Diamond v. Pillsbury Winthrop Shaw Pittman, LLP (In re Howrey LLP)

• Decision Date: 07 February 2014
• Court: U.S. Bankruptcy Court — Northern District of California
• Parties: In re HOWREY LLP, Debtor. ALLAN B. DIAMOND, Chapter 11 Trustee for Howrey LLP, Plaintiff, v. PILLSBURY WINTHROP SHAW PITTMAN, LLP, ET AL., Defendant.

In re HOWREY LLP, Debtor.

ALLAN B. DIAMOND, Chapter 11 Trustee for Howrey LLP, Plaintiff, v. PILLSBURY WINTHROP SHAW PITTMAN, LLP, ET AL., Defendant.

Bankruptcy Case No. 11-31376DM

Adversary Proceeding No. 13-3095DM

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF CALIFORNIA

Signed and Filed: February 7, 2014

__________

DENNIS MONTALI

U.S. Bankruptcy Judge

Chapter 11

MEMORANDUM DECISION ON MOTIONS TO DISMISS

I. INTRODUCTION

Plaintiff Allan B. Diamond, Chapter 11 Trustee ("Trustee") for debtor Howrey LLP ("Debtor"), filed multiple nearly identical complaints for avoidance and recovery of actual and constructive fraudulent transfers and for an accounting and turnover and other relief, seeking to recover from several law firm defendants the value of profits received by them with respect to unfinished business that previously had been handled by Debtor. Trustee contends that a prepetition waiver of Debtor's interest in profitsrealized or to be realized from its unfinished business ("Howrey Unfinished Business") constituted a fraudulent transfer. On October 23, 2013, the court held a hearing on motions to dismiss (collectively, the "motions") filed by nine of these defendants.¹ Having considered the motions, the oppositions and the arguments of the parties, the court will grant the motions in part and deny them in part, although Trustee will be given leave to amend the complaints in some respects.²

As this court has previously held when applying California law, the unfinished business of a law partnership is any business covered by retainer agreements between the firm and its clients for the performance of partnership services that existed at the time of dissolution. Greenspan v. Orrick Herrington & Sutcliffe (In re Brobeck, Phelger & Harrison LLP), 408 B.R. 318, 333 (Bankr. N.D. Cal. 2009)("Brobeck"), citing Rosenfeld_r Meyer & Susman v. Cohen, 146 Cal. App. 3d 200, 217, 194 Cal. Rptr. 180 (1983). It does not, however, extend to business created after dissolution, even if that business comes from a client of the dissolved firm.Brobeck, 408 B.R. at 333. The entitlement of partners to recover profits from a dissolved law firm's unfinished business (the "Unfinished Business Rule") is well-established under California law. Id., citing Jewel v. Boxer, 156 Cal. App. 3d 171, 203 Cal. Rptr. 13 (1994) ("Jewel"). Here, Debtor's partnership was governed by the laws of the District of Columbia ("D.C."), and thus this court must apply D.C's law. For the reasons set forth below, the court concludes that D.C. law pertaining to the Unfinished Business Rule is similar to that of California.

II. ISSUES

A. Does the Unfinished Business Rule apply to Hourly Rate Matters in the District of Columbia?

B. May the Trustee recover under the fraudulent transfer laws profits on Howrey Unfinished Business that was handled by former partners of Debtor who left Debtor prior to its dissolution?

C. May the Trustee recover under the fraudulent transfer laws profits on Howrey Unfinished Business that was acquired from former partners of Debtor who left as of or after its dissolution?

D. May the Trustee recover profits on Howrey Unfinished Business by an Accounting and Turnover count under 11 U.S.C. § 542?

E. May the Trustee amend the complaints to proceed against defendants with respect to Howrey Unfinished Business that was handled by former partners of Debtor who left Debtor prior to its dissolution?

III. FACTS³

Debtor, then known as Howrey Simon Arnold & White, LLP, adopted a partnership agreement in 2000. Although originally formed as a general partnership, Debtor thereafter operated as a limited liability partnership under the D.C. Uniform PartnershipAct of 1996, as amended ("D.C. RUPA").⁴

By early 2010, Debtor was insolvent or inadequately capitalized. On March 4, 2011, Debtor's management scheduled a vote for dissolution and five days later Debtor's partners voted to dissolve under D.C. RUPA, effective March 15, 2011. Also on March 4, 2011, management informed the partners about a proposed amendment to Debtor's partnership agreement to be executed concurrently with dissolution. Debtor's partners were urged to execute a Jewel Waiver, absent which they would have had a duty to account to Debtor for profits earned on the Howrey Unfinished Business.⁵

The actual Jewel Waiver adopted by Debtor and its partners on March 9, 2011, is found in Amendment No. 3 to Debtor's Partnership Agreement that added a new paragraph 19.3. That paragraph provides, in part:

19.3 No Unfinished Business Following Dissolution. In the event of dissolution of the Partnership (as set forth in Paragraph 17.3 above), neither 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 andother 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. The provisions of this Paragraph 19.3 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 that term is defined in Jewel v Boxer, 156 Cal. App. 3d 171 (Cal. Dist. Ct. App. 1984), or as otherwise might be provided in the absence of this provision through interpretation or application of the LLP Act.

