Heller Ehrmann: Law Firm's Future Billings Part of BK Estate

Just released court opinions, articles,and other news about asset protection and related topics.
Forum rules The information given on this page is for educational and informational purposes only, and does not constitute any legal or tax advice or opinion. This page is meant to give a quick start to research by other professionals, but it should absolutely not be relied upon for any purposes whatsoever. Additionally, this page is kept current only as our time allows, and the information given here may not be current. We make NO GUARANTEES as to the accuracy of the information herein and you should not rely on it. Even professionals who use this information must independently verify whether it is correct and current. Nothing in the information given below should imply that the drafters of this webpage are admitted to practice law in the referenced state or have any special expertise in the areas listed. Nothing herein should be construed as a solicitation by the drafters of this website to practice law in the referenced state. Persons desiring planning should contact a licensed attorney or other appropriate planning professional in this state. Certainly, nothing herein is any substitute for the services, advice, or counsel of a properly licensed attorney in the relevant state!

Heller Ehrmann: Law Firm's Future Billings Part of BK Estate

Postby JDA » Sun May 08, 2011 9:45 am

In re Heller Ehrmann LLP, 2011 WL 1539796 (Bkrtcy.N.D.Cal., Slip Copy, April 22, 2011)

United States Bankruptcy Court,

N.D. California.

In re HELLER EHRMAN LLP, Debtor.

Heller Ehrman LLP, Plaintiff,

v.

Arnold & Porter LLP, Defendant.

Bankruptcy No. 08–32514DM.

Adversary No. 10–3203DM.

April 22, 2011.

Christopher D. Sullivan, Matthew R. Schultz Trepel McGrane Greenfield, Melissa Lor, Schnader Harrison Segal and Lewis, San Francisco, CA, for Plaintiff.

Diana D. DiGennaro, Jonathan Hughes, Pamela Phillips, Howard Rice Nemerovski Canady Falk, San Francisco, CA, for Defendant.

MEMORANDUM DECISION ON MOTION TO DISMISS

DENNIS MONTALI, United States Bankruptcy Judge.

I. INTRODUCTION

*1 Plaintiff ("Debtor") filed a complaint FN1 for avoidance of fraudulent transfers, seeking to recover from Defendant law firm the value of profits received by it with respect to unfinished business that was being handled by the Debtor at the time of its dissolution. Under documents that governed Debtor, its corporate partners and the attorney Shareholders of the corporate partners, Debtor retained the right to all profits and fees (including "unbilled fees, work in progress ... or clientele") derived from legal services to its clients, even upon departure of the attorney handling much matters. However, as part of its dissolution process, Debtor agreed to waive its rights under Jewel v. Boxer, 156 Cal.App.3d 171 (1984) ( "Jewel "),FN2 to recover fees associated with such unfinished business and generated by its attorneys after their departure. Debtor seeks to avoid this waiver as constructive or actually fraudulent transfer.

FN1. Debtor filed sixteen similar adversary proceedings against sixteen law firms. The complaints are virtually identical as to the allegations and the theories of recovery; they differ as to each particular defendant's "unfinished business" discussed in the text, infra. The adversary proceedings are: 10–3203; 10–3210; 10–3213; 10–3216; 10–3219; 10–3221; 10–3234; 10–3235; 10–3238; 10–3239; 10–3243; 10–3244; 10–3251; 10–3253; 10–3254; and 10–3263.

FN2. In Jewel, the court held that, in the absence of a partnership agreement, the Uniform Partnership Act requires that attorney fees received on cases in progress upon dissolution belong to all partners of the dissolved partnership, even when a former partner is substituted in as counsel for the dissolved firm. Debtor had a partnership agreement, but as explained in the text, it retained certain potentially valuable rights.

In the First Claim For Relief, Debtor seeks to avoid and recover intentional fraudulent transfers under the Bankruptcy Code; in the Second Claim For Relief, Debtor seeks to avoid and recover the same transfers as constructive fraudulent transfers under the Bankruptcy Code; in the Third Claim For Relief, it seeks to avoid and recover actual fraudulent transfers under the California Uniform Fraudulent Transfer Act ("CUFTA"); in the Fourth Claim For Relief, it seeks to avoid and recover constructive fraudulent transfers under CUFTA.

Defendant filed a motion to dismiss ("Motion"). For the reasons explained below, the Motion will be granted, in part, although Debtor will be given leave to amend the Complaint as to the First Claim For Relief and the Third Claim For Relief; in all other respects the Motion will be denied.FN3

FN3. All defendants in the adversary proceedings listed in footnote 1 filed motions to dismiss that were fully briefed, then argued and submitted on March 31, 2011. While some defendants argued issues that others did not, the court deals with all issues as though they had been raised by all defendants. The court disposes of the sixteen motions by identical Memorandum Decisions and Orders on Motion to Dismiss filed in those sixteen matters this date.

II. ISSUES

A. Did the doctrine of Jewel apply given the organizational structure adopted by Debtor no later than January 1, 1994?

B. Assuming Jewel applies, did Debtor's Basic Documents FN4 operate to waive all or any of Debtor's rights to demand an accounting by, or recover unfinished business profits from, attorneys who left the firm and retained unfinished business?

FN4. For purposes of the Motion and this Memorandum Decision, the Basic Documents are the Partnership Agreement ("PA") (revised, as amended, effective January 1, 1994); Shareholders Agreement ("SHA") (revised, as amended, effective September 28, 2005); Employment Agreement ("EA") (revised, as amended, effective September 28, 2005); Glossary (as amended and restated as of June 1, 2006).

C. Assuming Jewel applies and Debtor did not waive its rights under the Basic Documents, did paragraph VI(F) (the "Jewel Waiver") of Debtor's dissolution plan effective September 26, 2008 (the "Plan of Dissolution") constitute a transfer of Debtor's property that the Debtor may seek to avoid and recover, in whole or in part, by the Complaint?

D. Would any recovery on the Complaint by Debtor constitute an illegal sharing of fees under the California Rules of Professional Conduct or violate any other applicable law?

E. May Debtor recover on the Complaint against Defendant, rather than individuals who were Members of Debtor's professional corporate partners and later joined Defendant?

F. Do the First Claim For Relief and the Third Claim For Relief adequately allege sufficient facts to establish essential elements of actual fraudulent transfers?

III. DISCUSSION FN5

FN5. All facts referred to in this Memorandum Decision are drawn from the Complaint or the Basic Documents, and assumed true for purposes of the Motion. al- Kidd v. Ashcroft, 580 F.3d 949, 956 (9th Cir.2009). The court rejects as unpersuasive arguments as to any issue raised in the Motion and not specifically addressed in this Memorandum Decision.

A. Jewel applies despite Debtor's organizational structure.

*2 Defendant argues that Jewel cannot apply because of Debtor's organizational structure. Debtor is a California limited liability partnership with a California professional corporation as its managing general partner and several other professional corporations (incorporated in California and other states) as its remaining partners. The individual attorneys who practiced law under the business of Debtor were Members (viz., Shareholders) of those professional corporations pursuant to various versions of the SHA. Those individuals also were employed by their respective professional corporations pursuant to versions of the EA.

