Diamond v. Hogan Lovells US LLP

Case Type:
Business
Case Status:
Affirmed in part and Reversed in part
Citation:
15-16326, 15-16327, 15-16328, 15-16329, 15-16330, 15-16331, 15-16332, a5-16333 (9th Circuit, Feb 27,2018) Published
Tag(s):
Ruling:
Issues raised by the bankruptcy trustee's litigation can be resolved only by application of unresolved District of Columbia laws. As a result, the following questions are certified to the District of Columbia Court of Appeals: 1) If a matter was billed on an hourly fee basis by the bankrupt law firm, does the former partner have a duty to account for fees earned after his or her dissociation? 2) If yes, does DC law allow a recovery from the new firm for unjust enrichment? 3) What, if any, interest does the former firm have in collections for hourly-billed work at the new firm?
Procedural context:
After Howrey LLP became the debtor in an involuntary Chapter 7 bankruptcy case, the trustee sued law firms that had employed Howrey's former partners, seeking recovery of amounts earned or collected after the attorneys had joined the new firms. The law firms moved to dismiss the adversary proceedings. The bankruptcy court denied the motions, applying the standard for determining ownership of legal fees in contingency cases to hourly-rate engagements. The law firms appealed, and the district court reversed. The district court reasoned that there was no duty to account because the clients had entered into new engagement letters with the new law firms. The case was then appealed to the Ninth Circuit.
Facts:
Howrey LLP, a law firm formed under the partnership laws of the District of Columbia, failed following the 2008-09 recession. In 2011, creditors filed an involuntary bankruptcy petition against Howrey. In the month before the involuntary bankruptcy, Howrey's remaining partners voted to dissolve the firm and to amend the partnership agreement to include a Jewel waiver, which is designed to eliminate any duty of departing partners to account for profits related to the winding up of unfinished business. Many of the departing partners continued work on matters that were started while they were still at Howrey. In 2013, the bankruptcy trustee sued the firms where the former Howrey partners landed. The trustee asserted two legal theories: 1) partners who left before Howrey's partnership agreement was amended to include the Jewel waiver had a duty to account for fees earned on matters that had originated at Howrey, and their new firms were liable under an unjust enrichment theory; and 2) partners who left post-amendment were liable for a fraudulent transfer (the Jewel amendment) and their new firms were liable as subsequent transferees under 11 U.S.C. § 550.
Judge(s):
GOULD, MURGUIA, FREUDENTHAL (D. Wyo., sitting by designation)

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