Title: Heller Ehrman LLP v. Davis Wright Tremaine LLP

State: california

Issuer: California Supreme Court

Document:

1 
Filed 3/5/18 
 
 
IN THE SUPREME COURT OF CALIFORNIA 
 
 
HELLER EHRMAN LLP, 
) 
S236208 
 
 
) 
 
Plaintiff and Appellant, 
) 
 
 
) 
 
v. 
) 
9th Cir. Nos. 14-16314, 
 
 
) 
14-16315, 14-16317, 14-16318  
DAVIS WRIGHT TREMAINE LLP, 
) 
 
) 
  
 
Defendant and Respondent. 
) 
 
 
) 
AND RELATED CASES. 
) 
 
____________________________________) 
 
 
Like “cloud-capp’d towers,” “gorgeous palaces,” and perhaps someday 
even “the great globe itself,” many arrangements endure for some time but 
eventually dissolve.1  So too with certain law partnerships –– including firms that 
are retained, before they dissolve, to handle matters on an hourly basis.  The 
question before us is whether a dissolved law firm retains a property interest in 
such legal matters that are in progress –– but not completed –– at the time of 
dissolution.  The United States Court of Appeals for the Ninth Circuit asks us to 
answer this question, which implicates both common law principles and statutory 
rules of partnership law, and has implications for the competing interests of 
ongoing and dissolved law partnerships, partners and firm employees, creditors 
and clients. 
                                              
1  
“The cloud-capp’d towers, the gorgeous palaces, / The solemn temples, the 
great globe itself, / Yea, all which it inherit, shall dissolve.”  (Shakespeare, The 
Tempest, act IV, scene I, lines 152–154.)   
 
2 
What we hold is that under California law, a dissolved law firm has no 
property interest in legal matters handled on an hourly basis, and therefore, no 
property interest in the profits generated by its former partners’ work on hourly fee 
matters pending at the time of the firm’s dissolution.  The partnership has no more 
than an expectation that it may continue to work on such matters, and that 
expectation may be dashed at any time by a client’s choice to remove its business.  
As such, the firm’s expectation — a mere possibility of unearned, prospective fees 
— cannot constitute a property interest.  To the extent the law firm has a claim, its 
claim is limited to the work necessary for preserving legal matters so they can be 
transferred to new counsel of the client’s choice (or the client itself), effectuating 
such a transfer, or collecting on work done pretransfer.  
I. 
 
Petitioner Heller Ehrman (Heller) was a global law partnership with more 
than 700 attorneys.  By August 31, 2008, the firm was in financial distress.  
Heller’s creditors soon declared it in default, and Heller’s shareholders — lawyers 
responsible for running the firm and providing legal services to its clients — voted 
to dissolve the firm.  Heller notified its clients that as of October 31, 2008, it 
would no longer be able to provide any legal services. 
 
Heller’s dissolution plan included a provision known as a Jewel waiver.  
Named after the case of Jewel v. Boxer (1984) 156 Cal.App.3d 171 (Jewel), the 
provision purported to waive any rights and claims Heller may have had “to seek 
payment of legal fees generated after the departure date of any lawyer or group of 
lawyers with respect to non-contingency/non-success fee matters only.”  The 
waiver was intended as “an inducement to encourage Shareholders to move their 
clients to other law firms and to move Associates and Staff with them, the effect of 
which will be to reduce expenses to the Firm-in-Dissolution.”  By its express 
 
3 
terms, the waiver governed only those matters billed on a non-contingency –– that 
is continual, or hourly –– basis. 
 
In the following months, Heller’s former shareholders joined at least 16 
other law firms, including the respondent law firms of Davis Wright Tremaine 
LLP; Jones Day, Orrick, Herrington & Sutcliffe LLP; and Foley & Lardner LLP.  
Many of Heller’s former clients –– and all of those who went to the respondents 
— signed new retainer agreements. 
In the meantime, Heller filed for bankruptcy under chapter 11 of the United 
States Bankruptcy Code.  When Heller’s plan of liquidation was approved, the 
bankruptcy court appointed a plan administrator who became responsible for 
pursuing claims to recover assets for the benefit of Heller’s creditors. 
 
In December 2010, the administrator filed adversary proceedings in 
bankruptcy court on behalf of Heller against the law firms where Heller’s former 
shareholders had found work.  The administrator sought to set aside the Jewel 
waiver, claiming that under the Bankruptcy Code, the waiver was a fraudulent 
transfer of Heller’s rights to postdissolution fees to its former shareholders, and 
from them, to their new firms.  While it was not the administrator’s allegation that 
the shareholders breached any fiduciary duty while working for Heller, the 
administrator nonetheless sought to recover from the shareholders’ new firms the 
profits generated by the hourly fee matters pending when Heller dissolved and 
were brought to the new firms. 
 
