Fees Are Off the Table After Firm's Bankruptcy
(CN) - Defunct law firm Heller Ehrman is not entitled to fees that Jones Day and several other outfits earned when they inherited its cases, a federal judge ruled.
Heller Ehrman LLP was an international law firm that employed about 700 lawyers. The company consisted of eight professional corporations, which acted as "shareholders."
In September 2008, Heller Ehrman defaulted on its $35 million revolving line of credit with Bank of America and said it could not continue to operate. A dissolution plan that shareholders soon adopted included a "Jewel Waiver" provision that waived any rights and claims under the doctrine of Jewel v. Boxer in seeking legal fees generated after a lawyer or law group left the firm.
Heller Ehrman filed for Chapter 11 bankruptcy in December 2008.
The trustee in the firm's bankruptcy case filed several "adversary" lawsuits in San Francisco against firms that took over Heller Ehrman's abandoned cases. The trustee alleged it has a right to the profits made off those cases under the "unfinished business" rule.
Several of the firms settled with the trustee, but Davis, Wright, Tremaine LLP; Jones Day; Foley & Lartner LLP; and Orrick, Herrington & Suttcliffe LLP fought back.
U.S. District Judge Charles Breyer granted the firms summary judgment Wednesday.
"The trustee's adversary proceedings against defendants and other law firms allege that Heller's estate is entitled to recover profits associated with pending hourly matters because the 'Jewel Waiver' was a constructively fraudulent transfer or an actual fraudulent transfer of Heller's property under the Bankruptcy Code or under the California Uniform Fraudulent Transfer Act," Breyer said.
There is no clear precedent under California law, however, for property interest in hourly fees matters after a company dissolves, according to the ruling.
In the matter of equity, moreover, Heller Ehrman clients were forced to obtain new representation and bound themselves under new contracts.
"Heller ceased to be able to represent its clients, leaving them with no choice but to seek representation elsewhere," Breyer said. "Defendants came to the rescue of these clients and provided them with legal services on ongoing matters. The former Heller clients negotiated and signed entirely new retainer agreements with third-party firms. And those firms provided substantively new representation, requiring significant resources, personnel, capital and services well beyond the capacity of either Heller or its individual shareholders."
The trustee's argument also fails to stand under public policy, Breyer found.
"No firm can be expected to contribute those resources if they are not entitled to retain the corresponding profits," he wrote. "Here the trustee asks this court to deprive defendants of profits earned off of defendants' labor and capital investment. Public policy weighs strongly against such an outcome."