Nearly ten years after international law firm Heller Ehrman closed its doors, the California Supreme Court addressed whether the dissolved firm had any interest in the hourly-fee legal matters former partners continued to handle. In Heller Ehrman LLP v. Davis Wright Tremaine LLP, 2018 Daily Journal D.A.R. 2052, the Court ruled that Heller Ehrman had no property interest in post-dissolution hourly-fee legal matters. Post-dissolution, Heller Ehrman’s interest was limited to winding up the partnership’s affairs.
The Court addressed three rules governing partners in dissolving a firm: (1) the duty to account to the partnership; (2) the scope of permissible competition; and (3) reasonable compensation for winding up a partnership’s affairs.
In the news:
The Bar Association of San Francisco submitted an amicus brief in this matter in support of the four law firms that were sued by the bankruptcy trustee of the dissolved Heller law firm. Read additional coverage in this closely-watched case:
First, a partner has a duty “to 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.” The firm may recover all fees related to withdrawing from representation and transferring the matters to its former partners’ new firms. It also may collect on work the firm performed but had not billed for at the time of dissolution. A departing partner must account to the firm, and former partners, for any profits derived from such activities. The duty, however, does not extend to substantive legal work done on hourly fee matters after the partner leaves the dissolved firm.
Second, after a firm dissolves its former partners are no longer constrained by the pre-dissolution duty not to compete with the partnership for business. Allowing partners to compete for business in the event the firm dissolves may have the collateral benefit of discouraging partners from competing during the life of the partnership.
Third, partners may recover reasonable costs for services rendered in winding up the business of the partnership. Winding up includes completing the partnership’s transactions, reducing the partnership’s assets to cash, and distributing the cash to the former partners. It is limited to acts to preserve the pending matters so they can be transferred to the client’s new counsel, effectuating the transfer, and collecting fees for work performed prior to the transfer.
Attorneys practicing as partners should be familiar with these dissolution principles. Not only will this knowledge ease the difficult task of unwinding the business relationship, but it will limit potential exposure for claims of breach of fiduciary duty by disgruntled former partners.
About the author:
John Sullivan is the Vice Chair of BASF’s Legal Malpractice Section. He is a partner at Long & Levit, LLP, and a contributor to Long & Levit’s Lawyers and Judge’s Blog, www.longlevit.com/blog/, which is searchable by topic and case name.