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Clawbacks are Facing Pushback’s in Law Firm Bankruptcies
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When it comes to litigation involving defunct law firms, the clawback suits may be on their way out–of the bankruptcy court.

In a long series of recent court actions involving the Coudert Brothers, Thelen estates, and Heller Ehrman, law forms hit with the so-called unfinished business claims in bankruptcy court argue that the claims should be litigated in federal district court instead.

  
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And if a November 2 ruling by the US District Court Judge Colleen McMahon in Manhattan is any indication, then the argument appears to be working.

The decision came in response to an August motion filled by Akin Gump Stauss Hauer & Feld, Duane Morris, Jones Day, and at least seven other firms asking if claims filed against them in 2008 by the Coudert Brothers estate be withdrawn from bankruptcy court.

Arguing in favor of moving the claims–via which the Coudert estates hopes to recover their profits from the work that originated at Coudert and went elsewhere as partners fled the firm in the months prior to its 2006 dissolution–the ten firms pointed specifically to the U.S. Supreme Court’s January decision in Stern vs. Marshall. In Stern, which involved the bankruptcy of deceased former Playmate of the Year Anna Nicole Smith, the Court found that the district court judges, not their bankruptcy court counterparts, have the constitutional authority to rule on common law question, such as the unfinished business claims that can arise in bankruptcy cases.

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Granting the withdrawal request, McMahon noted in her decision that absent Stern,”’the firms’ motion could and probably would be denied.”

William Brandt, who is the president of Development Specialists, which is a consulting firm that often advises bankrupt law firms and their estates, predicts that McMahon’s ruling will reshape the legal landscape for firms embroiled in clawback suits around the country.



”I think her decision will have a major impact on a lot of other cases,” says Brandt, whose own efforts to recover money for the Coudert and Heller Ehrman estates have been delayed by change-of-venue motions.

It didn’t even take long for one firm targeted in such an action to seize on McMahon’s ruling.

Thompson Hine filed a motion on November 4, asking federal district to take over a claim brought in bankruptcy court by Yann Geron, who is the Chapter 7 trustee of the bankrupt Thelen estate. The issue: Geron’s attempt to recoup the profits from work brought to Thompson Hine by former Thelen parter Michael Shannon, who left Thelen about two months before its partnership voted to dissolve on October 28, 2008, all according to the Thompson Hine filing.

In its motion requesting the withdrawal, Thompson Hine pointed specifically to McMahon’s November 2 ruling and its reliance on Stern, noting that ”a decision this district recently granted a motion for withdrawal of the reference in a case very similar to this one, in which the trustee for a bankrupt law firm brought unfinished business claims against the law firms joined by the bankrupt firm’s partners.”



 

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