The trustee for Howrey filed complaints for constructive fraudulent transfer and sought recovery from several California law firms for profits received by them from unfinished business previously handled by Howrey, including hourly fees. Former partners who left prior to the vote for dissolution and after the dissolution filed motions to dismiss.
The former partners argued the unfinished business (UFB) rule in D.C. applies only to contingency fee matters and did not apply to hourly rate matters. Finding that D.C. and California laws were similar, the U.S. Bankruptcy Court for the Northern District of California held unfinished business is any business covered by retainer agreements for the performance of services that existed at the time of dissolution. “It is relatively settled that contingency fees are subject to the UFB doctrine but less so regarding hourly rates,” says Mark A. Platt, Dallas, TX, cochair of the ABA Section of Litigation’s Bankruptcy & Insolvency Litigation Committee.
The former partners also argued that Howrey lacked interest in profits earned from matters transferred after the date of the dissolution. Disagreeing, the court held the trustee can pursue a claim for recovery of profits from unfinished business acquired from former partners who left as of or after the dissolution. The court held the trustee could not pursue fraudulent transfer claims against partners who left prior to the Howrey Jewel waiver; however, the trustee could amend the complaint to establish liability other than fraudulent transfer.In response, the trustee amended its complaint alleging unjust enrichment and demanding accounting for UFB and recovery of profits related to UFB against the pre-dissolution partners.
Jewel Waivers are Not Always a Defense
Jewel waivers have been used with mixed success in limiting liability of partners of dissolving firms. “A Jewel waiver seeks to shield former partners from the need to provide the dissolved firm with accounting, and potentially reimbursement, of profits from unfinished business,” explains Platt. The phrase “Jewel waiver” originated from a California case, Jewel v. Boxer, wherein a California state appellate court held that absent an agreement to the contrary, former partners of a dissolved firm have a duty to account to the dissolved firm profits earned from client matters completed after dissolution.
Howrey demonstrates that a Jewel waiver can be set aside as a fraudulent transfer in certain circumstances. “Whether a Jewel waiver will be set aside depends in part on when the partners entered into the Jewel waiver,” warns Platt. “Among the questions a court will ask are whether the dissolving firm was insolvent when the partners entered into the Jewel waiver, and whether the departing partner gave reasonably equivalent value in return for the waiver,” explains Platt.
Until the law is settled with the boundaries of the UFB doctrine, lawyers must factor in potential exposure with lateral partners. “Minimize the dispute by defining the UFB matter,” recommends Scott F. Bertschi, Atlanta, GA, cochair of the ABA Section of Litigation’s Professional Liability Litigation Committee. “It is very important that each matter has an engagement letter that clearly defines the representation,” he adds. For example, “you may think you represent the client on one matter only, but the client thinks you represent him for two matters. The engagement letter must identify what the matter is,” stresses Bertschi.
Because UFB is not a malpractice issue, malpractice insurers typically do not provide coverage for the obligation of an attorney or law firm to repay funds received from UFB, cautions Bertschi. Therefore, “when attorneys are asked to pay back what the attorney owes at a new firm, the insurance carrier probably won’t cover it,” says Bertschi.
Although no ethical issues existed in Howrey, “attorneys must be mindful that they cannot be party to unethical issues, including fraudulent transfer of assets,” says Eileen M. Letts, Chicago, IL, cochair of the ABA Section of Litigation’s Ethics and Professionalism Committee. “Be careful what you sign. Read everything carefully and make informed decisions prior to signing a partnership agreement. In the unfortunate event of insolvency, you must be responsible for debt,” advises Letts.
Angela Foster is a contributing editor for Litigation News.