The parties do not disagree that Debtor was organized under the California Revised Uniform Limited Partnership Act (Cal. Corp.Code §§ 16100–16962) ("RUPA"), and that the corporate partners of Debtor were not. Likewise, the Shareholder-employees of those corporate partners are not governed by RUPA. Defendant therefore argues that the duty of partners to account to one another under RUPA does not govern the relationships here, and even of it did, the "reasonable compensation" rule of RUPA means that Debtor had nothing to transfer via the Jewel Waiver. Defendant also contends that Jewel has no applicability because it dealt with individuals who practiced law as partners in a law partnership. Even though the court agrees that RUPA is inapplicable, it disagrees with Defendant's contention that—absent the Jewel waiver—the Shareholders had no duty to account for profits from unfinished business.

Defendant relies on Debtor's two-tier structure in an effort to distinguish Fox v. Abrams, 163 Cal.App.3d 610 (1985), in which the California Court of Appeals rejected the argument that Jewel does not apply to parties who practice law together in a law corporation. The Fox court pointed out that Jewel was not based solely on partnership law, but rather on a sound public policy preventing lawyers who practice law together for competing for the most remunerative cases in anticipation that they might retain those cases should the law firm dissolve. The doctrine discourages former members of the firm from scrambling to take physical possession of files and seeking personal gain by soliciting existing clients.

The policy announced by the Fox court was unequivocal:

There is no reason to hold that when lawyers decide to practice together in corporate form rather than partnership, they are relieved of fiduciary obligations toward each other with respect to the corporation's business.

* * *

What we do say, however, is that attorneys practicing together in a law corporation owe each other fiduciary duties very similar to those owed by law partners and therefore the fact that a law corporation is involved is no reason to disregard the fair and reasonable principles of Jewel v. Boxer or to interpret the parties' agreement in a manner favoring one group over another.

*3 Fox, 163 Cal.App.3d at 617 (emphasis added). See also Rothman v. Dolan, 20 Cal.App. 4th 755, 757 (1993); Grossman v. Davis, 28 Cal.App. 4th 1833, 1835 (1994).FN6

FN6. The application of the Jewel principle to law firms formed as corporations has been recognized in other jurisdictions as well. Sullivan, Bodney & Hammond v. Bodney 16 Kan.App.2d 208, 820 P .2d 1248 (1991); Sullivan, Bodney & Hammond v. Houston General Insurance Co., 2 F.3d 824 (8th Cir.1993) ("We do not believe that the Supreme Court of Missouri would allow members of the Missouri bar to expand their rights against litigation clients and adversaries simply by conducting business in the corporate form").

The cornerstone of Defendant's argument is that the Shareholders had no fiduciary duty to Debtor. This ignores the principles announced in Jewel and extended in Fox to attorneys practicing within a professional corporation. This court will apply those principles to a partnership consisting of corporations that are owned by the attorney-employees who give them professional life and meaning.

Defendant offers no authority suggesting that the partnership-corporation-shareholder structure of Debtor immunizes it from the Jewel analysis. While Debtor has not cited cases applying Jewel to any law firm structured in a two-tier setting such as Debtor, the principles are the same and this court will not ignore the substance of Debtor's existence in blind deference to the form of it. Jewel and its progeny apply these sound principles to attorneys who practice law together. The attorneys who came together and created Debtor to be the institution that it once was did so by the carefully drafted Basic Documents, and they worked together as attorneys, representing clients, sharing the good with the bad, and quite importantly, trusting one another as fellow members of the same law firm.

The rules of RUPA (governing the partnership structure of Debtor) and the applicable governing professional corporate laws (whether those of California or another state) FN7 creating Debtor's corporate partners provide the structure and means of governance of the entities and compensation of the Members. Those Members are themselves attorneys practicing an honored and respected profession, and they are governed by yet another set of rules that bind those professionals together. Those are the rules of trust, confidence and loyalty, rules that apply to attorneys representing clients together, fiduciary ones to be sure. Jewel, 156 Cal.App.3d at 179. The choice of California law by the partners is not without consequences. Jewel applies, regardless whether RUPA does. Under Jewel, attorneys practicing together need to establish their respective rights and duties by their agreements.

FN7. California partners were formed under the Moscone–Knox Professional Corporation Act (Cal. Corp.Code § 13400, et seq.). Corporate partners formed elsewhere would have been created under comparable but different provisions of their respective state's laws.

More importantly, Defendant's argument ignores the Basic Documents themselves. Attached to this Memorandum Decision is an appendix that sets forth the portions of the Basic Documents that support the court's conclusion that Debtor was a law firm organized through an integrated set of interrelated documents. It was a law firm of lawyers who chose the way they practiced law together. That they chose to do it in the form they did, and because they preserved to the Debtor the rights they did, they are governed by California law and the principles of Jewel and Fox.

As illustrated in the appendix, Debtor retained to itself several rights, including unbilled fees, work in process and rights and access to clientele. The final sentence of Paragraph 9.5 of the Employment Agreement confirms forcefully the nature of the relationship:

*4 Employee [a practicing attorney with Debtor] understands and agrees that, so long as Employee remains employed by the Company [the Professional corporate partner of Debtor], Employee's solicitation of clients to terminate their client relationship with the [Debtor] in whole or in part involves fiduciary principles on the part of the Employee and requires prior consent of the Company.

(Emphasis added.) FN8

FN8. If the drafters of "involves fiduciary principles" meant to mean something less than the fiduciary relationships that the Jewel and Fox courts recognized, they failed.

In sum, the court is satisfied that, just as the Fox court extended Jewel to the professional corporation, the same rules and consequences should follow and apply to Debtor's two-tier structure.

B. The Basic Documents did not waive Debtor's rights under Jewel.

Defendant seeks dismissal of the adversary proceeding because Debtor had no right to bring claims against the Shareholders or the corporate partners for unfinished business profits and thus the Jewel Waiver transferred no property of Debtor in the first instance. In other words, Debtor had no rights in unfinished business to waive. The court is not persuaded; the Basic Documents provided Debtor—at least until the Jewel Waiver was executed—with the right to claim profits from such unfinished business after the departure of Shareholder attorneys completing such business. Debtor's Members were quite experienced, and plainly knew about Jewel and Brobeck FN9 when they drafted the Plan of Dissolution and the Jewel Waiver.

FN9. See discussion in III(C), infra.

As shown specifically in the attached appendix, no corporate partner or Shareholder had a right to Debtor's unbilled time or its work in process. Debtor did not waive (either explicitly or inferentially by those documents) such rights or the right to compel an accounting from departed Members, at least not until the execution of the Jewel Waiver, when Debtor was insolvent and bankruptcy was three months in the future.

The language of the Basic Documents, by reserving to Debtor the unbilled fees, the work in process and the access to the clientele, convinces the court that whatever vitality may have once existed by virtue of Jacobson v. Wikholm, 29 Cal.2d 24 (1946), suggesting that the surviving partner who completes the work in progress keeps all of the profits, was abrogated by the parties' agreements.

