Kelly A. Knight is an attorney and mediator based in Los Angeles, CAlifornia. He handles matters throughout California.

California Supreme Court holds that dissolved law partnerships do not have a property interest in unfinished hourly fee cases, except for charges for activities necessary for winding up

In a case that may have a broad impact beyond the narrow issue addressed, the Cal Supremes just held that a dissolved law partnership does not have a property interest in post-dissolution legal fees and costs in hourly fee matters, except for charges related to winding up (e.g., filing a motion for continuance, serving notices of withdrawal, etc.). 

On certification from the Ninth Circuit, in Heller Ehrman LLP v. Davis Wright Tremaine LLP, no. S236208 (Cal. Mar. 5, 2018) (slip op. linked here), the California Supreme Court held that dissolved law partnerships do not have a property interest in former partners' profits generated in hourly fee matters pending at the time of dissolution:

What we hold is that under California law, a dissolved law firm has no property interest in legal matters handled on an hourly basis, and therefore, no property interest in the profits generated by its former partners’ work on hourly fee matters pending at the time of the firm’s dissolution. The partnership has no more than an expectation that it may continue to work on such matters, and that expectation may be dashed at any time by a client’s choice to remove its business. As such, the firm’s expectation — a mere possibility of unearned, prospective fees — cannot constitute a property interest. To the extent the law firm has a claim, its claim is limited to the work necessary for preserving legal matters so they can be transferred to new counsel of the client’s choice (or the client itself), effectuating such a transfer, or collecting on work done pretransfer.

Slip op. at 2.

After the mega-law firm Heller Ehrman LLP filed for chapter 11 bankruptcy, the bankruptcy court appointed a plan administrator who then went after the law firm's former partners in adversary proceedings, seeking to recover post-dissolution legal fees for matters that were taken from Heller to new law firms. Slip op. at 3. But the Cal Supremes held that a dissolved law partnership has no property interest in profits from hourly fees after the case has moved to a new firm:

What we conclude is that a dissolved law partnership is not entitled to profits derived from its former partners’ work on unfinished hourly fee matters. Any expectation the law firm had in continuing the legal matters cannot be deemed sufficiently strong to constitute a property interest allowing it to have an ownership stake in fees earned by its former partners, now situated at new firms, working on what was formerly the dissolved firm’s cases. Any “property, profit, or benefit” accountable to a dissolved law firm derives only from a narrow range of activities: those associated with transferring the pending legal matters, collecting on work already performed, and liquidating the business.

Slip op. at 5.

This ruling, the court explained, (1) protects a client's choice of counsel, allowing the client to choose a new law firm without fear that the former, dissolved law firm will come after the client even though the dissolved firm has been paid in full for its work before the client moved the case, and (2) it protects the ability of lawyers to move to new firms:

The limited nature of the interest accorded to the dissolved law firm protects clients’ choice of counsel. It allows the clients to choose new law firms unburdened by the reach of the dissolved firm that has been paid in full and discharged. The rule also comports with our policy of encouraging labor mobility while minimizing firm instability. It accomplishes the former by making the pending matters, and those that work on them, attractive additions to new firms; it manages the latter by placing partners who depart after a firm’s dissolution at no disadvantage to those who leave earlier.

Slip op. at 5.

The Heller Ehrman LLP opinion may have a clarifying impact on what a functioning law firm's property rights are in its current cases (e.g., where issues might arise when an attorney departs the firm and a client moves the matter to the attorney's few firm)---i.e., it provides at least some basis to argue that a law firm does not have a future property interest in its current hourly cases because the clients in those can at any time decide to leave. What a law-firm partner's fiduciary duties to the firm is a separate issue:

Although this dispute has a direct impact on who controls the profits from ongoing cases involving hourly fees, no doubt for some litigants certain aspects of this case also seem to implicate broader concerns — regarding, for example, the extent of partners’ fiduciary obligations to their firm or the efforts partners make to secure business on behalf of their firm. Nonetheless, the question we must ultimately address is about the scope of a dissolved firm’s property interests, and whether those interests extend to the profits from ongoing matters billed on an hourly fee basis.

Slip op. at 4.

But in the context of a dissolved law partnership, even though the partners had a shared "interest" in each other's work prior to the dissolution (in that they would collectively market themselves, owe a shared fiduciary duty, collectively pool human capital to make the firm attractive, etc.), they do not have a property interest.  Slip op. at 11 ("[A] shared interest can differ from a property interest, which under California law must reflect more than a mere contingency or a certain probability that an outcome — such as further hourly fees remitted to the firm — may materialize."), citing Civ. Code § 700 (“A mere possibility . . . is not to be deemed an interest of any kind.”). A hope to continue working on an unfinished hourly matter for a client is just a hope and is speculative, given the right of the client to terminate counsel at any time:

While Heller was a viable, ongoing business, it no doubt hoped to continue working on the unfinished hourly fee matters and expected to receive compensation for its future work. But such hopes were speculative, given the client’s right to terminate counsel at any time, with or without cause. As such, they do not amount to a property interest.... Dissolution does not change that fact, as dissolving does not place a firm in the position to claim a property interest in work it has not performed — work that would not give rise to a property interest if the firm were still a going concern.

A dissolved law firm therefore has no property interest in the fees or profits associated with unfinished hourly fee matters. The firm never owned such matters, and upon dissolution, cannot claim a property interest in the income streams that they generate. This is true even when it is the dissolved firm’s former partners who continue to work on these matters and earn the income — as is consistent with our partnership law.

Slip op. at 11-12.

To protect from any hampering of a client's freedom to move from one firm to another or to choose an attorney of the client's choice, the Cal Supremes made clear that matters belong to clients, and a former law firm has no property interest once fully paid and discharged: "To protect this freedom, we affirm that client matters belong to the clients, not the law firms, and the latter may not assert an ongoing interest in the matters once they have been paid and discharged." Id. at 13.

There is one exception to this limit: the time spent by the Heller lawyers for things like filing motions for continuances, shipping client files to new counsel, getting new counsel up to speed on pending matters. Slip op. at 17. "But the duty extends no further. Specifically, it does not extend to substantive legal work done on hourly fee matters to continue what was formerly the business of a dissolved partnership. Such work falls outside of the definition of winding up . . . ." Id.

Note that there is a wrinkle to this in contingent-fee cases. In Jewel v. Boxer, 156 Cal. App. 3d 171 (1984), when a personal-injury law firm dissolved, the firm's partners sued certain former partners who took some of the contingent-fee cases, arguing that the former partners should not be entitled to fees on those cases greater than they would have been at the firm and as part of the partnership, and the Court of Appeal agreed with the plaintiffs that the former partners had no right to more compensation from the cases than they would have been under the partnership agreement; any fees generated from matters pending when the firm dissolved were to be shared by the partnership regardless of continuing, post-dissolution legal services. See slip op. at 6-7 (discussing Jewel). The Cal Supremes in Heller Ehrman LLP expressly excluded contingent-fee matters from its holding: "[J]ewel dealt with contingency fee matters, and whether our conclusion in this case extends to such matters is a question we need not address here." Slip op. at 15. (Also note that in Heller Ehrman LLP, the Heller dissolution plan included a so-called "Jewel waivers." See slip op. at 2. Whether such a waiver is now necessary for hourly fee matters seems doubtful, given the holding in Heller Ehrman  LLP that a dissolved firm holds no continuing property interest in continuing hourly matters, but nevertheless seems highly prudent given that a factual issue could arise that could provide a basis to distinguish the case, there could contingent-fee or alternative-fee matters, etc.)

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