Today’s WSJ covers the Howrey bankruptcy and specifically the ex-partners’ and their new firms’ potential liabilities for unfinished business taken from Howrey.
As the article says, Howrey’s bankruptcy trustee, the custodian of its claims under state law, “has the right to sue for profits generated by work that partners started at their old law firms and took to their new positions, such as continuing cases.” The defendants can include the new firms the partners joined, including Dewey & LeBoeuf, Baker Botts and Arent Fox, which “may have the deepest pockets.”
This may be Howrey’s most important asset because, according to the old saw the article quotes, a law firm’s “most valuable assets of a law firm go home every night.”
A similar fight is happening over the remains of Heller Erhman. The article says that the defendant law firms in the Heller case are “arguing that clients have a right to take their business where they choose.”
Of course that’s true, but it doesn’t end the legal complications. As discussed in The Source, §7.08(e) (footnotes omitted):
All of the partners of the dissolved firm, however, are generally entitled to share in fees for pre-dissolution work-in-process paid after dissolution to the dissolved partnership or to withdrawing partners, even if the client has exercised a right to discharge the attorney or attorneys who are sharing in the fees.* * *
Moreover, depending on the applicable law, the partner or firm completing the case may not be entitled to extra compensation for completing the case. Rather, the case is treated as an asset of the prior firm and shared among the partners of that firm on the same basis that they shared fees while the firm was still alive. As discussed in Bromberg & Ribstein, this reflects the difficulty of figuring out an alternative basis for dividing the free, the assumption that the partnership continues on the pre-dissolution basis until winding up is completed, and the need to encourage partners to stay with the firm. Of course there are strong policy arguments on the other side: giving partners freedom to move and the risks to the client if the lawyer isn’t paid for extra work.
But note that these are only default rules. Thus, my book notes (footnotes omitted):
The partners can and should anticipate the above problems in their agreement. The partners should be careful to define the situations in which the work-in-process provision applies.
Often, however, there is no clear agreement, and the lawyers and their lawyers are left to hash out the issues at substantial cost.
I have two questions:
- Would it really be so bad if the practice of law were put on sounder financial footing by permitting non-lawyer capital? These bankruptcies illustrate the instability and insubstantiality of these weak cooperatives we call “firms.” See Death of Big Law. The dissolutions are likely to increase as Big Law devolves, and clients are caught in the middle.
- Why aren’t these matters dealt with more definitively in agreements among lawyers who write agreements for others for a living?