When Debtor reconfigured itself under the Basic Documents or at some other time before bankruptcy loomed and it was insolvent, it could have surrendered those rights to its Partners or its Members, but it did not. Had it done so, whether wise law firm practice or not, the September 2008 Jewel Waiver would have been unnecessary and Debtor now would likely have no theory of fraudulent transfer to pursue.

C. The Jewel Waiver constitutes a transfer of Debtor's unfinished business. FN10

FN10. Debtor does not challenge the efficacy of the Jewel Waiver itself, but only the consequence as a fraudulent transfer.

As noted above, the Jewel Waiver was part of Debtor's Plan of Dissolution. In the Jewel Waiver, Debtor, agreed to waive

... any rights and claims under the doctrine of [ Jewel ] to seek payment of legal fees generated after the departure date of any lawyer or group of lawyers with respect to noncontingency/non-success fee matters only....

*5 While the Jewel Waiver did not refer to "unfinished business," specifically, the court construes the Jewel Waiver to waive exactly that, namely Debtor's right to profits from a dissolved law firm's unfinished business as defined in Jewel and as reiterated by this court in Greenspan v. Orrick, Harrington & Sutcliffe ( In re Brobeck Phleger & Harrison LLP ) 408 B.R. 318 (Bankr.N.D.Cal.2009) ( "Brobeck ").FN11

FN11. As in Brobeck, the court does not construe the Complaint to extend to new business handled by former members of Debtor at new law firms.

For the reasons stated in Brobeck, the court treats Debtor's unfinished business as Debtor's property that was transferred by the Jewel Waiver, and that may be recovered under the Complaint. Even those rights, however, are subject to the reasonable compensation for completing the work in progress that RUPA (unlike the former Uniform Partnership Act) recognizes, this court in Brobeck recognized, and the Debtor in the Complaint recognizes.FN12

FN12. To say that property that produced no profits was not property is circular, conflating what was transferred with its value. See Brobeck, 408 B.R. at 338.

D. Recovery by Debtor on the Complaint will not violate California Rules of Professional Conduct or other applicable law.

One Defendant contended in its briefing that a recovery by Debtor in these actions would violate the fee-sharing prohibitions of the California Rules of Professional Conduct. The court believes that a transfer of unbilled fees could be recovered without doing violence to any applicable California Rule of Professional Conduct or similar law.

First, no "sharing" of fees would occur. Rather, the "profit" on the unfinished business would be recovered as a matter of state or federal fraudulent transfer law. Second, to the extent the Debtor is proceeding under the Bankruptcy Code, the doctrine of federal preemption would overrule any apparently contrary state law or rule. Finally, the court believes that there is no prohibition on recovering assets transferred in actual or constructive fraud of creditors. The client would have paid the fees and the fees will have been reduced to cash or equivalent.

Had Debtor made a transfer in fraud of creditors of an account receivable due from a client for legal services rendered, surely a recovery under the fraudulent transfer laws would not be an impermissible sharing of fees. There is no difference with unbilled fees.

A related argument is that a policy permitting the bankruptcy estates of dissolved law firms to recover unfinished business profits would render former lawyers of those firms "toxic"; no firms would hire them given the potential loss of those profits. The court is sympathetic to this policy concern, but the policy of the fraudulent transfer laws—recovery for creditors what value is rightfully theirs—is far more compelling and is firmly established in both state and federal law.

In sum, no defendant has set forth persuasive authority to suggest a conflict sufficient to defeat the Debtor's theories of recovery.

E. Debtor may seek to recover fraudulent transfers from Defendant.

Law firms that take on attorneys from an insolvent firm that executed a Jewel Waiver in its dying days may be named as fraudulent transfer defendants based on 11 U.S.C. § 550(b)(1). See Brobeck, 408 B.R. 339, fn. 31 ("Therefore, if the Trustee can recover profits from Brobeck's Unfinished Business, he can recover from not only the Partner Defendants but from the Firms as well, subject to any defenses available to the Firms in [§ ] 550(b)(1)").

*6 In Brobeck the plaintiff trustee named as defendants the individual former Brobeck partners who joined the firms he sued. Here Debtor has not done that. Nor does Debtor contend that the defendant was an initial transferee from Debtor by virtue of the Jewel Waiver. Instead, it contends in the alternative that the defendant is a subsequent transferee or that it may be an entity "... for whose benefit such transfer was made[.]" See 11 U .S.C. § 550(a)(1).

While Defendant seeks to dismiss or at least pin down Debtor on which of these alternate theories it relies, the court is satisfied that Debtor's alternate pleading here may survive the Motion. The development of the factual record will establish which theory prevails, and thus what defenses are available to defendant.FN13

FN13. One Defendant has argued that Debtor cannot demonstrate that the Jewel Waiver was given for less than a reasonably equivalent value. This is a fact question not appropriate for resolution in the context of a Rule 7012 motion to dismiss. Further, the language of the Jewel Waiver is not clear as to what consideration, if any, was exchanged.

F. The First Claim for Relief and the Third Claim for Relief lack specificity and should be amended.

Defendant argues that Debtor's four fraudulent transfer claims lack the specificity and detail required by Fed.R.Civ.P. 9, incorporated by Fed. R. Bankr.P. 7009.FN14 It also argues that under the general rules of pleadings of Fed.R.Civ.P. 8, incorporated by Fed. R. Bankr.P. 7008, and recent Supreme Court precedents,FN15 that Debtor's theories must have plausibility, not merely possibility, and should fail because the circumstances of the Jewel Waiver were completely explainable as part of Debtor's Plan of Dissolution.

FN14. Fed.R.Civ.P. 9(b) provides that:

In alleging fraud or mistakes, a party must state with particularity the circumstances constituting fraud or mistake.

FN15. See Ashcroft v. Iqbal, ––– U.S. –––– 129 S.Ct. 1937 (2009) and Bell Atlantic Corp. v. Twombley, 550 U.S. 544 (2007).

The court disagrees with Defendant concerning Debtor's Second Claim for Relief and Fourth Claim for Relief (constructive fraudulent transfers). Attacking a transfer as a constructively fraudulent transfer is not the same as alleging fraud. A constructively fraudulent transfer has nothing to do with the conduct of the transferee. Stated otherwise, the transfer itself is what is "fraudulent," because of its impact on the creditors of an insolvent transferor. Accordingly, the court will not dismiss these claims for relief or even require that they be amended.

As to the First Claim for Relief and the Third Claim for Relief (actual fraudulent transfers), the fraudulent conduct that is necessary to state a claim on these theories requires actual conduct by the transferor, and no particular involvement by the transferee. That is not to say that in appropriate circumstances a transferee may not be a participant to an actual fraudulent transfer, but no such conduct is suggested in the Complaint.

The gravamen of these two counts is that somehow attorney members of Debtor, in connection with the execution of the Jewel Waiver, intended to hinder, delay or defraud Debtor's creditors. Not only are those serious allegations for Debtor to make, they lack specificity under each of the two rules cited above. Accordingly, the court will grant the Motion but will give Debtor thirty days from the date the order is issued on this Memorandum Decision to amend those claims for relief.

