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Posted: July 1, 2014

Pending Hourly Fee Matters are Not Partnership Property

On July 1, 2014, the Court of Appeals issued a decision in In re: Thelen LLP and In re: Coudert Brothers LLP, 2014 NY Slip Op. 04879, holding “that pending hourly fee matters are not partnership property or unfinished business within the meaning of New York’s Partnership Law.”

In In re: Thelen LLP and In re: Coudert Brothers LLP, the Second Circuit certified “two unresolved questions of New York law regarding the applicability and scope of the unfinished business doctrine:”

Under New York law, is a client matter that is billed on an hourly basis the property of a law firm, such that, upon dissolution and in related bankruptcy proceedings, the law firm is entitled to the profit earned on such matters as the ‘unfinished business’ of the firm?

and

If so, how does New York law define a client matter for purposes of the unfinished business doctrine and what proportion of the profit derived from an ongoing hourly matter may the new law firm retain?

The Court of Appeals answered the first question “no”, mooting the second question.

As to whether the Partnership Law made a pending hourly fee matter partnership property, the Court of Appeals held that:

In New York, clients have always enjoyed the unqualified right to terminate the attorney-client relationship at any time without any obligation other than to compensate the attorney for the fair and reasonable value of the completed services. In short, no law firm has a property interest in future hourly legal fees because they are too contingent in nature and speculative to create a present or future property interest, given the client’s unfettered right to hire and fire counsel.

(Internal quotations and citations omitted) (emphasis added). The court went on to explain the public policy ramifications of finding that a law firm has a property interest in unfinished hourly fee work, explaining:

Treating a dissolved firm’s pending hourly fee matters as partnership property, as the trustees urge, would have numerous perverse effects, and conflicts with basic principles that govern the attorney-client relationship under New York law and the Rules of Professional Conduct. By allowing former partners of a dissolved firm to profit from work they do not perform, all at the expense of a former partner and his new firm, the trustees’ approach creates an “unjust windfall” . . . .

Next, because the trustees disclaim any basis for recovery of profits from the pending client matters of a former partner who leaves a troubled law firm before dissolution, their approach would encourage partners to get out the door, with clients in tow, before it is too late, rather than remain and work to bolster the firm’s prospects. Obviously, this run-on-the-bank mentality makes the turnaround of a struggling firm less likely.

And attorneys who wait too long are placed in a very difficult position. They might advise their clients that they can no longer afford to represent them, a major inconvenience for the clients and a practical restriction on a client’s right to choose counsel. Or, more likely, these attorneys would simply find it difficult to secure a position in a new law firm because any profits from their work for existing clients would be due their old law firms, not their new employers.

. . .

Ultimately, what the trustees ask us to endorse conflicts with New York’s strong public policy encouraging client choice and, concomitantly, attorney mobility. . . .”

(Internal quotations and citations omitted)

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