The respondents vigorously contested the administrator’s claim.  At 
summary judgment, the parties filed cross-motions on whether the Jewel waiver 
constituted a transfer of Heller’s property to the respondents and whether any such 
transfer was a fraudulent transfer under the Bankruptcy Code.  Relying on one of 
his earlier decisions, the bankruptcy judge found in favor of Heller on both issues. 
 
4 
 
The district court reversed.  The court rested its ruling on considerations of 
law, equity, and public policy.  In analyzing California law, the court reasoned that 
the Revised Uniform Partnership Act (RUPA) undermined Jewel, the legal 
foundation on which Heller based its claim.  Specifically, the court concluded that 
RUPA contains no provision giving dissolved law firms the right to demand an 
accounting for profits earned by its former partners under new retainer 
agreements.  The court ultimately held that Heller did not have a property interest 
in the hourly fee matters pending at dissolution.  Moreover, since Heller did not 
have a property interest in such matters, there was no fraudulent transfer to the 
new law firms.  The court’s decision on the property issue thus resolved the case. 
 
Heller appealed to the Ninth Circuit, which asked us to provide guidance.  
We granted the Ninth Circuit’s request that we resolve the question of what 
property interest, if any, a dissolved law firm has in the legal matters, and 
therefore the profits, of cases that are in progress but not completed at the time of 
dissolution. 
II. 
Although this dispute has a direct impact on who controls the profits from 
ongoing cases involving hourly fees, no doubt for some litigants certain aspects of 
this case also seem to implicate broader concerns — regarding, for example, the 
extent of partners’ fiduciary obligations to their firm or the efforts partners make 
to secure business on behalf of their firm.  Nonetheless, the question we must 
ultimately address is about the scope of a dissolved firm’s property interests, and 
whether those interests extend to the profits from ongoing matters billed on an 
hourly fee basis.  The most sensible interpretation of the scope of property 
interests under our state law — along with the practical implications arising from 
different approaches to the property issue — persuades us that the dissolved firm’s 
property interest here is quite narrow. 
 
5 
What we conclude is that a dissolved law partnership is not entitled to 
profits derived from its former partners’ work on unfinished hourly fee matters.  
Any expectation the law firm had in continuing the legal matters cannot be 
deemed sufficiently strong to constitute a property interest allowing it to have an 
ownership stake in fees earned by its former partners, now situated at new firms, 
working on what was formerly the dissolved firm’s cases.  Any “property, profit, 
or benefit” accountable to a dissolved law firm derives only from a narrow range 
of activities:  those associated with transferring the pending legal matters, 
collecting on work already performed, and liquidating the business.   
The limited nature of the interest accorded to the dissolved law firm 
protects clients’ choice of counsel.  It allows the clients to choose new law firms 
unburdened by the reach of the dissolved firm that has been paid in full and 
discharged.  The rule also comports with our policy of encouraging labor mobility 
while minimizing firm instability.  It accomplishes the former by making the 
pending matters, and those that work on them, attractive additions to new firms; it 
manages the latter by placing partners who depart after a firm’s dissolution at no 
disadvantage to those who leave earlier. 
A. 
Because this dispute concerns a dissolved firm of lawyers with fiduciary 
duties to the firm, the law of partnership and its related fiduciary obligations 
provide useful context for the analysis.  But neither previous cases nor specific 
statutory provisions concerning partnerships resolve the question before us.  
Only twice previously — in the late 19th century — have we addressed the 
fiduciary duties of a dissolved law firm’s former partners regarding the unfinished 
business at the time of dissolution.  In Osment v. McElrath (1886) 68 Cal. 466 and 
Little v. Caldwell (1894) 101 Cal. 553, we confronted situations in which law 
 
