Docket No. S236208
Heller Ehrman LLP v. Davis Wright Tremaine LLP
Filed 3/5/18
IN THE SUPREME COURT OF CALIFORNIA
HELLER EHRMAN LLP,
S236208
Plaintiff and Appellant,
v.
9th Cir. Nos. 14-16314,
14-16315, 14-16317, 14-16318
DAVIS WRIGHT TREMAINE LLP,
Defendant and Respondent.
AND RELATED CASES.
Like “cloud-capp’d towers,” “gorgeous palaces,” and perhaps someday
even “the great globe itself,” many arrangements endure for some time but
eventually dissolve.1 So too with certain law partnerships –– including firms that
are retained, before they dissolve, to handle matters on an hourly basis. The
question before us is whether a dissolved law firm retains a property interest in
such legal matters that are in progress –– but not completed –– at the time of
dissolution. The United States Court of Appeals for the Ninth Circuit asks us to
answer this question, which implicates both common law principles and statutory
rules of partnership law, and has implications for the competing interests of
ongoing and dissolved law partnerships, partners and firm employees, creditors
and clients.
1
“The cloud-capp’d towers, the gorgeous palaces, / The solemn temples, the
great globe itself, / Yea, all which it inherit, shall dissolve.” (Shakespeare, The
Tempest, act IV, scene I, lines 152–154.
1
What we hold is that under California law, a dissolved law firm has no
property interest in legal matters handled on an hourly basis, and therefore, no
property interest in the profits generated by its former partners’ work on hourly fee
matters pending at the time of the firm’s dissolution. The partnership has no more
than an expectation that it may continue to work on such matters, and that
expectation may be dashed at any time by a client’s choice to remove its business.
As such, the firm’s expectation — a mere possibility of unearned, prospective fees
— cannot constitute a property interest. To the extent the law firm has a claim, its
claim is limited to the work necessary for preserving legal matters so they can be
transferred to new counsel of the client’s choice (or the client itself), effectuating
such a transfer, or collecting on work done pretransfer.
I.
Petitioner Heller Ehrman (Heller) was a global law partnership with more
than 700 attorneys. By August 31, 2008, the firm was in financial distress.
Heller’s creditors soon declared it in default, and Heller’s shareholders — lawyers
responsible for running the firm and providing legal services to its clients — voted
to dissolve the firm. Heller notified its clients that as of October 31, 2008, it
would no longer be able to provide any legal services.
Heller’s dissolution plan included a provision known as a Jewel waiver.
Named after the case of Jewel v. Boxer (1984) 156 Cal.App.3d 171 (Jewel), the
provision purported to waive any rights and claims Heller may have had “to seek
payment of legal fees generated after the departure date of any lawyer or group of
lawyers with respect to non-contingency/non-success fee matters only.” The
waiver was intended as “an inducement to encourage Shareholders to move their
clients to other law firms and to move Associates and Staff with them, the effect of
which will be to reduce expenses to the Firm-in-Dissolution.” By its express
2
terms, the waiver governed only those matters billed on a non-contingency –– that
is continual, or hourly –– basis.
In the following months, Heller’s former shareholders joined at least 16
other law firms, including the respondent law firms of Davis Wright Tremaine
LLP; Jones Day, Orrick, Herrington & Sutcliffe LLP; and Foley & Lardner LLP.
Many of Heller’s former clients –– and all of those who went to the respondents
— signed new retainer agreements.
In the meantime, Heller filed for bankruptcy under chapter 11 of the United
States Bankruptcy Code. When Heller’s plan of liquidation was approved, the
bankruptcy court appointed a plan administrator who became responsible for
pursuing claims to recover assets for the benefit of Heller’s creditors.
In December 2010, the administrator filed adversary proceedings in
bankruptcy court on behalf of Heller against the law firms where Heller’s former
shareholders had found work. The administrator sought to set aside the Jewel
waiver, claiming that under the Bankruptcy Code, the waiver was a fraudulent
transfer of Heller’s rights to postdissolution fees to its former shareholders, and
from them, to their new firms. While it was not the administrator’s allegation that
the shareholders breached any fiduciary duty while working for Heller, the
administrator nonetheless sought to recover from the shareholders’ new firms the
profits generated by the hourly fee matters pending when Heller dissolved and
were brought to the new firms.
The respondents vigorously contested the administrator’s claim. At
summary judgment, the parties filed cross-motions on whether the Jewel waiver
constituted a transfer of Heller’s property to the respondents and whether any such
transfer was a fraudulent transfer under the Bankruptcy Code. Relying on one of
his earlier decisions, the bankruptcy judge found in favor of Heller on both issues.
