Diamond v. Hogan Lovells US LLP (9th Cir.)

The following is a case update written by Corey R. Weber, a partner at Brutzkus Gubner Rozansky Seror Weber LLP, analyzing a recent decision of interest:

The Ninth Circuit Court of Appeals adopted the D.C. Court of Appeals’ responses to questions which it had certified to it, holding that hourly-billed matters are not property of a law firm; that after a partner leaves a law firm, the partner does not have a duty to account to the prior firm for profits on hourly-billed matters; and that a dissolved law firm has no interest in hourly fees earned post-dissolution. Diamond v. Hogan Lovells US LLP, 2020 WL 946025 (9th Cir., Feb. 27, 2020).

To view the full opinion, click here.

FACTS

Howrey LLP (Howrey) filed a bankruptcy case and former Howrey partners were hired by new law firms. The former Howrey partners brought hourly clients with them to their new law firms and the trustee for the bankruptcy estate of Howrey asserted that he was entitled to recover profits from the hourly-billed matters based on unjust enrichment and fraudulent transfer claims. After the trustee filed complaints against the law firms, the law firms filed motions to dismiss. The bankruptcy court denied the motions and the district court reversed the bankruptcy court’s rulings on appeal. On appeal from the district court, the Ninth Circuit certified questions to the D.C. Court of Appeals regarding D.C.’s partnership statutes. See Diamond v. Hogan Lovells US LLP, 883 F.3d 1140 (9th Cir. 2018) (“the viability of both theories turns on the answers to unresolved questions of D.C. partnership law concerning the scope of the interest, if any, that a partnership has in client matters started at the partnership but completed at another firm.”). The certified questions include: (1) whether a disassociated partner owes a duty to his or her former law firm to account for profits on hourly cases brought to the new law firm; (2) if the answer is yes, whether the former law firm can recover those profits under an unjust enrichment theory; and (3) what interest, if any, a dissolved law firm has in hourly cases brought to the new law firm.

The D.C. Court of Appeals answered the certified questions as follows: (1) “hourly-billed client matters are not ‘property’ of the law firm”; (2) “[a]fter a partner leaves a 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”; and (3) “[a] dissolved law firm has no interest in profits earned on hourly-billed client matters following dissolution.” The Ninth Circuit adopted the D.C. Circuit’s determinations, vacated the district court decision and remanded for further proceedings consistent with the answers to the certified questions.

REASONING

The Ninth Circuit’s opinion attaches the D.C. Court of Appeals decision as an appendix. The D.C. Court of Appeals decision stated that D.C. partnership law creates a duty for a partner in a dissolved partnership to account for “property” in the winding up of the firm, but that “property” is not defined in the statute and whether hourly-billed client matters constitute “property” was an issue of first impression. Citing to In re Thelen LLP, 24 N.Y. 3d 16, 22-23 (2014) and Heller Ehrman LLP v. Davis Wright Tremaine LLP, 4 Cal. 5th 467 (Cal. 2018), the D.C. Court of Appeals determined “that hourly-billed client matters are not partnership property” and stated that “[a]t the heart of the two courts’ holdings is the consensus that hourly-billed client matters are not partnership property because, under established rules of attorney-client relations and professional responsibility, a law firm does not own client legal matters, clients own their matter—clients have the right to transfer their matters to new counsel, to terminate representation, and to hire new counsel.”

The D.C. court stated that “[u]nder the District of Columbia’s Rules of Professional Conduct, it is similarly well understood that clients own their legal matters” and that “the law firm does not hold the bundle of rights that would give rise to a ‘property’ interest in client legal matters.” As a practical matter, and based on legal ethics, the court concluded that the trustee’s position would reduce clients’ freedom of choice, would restrict rights to practice law and mobility, and would violate the D.C. Rules of Professional Conduct. The court stated that a former partner’s “duty to account back to the former firm is limited to fees earned from work performed before the partner’s disassociation” and “a dissolved partnership is not entitled to fees earned by former partners who continue to work on hourly-billed client matters.” As to contingency fee matters, the D.C. Circuit limited the unfinished business rule in prior cases to contingency fee matters and stated that “[i]n our view, the differences between contingency fee cases and hourly-billed cases are sufficiently material that our conclusion in one does not bind us in the other.” In a footnote, the D.C. Circuit stated that it was unclear whether a prior decision remained good law and that “we leave for another case whether, in light of the D.C. RUPA, former partners have a duty to remit fees earned from contingency cases post-dissolution to the dissolved partnership.”

AUTHOR’S COMMENT

The determinations by the D.C. Court of Appeals on certified questions adopted by the Ninth Circuit are not surprising and follow the trend in recent cases. Although the determinations are based on D.C. partnership statutes, the circuit also relied on public policy and rules of professional conduct. In certifying the questions to the D.C. Circuit, the Ninth Circuit also reflected on the public policy issues, stating that, “[o]n the one hand, if a firm goes into bankruptcy all of its suppliers become creditors and will be impacted by the scope of a partner’s duty to account for profits” and that, “[o]n the other hand, if the scope of a partner’s duty to account for profits is described too broadly, this will have real-world impacts on the lawyers who practice in Washington, D.C.” See Diamond v. Hogan Lovells US LLP, 883 F.3d 1140, 1147-1148 (9th Cir. 2018). The D.C. Circuit’s public policy analysis was similar to other recent cases, including the California Supreme Court. In Heller, the California Supreme Court determined on certified questions from the Ninth Circuit that, under California law, dissolved law firms do not have a property interest in hourly-billed cases, and that “[t]o hold otherwise would risk intruding without justification on clients’ choice of counsel, as it would change the value associated with retaining former partners—who must share the clients’ fees with their old firm—relative to lawyers unassociated with the firm at its time of dissolution who could capture the entire fee amount for themselves or their current employers. Allowing the dissolved firm to retain control of such matters also risks limiting lawyers’ mobility postdissolution, incentivizing partners’ departures predissolution, and perhaps even increasing the risk of a partnership’s dissolution.” Heller at 483.

For discussions of other cases dealing with related issues, see:

• 2016-32 Comm. Fin. News. NL 64
• 2011 Comm. Fin. News. 39
• 2009 Comm. Fin. News. 58

These materials were written by Corey R. Weber, a partner at Brutzkus Gubner Rozansky Seror Weber LLP, a member of the ad hoc group and the Chair of the CLA Business Law Section, with editorial contributions by the Hon. Meredith Jury (United States Bankruptcy Judge, C.D. Cal, Ret.), also a member of the ad hoc group. Thomson Reuters holds the copyright to these materials and has permitted the Insolvency Law Committee to reprint them. This material may not be further transmitted without the consent of Thomson Reuters.