In re Labrum & Doak, LLP
| Citation | 227 BR 391 |
| Decision Date | 04 December 1998 |
| Docket Number | Bankruptcy No. 98-10215DAS,Adversary No. 98-0273. |
| Parties | In re LABRUM & DOAK, LLP, Debtor. OFFICIAL COMMITTEE OF UNSECURED CREDITORS, on Behalf of the ESTATE OF LABRUM & DOAK, a Pennsylvania General Partnership, Plaintiff, v. Karen M. ASHDALE, Perry S. Bechtle, Robert F. Blanck, Michael G. Brennan, John R. Brown, Gerald Bruderele, Jacqueline M. Carolan, R. Michael Carr, Leslie M. Cyr, Zachery R. Estrin, Carl R. Fogelberg, Thomas P. Grace, Jonathan G. Greystone, James O. Hausch, Jonathan Herbst, James D. Hilly, Barbara L. Hollenbach, Mary M. Jacobs, Maureen A. Jordan, Thomas C. Kaczke, Douglas J. Kent, J. Stephen Kreglow, Michael R. Krekstein, John F. Ledwith, John D. Lucey, Jr., Edwin F. McCoy, Kean K. McDonald, William J. McKee, Scott H. Mustin, James M. Neeley, Peter J. Neeson, John H. Osorio, David J. Parsells, Jan M. Ritchie, Daniel J. Ryan, John E. Salmon, Paul M. Silver, Stephen J. Springer, Robert J. Stern, Pamela Tobin, Ronald J. Uzdavinis, Patrick R. Vitullo, John L. White, Merle A. Wolfson, Defendants. |
| Court | United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania |
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Neal Colton, Philadelphia, PA, for debtor.
Aris J. Karalis, Philadelphia, PA, for Official Committee of Unsecured Creditors.
Michael P. Zipfel, Rawle & Handerson, LLP, Philadelphia, PA, for Rawle & Henderson.
Robert Szwajkos, Lavin, Coleman, O'Neill, Ricci, Finarelli & Gray, Philadelphia, PA, for Barbara Hollenbach.
Thomas C. Kaczka, Marshall Dennehey Warner Coleman & Goggin, Philadelphia, PA, pro se and for Marshall.
Paul J. Winterhalter, Philadelphia, PA, for Official Former Partners Committee.
Carl R. Fogelberg, Fogelberg & Associates, New York City, pro se.
Frederic Baker, Ass't. U.S. Trustee, Philadelphia, PA, United States Trustee.
Presently before us in the instant bankruptcy case of a dissolved law firm, LABRUM & DOAK, LLP ("the Debtor"), is the disposition of an adversary proceeding ("the Proceeding") instituted by the OFFICIAL COMMITTEE OF UNSECURED CREDITORS ("the Committee"), on behalf of the Debtor, to recover certain post-dissolution income earned by the Debtor's former partners in matters billed on an hourly, non-contingent-fee basis.
Although the original and amended complaints named forty-four (44) alleged former partners as parties, it has been reported that the Proceeding has been dismissed voluntarily or that settlements have been negotiated with all of the defendants except (1) PETER J. NEESON, ESQUIRE, JOHN E. SALMON, ESQUIRE, and STEPHEN J. SPRINGER, ESQUIRE, three very successful former Philadelphia office partners who have become partners of Rawle & Henderson, LLP (collectively, "the Rawle Defendants"); (2) BARBARA L. HOLLENBACH, ESQUIRE, a former Bethlehem office partner who is now a partner of Tallman, Hudders & Sorrentino, P.C.; (3) MICHAEL G. BRENNAN, ESQUIRE, THOMAS C. KACZKA, ESQUIRE, and JOHN H. OSORIO, ESQUIRE, three former New Jersey office partners who are now partners in Marshall, Dennehey, Warner, Coleman & Goggin (collectively, "the Marshall Defendants"); and (4) CARL R. FOGELBERG, ESQUIRE, a former partner located in New York City now doing business there as Fogelberg & Associates, P.C.
The instant disputes with these active defendants ("the Defendants") are perhaps the most unique and controversial of the numerous pieces of litigation arising out of this case. Many arguments are presented in defense, but none have any substantial merit. One of the closer issues is whether the Debtor's partnership agreement controls the allocation of attorneys' fees of the Defendants at the time of dissolution. We agree with the Committee that it does not and that therefore the rights and liabilities of the Defendants are governed by the Pennsylvania Uniform Partnership Act, 15 Pa.C.S. § 8301, et seq. ("PAUPA"). We also hold that the Committee is not judicially estopped or precluded, under any application of the doctrine of merger/res judicata, from litigating the issues at hand. Consistent with the Committee's position, and every case from jurisdictions which have addressed the pertinent issues, we conclude that the Debtor's claim for hourly, non-contingent fees derived from pre-dissolution work in progress at time of the Debtor's dissolution is property of its estate which is recoverable by it, even though many of the fees were received after the dissolution. Finally, we hold, again consistent with all known authorities, that the Model Rules of Professional Conduct ("the MRPC") do not preclude a recovery for the Debtor.
