New York Court Of Appeals Shuts The Door On Unfinished Business Litigation

The New York Court of Appeals may have just halted failed law firms' efforts to recover fees from their former partners and those partners' new firms from ongoing client representations under the so-called "unfinished business doctrine." Unfinished business litigation has proliferated in recent years after the dissolutions and bankruptcies of several major law firms. In In re Thelen LLP, 2014 N.Y. LEXIS 1577, 2014 NY Slip Op 4879, 2014 WL 2931526 (N.Y. July 1, 2014), the Court of Appeals held that these profits cannot be avoided and recovered by the old firm once the matters have been transferred to a new firm. Specifically, the court held that "pending hourly fee matters are not partnership 'property' or 'unfinished business' within the meaning of New York's Partnership Law. A law firm does not own a client or an engagement, and is only entitled to be paid for services actually rendered." These questions arose out of the bankruptcies of two law firms—Thelen LLP and Coudert Brothers LLP—and subsequent litigation between the bankruptcy estates and the law firms to which former partners of both firms moved.

The "unfinished business doctrine" arose from a California Court of Appeals decision—Jewel v. Boxer, 156 Cal. App. 3d 171 (1984). Jewel held that, absent a waiver in the partnership agreement, former partners of a dissolved law firm have an ongoing duty to account to the firm and to each other for profits earned from client matters that continue after the partner leaves the firm or the firm dissolves. The Jewel court also held that partnership agreements may include provisions that structure exactly how a partnership will deal with unfinished business in the event of dissolution; a Jewel waiver of this kind has since been employed by many law firms to attempt to eliminate the partners' ongoing duty to each other and to the dissolved firm for profits from unfinished business in the event of a dissolution.

On the day that Coudert Brothers dissolved in August 2005, the partnership added a "Special Authorization" to its partnership agreement that gave the partnership the power to sell the firm's assets to other firms to maximize value, to wind down business in an orderly fashion, and to maintain continuity for clients. After Coudert filed for bankruptcy protection one year later, the administrator of its estate, Developmental Specialists, Inc. ("DSI") commenced adversary proceedings against certain of the former partners' new firms to recover...