IV. CONCLUSION

Concurrently with the entry of this Memorandum Decision the court is issuing an order denying the Motion as to the Second Claim For Relief and the Fourth Claim For Relief, and granting the Motion as to the First Claim For Relief and Third Claim For Relief, with Debtor given thirty days to amend either or both of those claims for relief.

*7 Consistent with the court's practice on adversary proceedings related to Debtor, rather than set a continued status conference, the court will simply leave this matter off calendar, subject to being reset if and when any party wishes to be heard on any motions or until either or both parties desire to bring the matter before the court for trial setting and other pretrial matters.

[Court's Appendix Giving Its Rulings On Each Paragraph of Agreement Has Been Omitted -- Consult Full Opinion To View.]

= = = = = = = A S S E T P R O T E C T I O N = = = = = = = =

Posted by Jay D. Adkisson, a co-author along with Chris Riser of Asset Protection: Concepts & Strategies (McGraw-Hill 2003) with main website http://www.assetprotectionbook.com and blog at http://www.assetprotectionblog.com see also http://www.jayadkisson.com and http://www.risad.com

Join our LinkedIn Group on Asset Protection at http://www.linkedin.com/groups?mostPopular=&gid=3694878

Join our Twitter on Asset Protection at http://www.twitter.com/jay_adkisson

Get our RSS Feed on Asset Protection at http://assetprotectionbook.com/forum/feed
User avatar
JDA
Site Admin
 
Posts: 1281
Joined: Thu Nov 13, 2008 8:06 pm
Location: Admitted to practice law in Arizona, California, Nevada, Oklahoma and Texas

Re: Heller Ehrmann: Law Firm's Future Billings Part of BK Es

Postby JDA » Sat Feb 22, 2014 9:09 am

In re Heller Ehmann LLP, 2014 WL 323068 (Bk.N.D.Cal., Jan. 28, 2014).

United States Bankruptcy Court, N.D. California.

In re Heller Ehrman LLP, Debtor.

Heller Ehrman LLP, Plaintiff,

v.

Jones Day, Defendant.

Bankruptcy Case No. 08–32514DMAdversary Proceeding No. 10–3221DM

January 28, 2014

Opinion

Chapter 11

MEMORANDUM DECISION ON MOTIONS FOR SUMMARY JUDGMENT AND PARTIAL SUMMARY JUDGMENT ON THE VALUE OF UNFINISHED BUSINESS TO BE RECOVERED

DENNIS MONTALI, U.S. Bankruptcy Judge

I. INTRODUCTION

*1 On November 6, 2013, the court heard oral argument on four motions filed by Heller Ehrman LLP ("Heller"), by and through Michael Burkart, plan administrator, for summary judgment (as against one defendant) or partial summary motion (as against three defendants) regarding the valuation of its avoidance claims. The four motions were directed at defendants Orrick, Herrington & Sutcliffe LLP ("Orrick") (Adversary Proceeding No. 10-3234); Jones Day (Adversary Proceeding No. 10-3221); Foley & Lardner ("Foley") (Adversary Proceeding No. 10–3213); and Davis Wright Tremaine LLP ("Davis") (Adversary Proceeding No. 10–3210) (collectively, "Defendants").1 Appearances were noted on the record.

Defendants were all parties to previous motions and the subject of this court's April 2011 Memorandum Decision on Motion to Dismiss ("Heller I")2 and March 2013 Memorandum Decision on Motions and Cross–Motions for Summary Judgment ("Heller II").3 In those decisions, the court held that a prepetition waiver of Heller's interest in profits realized or to be realized from its unfinished business ("Unfinished Business")4 constituted a fraudulent transfer. As a dissolved law firm's entitlement to profits from its unfinished business arises under California law as determined in Jewel v. Boxer, 156 Cal.App.3d 171, 203 Cal.Rptr. 13 (1994)("Jewel") and its progeny, the waiver is referred to as the "Jewel Waiver."

In Heller II, this court held that the Defendants were liable for the avoidable transfer as subsequent transferees, and noted that the only matter left for trial was the calculation of the amount of that liability:

What remains, therefore, is proof at trial of the extent of Heller's damages, namely the amount earned by Defendants as profit on the unfinished business.

*2 Heller II, 2013 WL 951706 at *14. Thereafter, contending that the damages could be determined as a matter of law and undisputed fact, Heller sought and obtained leave to file the current motions for partial summary judgment against Orrick and summary judgment against Jones Day, Davis and Foley.5 This Memorandum Decision addresses Heller's Motion For Summary Judgment on the Value of the Unfinished Business Profits to be Recovered directed at Orrick (Docket No. 241 in A.P. No. 10–3234) and three similar Motions for Partial Summary Judgment on the Value of the Unfinished Business Profits to be Recovered directed at Jones Day (Docket No. 249 in A.P. No. 10–3221), Foley (Docket No. 165 in A.P. No. 10–3213), and Davis (Docket No. 196 in A.P. No. 10–3210). Because material facts are in dispute as to the calculation of damages and, for a separate reason, because these facts give rise to application of a principle of unsettled law, the court will deny Heller's motions and the Defendants' cross-motions. It will, however, address legal principles raised in the motions and cross-motions, as well as in the testimony of the various experts: (1) the scope of recoverable damages and any offsets, including the "reasonable compensation" to which the Defendants are entitled under section 1604(h) of the Uniform Partnership Act of 1994 ("RUPA"), set forth in chapter 5 of title 2 of the California Corporations Code; (2) other equitable and legal doctrines relevant to the calculation of damages; and (3) the burdens of proof borne by the parties.

As discussed in more detail later, the court rejects Defendants' contention that the entirety of the fees received by them with respect to Heller's Unfinished Business constitutes, as a matter of law, "reasonable compensation" which they are entitled to retain under RUPA. It also rejects their argument that the value of the Unfinished Business is minimal to non-existent because Heller would not have been able to complete the Unfinished Business following dissolution. In addition, the court agrees with Heller that Defendants bear the burden of demonstrating the reasonableness of their compensation for completing Heller's Unfinished Business, including the expenses that should be attributable to this work.

On the other hand, the court rejects Heller's contention that, as a matter of undisputed fact, it is entitled to recover the full amount of profits (as measured by Heller's experts) received by Defendants, because they purportedly have not satisfied their burden of demonstrating their "reasonable compensation." Rather, under governing law, Defendants are entitled to recover all direct costs and certain indirect costs of completing the Unfinished Business, and the trier of fact must determine the amount of those direct and indirect costs.