3
The district court reversed. The court rested its ruling on considerations of
law, equity, and public policy. In analyzing California law, the court reasoned that
the Revised Uniform Partnership Act (RUPA) undermined Jewel, the legal
foundation on which Heller based its claim. Specifically, the court concluded that
RUPA contains no provision giving dissolved law firms the right to demand an
accounting for profits earned by its former partners under new retainer
agreements. The court ultimately held that Heller did not have a property interest
in the hourly fee matters pending at dissolution. Moreover, since Heller did not
have a property interest in such matters, there was no fraudulent transfer to the
new law firms. The court’s decision on the property issue thus resolved the case.
Heller appealed to the Ninth Circuit, which asked us to provide guidance.
We granted the Ninth Circuit’s request that we resolve the question of what
property interest, if any, a dissolved law firm has in the legal matters, and
therefore the profits, of cases that are in progress but not completed at the time of
dissolution.
II.
Although this dispute has a direct impact on who controls the profits from
ongoing cases involving hourly fees, no doubt for some litigants certain aspects of
this case also seem to implicate broader concerns — regarding, for example, the
extent of partners’ fiduciary obligations to their firm or the efforts partners make
to secure business on behalf of their firm. Nonetheless, the question we must
ultimately address is about the scope of a dissolved firm’s property interests, and
whether those interests extend to the profits from ongoing matters billed on an
hourly fee basis. The most sensible interpretation of the scope of property
interests under our state law — along with the practical implications arising from
different approaches to the property issue — persuades us that the dissolved firm’s
property interest here is quite narrow.
4
What we conclude is that a dissolved law partnership is not entitled to
profits derived from its former partners’ work on unfinished hourly fee matters.
Any expectation the law firm had in continuing the legal matters cannot be
deemed sufficiently strong to constitute a property interest allowing it to have an
ownership stake in fees earned by its former partners, now situated at new firms,
working on what was formerly the dissolved firm’s cases. Any “property, profit,
or benefit” accountable to a dissolved law firm derives only from a narrow range
of activities: those associated with transferring the pending legal matters,
collecting on work already performed, and liquidating the business.
The limited nature of the interest accorded to the dissolved law firm
protects clients’ choice of counsel. It allows the clients to choose new law firms
unburdened by the reach of the dissolved firm that has been paid in full and
discharged. The rule also comports with our policy of encouraging labor mobility
while minimizing firm instability. It accomplishes the former by making the
pending matters, and those that work on them, attractive additions to new firms; it
manages the latter by placing partners who depart after a firm’s dissolution at no
disadvantage to those who leave earlier.
A.
Because this dispute concerns a dissolved firm of lawyers with fiduciary
duties to the firm, the law of partnership and its related fiduciary obligations
provide useful context for the analysis. But neither previous cases nor specific
statutory provisions concerning partnerships resolve the question before us.
Only twice previously — in the late 19th century — have we addressed the
fiduciary duties of a dissolved law firm’s former partners regarding the unfinished
business at the time of dissolution. In Osment v. McElrath (1886) 68 Cal. 466 and
Little v. Caldwell (1894) 101 Cal. 553, we confronted situations in which law
5
firms dissolved with contingency matters pending. In both cases, we held that the
fees generated by one partner in completing the matters were to be shared equally
with the former partner (or his estate). (Osment, supra, 68 Cal. at p. 470; Little,
supra, 101 Cal. at p. 561.) We thus rejected the argument that the lawyers who
personally completed the matters were entitled to a greater share of the fees than
stipulated to in the partnership agreements.
California partnership law was codified in 1929 when the Legislature
adopted the Uniform Partnership Act (UPA). The UPA preserved many common-
law principles, including the rules elucidated in Osment and Little. (See Jacobson
v. Wikholm (1946) 29 Cal.2d 24, 27–28 (Jacobson).) The First District Court of
Appeal then added further gloss when it interpreted UPA in the case of Jewel v.
Boxer, supra. In Jewel, partners of a dissolved law firm sued their former partners
who had been handling “most of the active personal injury and workers’
compensation cases.” (Jewel, supra, 156 Cal.App.3d at p. 175.) The suing
partners sought their shares of the fees from these cases, arguing that they were
entitled to the same fees as prevailed during the partnership.
The Jewel court ruled in favor of the plaintiffs. It reasoned that the former
partners were not entitled “to extra compensation for services rendered in
completing unfinished business,” where “extra compensation” was compensation
“which is greater than would have been received as the former partner’s share of
the dissolved partnership.” (Jewel, supra, 156 Cal.App.3d at p. 176 & fn. 2.
