On Tuesday, U.S. District Judge William Pauley took the debate over clawback claims and unfinished business of partners leaving a law firm to new heights. He ruled that the bankrupt law firm Thelen cannot claw back profits from legal matters its partners took with them when they went to one particular firm, but allowed similar claims to proceed against partners who left to join another law firm.
The first lawsuit, which was brought by the estate of Thelen was against Seyfarth Shaw, which hired 11 former Thelen partners at its New York office. Pauley dismissed the claw back claims finding that “under New York law, a dissolved law firm’s pending hourly fee matters are not partnership assets.” However, Pauley certified the matter for an appeal to the 2nd Circuit Court of Appeals, acknowledging the matter was complex.
On a second case brought by Thelen, Pauley allowed the lawsuit to proceed under California law, holding that California law may recognize hourly fee cases as a dissolved firm’s assets. This case had been brought by Thelen against Robinson & Cole, which had hired nine partners from Thelen.
Yann Geron, the trustee for Thelen’s estate said, “We recognize the differences noted by Judge Pauley between new York and California law, and differences in viewpoints even between judges in the Southern District of New York in recent decisions.”
The Thelen estate was pleased with the ruling in Robinson & Cole, but upset over the Seyfarth matter. It seems the matters would ultimately go before the appellate courts.
Considering the Coudert and Dewey clawbacks already plaguing the scene, Pauley’s new ruling can impact the future of those and other failed law firms. Dewey is already trying to claw back claims from Pillsbury Winthrop, Shaw Pittman, Holland & Knight, and DLA Piper among others.
In his decision, Pauley observed that under New York law, a bankrupt law firm does not have a property interest in pending hourly fee matters and recognizing such an interest would create “bizarre consequences.”