However, we also hold that the valuation evidence presented by the Committee's expert was inconsistent with the extant case authority and failed to accurately measure the Debtor's potential recovery from these cases following dissolution. We accept the Committee's limitation of the duration of compensation to one year after the Debtor's dissolution as equitable, given the Debtor's large size and present insolvency. Nevertheless, we hold that this valuation must be determined by reference to the net income generated by only those former cases or matters of the Debtor initiated while they were partners of the Debtor, and only those which were inherited by the Defendants themselves as opposed to colleague associates. Since neither the Committee nor most of the Defendants focused on the proper measurement formula, we will give all interested parties a further opportunity to present evidence of the proper amount due from each Defendant to the Debtor in light of these conclusions at a subsequent hearing of January 6, 1999.
The procedural history of the Debtor's main bankruptcy case and a description of what we then perceived were four significant adversary proceedings initiated in its course are outlined in the first opinion arising out of this case published in the Bankruptcy Reporter, In re Labrum & Doak, LLP, 222 B.R. 749, 752-53 (Bankr.E.D.Pa.1998) ("Labrum IV"). Labrum IV determined that tax recapture liability arising from the Debtor's former Philadelphia office lease must be allocated among its former partners receiving past tax benefits therefrom as well as its partners at dissolution. In decisions published at 226 B.R. 161 ("Labrum VI"), supplementing 225 B.R. 93 ("Labrum V") (Bankr. E.D.Pa.1998), we held that the Debtor was entitled to certain quantum meruit fees from former attorneys who completed its contingency-fee cases after dissolution. In an opinion now reported only at 227 B.R. 372 (Bankr.E.D.Pa.1998) ("Labrum VII") we approved most aspects of the Committee's Chapter 11 plan. That plan was ultimately confirmed in a slightly-amended form on December 2, 1998. Finally, we dismissed a proceeding brought by the Official Committee of Former Partners ("the FP Committee"), joined by the instant Committee, which sought to recover certain 1997 pre-dissolution distributions to certain partners pursuant to 11 U.S.C. §§ 547(b) and 548(b) in an opinion now reported only at 227 B.R. 383 (Bankr. E.D.Pa.1998) ("Labrum VIII").
The instant Proceeding appears somewhat similar to the proceeding addressed in Labrum V and Labrum VI, although it seeks a recovery from only partners in non-contingency fee cases and matters previously handled by the Defendants for the Debtor at the time of its dissolution under a partnership-law theory. The proceeding decided in Labrum V and Labrum VI sought a recovery from non-partners who inherited contingency-fee cases previously handled by those defendants for the Debtors on a quantum meruit basis.
A comprehensive history of the case can be gleaned from examining all of the foregoing opinions. For purposes of the Proceeding before us, we note that the Debtor was a law partnership which was engaged in practice for ninety-three years. On June 5, 1997, the Debtor's remaining partners, largely in response to advice from the "rainmaking" Rawle Defendants that they planned to depart, voted to dissolve the firm effective July 31, 1997, and on the latter date the firm ceased its practice. This case was filed as an involuntary bankruptcy petition under Chapter 7 of the Bankruptcy Code on January 6, 1998, by six former partners, named in Labrum III, 222 B.R. at 752, and was converted by the Debtor to a Chapter 11 case on January 22, 1998. On February 11, 1998, the office of the United States Trustee appointed the Committee, which has been an active player in most of the litigation in the case and plans to continue in this role even after confirmation. See Labrum VII, 227 B.R. at 375, 378-379, 380.
The genesis for the instant Proceeding was a motion filed on April 28, 1998, by the law firm of Ryan, Brown, McDonnell, Berger and Gibbons and several partners of that firm (collectively "the Ryan Firm"), the only parties contesting the contingency-fee proceeding to its end, requesting permission to file a complaint seeking an accounting and a return of income earned subsequent to the dissolution of the Debtor by its former partners in matters billed on an hourly-fee basis. The motivation for this motion was apparently the Ryan Firm's perception that the Rawle Defendants had been in control of the Debtor and would refrain from pursuing a cause of action in which they were the major defendants. After an extensive hearing followed by briefing we filed a decision, reported as In re LaBrum & Doak, LLP, 1998 WL 246530 ("LaBrum I"). Therein, we denied the participation of the Ryan Firm or its chosen advocate in any such proceedings, on the grounds that the retaliatory aspects of the motion might deem their active presence counter-productive. However, we also held that the Committee, which was perceived as neutral on the intra-partner disputes, should file what ultimately became the instant Proceeding, if it deemed same appropriate to...
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