Accordingly, without an agreement to the contrary, any attorney fees generated
from matters pending when the law firm dissolved were “to be shared by the
former partners according to their right to fees in the former partnership,
regardless of which former partner provides legal services in the case after the
dissolution.” (Id. at p. 174.
6
Subsequent Court of Appeal decisions consistently applied Jewel’s holding
to contingency fee cases. (See, e.g., Fox v. Abrams (1985) 163 Cal.App.3d 610,
612–613; Rosenfeld, Meyer & Susman v. Cohen (1987) 191 Cal.App.3d 1035,
1063.) Such widespread application of Jewel was confined to the contingency fee
context, however. Only in 1993 did a Court of Appeal expressly interpret Jewel to
encompass matters the dissolved law firm had been handling on an hourly basis.
(See Rothman v. Dolin (1993) 20 Cal.App.4th 755, 757–759.) To this day,
Rothman remains the only published California opinion to apply Jewel to the
hourly fee context, and it did so before UPA was revised.
Three years after Rothman, the Legislature again revised partnership law by
replacing UPA with RUPA. (See Corp. Code, § 16100 et. seq.) RUPA made
several changes to the default rules of California partnership law. First, it added
an entire section governing the fiduciary duty to account. It replaced former
Corporations Code section 15021(1), which had provided that partners had a duty
to account for benefits and profits, with section 16404, subdivision (b)(1), which
sets forth a partner’s duty “[t]o account to the partnership and hold as trustee for it
any property, profit, or benefit derived by the partner in the conduct and winding
up of the partnership business or derived from a use by the partner of partnership
property or information, including the appropriation of a partnership opportunity.”
(Corp. Code, § 16404, subd. (b)(1).
Second, RUPA supplied a new provision specifying that one of a partner’s
fiduciary duties is the duty “[t]o refrain from competing with the partnership in the
conduct of the partnership business before the dissolution of the partnership.”
(Corp. Code, § 16404, subd. (b)(3).) Notably, the duty to refrain from competing
with the partnership only pertains to the period before dissolution.
Third, RUPA changed the rule previously in force regarding partners’
postdissolution rights to reasonable compensation. It replaced Corporations Code
7
section 15018, subdivision (f), which had provided that only a “surviving partner
is entitled to reasonable compensation for his or her services in winding up the
partnership affairs,” with section 16401, subdivision (h), which provides that all
partners are entitled to such compensation. (Corp. Code, § 16401, subd. (h).
Since the enactment of RUPA, no California court has, in a published
opinion, resolved whether there remains a basis for holding that a partnership has a
property interest in legal matters pending at a firm’s dissolution. The last time we
took up the issue was in Osment and Little. More recent is the intermediate
appellate decision in Jewel, although that, too, was issued before the passage of
RUPA and implicated only contingency fee matters. We thus consider with fresh
eyes the question posed to us by the Ninth Circuit.
B.
Heller is a dissolved partnership, and the parties make various arguments
associated with partnership law. So we place our analysis of whether hourly fee
matters pending at the time of a partnership’s dissolution are the partnership’s
property in context by considering not only the scope of property rights under
California law — and the interests of clients relative to those of the attorneys they
hire — but also the application of California’s partnership law to this case.
Both the common law and provisions of California law codifying the nature
of property associate a property interest with a specific bundle of rights to control
the use and disposition of a particular asset. (See Civ. Code, § 654 [defining
property as “the right of one or more persons to possess and use it to the exclusion
of others”]; United States v. Craft (2002) 535 U.S. 274, 278–279 [calling it a
“common idiom” that property is described as “a ‘bundle of sticks’ — a collection
of individual rights which, in certain combinations, constitute property”]; Citizens
for Covenant Compliance v. Anderson (1995) 12 Cal.4th 345, 369; Moore v.
8
Regents of University of California (1990) 51 Cal.3d 120, 165–166 (dis. opn. of
Mosk, J.) [“the concept of property is often said to refer to a ‘bundle of rights’ that
may be exercised with respect to that object — principally the rights to possess the
property, to use the property, to exclude others from the property, and to dispose
of the property by sale or by gift”].) By helping to structure expectations that
people can reasonably hold in their dealings with each other, conceptions of
property facilitate social and economic relationships. The circumstances giving
rise to a property interest, in turn, include not only familiar arm’s-length
transactions but also certain sufficiently reliable expectations, such as unvested
retirement benefits. (E.g., In re Marriage of Green (2013) 56 Cal.4th 1130, 1140–
1141 [“Nonvested retirement benefits are certainly contingent on various events
occurring — such as continued employment — but this does not prevent them
from being a property right for these purposes.”].) In this case, we consider the
question of whether a sufficiently strong expectation exists in the context of a law
firm partnership performing hourly work on legal matters. We find that it does
not.