Some partners of Debtor left before March 4, 2011, and joined five of the six defendants presently before the court; more left after dissolution and joined the sixth defendant and two of the other five.⁶

The complaints do not allege specifics regarding the matters of Howrey Unfinished Business defendants completed, nor profits they realized on that Howrey Unfinished Business. Thus, the principal questions presented by the present motions are (1) whether under D.C. law, the Unfinished Business Rule applies to hourly rate work, and (2) whether defendants can be held liable as subsequent transferees under 11 U.S.C. § 550 based upon Howrey Unfinished Business acquired from partners of Debtor who left prior to the Jewel Waiver. As set forth below, the court believesthat the Unfinished Business Rule does apply to hourly rate matters. With respect to the second issue, defendants contend that, as to matters transferred after the date of dissolution, they were not initial or subsequent transferees of Debtor's property and that Debtor's estate has no interest in the profits earned on Howrey Unfinished Business. The court has already addressed those issues in Brobeck, Heller I and Heller II. Brobeck, 408 B.R. at 338-341; Heller I, 2011 WL 1539796; Heller II, 2013 WL 951706; and Heller III, 2014 WL 323068. The result here is the same.

IV. DISCUSSION

A. The Unfinished Business Rule Applies to Hourly Rate Matters in the District of Columbia.

1. D.C. Law

In deciding defendants' motions, this court must follow "state law as announced by the highest court of the [s]tate." C.I.R. v. Bosch's Estate, 387 U.S. 456, 465 (1967); accord Vacation Vill., Inc. v. Clark County, Nev., 497 F.3d 902, 915 (9th Cir. 2007). This court cannot certify matters to the District of Columbia Court of Appeals, even when a party (defendants here) contends that the governing law is unsettled.⁷ That being the case, this court's duty is to apply the law as it finds it. Here,with the District of Columbia Court of Appeals having issued two significant decisions, and the United States District Court for the District of Columbia having issued another, this court's task is straightforward and the result is settled, notwithstanding defendants' argument to the contrary. Further, sound policies support the result: the Unfinished Business Rule applies to hourly rate matters in D.C.

Defendants argue that the Unfinished Business Rule applies in D.C. only as to contingency fee matters. Trustee, quite obviously, relies on the trilogy of D.C. cases that support application of the Unfinished Business Rule to matters handled on an hourly basis. Those cases, read together, are decisive. See Beckman v. Farmer, 579 A.2d 618 (App. D.C. 1990), Young v. Delaney, 647 A.2d 784 (App. D.C. 1994), and Robinson v. Nussbaum, 11 F. Supp. 2d 1 (D.D.C. 1997).

While Beckman involved contingency fees, the court was unequivocal in its statement that the fiduciary obligations of partners runs throughout the liquidation to the conclusion of the winding up, and applies to "any transaction connected with the conduct, or liquidation of the partnership. . . ." Beckman, 579 A.2d at 636. Despite defendants' desire that the court read Beckman narrowly, that court's direction is clear that "all work performed on partnership business unfinished at the date of dissolution ... was done for the benefit of the dissolved partnership." Id. at 639 (emphasis added). Citing Jewel (amongother state court cases),⁸ the Beckman court observed that "pending cases are uncompleted transactions requiring winding up . . . and are therefore assets of the partnership subject to post-dissolution distribution." Id. at 636. "It follows that any profits from the completion of such unfinished business inure to the partnership's benefit, even if received after dissolution." Id.

The Beckman court also rejected the argument that application of the Unfinished Business Rule would impair lawyer mobility:

The duty to wind up partnership business does not disable the former partners in a law firm from accepting employment from former clients of the dissolved partnership, provided the new employment does not relate to work in progress at the time of dissolution.

579 A.2d at 638.

Finally, the Beckman court held that the Unfinished Business Rule "is a creature of statute and attempts by courts to evade it are inappropriate," especially where partners could have "entered a partnership agreement which could have assured" the doctrine did not apply unless the firm and its partners so...