Attention All Lawyers! The Unfinished Business Rule May Finally Be Finished
The courts continue to pick away at the “unfinished business rule.” The latest blow came earlier this month when a U.S. district court dismissed a Chapter 7 trustee’s claims against eight law firms who provided services to former clients of Howrey LLP. We are getting close to the point where the unfinished business rule may in fact be finished.
By way of background, under the unfinished business rule, hourly rate cases and the future profits associated with those cases are considered to be property of the law firm. If the law firm is bankrupt and a former partner brings an unfinished hourly rate case to a new law firm, the Chapter 7 trustee could assert a claim against the new law firm for the profits generated by that case. The unfinished business rule was obviously a powerful weapon in the hands of a bankruptcy trustee, especially as the number and size of law firm bankruptcies increased.
However, over the last few years a number of courts have pushed back on unfinished business claims. In the Thelen LLP and Heller Ehrman LLP bankruptcies, the courts held that under New York and California law pending hourly fee matters are not property of the law firm and consequently the bankruptcy trustee cannot sue new firms for profits associated with those cases.
The Howrey case is the latest nail in the coffin of the unfinished business rule. The Howrey Chapter 7 trustee asserted claims against eight law firms which had hired former Howrey partners. Some partners had joined the new law firms before Howrey’s dissolution and others had joined their new law firms after dissolution. In the pre-dissolution cases, the trustee asserted unjust enrichment claims against the new firms, alleging that the partners who had left pre-dissolution had conferred an unfair benefit on their new law firms by transferring rights to profits associated with the transferred matters. In the post-dissolution cases, the trustee claimed that the new firms had received property (i.e., the new cases) without paying reasonably equivalent value to Howrey.
Analyzing the issue under the laws of the District of Columbia (where Howrey had maintained its main office), the district court first looked to the trustee’s post-dissolution claims. Because there was no D.C. law firmly on point, the district court “predicted” that the District of Columbia Court of Appeals, the highest court in the District of Columbia, would conclude that dissolved law firms do not have a property interest in client matters handled by different, pre-existing firms under new retention agreements. Instead, these client matters are presumptively new matters, and the bankruptcy estate therefore has no claim to profits generated by these matters. Here, all of the work performed by the eight law firm defendants was undeniably performed under new engagement agreements. In short, there were no allegations that would rebut the presumption that the law firms were handling new matters.
The trustee’s pre-dissolution claims fared no better. First, the fact that Howrey did not own new representations undertaken by third-party firms barred the trustee’s claims since those claims depended upon a property right that does not exist. Second, the unfinished business rule does not apply when a partnership continues after a partner’s departure, such as the case here when the pre-dissolution partners left. Third, D.C. law does not recognize an unjust enrichment claim where the benefit is conferred by a third party and not by the plaintiff.
The Howrey decision may spell the end of unfinished business claims as applied to law firm dissolutions. Courts have now rejected these claims under New York, California and D.C. law, and it is questionable whether other state laws would lead to a different result. Attorneys should obviously be happy with this result. A contrary ruling would have severely restricted an attorney’s mobility since a book of business would not have been freely transferable to a new law firm. Moreover, the Howrey court has given a primer to attorneys and their new firms on how to move matters without liability — a new engagement agreement may suffice. But perhaps the biggest winners in these cases are the clients since underlying each of the decisions is the recognition that a client’s legal matter belongs to the client and not to the lawyer or his or her firm. Clients have an unqualified right to hire and fire attorneys, and the unfinished business rule will not be allowed to detract from that basic principle.