A property interest grounded in such an expectation requires a legitimate,
objectively reasonable assurance rather than a mere unilaterally-held presumption.
(See Bd. of Regents v. Roth (1972) 408 U.S. 564, 577 [discussing property
interests protected by procedural due process and stating that “[t]o have a property
interest in a benefit, a person . . . must have more than a unilateral expectation of
it. He must, instead, have a legitimate claim of entitlement to it”]; Paramount
Convalescent Center, Inc. v. Department of Health Care Services (1975) 15
Cal.3d 489, 495 [stating that plaintiff’s case turned on whether it “had a legitimate
claim of entitlement to a new contract, i.e., a property right of which [it] could not
be deprived without a hearing, or whether it had a mere expectancy or hope that
future contracts would be forthcoming”].) What Heller claims here is not merely
9
that a firm has a legitimate interest in the hourly matters on which it is working.
Rather, Heller claims a legitimate interest in the hourly matters on which it is not
working — and on which it cannot work, because it is a firm in dissolution that
has ceased operations. In doing so, it seeks remuneration for work that someone
else now must undertake. Because such a view is unlikely to be shared by either
reasonable clients or lawyers seeking to continue working on these legal matters at
a client’s behest, Heller’s expectation is best understood as essentially unilateral.
A client may ordinarily find that it makes little sense to continually change
the allocation of work on legal matters billed on an hourly basis to different
lawyers or firms, because of the value of the relationships formed in the course of
representation, the accumulation of knowledge by the lawyers involved in the
case, or simply the cost of identifying and transacting to retain suitable new
counsel. Even so, hanging over all agreements involving legal representation ––
especially those involving work paid on an hourly basis –– is the possibility that a
client will change the nature of the work requested, the terms on which the work is
to be performed, or the lawyer the client prefers. (See, e.g., General Dynamics
Corp. v. Superior Court (1994) 7 Cal.4th 1164, 1174–1175, 1172 (General
Dynamics) [stating that it is “bedrock law” that a client has the right “to sever the
professional relationship [with its attorney] at any time and for any reason,”
although carving out a limited exception for in-house counsel whose relationship
with the client is not a “ ‘one shot’ undertaking”].) Such uncertainty is rooted not
only in the reality that hourly fees are paid in increments, but also in the extent to
which the client legitimately retains flexibility to change the terms of the bargain
for legal services after a lawyer has been retained. (See, e.g., id. at pp. 1174–
1175; Gage v. Atwater (1902) 136 Cal. 170, 172–173 [“The interest of the client in
the successful prosecution or defense of the action is superior to that of the
10
attorney, and he has the right to employ such attorney as will in his opinion best
subserve his interest.”].
Of course, to assume that firms routinely acquire business simply through
the good offices of a single lawyer belies the reality that firms exist for a reason —
no matter how much business that individual appears to generate alone. Partners
pool not only physical resources but human capital. They hold out not only
themselves but their firm as capable of deploying the necessary resources to
handle matters effectively. In doing so, lawyers often leverage the preparatory
work and reputation of an entity in which they have a shared stake, and to which
they owe a shared fiduciary duty. These realities certainly make it difficult to
deny that lawyers in the same firm would ordinarily feel some shared interest in
each other’s work — indeed, some degree of mutual interest is all but implicit in
the very nature of a firm.
But a shared interest can differ from a property interest, which under
California law must reflect more than a mere contingency or a certain probability
that an outcome — such as further hourly fees remitted to the firm — may
materialize. (Civ. Code, § 700 [“A mere possibility . . . is not to be deemed an
interest of any kind.”]; accord In re Marriage of Brown (1976) 15 Cal.3d 838,
844–845 [distinguishing between an expectancy and a contingent interest in
property and explaining that “[t]he term expectancy describes the interest of a
person who merely foresees that he might receive a future beneficence” and that
such an interest cannot be enforced].) While Heller was a viable, ongoing
business, it no doubt hoped to continue working on the unfinished hourly fee
matters and expected to receive compensation for its future work. But such hopes
were speculative, given the client’s right to terminate counsel at any time, with or
without cause. As such, they do not amount to a property interest. (Civ. Code,
§ 700; In re Thelen LLP (2014) 20 N.E.3d 264, 270–271 [“no law firm has a
11
property interest in future hourly legal fees because they are ‘too contingent in
nature and speculative to create a present or future property interest’ ”]; Heller
Ehrman LLP v. Davis, Wright, Tremaine, LLP (N.D.Cal. 2014) 527 B.R. 24, 30–
31 (Heller) [“A law firm never owns its client matters. The client always owns the
matter, and the most the law firm can be said to have is an expectation of future
business.”].) Dissolution does not change that fact, as dissolving does not place a
firm in the position to claim a property interest in work it has not performed —
work that would not give rise to a property interest if the firm were still a going
concern.