In summary, although the amount of fees received by Defendants for completion of Unfinished Business has been established in the confidential portion of the record, questions of fact exist as to the reasonableness of Defendants' compensation and overhead and costs in completing that work.6 Because the court is not granting Heller's motions, it will not address the question of whether Heller is entitled to pre-judgment interest.7

II. DISCUSSION8

A. Previously Decided Issues

*3 Some issues briefed by Defendants (or observed by their experts) have been resolved in Heller I or Heller II and will not be discussed in any detail in this Memorandum Decision. The court has determined that the Unfinished Business was property of Heller; that Heller was insolvent on the date of the Jewel Waiver; that no reasonably equivalent value was given for what was transferred to the Heller partners who were the beneficiaries of the Jewel Waiver and who later joined Defendants; that each Defendant was an immediate transferee of the Heller partners who received the right to complete the Unfinished Business without having to account for any profits, and thus those Defendants came within the reach of 11 U.S.C. sec. 550(a)(2); and that none of the Defendants took the Unfinished Business for value, thus depriving them of the safe harbor of 11 U.S.C. sec. 550(b)(1).

B. Overarching Principles Governing Calculation of Damages in Avoidance Actions

Any damages awarded in these fraudulent transfer avoidance actions should adhere to the Ninth Circuit's repeated admonishment to use a measure that "restore[s] the estate to the financial condition it would have enjoyed if the transfer had not occurred." USAA Fed. Savings Bank v. Thack (In re Taylor), 599 F.3d 880, 890 (9th Cir.2010); Aalfs v. Wirum (In re Straightline Invs., Inc.), 525 F.3d 870, 883 (9th Cir.2008). Therefore, the court has discretion "on how to value the property so as to put the estate in its pretransfer position." Taylor, 599 F.3d at 890; Decker v. Tramiel (In re JTS Corp.), 617 F.3d 1102, 1111–12 (9th Cir.2010). This approach is consistent with section 550's "equitable underpinnings" and serves its "primary goal [of] equity and restoration." JTS Corp., 617 F.3d at 1111. Thus, any damages awarded to Heller should not exceed the amount it would have recovered if it had completed the Unfinished Business.

Here, the avoidable transfer was the Jewel Waiver in favor of departing Heller partners of their duties to account for net profits from Unfinished Business; the only way to determine the value of the fraudulently transferred rights is to determine the amount of those net profits.9 While Heller is not pursuing Defendants under a direct accounting theory, it is pursuing them as subsequent transferees of the avoidable transfers. Consequently, the court must focus on the non-bankruptcy law rights that were surrendered by Heller when the Jewel Waiver was executed, viz., the right to recover profits under RUPA and California state law.10 Liability under the fraudulent transfer law here or under well-established partnership principles as considered in Coudert, are two sides of the same coin.

C. Heller's Right to Recovery under RUPA and Jewel v. Boxer

*4 Under Jewel, 156 Cal.App.3d at 171, a dissolved law firm's pending unfinished business is a partnership asset. Such unfinished business includes matters in progress but not completed when the firm is dissolved, regardless of whether the firm was retained to handle the matters on an hourly or a contingency fee basis. Brobeck, 408 B.R. at 333, citing Rothman v. Dolin, 20 Cal.App. 4th 755, 759, 24 Cal.Rptr.2d 571 (1993). The Jewel court rejected a quantum meruit approach to allocating fees from post-dissolution unfinished business among the former partners and remanded for the trial court to allocate the post-dissolution income in accordance with the partners' respective percentage interests in the dissolved firm. In doing so, the Jewel court acknowledged that it was "net post-dissolution income, not gross income, that is to be allocated to the former partners." Jewel, 156 Cal.App.3d at 179 (emphasis in original). Thus, the former partners working on the unfinished business were entitled to reasonable overhead expenses (excluding partners' salaries) attributable to the production of the post-dissolution income.

The Jewel court applied the Uniform Partnership Act then in place, which did not permit compensation to partners (unless they were "surviving" partners) for winding up partnership business. Jewel, 203 Cal.Rptr. at 17 ("The Uniform Partnership Act unequivocally prohibits extra compensation for post-dissolution services, with a single exception for surviving partners"). Since Jewel was decided, California has adopted RUPA, which now allows any former partner to recover reasonable compensation when completing or winding up partnership business. Cal. Corp.Code sec. 16401(h).11 Because RUPA entitles partners of a dissolving firm to reasonable compensation for services rendered in winding up the business of the partnership, "there is no basis to require [Heller's] former partners to remit all profits earned from former [Heller] matters to the [Heller] estate." Geron v. Robinson & Cole LLP, 476 B.R. 732, 744 (S.D.N.Y.2012). Rather, since the former partners are entitled to reasonable compensation for their work, Defendants completing the Unfinished Business are likewise entitled to deduct reasonable compensation and costs from the gross fees received.

D. Defendants' Arguments

1. There are No Cognizable Damages Because of Heller's Inability to Complete the Work

Defendants contend that the court should value Heller's Unfinished Business at zero as it was unable to complete the work at the time of the fraudulent transfer. The court disagrees, because Jewel and the cases following it would be rendered meaningless were that the law. If inability to perform the work was a defense to liability, no partner could seek an accounting from a former partner upon dissolution of a firm.

The Coudert bankruptcy court rejected similar arguments by law firms that retained former Coudert partners and took over representation in Coudert's unfinished matters.12 In doing so, it held that while a dissolved law firm's historic performance is relevant to the measure of damages, its inability to complete the work as of the date of dissolution is irrelevant. The Coudert–BK court was not persuaded by the defendant law firms' contention that it should take "into account the particular condition of Coudert at the time, which is that Coudert was in dissolution and, a fortiori, could not continue the legal representation."

*5 I don't agree with the [defendants'] second contention, which is that because Coudert was going out of business there could not have been any value to the firm of its unfinished business (rather, indeed, according to the movants, such unfinished matters would have presented potential malpractice liability to a firm that could not staff them). That approach would again mean that the cases that have applied the unfinished business doctrine in the context of dissolved law firms were engaging in an exercise of pointless deliberation when, instead, they could have easily dismissed the claim on the basis that the firm was in dissolution and, therefore, that the matter could have had no value to it because the firm could not have served the client. But, of course, the unfinished business rule applies to firms in dissolution, in keeping with New York Partnership Law Section 43.1, which applies specifically to firms in liquidation. Therefore, I do not believe that the fact that Coudert was in dissolution would justify granting the defendants' motion to dismiss [plaintiff's] unfinished business claim.

Coudert–BK at pages 49–50. This court agrees. Heller's cessation of business at the time of the Jewel Waiver is irrelevant to the issue before the court on the present motions.

2. "Reasonable Compensation" Is Equivalent to 100% of Fees Recovered on the Unfinished Business.

Like Defendants here, the Coudert-2012 defendants contended that the bankruptcy estate of the dissolved law firm could not recover anything because all post-dissolution profits were attributable to the "efforts, skill and diligence" of the former Coudert partners and their new firms, and thus no net income was realizable. The Coudert–2012 court succinctly responded: "That is not at all apparent." Coudert–2012, 480 B.R. at 175. The same is true here, at least for the purposes of these motions. As the Coudert–2012 court explained:

Lest there be any doubt: this court cannot blithely assume that the profits attributable to the former Coudert partners' post-dissolution 'efforts, skill and diligence' are equal to the profits realized by the firms for completing the Client matters.

