Geron v. Seyfarth Shaw LLP

Docket No. 12-4138
Second Circuit certified the following question of law for the N.Y. Court of Appeals: does New York law treat a dissolved law firm's pending hourly fee matters as its property?
Procedural context:
Appeal from a decision in an adversary proceeding brought by Chapter 7 Trustee of Thelen LLP against Seyfrath Shaw LLP ("Seyfarth"). The district court granted Seyfarth's motion for judgment on the pleadings pursuant to Fed.R.Civ.P. 12(c). On appeal, the Second Circuit, noting a split with another Southern District of New York decision (DSI, Inc. v. Akin Gump Strauss Hauer & Feld LLP (In re Coudert Bros.), 480 B.R. 145 (S.D.N.Y. 2012), whose appeal is also pending, decided to certify the legal issue stated above to the New York Court of Appeals.
This matter involves an adversary proceeding in the Thelen LLP bankruptcy case brought by the Chapter 7 Trustee against former partners of Thelen and the law firm (Seyfarth) that those former partners joined after the dissolution of Thelen. The theory of recovery is based on the "unfinished business doctrine," which considers, unless otherwise agreed, the unfinished matters in existence at the dissolution of a partnership to be the property of the partnership; and therefore, the profits derived from such matters are owed to the partnership. The Trustee sued Seyfarth alleging that Seyfarth received a fraudulent transfer when it pocketed the fees from unfinished matters brought by the former Thelen partners. Thelen was registered as a limited liability partnership governed by California law. Just prior to dissoloution, when the firm was insolvent, the partners adopted an amended partnership agreement, which included a new provision waiving the rights of each partner and the partnership to ongoing matters at the time of the dissolution (the "Unfinished Business Waiver"). Following the dissolution, eleven Thelen partners joined Seyfarth, ten in its New York office and one if California. The Trustee sued under Sections 544 and 548 of the Bankruptcy Code and California state law to avoid the Unfinished Business Waiver as a fraudulent transfer and to recover the value of the unifinished business for the benefit of the estate's creditors. The District Court found that the controlling law governing the dispute was New York law. The District Court noted that, under New York law, "absent an agreement to the contrary, pending contingent fee cases of a dissolved partnership are assets [of the bankruptcy estate]." The District Court also noted that New York courts had not authoritatively resolved whether the unfinished business doctrine applied to pending hourly fee matters. Reasoning that the extension of the doctrine to hourly matter would clash with New York's public policy in favor of client autonomy and attorney mobility, the District Court dismissed the complaint against Seyfarth. In analyzing de novo the question of which law governed, the Second Circuit reasoned that absent a significant federal policy calling for the imposition of a federal conflicts rule, a bankruptcy court must apply the choice of law rule of the forum state, which here was New York law. Given that a fraudulent conveyance is a tort, the analytical test to be applied under New York conflicts law was to determine which jurisdiction had the greatest interest in the litigation. Because fraudulent conveyance law is conduct-regulating, the law of the jurisdiction where the tort occurred generally applies. In this matter, the Circuit ruled, the most significant contacts were in New York. The vast majority of the Thelen partners joined Seyfarth's New York office. The Thelen bankruptcy petition stated that Thelen's principal place of business or its principal assets were in the Southern District of New York. Finally, the injury was inflicted in New York, the Court ruled. On the substantive issue of whether New York law recognized the application of the unfinished business doctrine to hourly fee matters, the Second Circuit determined that it could not decide the question without guidance from the New York Court of Appeals. In doing so, the Second Circuit acknowledged that it had predicted in Santalucia v. Sebright Transportation, Inc. 232 F.3d 293 (2d Cir. 2000) that New York law applied the doctrine to unfinished contingent fee matters. While that had not been the subject of any decision of the New York Court of Appeals, the unanimous view of the intermediate New York court enabled the Circuit in Santalucia to predict with confidence that the Court Appeals would take a similar view. The Second Circuit, however, could not find a similar body of law in connection with the application of the doctrine to hourly fees. In addition, it believed that there were strong legal and policy arguments on both sides of the issue. Among the arguments in favor, the Circuit noted: 1) New York Partnership Law treats all partnerships the same regardless of the nature of their business, and considers executory contracts to perform professional services to be partnership assets; 2) the New York Partnership Law instructs courts to adopt interpretations of its provisions that conform to those of other Uniform Partnership Act states. Many cases from such jurisdictions have applied the unifinished business doctrine to hourly fee cases; 3) given that contingent fee cases are deemed to be property of the partnership, a different treatment for hourly fee cases might mean that a partner's fiduciary obligations to a firm would vary according to the billing method used, which could result in more dissolutions as partners would treat their book of business as a personal and not a partnership asset. Among the arguments against the application of the doctrine to hourly fees, the Circuit noted the following: 1) the uniqueness of the attorney-client relationship, and the possibility that the application of the doctrine may undermine the relationship; 2) the potential for unintended consequences such as disruption of services because firms could be reluctant to accept lawyers brining unfinished matters from dissolved law firms; 3) hourly fee matters are arguably different from contingency fee matters. In a contingent fee case, the ultimate recovery may be heavily dependent on work done by the dissolved partnership. In an hourly fee matter, the dissolved firm has been fully paid for the work it has done, and the continuing matter, therefore, could be construed as a new one rather than an unfinished business. Given the significance of the issues involved, the Second Circuit certified the question for the Court of Appeals.
Lynch, Chin and Carney

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