A dissolved law firm therefore has no property interest in the fees or profits
associated with unfinished hourly fee matters. The firm never owned such
matters, and upon dissolution, cannot claim a property interest in the income
streams that they generate. This is true even when it is the dissolved firm’s former
partners who continue to work on these matters and earn the income — as is
consistent with our partnership law.
To find otherwise would trigger or exacerbate a host of difficulties. The
more fees a former partnership can claim, the less remain available to compensate
the people who actually perform the work. Reduced compensation creates
incentives that are perverse to the mobility of lawyers, clients’ choice for counsel,
and stability of law firms. Former partners of a dissolved firm may face limited
mobility in bringing unfinished matters to replacement firms when those
unfinished matters are unattractive because the fees they generate must be shared
with the dissolved firm. It was for this reason that Heller’s shareholders executed
the Jewel waiver, intending it as “an inducement to encourage Shareholders to
move their clients to other law firms and to move Associates and Staff with them.”
Indeed, partners and their associates and staff are valuable hires to some extent
precisely because of the business they bring. That lawyers sometimes have reason
12
to switch firms does not diminish the importance of certain fiduciary duties that
facilitate the existence of any firm. (See Corp. Code, § 16404, subd. (a
[specifying that a partner owes the partnership the duty of loyalty and the duty of
care], subd. (b) [listing the obligations subsumed under the duty of loyalty, which
includes, for example, the duty “[t]o refrain from dealing with the partnership . . .
as or on behalf of a party having an interest adverse to the partnership”], subd. (c
[specifying that, under the duty of care, a partner must refrain “from engaging in
grossly negligent or reckless conduct, intentional misconduct, or a knowing
violation of law”].) Yet neither the scope of those duties nor a reasonable
understanding of the scope of property under California law supports the inference
that a dissolved firm owns the fees from matters its attorneys once handled on an
hourly basis.
Recognizing a property interest even in hourly matters would also risk
impinging on the client’s right to discharge an attorney at will, a right that has
been recognized in both statute and case law. (Fracasse v. Brent (1972) 6 Cal.3d
784, 790, citing Code Civ. Proc., § 284; General Dynamics, supra, 7 Cal.4th at pp.
1174–1175.) To allow a firm like Heller to share in fees paid by a client who has
discharged it (and paid it in full) necessarily reduces the fees available to
compensate the client’s substituted counsel of choice. In such a situation, clients
with pending matters who prefer any of the firms that hired Heller’s former
shareholders may — in recognition of the fact that these firms will not receive the
full fees paid and therefore will not be as incentivized to work on their matters —
opt for second-choice counsel. In other words, allocating fees to Heller alters the
freedom that clients have in choosing attorneys after Heller stopped representing
them. To protect this freedom, we affirm that client matters belong to the clients,
not the law firms, and the latter may not assert an ongoing interest in the matters
once they have been paid and discharged.
13
The clients’ ability to retain their preferred counsel is a weighty interest,
even if counterbalanced by an interest in partnership stability. This weighing of
equities is evident in a case like Howard v. Babcock (1993) 6 Cal.4th 409, 412,
where we deemed enforceable a law partnership’s noncompete agreement, which
imposed a reasonable cost on departing partners who competed with the firm. In
doing so, we sought “to achieve a balance between the interest of clients in having
the attorney of choice, and the interest of law firms in a stable business
environment.” (Id. at p. 425.) Here, however, both interests are served by cutting
off the fees going to the dissolved law firm.
Amici make this argument by pointing to the instability that results under a
rule that pivots depending on when a partner departs a business. In particular,
amici refer to situations where a partner remains with a struggling partnership in
an effort to help rescue it, the partnership subsequently dissolves, and that
dissolved partnership is understood to have a continued interest in unfinished
hourly fee business — but only because the partner remained until dissolution.
Anticipating such an outcome, partners would leave the firm and take business
with them at the first sign of trouble so as not to risk being around when the
partnership dissolves. We minimize this instability by reducing the incentives for
partners to “jump ship” — that is, by limiting the dissolved partnership’s
continued interest in unfinished hourly fee matters as asserted against partners
who stay until dissolution.
