Diamond v. Hogan Lovells US LLP, No. 18-SP-218

• Decision Date: 13 February 2020
• Docket Number: No. 18-SP-218
• Parties: Allan B. DIAMOND, Chapter 7 Trustee of Howrey LLP, Appellant, v. HOGAN LOVELLS US LLP, et al., Appellees.
• Court: D.C. Court of Appeals

224 A.3d 1007

Allan B. DIAMOND, Chapter 7 Trustee of Howrey LLP, Appellant,

v.HOGAN LOVELLS US LLP, et al., Appellees.

No. 18-SP-218

District of Columbia Court of Appeals.

Argued December 17, 2018

Decided February 13, 2020

Christopher R. Murray, with whom Christopher D. Sullivan was on the brief, for appellant.

Jonathan W. Hughes, with whom Allon Kedem was on the statement in lieu of brief, for appellee Hogan Lovells US, LLP.

Shay Dvoretzky, with whom Parker A. Rider-Longmaid, Washington, was on the brief, for appellee Jones Day.

Margaret A. Ziemianek, Robert M. Novick, and Henry Brownstein, Washington, were on the brief for appellee Kasowitz Benson Torres LLP.

Robert Radasevich and Nancy J. Newman were on the brief for appellee Neal, Gerber & Eisenberg LLP.

Jon B. Jacobs was on the statement in lieu of brief for appellee Perkins Coie LLP.

Jack McKay, Washington, was on the statement in lieu of brief for appellee Pillsbury Winthrop Shaw Pittman LLP.

Steven P. Hollman, Washington, was on the statement in lieu of brief for appellee Sheppard, Mullin, Richter & Hampton LLP.

Lori L. Roeser and M. Ryan Pinkston were on the brief for appellee Seyfarth Shaw LLP.

Todd S. Kim, Hilarie Bass, and Eric A. Shumsky, Washington, were on the brief for amicus curiae American Bar Association in support of appellees.

Anthony E. Davis, Logan G. Haine-Roberts, and Gretchen Harris Sperry were on the brief for amicus curiae The Association of Professional Responsibility Lawyers in support of appellees.

Robert J. Malionek and Gregory G. Garre, Washington, were on the brief for amicus curiae The Bar Association of the District of Columbia in support of appellees.

Douglas L. Hendricks and Brian R. Matsui were on the brief for amicus curiae "25 National and International Law Firms"^* in support of appellees.

Before Blackburne-Rigsby, Chief Judge, Beckwith, Associate Judge, and Ruiz, Senior Judge.

Blackburne-Rigsby, Chief Judge:

This case is before the court on a certified question from the United States Court of Appeals for the Ninth Circuit.¹ The Ninth Circuit asks this court to clarify certain aspects of the District of Columbia's partnership laws that would assist the Ninth Circuit in resolving the pending bankruptcy proceedings of the dissolved Howrey LLP ("Howrey") law firm. As we construe the inquiry,² the Ninth Circuit asks us to answer the following questions:

(1) Do law partnerships have a property interest in hourly-billed client matters?

(2) Under District of Columbia law, does a partner who leaves the law firm (disassociates) owe a duty to the former law firm to account for profits earned post-departure on legal matters that were in progress but not completed at the time of the partner's departure, where those matters were billed on an hourly basis and where those matters were then completed by the former partner at another firm?

(3) If the answer to question (2) is "yes," then does District of Columbia law allow a partner's former law firm to recover those profits from the partner's new law firm under an unjust enrichment theory?

(4) Under District of Columbia law, what property interest, if any, does a dissolved law firm have in profits earned on legal matters that were in progress but not completed at the time the law firm dissolved, where the matters were billed on an hourly basis, and where those matters were then completed by a former partner at another firm post dissolution?

I. Short Answers

We answer the above questions as follows:

(1) We hold that hourly-billed client matters are not "property" of the law firm. A client has an almost "unfettered right" to choose or to discharge counsel. In re Mance , 980 A.2d 1196, 1203 (D.C. 2009). Therefore, a law firm has no more than a "unilateral expectation," rather than a "legitimate claim of entitlement," to future fees earned from continued work on hourly-billed client matters. Bd. of Regents of State Colleges v. Roth , 408 U.S. 564, 577, 92 S.Ct. 2701, 33 L.Ed.2d 548 (1972).

(2) After a partner leaves the law firm (disassociates), the partner owes no continued duty to the former law firm to account for new profits earned on hourly-billed client matters that started at the former firm. A dissociated partner has a limited duty of loyalty to the former firm only "with regard to matters arising and events occurring before the partner's dissociation." D.C. Code § 29-606.03(b)(3) (2013 Repl.). This limited duty requires a dissociated partner to remit profits earned on work performed prior to the partner's dissociation, but does not include profits earned from work performed subsequent to the partner's dissociation.