Id. at 177–178.

Defendants' position is, in essence, that there are no net profits on the Unfinished Business which are recoverable by Heller. With some variation in how Defendants present their arguments and in how their several experts structure their analyses to reach their ultimate opinions, the court distills those theories down into a simple "No Profits" proposition that it categorically rejects. According to Defendants, the Unfinished Business profits equal revenue less compensation paid to shareholders/partners, less compensation paid to non-owner employees, less operating costs. Thus, they opine, there was no profit and thus, nothing for Heller to recover.

*6 Those experts identify numerous categories of what they deem permissible costs, including, in some instances, political contributions, advertising, business development, professional development, payments to retired partners, charitable contributions and summer associate programs.

One common characteristic of the Defendants' expert reports is that there is no correlation between categories of expenses such as those listed above and the completion of any particular matter or aggregate of matters of Unfinished Business. Rather, there is the pervasive notion that all expenses incurred by the Defendants, including indirect expenses and regardless of how remote they are from the direct and indirect expenses of completing any Unfinished Business, should be charged against revenues, then further reduced by distributions to partners, resulting in no profit.

Further, all of the Defendants and their experts expend a great deal of effort describing how they choose to distribute their firm profits to their members. Again, without being specific, there are generalized intangible factors such as adherence to core values, client relationships and management, commitment to the firm, professional achievement, loyalty, leadership, and similar qualities. While these are no doubt important factors within the management of any particular firm, they fail as a matter of law to provide evidence of the reasonable compensation RUPA would allow for completion of Unfinished Business.

Another common theme of all of the Defendants and their experts is to justify not only their firms' prominence (not disputed by Heller or the court) and the notion that their billing rates are commensurate with the market and acceptable to their respective clients. Stated otherwise, the overriding philosophy seems to be that since billing rates are "market rates" there could never be any damages recovered by Heller since those rates produce a basis from which to charge expenses and leave the remaining amounts as reasonable compensation to the partners. In other words, their defense is what we charged is pre se reasonable, therefore we earned no profit. Putting it bluntly, yet mildly, this theory is as far-fetched as Heller's Take–It–All approach.

The court will not presume that the legislature intended in RUPA that there could be no liability because as a matter of law, market billing rates were per se reasonable expenses for completing Unfinished Business. So too under the fraudulent transfer laws. Reasonable compensation to the partners is not the same as reasonable compensation for completion of the Unfinished Business.

Similarly, the particular compensation of any member of Defendant, or in particular of any member who previously was at Heller, is of no relevance to the issues before the court. Therefore, any conclusions about how a former Heller member's compensation level at Heller compared with his or her compensation level at Defendant, while interesting, has nothing to do with the critical issues of whether any Defendant realized a profit on Heller's Unfinished Business.

For the same reason, discussions by experts about software programs the Defendant firms use to allocate compensation and other costs is not helpful. No doubt those programs assist Defendants' management in determining the profitability of an office, or a particular partner, or a particular matter, and are effective management tools, but they do not answer the question of whether particular expenses were reasonable and necessary to complete a matter or matters of Heller's Unfinished Business.13

*7 One expert rejected Heller's claims to recover profits on Unfinished Business because he felt that the value derived from that Unfinished Business is a product of personal goodwill, expertise and effort expended by one of Defendants. His view that Heller's damage calculations rest entirely on the fiction that the Heller estate owned the collective, individual personal goodwill of its former shareholders, is not the point. The Jewel Waiver was a fraudulent transfer and the sole issue here is to determine what Defendants must pay as subsequent transferees of that transfer. While it may be so that various intangibles were relevant to successful completion of Unfinished Business, and indeed other work was created and maintained as a result of Defendants' expenditures on such things as offices, recruiting, training, marketing, branding, opening new offices and so on, RUPA more narrowly instructs that the only proper offset against Unfinished Business revenue is the reasonable compensation for the services rendered in winding up the business of Heller. It does not include such unrelated items as building the firm, marketing, training and branding.

In response to Defendants' experts, Heller's own expert, Mr. Regan, takes issue with many of he approaches taken by those experts. For example, he quite properly challenged one of the Defendant's expense of recruiting fees of six figures to acquire Heller's partners as a cost to charge against Unfinished Business. He also questioned one of the expert's treatment of associate time in that no non-billable work was charged to determine the proper compensation that should be attributable to Unfinished Business.

That being said, Mr. Regan's own analysis was questioned by several of Defendants. And the court believes that general observations such as partner time being "excessive" is an imprecise analysis. So too are Mr. Regan's other particular criticisms of specifics, as are Defendants' criticisms of his positions.

To summarize, some expenses simply cannot, as a matter of law, constitute charges against the costs of completing Unfinished Business. The most glaring example is the charge for the legal recruiter for locating former Heller partners. Similarly, the court can see no connection between expenses such as political contributions, payments to retired firm members, charitable contributions, new business development, advertising, costs involved in opening new offices in other locations, and similar broad expenses that are not likely to have any bearing on the completion of Unfinished Business. That being said, to the extent Defendants at trial can link the cost of such items as additional lawyer and non-lawyer employees, professional training, space, travel and expenses pertaining to Unfinished Business, those categories would appear to be proper. They have not been linked as yet.

Falling in between the obvious related expenses and those that can have no conceivable bearing on completion of Unfinished Business, are charges relating to completion of pro bono matters that the particular Defendant took from Heller. If there is proof that a Defendant had to complete pro bono projects as part of the cost of obtaining Heller partners who brought fee-producing Unfinished Business, such a charge may be an acceptable credit. At trial these connections should be demonstrated by the experts and it is up to the trier of fact to determine whether such a connection is accepted.

As with the other issues, these matters should be examined under the prism of cross-examination and do not justify summary judgment for either side.

E. Heller's Contentions

Heller advances a "Take–It–All" theory of recovery. Heller has requested recovery of all fees collected by Defendants on Unfinished Business, asserting that they have not carried their burden of demonstrating their entitlement to "reasonable compensation." The court rejects this position outright; as discussed previously, issues of fact exist as to the amount and nature of Defendants' reasonable compensation and costs. And even if the court excluded all of Defendants' evidence, Heller has still not proven that it should Take–It–All.

*8 Moreover, an award of damages under section 550 should "restore the estate to the financial condition it would have enjoyed if the transfer had not occurred." Taylor, 599 F.3d at 890; Straightline, 525 F.3d at 883. This court should thus "value the property so as to put the estate in its pretransfer position." Taylor, 599 F.3d at 890.

As the Ninth Circuit stated in Taylor: "[A] bankruptcy court ordinarily determines the value of the property to be the value at the time of the transfer, but has discretion on how to value the property so as to put the estate in its pretransfer position." Id. See also Joseph v. Madray (In re Brun), 360 B.R. 669, 674 (Bankr.C.D.Cal.2007) ("Typically, courts equate 'value' with the fair market value of the subject property at the time of the transfer."). Certainly, courts can award the value of property measured at the time of recovery where the property naturally increases in value. Taylor, 599 F.3d at 890. Here, however, there is little doubt that most, if not all, of the post-dissolution Unfinished Business income stream resulted from the efforts and capital of the Defendants; the Unfinished Business did not simply appreciate in value. Thus, when ascertaining the value to be recovered by Heller, the trier of fact will necessarily take into account the amounts ultimately recovered by Defendants for completing the Unfinished Business. In other words, the post-dissolution fees charged and collected by Defendants are probative of value, even if they are not conclusive.