Against these concerns, Heller raises the policy considerations allegedly
animating Jewel. The court in Jewel thought that prohibiting former partners from
earning “extra compensation” for work done postdissolution was necessary to
“prevent[] partners from competing for the most remunerative cases during the life
of the partnership” and to “discourage[] former partners from scrambling to take
physical possession of files and seeking personal gain by soliciting a firm’s
14
existing clients upon dissolution.” (Jewel, supra, 156 Cal.App.3d at p. 179.) But
Jewel dealt with contingency fee matters, and whether our conclusion in this case
extends to such matters is a question we need not address here. Suffice to say that
we find nothing in Jewel to advance Heller’s position regarding hourly fee cases.
Simply put, a Jewel-type rule is unnecessary to prevent competition among
partners. Under our partnership law, partners cannot compete with their firm
during the partnership, even for “the most remunerative cases.” (Jewel, supra, 156
Cal.App.3d at p. 179; Corp. Code, § 16404, subd. (b)(3) [stipulating that partners
have a fiduciary duty “[t]o refrain from competing with the partnership in the
conduct of the partnership business before the dissolution of the partnership”].
Our law also makes clear that the duty to refrain from competing with the
partnership only pertains to the period before dissolution. (Corp. Code, § 16404,
subd. (b)(3); Sen. Com. on Judiciary, Analysis of Assem. Bill 583 (1995-1996
Reg. Sess.) as amended June 5, 1996, p. 7 [indicating that “a partner is free to
compete . . . upon dissolution” since “[t]he duty [not] to compete only applies to
the ‘conduct of the business’ and not to the ‘winding up’ ”].) This temporal limit,
perhaps counterintuitively, readily advances the spirit of RUPA’s prohibition
against competition during the life of the partnership. When partners know they
may freely compete after a firm dissolves, they have less reason to compete during
the life of the partnership.
Our holding fits comfortably with RUPA’s provisions governing fiduciary
duty. Under RUPA, a partner has the duty “[t]o account to the partnership and
hold as trustee for it any property, profit, or benefit derived by the partner in the
conduct and winding up of the partnership business or derived from a use by the
partner of partnership property or information.” (Corp. Code, § 16404, subd.
(b)(1).) Because no partnership property or information is at stake here (per our
previous discussion), we can focus on the textual language specifying that a
15
partner has as duty to account during the “winding up of the partnership
business.”2 (Corp. Code, § 1604, subd. (b)(1).
Winding up is “the process of completing all of the partnership’s
uncompleted transactions, of reducing all assets to cash, and of distributing the
proceeds, if any, to the partners.” (Gregory, The Law of Agency and Partnership
(3d ed. 2001) § 227, p. 368.) Under RUPA, “[a] person winding up a
partnership’s business may preserve the partnership business or property as a
going concern for a reasonable time, prosecute and defend actions and
proceedings, whether civil, criminal, or administrative, settle and close the
partnership’s business, dispose of and transfer the partnership’s property,
discharge the partnership’s liabilities, distribute the assets of the partnership
pursuant to Section 16807, settle disputes by mediation or arbitration, and perform
other necessary acts.” (Corp. Code, § 16803, subd. (c).
We read these provisions to indicate that the process of winding up a law
partnership’s hourly fee matters extends no further than to certain acts. These
include those acts necessary to (1) preserve legal matters for transfer to the client’s
new counsel or the client itself, (2) effectuate such a transfer, and (3) collect on
work done pretransfer. (Jacobson, supra, 29 Cal.2d at pp. 28–29 [stating that
under the common law “the winding up or settling of the partnership affairs was
restricted to selling the firm property, receiving money due the firm, paying its
debts, returning the capital contributed by each partner, and dividing the profits”];
King v. Stoddard (1972) 28 Cal.App.3d 708, 712–713 (King) [listing “acts
approved as ‘appropriate for winding up partnership affairs’ ” to include such
things as the “assignment of partnership property to repay partnership debt,”
2
The “conduct . . . of the partnership business” language does not apply to a
firm in dissolution, since such a firm is not conducting its business as usual.
(Corp. Code § 1604, subd. (b)(1).
16
“disposition of partnership property,” “maintenance of action for damages on
behalf of the partnership,” and “execution of renewal notes after death of
partner”]; Black’s Law Dict. (10th ed. 2014) p. 1835 [defining “winding up” as
“[t]he process of settling accounts and liquidating assets in anticipation of a
partnership’s or a corporation’s dissolution”].
