 603(b)). See Hearing Tr. 24:19-25:13. That statute states in part:
Upon a partner’s dissociation: ...
(3) the partner’s duty of loyalty under § 33-104.04(b)(l) [to account for partnership profits] ... continued] only with regard to matters arising and events occurring before the partner’s dissociation, unless the partner participates in winding up the partnership’s business pursuant to § 33-108.03.
In addition, the trustee’s unjust enrichment claim fails because District of Columbia law does not recognize a claim for unjust enrichment where the alleged benefit is conferred by a third-party. The District of Columbia Court of Appeals has clearly held that “[ujnjust enrichment occurs when: (1) the plaintiff conferred a benefit on the defendant; (2) the defendant retains the benefit; and (3) under the circumstances, the defendant’s retention of the benefit is unjust.” News World Comm’ns, Inc. v. Thompsen,
The bankruptcy court suggested that the District of Columbia courts and federal courts applying District law had not yet been confronted with a case where the benefit was conferred by a third party with some connection to the plaintiff. See Howrey II,
That element is missing here. Howrey is the plaintiff in this case and there is no allegation that Howrey conferred any benefit on th'e defendant law firms. At most, any benefit they received would necessarily have come from third-parties who are not plaintiffs in this case. That sinks any possibility of an unjust enrichment claim in this case.
The trustee’s conception of the unjust enrichment claim also leads to bad public policy. Lateraling between firms is the reality of law practice today and has been the reality for many years. As the trustee candidly'acknowledged at the hearing, its unjust enrichment theory threatens to impose the heavy hand of court-ordered “equity” on these completely normal career moves:
THE COURT: When you lateral, part of your charm to the new firm is you’re bringing your, quote/unquote, book. That means your existing works in progress to put it in the terms of these cases....
So you port it over and you’re saying&emdash; tell me yes or no. You are saying that person, that lateral owes money to his prior employer for the lifetime of those cases?
MR. MURRAY: Yes. And I will tell you why, but that is definitely our position, and I think it is supported by 603’s text, even if policy and the reality of law firms may have .evolved since then&emdash;
Hearing Tr. at 22:15-23:3. This goes too far, and loses all tether to the purposes of unjust enrichment law.
CONCLUSION
Because the facts alleged by the trustee do not state claims to the profits earned by the law firm defendants, and there is no prospect that they can be fixed by amendment, the Court dismisses them with prejudice. Since this holding disposes of the appeal in its entirety, the Court does not reach the appellants’ other arguments.
IT IS SO ORDERED.
Notes
. Docket cites refer to the lead case, 3:14-cv-04889-JD.
. Neal, Gerber & Eisenberg LLP; Seyfarth Shaw LLP; Hogan Lovells U.S. LLP; and Kasowitz, Benson, Torres & Friedman LLP only took on "pre-dissolution partners.” Perkins Coie LLP; Pillsbury Winthrop Shaw Pittman LLP; Sheppard Mullin Richter & Hampton LLP; and Jones Day took on both “pre-” and "post-dissolution partners.”
. The appellants filed eight separate appeals, which the Court consolidated. See Dkt. No. 12. Jones Day filed appellants’ primary briefing, which the other appellants joined in whole or part. Each appellant filed its own excerpts of the bankruptcy record from its respective case below.
. The relevant statutory sections were renumbered in March 2013, but this opinion uses the prior numbering for consistency with the bankruptcy court’s opinion and the parties' briefing.
. Under UPA, which was in effect in the District of Columbia when Beckman was decided, a “dissolution” was not limited to situations like Howrey's; rather, “every partner dissociation resulted] in the dissolution of the partnership, most of which triggered] a right to have the business wound up unless the partnership agreement provide[d] otherwise.” See RUPA § 603, official cmt. 1 (citing UPA § 38). The two partners who continued to work on the contingent fee matter in Beckman likely regarded themselves as the continuation of the old firm and therefore continued working under the same retention agreement after the third partner left, though his departure triggered a technical dissolution. See Beck-man,
. Young does not compel a different result. In that case, the parties agreed that appellees had "paid expenses associated with the for
. The Beckman majority appeared to concede that its discussion of the unfinished business rule was, as Judge Steadman’s concurrence put it, “functional dicta,” since all that was necessary to dispose of the appeal was the court’s holding that the trial court erred in granting summary judgment that Farmer was a partner of Beckman and Kirstein’s. See Beckman,
. Including, for instance, that Beckman and Young are inapplicable outside the contingent fee context, that they have been superseded by RUPA, and that the entirety of the law firm defendants' profits constitute "reasonable compensation” under RUPA § 401(h).