Geron v. Robinson & Cole LLP

• Decision Date: 04 September 2012
• Docket Number: 12 Civ. 1364.,Nos. 11 Civ. 8967,s. 11 Civ. 8967
• Citation: 56 Bankr.Ct.Dec. 269,476 B.R. 732
• Parties: Yann GERON, as Chapter 7 Trustee of Thelen LLP, Plaintiff, v. ROBINSON & COLE LLP, et al., Defendants. Yann Geron, as Chapter 7 Trustee of Thelen LLP, Plaintiff, v. Seyfarth Shaw LLP, et al., Defendants.
• Court: U.S. District Court — Southern District of New York

476 B.R. 732

56 Bankr.Ct.Dec. 269

Yann GERON, as Chapter 7 Trustee of Thelen LLP, Plaintiff,

v.ROBINSON & COLE LLP, et al., Defendants.

Yann Geron, as Chapter 7 Trustee of Thelen LLP, Plaintiff,

v.Seyfarth Shaw LLP, et al., Defendants.

Nos. 11 Civ. 8967, 12 Civ. 1364.

United States District Court, S.D. New York.

Sept. 4, 2012.

Howard P. Magaliff, Esq., DiConza Traurig Magaliff LLP, New York, NY, for Plaintiff.

Christopher J. Major, Esq., Meister Seelig & Fein LLP, New York, NY, for Robinson & Cole LLP.

Robert W. Dremluk, Esq., Seyfarth Shaw LLP, New York, NY.

Thomas Feher, Esq., Thompson Hine LLP, Cleveland, OH, for Seyfarth Shaw LLP.

MEMORANDUM & ORDER

WILLIAM H. PAULEY III, District Judge.

These actions arise from an alarming phenomenon—the bankruptcy of a major law firm. The pursuit of pending hourly fee matters as assets of the estate has become a recurring feature of such bankruptcies. But this concept of law firm “property” collides with the essence of the attorney-client relationship. That relationship springs from agency law, not property law. The client is the principal, the attorney is the agent, and the relationship is terminable at will. The question presented is whether a dissolved law firm's pending hourly fee matters are nevertheless its property.

Plaintiff Yann Geron (the “Trustee”), the Chapter 7 trustee of the bankruptcy estate of former law firm Thelen LLP (“Thelen”), brings fraudulent transfer and accounting and turnover claims against Defendants Seyfarth Shaw LLP (“Seyfarth Shaw”) and Robinson & Cole LLP (“Robinson & Cole”). Through these claims, the Trustee seeks to recover profits from work that former Thelen partners performed after they joined those two law firms. Seyfarth Shaw moves for judgment on the pleadings under Federal Rule of Civil Procedure 12(c), and Robinson & Cole moves to dismiss all claims against it under Federal Rule of Civil Procedure 12(b)(6). For the following reasons, Seyfarth Shaw's motion is granted in its entirety and Robinson & Cole's motion is denied. Further, this Court sua sponte certifies this order for interlocutory appeal.

BACKGROUND

Until its dissolution in late 2008, Thelen was a registered limited liability partnership governed by California law, (Voluntary Petition (“Pet.”) at 1, In re Thelen LLP, Case No. 09–15631 (Bankr.S.D.N.Y.).) On October 28, 2008—in the midst of the global financial crisis—Thelen's partners voted to dissolve the firm. (Complaint against Robinson & Cole and Partner Does, dated Sept. 14, 2011 (“RC Compl.”) ¶ 20; Complaint against Seyfarth Shaw and Partner Does, dated Sept. 14, 2011 (“SS Compl.”) ¶ 20.) At the same time, Thelen's partners adopted the Fourth Amended and Restated Limited Liability Partnership Agreement (the “Fourth Partnership Agreement”), which was also governed by California law. (RC Compl. ¶ 20; SS Compl. ¶ 20.) In connection with the Fourth Partnership Agreement, Thelen's partners voted to wind up Thelen's business under a written Plan of Dissolution. (RC Compl. ¶ 21; SS Compl. ¶ 21.) At the time of its dissolution, Thelen was insolvent. (RC Compl. ¶¶ 23, 28–29; SS Compl. ¶¶ 23, 28–29.)

Unlike Thelen's previous partnership agreements, the Fourth Partnership Agreement incorporated a so-called Jewel Waiver. (RC Compl. ¶ 34; SS Compl. ¶ 34.) Specifically, it provides:

Neither the Partners nor the Partnership shall have any claim or entitlement to clients, cases or matters ongoing at the time of dissolution of the Partnership other than the entitlement for collection of amounts due for work performed by the Partners and other Partnership personnel prior to their departure from the Partnership. The provisions of this [section] are intended to expressly waive, opt out of and be in lieu of any rights any Partner or the Partnership may have to “unfinished business” of the Partnership, as the term is defined in Jewel v. Boxer, 156 Cal.App.3d 171 (Cal.App. 1 Dist.1984), or as otherwise might be provided in the absence of this provision through the interpretation or application of the [California Uniform Partnership Act of 1994, as amended].

(RC Compl. ¶ 34; SS Compl. ¶ 34.)