So we agree with the district court that “Heller should bill and be paid for
the time its lawyers spent filing motions for continuances, noticing parties and
courts that it was withdrawing as counsel, packing up and shipping client files
back to the clients or to new counsel, and getting new counsel up to speed on
pending matters.” (Heller, supra, 527 B.R. at p. 32.) These are activities
necessary to “preserve the partnership business” (Corp. Code, § 16803, subd. (c)
— here consisting of legal matters — so that the matters can be transferred to the
client’s new counsel of choice, to physically transfer the matters, and to “settle and
close” the business (by withdrawing from the pending matters and transferring
them to the clients or the clients’ new counsel). In the same vein, any effort to
collect on work Heller performed but had not billed for at the time of dissolution
falls into the category of liquidating the business, settling fee disputes with clients,
and “distribut[ing] the assets.” (Id.) Under Corporations Code section 16404,
subdivision (b)(1), a partner has the duty to account for any profits derived from
such activities.
But the duty extends no further. Specifically, it does not extend to
substantive legal work done on hourly fee matters to continue what was formerly
the business of a dissolved partnership.3 Such work falls outside of the definition
of winding up, despite Corporations Code section 16803, subdivision (c)’s
reference to the “prosecut[ion] and defen[se] [of] actions and proceedings.”
3
We disapprove of Rothman v. Dolin, supra, 20 Cal.App.4th 755, to the
extent that it conflicts with our analysis.
17
Winding up implies the conclusion of a firm’s business, not its indefinite
continuation. (See King, supra, 28 Cal.App.3d at p. 712 [“the indefinite
continuation of the partnership business is contrary to the requirement for winding
up of the affairs upon dissolution”].) Indeed, if the prosecution and defense of
routine hourly fee matters were encompassed within the concept of winding up,
then the process of winding up a law firm could conceivably last indefinitely since
the ordinary, ongoing business of a litigating law firm is precisely to “prosecute
and defend actions and proceedings.” (Corp. Code, § 16803, subd. (c).) We bear
in mind, too, that RUPA governs all partnerships rather than simply law
partnerships. (Corp. Code, § 16111, subd. (b).) In the context of general
partnerships, the language on prosecuting and defending actions must refer to
actions in which the partnership is a party, i.e., to actions involving disputes over a
firm’s receivables and liabilities, which must be resolved to liquidate the business.
To read this provision in any other way would risk treating law firms as distinct
from all other partnerships. Law firms would be able to assert a postdissolution
interest in the business that they normally conduct — the prosecution and defense
of actions — while other partnerships would have no statutory hooks to receive
compensation for what they do. This is a conclusion we cannot support.
Nor can we conclude that continuation of hourly fee matters can reasonably
be considered “preserv[ing] the partnership business or property as a going
concern for a reasonable time.” (Corp. Code, § 16803, subd. (c).) Such
continuing, ongoing work reaches beyond what is necessary to transfer the matters
or collect on work done before the transfer. So it lies outside the range of
activities for which a former partner has a duty to account. The situation might be
different in the context of contingency fee matters, where what constitutes “a
going concern” preserved for a “reasonable time” is considered against a backdrop
in which the dissolved firm had yet to be paid for the work it performed and will
18
not be paid until the matter is resolved. (Id.) But we have no occasion to
contemplate such matters here.
Nothing else in RUPA cuts against our holding. Of the three new
provisions in RUPA — governing the fiduciary duty to account, the scope of
permissible competition, and reasonable compensation for winding up a
partnership — we have explained how the first two cohere with our conclusion.
The third, too, is consistent with our analysis: winding up encompasses a limited
number of tasks but the partners who perform those tasks are entitled to
“reasonable compensation” for having done them. (Corp. Code, § 16401, subd.
(h).) RUPA therefore does not change our understanding of what constitutes
property.
19
III.
Under California partnership law, a dissolved law firm does not have a
property interest in legal matters handled on an hourly basis, or in the profits
generated by formers partners who continue to work on these hourly fee matters
after they are transferred to the partners’ new firms. To hold otherwise would risk
intruding without justification on clients’ choice of counsel, as it would change the
value associated with retaining former partners — who must share the clients’ fees
with their old firm — relative to lawyers unassociated with the firm at its time of
dissolution who could capture the entire fee amount for themselves or their current
employers. Allowing the dissolved firm to retain control of such matters also risks
limiting lawyers’ mobility postdissolution, incentivizing partners’ departures
predissolution, and perhaps even increasing the risk of a partnership’s dissolution.
So, with the exception of fees paid for work fitting the narrow category of
winding up activities that a former partner might perform after a firm’s
dissolution, a dissolved law firm’s property interest in hourly fee matters is limited
to the right to be paid for the work it performs before dissolution. Consistent with
our statutory partnership law, winding up includes only tasks necessary to preserve
the hourly fee matters so that they can be transferred to new counsel of the client’s
choice (or the client itself), to effectuate such a transfer, and to collect on the
pretransfer work. Beyond this, the partnership’s interest, like the partnership
itself, dissolves.