Each Defendant may have significantly lower or higher profit margins than Heller would have experienced had it completed the work. The Coudert–BK court held that unfinished business damages should be measured by "the potential value of the unfinished representation to a firm with Coudert's characteristics and not to, for example, a firm that had materially lower or higher profit margins." Coudert–BK at 49 (emphasis added). "Rather, again, the ultimate determination will be a fact based analysis, perhaps assisted by expert testimony, as to the objective projected net present value of the pending unfinished matter on the firm's dissolution date, based on the hypothetical continuation of the matter to its reasonably anticipated completion by an ongoing firm with [debtor's] characteristics." Id. That is the approach that must be taken here as well.

A limitation of recovery to the amounts and profit margins that a dissolved law firm would have received had it completed the work complies with the Ninth Circuit's oft-repeated principle that that damages under section 550 should "restore[s] the estate to the financial condition it would have enjoyed if the transfer had not occurred." Taylor, 599 F.3d at 890. It also serves the twin goals of "equity and restoration." JTS Corp., 617 F.3d at 2010. Thus, any damages awarded to Heller should not exceed the amount it would have recovered if it had completed the Unfinished Business. In other words, Heller is entitled to what the trier of fact determines to be the objective net value of the Unfinished Business, based on the hypothetical continuation of that business to completion by an ongoing firm with Heller's characteristics. Otherwise, it would be the beneficiary of an unwarranted benefit, particularly as the post-dissolution income stream resulted from the efforts of Defendants.

*9 Heller's alternative to its Take–It–All theory is that the court should make some sort of equitable adjustment to the gross collections on Unfinished Business as suggested by Mr. Regan. Even if such a result would be proper at trial, doing so now would be appropriate. Defendants are entitled to a trial on this theory just as they are on Heller's principal theory.

F. Burden of Proof

The court agrees with Heller that Defendants have the burden of establishing their entitlement to reimbursement of their "reasonable compensation" or "overhead expenses. See, e.g., Jewel, 156 Cal.App.3d at 181 (discussing burden of former partners "to seek reimbursement and introduce evidence of their overhead expenses"); Rosenfeld v. Cohen, 191 Cal.App.3d 1035, 1050–51 (1987) (holding former partners had failed to meet "the burden of establishing that data, and upon their failure to do so, a computation may be made on the basis of gross receipts"); Chazen v. Most, 209 Cal.App.2d 519, 523 (1962) (holding former partner was only entitled to expenses "he could substantiate" and approving trial court's order which declined to credit former partner "certain office expenses which the court divided between the partnership and [former partner's] individual law business").

Even if the burden were not on the party seeking "reasonable compensation" or reimbursement of expenses, Defendants have exclusive knowledge of what percentage of their hourly rates are attributable to different overhead expense items. Under California law, "[w]here the evidence necessary to establish a fact essential to a claim lies peculiarly within the knowledge and competence of one of the parties, that party has the burden of going forward with the evidence on the issue although it is not the party asserting the claim." Sanchez v. Unemployment Ins. Appeals Bd., 20 Cal.3d 55, 71 (1977); cf., Gough v. Titus (In re Christian & Porter Aluminum Co.), 584 F.2d 326, 339 (9th Cir.1978) ("The burden of proof is clearly on the fraudulent grantee to establish the amount of assets transferred, if the assets are entirely under its control and unavailable to the Trustee.").14

Finally, the "reasonable compensation" defense under RUPA is not unlike the assertion of a lien by a subsequent transferee under 11 U.S.C. sec. 550(e) for the lesser of the cost of improvements on the transferred property or any increase in the value of such property. In either case, the transferee bears the burden of establishing the defense. Sanders v. Hang (In re Hang), 2007 WL 2344958 (Bankr.E.D.Cal.2007), cited in Kaler v. Slominski (In re Keeley and Grabanski Land P'ship),2013 WL 5535490 (Bankr.D.N.D.2013). Similarly, Defendants, the subsequent transferees here, have the burden of proving their "reasonable compensation" offset.

G. Evidentiary Objections

Heller has objected to certain evidence presented by Orrick and Jones Day, and those two defendants have objected to certain of Heller's evidence. For purposes of the present motions only, the rulings on the evidentiary objections follow.

*10 Turning first to the expert reports, the court notes that in Heller's opposition to Orrick's objections it states that:

Plaintiffs' (sic) expert reports are merely one part of a mountain of evidence giving rise to triable issues of fact concerning Orrick's fundamentally flawed showing.

Docket No. 294 at 1:22–23 (emphasis added.

This proves the point why the court is denying Heller's motions and the cross-motions. "A mountain of evidence giving rise to triable issues of fact" is perhaps an understatement on this record.

Heller argues that no ruling is necessary on the objection to its experts reports because Orrick, like the other Defendants, has not carried it burden of proof. As noted previously, the court is rejecting Heller's theory that it is entitled to summary judgment as a matter of law. Even if Heller's experts reports are considered, they are not sufficient to have the court rule in Heller's favor at this point as a matter of law.

Because the court is denying Heller's motions and Orrick and Jones Day's cross-motions, and because the trier of fact will need the benefit of sophisticated expert testimony to assist it in finding the amount of profits realized by Defendants on Unfinished Business, the court will decline to rule on the objections to all of the experts' reports.

Orrick objects to Exhibit C to Heller's Request For Judicial Notice (Docket No. 277). It also objects to Exhibits 10 and 13–20 and paragraphs 26 and 28 of the Supplemental Declaration of Christopher Sullivan. The court sustains Orrick's objections in both instances because the information set forth in those documents is irrelevant.

Heller objects to declarations of three witnesses and the two experts reports offered by Orrick. The court sustains the objection to the declarations because they are irrelevant to the issue before the court. It declines to rule on the objections regarding the two experts reports for the reasons stated above.

Heller objects to Jones Day's deposition testimony of Jonathan Hayden, Peter Benvenutti, Joe Sims, Michael Burkart, Carl Goldfischer and Reuben Leibowitz and Exhibits 8 & 13 to the Agenbroad Declaration. Those objections are sustained as the testimony and interrogatory responses are offered in support of the wrong legal standard as explained previously in this Memorandum Decision.

Jones Day objects to various items, including several exhibits to Heller's counsel's declaration and to Heller's two experts reports. The court declines to rule on the objections to those reports for the reasons stated above. As far as the objections to the documents accompanying Heller's counsel's declaration, the court rules as follows:

Evidence Objected To (Sullivan Declaration):

Ruling

Exhibit 28

Overruled

Exhibit 20

Sustained

Exhibit 25

Sustained

Exhibit 2

Sustained

Exhibits 8-19

Sustained

Exhibit 21

Sustained

Exhibit 34

Sustained

Exhibit 3

Decline to rule for reasons stated above.