(3) Since a dissociated partner has no duty to account for profits earned after the partner leaves the firm, we need not address this question.

(4) A dissolved law firm has no interest in profits earned on hourly-billed client matters following dissolution. A dissolved law firm is only entitled to proceeds earned as part of the firm's "winding up" process, which include acts that preserve partnership rights and property, prosecute and defend actions, settle or transfer partnership business, or distribute assets. "Winding up" does not encompass new business or work done on former client matters after dissolution by former partners. The dissolved partnership can no longer undertake work on these matters after dissolution. See D.C. Code § 29-608.03(c) (2013 Repl.).

II. Factual Background

In the aftermath of the "Great Recession" of 2008, Howrey, a law firm operating under District of Columbia partnership law, became insolvent. Howrey faced a decline in demand for its legal services and an inability to collect accounts receivable from clients. This led Howrey to engage in unsustainable borrowing to cover its operating expenses. By early 2011, Howrey had defaulted on its loan, and the bank prohibited Howrey from using cash collateral without the bank's consent. Some partners left Howrey during this turbulent time. On March 9, 2011, the remaining Howrey partners voted to dissolve the firm, effective March 15, 2011.

As part of the dissolution vote, the partners also amended Howrey's partnership agreement. The amendment stated that:

[N]either the Partners nor the Partnership shall have any claim or entitlement to clients, cases or matters ongoing at the time of dissolution other than the entitlement for collections of amounts due for work performed by the Partners and other Partnership personnel on behalf of the Partnership prior to the earlier of their respective departure dates from the Partnership or the date of dissolution of the Partnership.³

In 2013, appellant Allan B. Diamond, Trustee for Howrey's bankruptcy estate (the "Trustee"), filed claims in the United States Bankruptcy Court for the Northern District of California against appellees, a group of eight law firms⁴ that hired former Howrey partners. The Howrey partners who were hired by these firms brought with them hourly-billed client matters that were pending before and after Howrey's dissolution, and they continued working on them at their new firms. The Trustee claimed that Howrey's bankruptcy estate was entitled to the profits that these firms earned from working on hourly-billed client matters that were initiated at Howrey. Specifically, the Trustee claimed that Howrey's estate was entitled to recover profits earned under an unjust enrichment theory if the partner left prior to Howrey's dissolution. The Trustee also claimed the estate is entitled to recover profits because the Jewel Waiver adopted upon dissolution constituted a "fraudulent transfer" of Howrey's assets by the former partners.⁵ Appellees filed motions to dismiss.

The bankruptcy court allowed the Trustee to move forward on both the pre-and post-dissolution claims.⁶ However, the United States District Court for the Northern District of California, upon review of the bankruptcy court's decision, reversed the bankruptcy court's denial of appellees' motions to dismiss. The district court rested its conclusion on the "universally-accepted truth that a firm does not own new client matters taken on by other firms" and its prediction that this court would construe the hourly-billed client matters as "new."⁷ The Ninth Circuit, concluding that appellees' liability in the bankruptcy proceedings turned on unanswered questions of District of Columbia law, decided that these issues "should be resolved in accord with the substantive law of the District of Columbia." Diamond , 883 F.3d at 1147. Accordingly, the Ninth Circuit certified the above-mentioned questions to this court, and stayed the Trustee's claims against appellees pending our decision. Id. at 1143, 1148.

III. Legal Framework

A. District of Columbia Partnership Law and the Duty of Loyalty

Partnership law in the District of Columbia is governed by statute. The District's current partnership law, titled the Uniform Partnership Act of 2010 ("D.C. RUPA"), is fashioned after the model Revised Uniform Partnership Act ("RUPA"), which was drafted by the National Conference of Commissioners on Uniform State Laws. D.C. Code §§ 29-601.01 to - 611.01 (2013 Repl.).⁸ The District's statutory scheme provides partnerships a starting point; with limited exceptions, partners may alter some of these statutory provisions through their partnership agreement. See D.C. Code § 29-601.04.

One of the basic tenets of partnership law is that "[p]artners are accountable to one another as fiduciaries." Marmac Inv. Co. v. Wolpe , 759 A.2d 620, 626 (D.C. 2000). Partners owe both a duty of care and a duty of loyalty to the partnership and to the other partners. D.C. Code § 29-604.07(a). At issue in this appeal is a partner's duty of loyalty.⁹ The D.C. RUPA requires a partner to "account to the partnership and hold as trustee for [the partnership] 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, including the appropriation of a...