On September 18, 2009, Thelen filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York. At that time, Thelen indicated that it “has been domiciled or has had a residence, principal place of business, or principal assets” in the Southern District of New York. (Pet. at 2.) After the Trustee was appointed, he instituted adversary proceedings against Seyfarth Shaw, Robinson & Cole, and several former Thelen partners. The Trustee contends that Thelen's adoption of the JewelWaiver in its Fourth Partnership Agreement constituted a fraudulent transfer by Thelen. The Trustee now seeks to avoid the fraudulent transfer of Thelen's unfinished business, recover its value, and require Defendants to account for and turn over the profits generated from that work.

DISCUSSION

I. Legal Standard

Courts evaluate motions for judgment on the pleadings under the same standard as motions to dismiss for failure to state a claim. See Bank of N.Y. v. First Millennium, Inc., 607 F.3d 905, 922 (2d Cir.2010). “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). To determine plausibility, courts follow a “two-pronged approach.” Iqbal, 556 U.S. at 679, 129 S.Ct. 1937. “First, although ‘a court must accept as true all of the allegations contained in a complaint,’ that ‘tenet’ ‘is inapplicable to legal conclusions,’ and ‘[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.’ ” Harris v. Mills, 572 F.3d 66, 72 (2d Cir.2009) (alteration in original) (quoting Iqbal, 556 U.S. at 678, 129 S.Ct. 1937). Second, a court determines “whether the ‘well-pleaded factual allegations,’ assumed to be true, ‘plausibly give rise to an entitlement to relief’ ” Hayden v. Paterson, 594 F.3d 150, 161 (2d Cir.2010) (quoting Iqbal, 556 U.S. at 679, 129 S.Ct. 1937). A court's “consideration [on a motion to dismiss] is limited to facts stated on the face of the complaint, in documents appended to the complaint or incorporated in the complaint by reference, and to matters of which judicial notice may be taken.” Allen v. WestPoint–Pepperell Inc., 945 F.2d 40, 44 (2d Cir.1991).

II. Choice of Law

To prevail on its claims against Seyfarth Shaw, the Trustee must demonstrate that Thelen had an interest in “property.” See11 U.S.C. §§ 542, 544, 548, 550; see alsoCal. Civ.Code §§ 3439.04–3439.07. According to the Trustee, Thelen's partners transferred “property” to Seyfarth Shaw and Robinson & Cole when they executed the Jewel Waiver. The parties agree that California law defines any “property interest” that Robinson & Cole received. ¹ However, the Trustee and Seyfarth Shaw dispute whether California law or New York law defines any “property interest” received by Seyfarth Shaw.

As a preliminary matter, this Court rejects the Trustee's contention that California law applies because Thelen's Fourth Partnership Agreement contained a choice-of-law provision to that effect. Because Seyfarth Shaw was not a party to the Fourth Partnership Agreement, it cannot be bound by that agreement. See Int'l Customs Assocs., Inc. v. Ford Motor Co., 893 F.Supp. 1251, 1255 (S.D.N.Y.1995) (citing Abraham Zion Corp. v. Lebow, 761 F.2d 93, 103 (2d Cir.1985)). Further, “a contractual choice-of-law-provision governs only a cause of action sounding in contract, not one sounding in tort[.]” Drenis v. Haligiannis, 452 F.Supp.2d 418, 425–26 (S.D.N.Y.2006). Fraudulent transfer claims sound in tort. See Drenis, 452 F.Supp.2d at 418. Accordingly, Seyfarth Shaw is not bound by the agreement's choice-of-law provision.

In the absence of a binding contractual choice-of-law provision, this Court applies the choice-of-law rules of New York to determine which state's law governs the purported property interest at issue. See In re Gaston & Snow, 243 F.3d 599, 600–01, 607 (2d Cir.2001). Thus, this Court first examines whether an actual conflict exists between the laws of the jurisdiction involved. See Paradigm BioDevices, Inc. v. Viscogliosi Bros., LLC, 842 F.Supp.2d 661, 665 (S.D.N.Y.2012). If there is such a conflict, this Court conducts an “interest analysis,” and applies the “law of the jurisdiction having the greatest interest in the litigation[.]” Istim, Inc. v. Chemical Bank, 78 N.Y.2d 342, 347, 575 N.Y.S.2d 796, 581 N.E.2d 1042 (1991) (quoting Schultz v. Boy Scouts of Am., Inc., 65 N.Y.2d 189, 197, 491 N.Y.S.2d 90, 480 N.E.2d 679 (1985)) (internal quotation marks omitted).

For the reasons described below, the existence and scope of a dissolved law firm's property interest in pending hourly fee matters vary under New York and California law. This Court therefore examines the competing interests of New York and California in this action. In ascertaining the state with the greatest interest, this Court undertakes a two-pronged inquiry, determining “(1) what are the significant contacts and in which jurisdiction are they located; and, (2) whether the purpose of the law [at issue] is to regulate conduct or allocate loss.” Padula v. Lilarn Props. Corp., 84 N.Y.2d 519, 521, 620 N.Y.S.2d 310, 644 N.E.2d 1001 (1994) (citation omitted).

Here, the majority of the significant contacts occurred in New York. The Trustee does not dispute that the majority of the former Thelen partners who moved to Seyfarth Shaw are licensed to practice law in New York. Moreover, Thelen filed its Chapter 7 petition in the Southern District of New York, indicating that it “has been domiciled or has had a residence, principal place of...