Decisions Do Not Apply 'Jewel Doctrine' To Departed Partners' Fees

Legal Fees Earned by Departed Partners in Now-Defunct Law Firms Determined Not to Be Property of the Bankrupt Firm

HIGHLIGHTS:

Two recent court decisions in California and New York call into question the continued viability of the unfinished business theory (the so-called "Jewel" doctrine) with respect to hourly matters earned by departed lawyers in firms that have dissolved. With the escalation of the number of dissolved firms in recent years and the complexity of bankruptcies in the modern era of the mega-firm, the unfinished business doctrine has been invoked with greater frequency and with greater scholarly scrutiny. Other states will likely weigh in either favoring, distinguishing or eviscerating the unfinished business doctrine for their own states. A California District Court recently held that a bankruptcy trustee could not claim a property interest in the hourly fee matters pending at the now-dissolved Heller Ehrman LLP law firm.1 This June California decision was followed by a similar holding less than a month later by the New York Court of Appeals (the highest court in New York), resolving a split among lower New York cases. The New York decision refused to apply the unfinished business doctrine in favor of the bankruptcy trustees for Thelen LLP and Coudert Brothers LLP.2 The two decisions call into question the continued viability of the unfinished business theory (the so-called "Jewel" doctrine) with respect to hourly matters. However, the issue is far from settled as other states will likely consider the issue.

Partner Migration Impacted by the Two Court Opinions

The three cases decided by the two opinions followed similar facts, now familiar in the wake of the demise of several venerable (and large) law firms. Heller and Thelen each dissolved in 2008, with ensuing bankruptcy protection cases. Coudert dissolved in 2005, subsequently seeking chapter 11 bankruptcy protection.

In each case, the bankruptcy trustee initiated adversarial proceedings against the law firms to which the former partners migrated. The suits asserted a property interest in the hourly fee matters pending at the time of dissolution. In Thelen and Coudert, the partners attempted to thwart the doctrine by entering into poorly timed waivers, sometimes referred to as a "Jewel waiver."3 An unfinished business or Jewel waiver is an agreement among the partners to disclaim any interest of the partnership in pending matters. Although an elegant and simple solution...