CUÉLLAR, J.
WE CONCUR: CANTIL-SAKAUYE, C. J.
CHIN, J.
CORRIGAN, J.
LIU, J.
KRUGER, J.
MANELLA, J.*
*
Associate Justice of the Court of Appeal, Two Appellate District, Division Four,
assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.
20
See last page for addresses and telephone numbers for counsel who argued in Supreme Court.
Name of Opinion Heller Ehrman LLP v. Davis Wright Tremaine LLP
Unpublished Opinion
Original Appeal
Original Proceeding XXX on request pursuant to rule 8.548, Cal. Rules of Court
Review Granted
Rehearing Granted
Opinion No.S236208
Date Filed: March 5, 2018
Court:
County:
Judge:
Counsel:
Diamond McCarthy, Christopher D. Sullivan, Matthew S. Sepuya, Christopher R. Murray, Andrew B.
Ryan, James Sheppard, Karen K. Diep; Valle Makoff, Jeffrey T. Makoff, Ellen Ruth Fenichel; Schnader
Harrison Segal & Lewis, Nuti Hart and Kevin W. Coleman for Plaintiff and Appellant.
Felderstein Fitzgerald Willoughby & Pascuzzi and Thomas A. Willoughy for The Official Committee of
Unsecured Creditors of Heller Ehrman LLP as Amicus Curiae on behalf of Plaintiff and Appellant.
Orrick, Herrington & Sutcliffe, E, Joshua Rosenkranz, Rachel Wainer Apter, Daniel A. Rubens,
Christopher J. Cariello, Anjali S. Dalal, Eric A. Shumsky, Charles W. Tyler; Arnold & Porter, Pamela
Phillips, Jonathan W. Hughes and Diana D. DiGennaro for Defendant and Respondent Orrick, Herrington
& Sutcliffe LLP.
Keker & Van Nest, Keker, Van Nest & Peters, Steven A. Hirsch, Steven P. Ragland, John C. Bostic;
Snyder Miller & Orton, Luther Orton and Maureen Green for Defendant and Respondent Davis Wright
Tremaine LLP.
PMRK Law, Peter P. Meringolo, Luther K. Orton; Snyder Miller & Orton, James L. Miller, Luther Orton
and Maureen Green Defendant and Respondent Foley & Lardner LLP.
Jones Day, Robert A. Mittelstaedt, Jason McDonell, Nathaniel Garrett, Shay Dvoretzky and Emily J.
Kennedy for Defendant and Respondent Jones Day.
Hinshaw & Culbertson, Anthony E. Davis, Cassidy E. Chivers and Joel D. Bertocchi for The Association
of Professional Responsibility Lawyers as Amicus Curiae on behalf of Defendants and Respondents.
Morrison & Foerster, Douglas L. Hendricks, Larry Engel, Bradley S. Lui, Brett H. Miller, Erica J.
Richards, James Sigel, Miriam A. Vogel and Brian R. Matsui for 32 National and International Law Firms
as Amici Curiae on behalf of Defendants and Respondents.
Page 2 – S236208 – counsel continued
Counsel:
Morgan Lewis & Bockius, Thomas M. Peterson and Deborah E. Quick for Professor Geoffrey C. Hazard,
Jr., and Professor Richard Zitrin as Amici Curiae on behalf of Defendants and Respondents.
McDermott Will & Emery, A. Marisa Chun; Taylor & Patchen, Taylor & Company Law Offices, Stephen
McG. Bundy and Joshua R. Benson for The Bar Association of San Francisco and The Los Angeles County
Bar Association as Amici Curiae on behalf of Defendants and Respondents.
Akin Gump Strauss Hauer & Feld and Rex Henke for Professor John Morley as Amicus Curiae on behalf
of Defendants and Respondents.
William C. Hubbard, Linda A. Klein; Pillsbury Winthrop Shaw Pittman, Kevin M. Fong, David G. Keyko
and Jay D. Dealy for American Bar Association as Amicus Curiae on behalf of Defendants and
Respondents.
Counsel who argued in Supreme Court (not intended for publication with opinion):
Christopher D. Sullivan
Diamond McCarthy
150 California Street, Suite 2200
San Francisco, CA 94111
(415) 692-5200
Eric A. Shumsky
Orrick, Herrington & Sutcliffe LLP
1152 15th Street NW
Washington, D.C. 20005
(202) 339-8400
Shay Dvoretzky
Jones Day
51 Louisiana Avenue NW
Washington, D.C. 20001
(202) 879-3939
Opinion Information
| Date: | Docket Number: |
| Mon, 03/05/2018 | S236208 |