Exhibit 3

Decline to rule for reasons stated above.

Exhibit 5

Decline to rule for reasons stated above.

Exhibit 37

Decline to rule for reasons stated above.

Exhibit 6

Decline to rule for reasons stated above.

Evidence Objected To (Sullivan Supplemental Declaration):

*11

Exhibits 2-10

Sustained

Exhibit 11

Sustained

Exhibit 12

Sustained

Exhibit 13

Sustained

Exhibit 14

Sustained

III. CONCLUSION

For the reasons stated above, Heller's motions and Jones Day's and Orrick's Cross–Motions will be denied. Counsel for Heller should circulate and up-load proposed forms of order denying those motions for the reasons stated in this Memorandum Decision.

Heller still contends that Defendants other than Jones Day have no right to trial by jury. Those three Defendants disagree. If Heller wishes to press that issue, then the court must decide the question and if the outcome is adverse to Heller, make a recommendation to the district court to withdraw the reference so that Defendants Orrick, Foley and Davis may proceed to a jury trial. At the same time Jones Day may wish to have the district court try the adversary proceeding against it at the same time.

To that end the court will hold a status conference on February 13, 2014, at 1:30 p.m. to determine whether and when to take additional briefing on the remaining pretrial issues as to three of the Defendants and to hear from all counsel concerning the steps that should be taken next so that this long running litigation may be concluded.

Counsel are directed to meet and confer prior to the hearing and to submit a joint status conference statement at least five days prior to the hearing.

Footnotes

1

These four adversary proceedings have not been consolidated although the motions were heard and argued together. This Memorandum Decision is being filed in each of the four adversary proceedings, with changes only in the caption. Orders disposing of the motions will be separately filed in each of those four actions.

2

Heller Ehrman LLP v. Arnold & Porter (In re Heller Ehrman LLP), 2011 WL 1539796 (Bankr.N.D.Cal. Apr. 22, 2011).

3

Heller Ehrman LLP v. Jones Day (In re Heller Ehrman LLP), 2013 WL 951706 (Bankr.N.D.Cal. March 11, 2013).

4

"Unfinished Business" refers to client matters that were pending but unfinished on the date of Heller's dissolution. The unfinished business of a law partnership is any business covered by retainer agreements between the firm and its clients for the performance of partnership services that existed at the time of dissolution. Greenspan v. Orrick Herrington & Sutcliffe (In re Brobeck, Phelger & Harrison LLP), 408 B.R. 318, 333 (Bankr.N.D.Cal.2009), citing Rosenfeld, Meyer & Susman v. Cohen, 146 Cal.App.3d 200, 217, 194 Cal.Rptr. 180 (1983). It does not, however, apply to business created after dissolution, even if that business comes from a client of the dissolved partnership. Brobeck, 408 B.R. at 333

5

Heller is seeking summary judgment in Orrick because it believes that all profits from Unfinished Business brought by Heller to Orrick can be identified. In contrast, Heller acknowledges that disputes exist vis-a-vis the other three Defendants as whether certain work is Unfinished Business or new business, and thus moves for only partial summary judgment against them.

6

The court does not question, for example, Orrick's reliance on the definition of overhead, namely, a business expense that cannot be allocated to a particular product or service. It does question Defendants' view that a simple proration of their total overhead is the proper method of assessing reasonable costs attributable to Unfinished Business. The determination of proper deductible overhead expenses attributable to completion of Unfinished Business is also a question of fact.

7

Also, because the court is not granting any of the motions or cross-motions, it need not characterize its ruling as recommended conclusions of law. See Order Denying Motion For De Novo Review filed on May 21, 2013, at Docket No. 7 in Case No. 13–cv–01775CRB in the United States District Court for the Northern District of California.

8

As stated in Heller II, 2013 WL 951706 at n.2, a decision involving competing summary judgment motions does not involve the making of findings of fact. The court will refer to the facts solely to provide context for its denial of the motions and cross-motions.

9

Jones Day also argued that the proper course for the court to take at this point is simply to set aside the Jewel Waiver and let Heller start all over again. The court rejects that suggestion without any extended discussion because, as noted above, the best measure of the value of the property rights transferred by the Jewel Waiver is the Unfinished Business itself.

10

In Heller II, the court cited Development Specialists, Inc. v. Akin Gump Strauss, Hauer & Feld, LLP (In re Coudert Brothers LLP), 480 B.R. 145 (S.D.N.Y.2012)("Coudert–2012"), for the proposition that law firms joined by former partners of the Coudert Brothers bankrupt law firm had a duty to account for unfinished business. Heller II, 2013 WL 951706 at *4. The duty to account for profits earned on Coudert's unfinished business arose as that business was completed and the fees were earned. Because the actions involved in completing that business were within the scope of the business of the defendant law firms those partners joined, the firms themselves were jointly liable for an accounting, and there was no need to join the individual partners as defendants.

11

RUPA sec. 16404(b)(1) imposes a fiduciary duty on former Heller partners to account to the partnership and hold as trustee 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 or partnership property or information, including the appropriation of a partnership opportunity. As noted above, sec. 16401(h) entitles that partner to reasonable compensation for services rendered in winding up the business of the partnership.

12

Before the Supreme Court issued Stern v. Marshall, 131 S.Ct. 2594 (2011), and before the District Court for the Southern District of New York withdrew the reference of the various Coudert unfinished business adversary proceedings, the Coudert bankruptcy court denied various motions to dismiss filed by defendant law firms. See Modified Bench Ruling on Motions to Dismiss issued on August 7, 2009, in Development Specialists, Inc. v. Akin Gump Strauss Hauer & Feld LLP (In re Coudert Brothers LLP) ("CoudertBK"), Adversary Proceeding No. 08–1490 (Bankr.S.D.N.Y. Aug. 7, 2009), available at Docket No. 29 and also available at http:// www.nysb.uscourts.gov/content/re–08–01490–rdd–development–s pecialists-inc-v-akin-gump-strauss-hauer-feld-llp. While CoudertBK is dated August 7, 2009, it was filed on January 19, 2010, and entered as a separate docket entry on November 10, 2011.

13

One expert took exception to positions taken by Heller in this litigation because of a position it took in the Brobeck bankruptcy. That also is irrelevant and will not be discussed further.

14

This doctrine (that the party with control of information has the burden of going forward with the evidence) cuts both ways, however. As discussed in the previous section, as a matter of law and equity, both equitable and legal precepts limit Heller's recovery to amounts it would have realized as net profits had it completed the work. Heller has the information regarding the its billing rates and its profit margin after deducting overhead and other costs.
User avatar
JDA
Site Admin
 
Posts: 1281
Joined: Thu Nov 13, 2008 8:06 pm
Location: Admitted to practice law in Arizona, California, Nevada, Oklahoma and Texas


Return to Asset Protection News and Tidbits

Who is online

Users browsing this forum: Bing [Bot] and 2 guests