6 
firms dissolved with contingency matters pending.  In both cases, we held that the 
fees generated by one partner in completing the matters were to be shared equally 
with the former partner (or his estate).  (Osment, supra, 68 Cal. at p. 470; Little, 
supra, 101 Cal. at p. 561.)  We thus rejected the argument that the lawyers who 
personally completed the matters were entitled to a greater share of the fees than 
stipulated to in the partnership agreements. 
California partnership law was codified in 1929 when the Legislature 
adopted the Uniform Partnership Act (UPA).  The UPA preserved many common-
law principles, including the rules elucidated in Osment and Little.  (See Jacobson 
v. Wikholm (1946) 29 Cal.2d 24, 27–28 (Jacobson).)  The First District Court of 
Appeal then added further gloss when it interpreted UPA in the case of Jewel v. 
Boxer, supra.  In Jewel, partners of a dissolved law firm sued their former partners 
who had been handling “most of the active personal injury and workers’ 
compensation cases.”  (Jewel, supra, 156 Cal.App.3d at p. 175.)  The suing 
partners sought their shares of the fees from these cases, arguing that they were 
entitled to the same fees as prevailed during the partnership. 
The Jewel court ruled in favor of the plaintiffs.  It reasoned that the former 
partners were not entitled “to extra compensation for services rendered in 
completing unfinished business,” where “extra compensation” was compensation 
“which is greater than would have been received as the former partner’s share of 
the dissolved partnership.”  (Jewel, supra, 156 Cal.App.3d at p. 176 & fn. 2.)  
Accordingly, without an agreement to the contrary, any attorney fees generated 
from matters pending when the law firm dissolved were “to be shared by the 
former partners according to their right to fees in the former partnership, 
regardless of which former partner provides legal services in the case after the 
dissolution.”  (Id. at p. 174.) 
 
7 
Subsequent Court of Appeal decisions consistently applied Jewel’s holding 
to contingency fee cases.  (See, e.g., Fox v. Abrams (1985) 163 Cal.App.3d 610, 
612–613; Rosenfeld, Meyer & Susman v. Cohen (1987) 191 Cal.App.3d 1035, 
1063.)  Such widespread application of Jewel was confined to the contingency fee 
context, however.  Only in 1993 did a Court of Appeal expressly interpret Jewel to 
encompass matters the dissolved law firm had been handling on an hourly basis.  
(See Rothman v. Dolin (1993) 20 Cal.App.4th 755, 757–759.)  To this day, 
Rothman remains the only published California opinion to apply Jewel to the 
hourly fee context, and it did so before UPA was revised. 
 
Three years after Rothman, the Legislature again revised partnership law by 
replacing UPA with RUPA.  (See Corp. Code, § 16100 et. seq.)  RUPA made 
several changes to the default rules of California partnership law.  First, it added 
an entire section governing the fiduciary duty to account.  It replaced former 
Corporations Code section 15021(1), which had provided that partners had a duty 
to account for benefits and profits, with section 16404, subdivision (b)(1), which 
sets forth a partner’s duty “[t]o 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, including the appropriation of a partnership opportunity.”  
(Corp. Code, § 16404, subd. (b)(1).) 
Second, RUPA supplied a new provision specifying that one of a partner’s 
fiduciary duties is the duty “[t]o refrain from competing with the partnership in the 
conduct of the partnership business before the dissolution of the partnership.”  
(Corp. Code, § 16404, subd. (b)(3).)  Notably, the duty to refrain from competing 
with the partnership only pertains to the period before dissolution.  
Third, RUPA changed the rule previously in force regarding partners’ 
postdissolution rights to reasonable compensation.  It replaced Corporations Code 
 
8 
section 15018, subdivision (f), which had provided that only a “surviving partner 
is entitled to reasonable compensation for his or her services in winding up the 
partnership affairs,” with section 16401, subdivision (h), which provides that all 
partners are entitled to such compensation.  (Corp. Code, § 16401, subd. (h).) 
Since the enactment of RUPA, no California court has, in a published 
opinion, resolved whether there remains a basis for holding that a partnership has a 
property interest in legal matters pending at a firm’s dissolution.  The last time we 
took up the issue was in Osment and Little.  More recent is the intermediate 
appellate decision in Jewel, although that, too, was issued before the passage of 
RUPA and implicated only contingency fee matters.  We thus consider with fresh 
eyes the question posed to us by the Ninth Circuit. 
B. 
Heller is a dissolved partnership, and the parties make various arguments 
associated with partnership law.  So we place our analysis of whether hourly fee 
matters pending at the time of a partnership’s dissolution are the partnership’s 
property in context by considering not only the scope of property rights under 
California law — and the interests of clients relative to those of the attorneys they 
hire — but also the application of California’s partnership law to this case. 
Both the common law and provisions of California law codifying the nature 
of property associate a property interest with a specific bundle of rights to control 
the use and disposition of a particular asset.  (See Civ. Code, § 654 [defining 
property as “the right of one or more persons to possess and use it to the exclusion 
of others”]; United States v. Craft (2002) 535 U.S. 274, 278–279 [calling it a 
“common idiom” that property is described as “a ‘bundle of sticks’ — a collection 
of individual rights which, in certain combinations, constitute property”]; Citizens 
for Covenant Compliance v. Anderson (1995) 12 Cal.4th 345, 369; Moore v. 
 
9 
Regents of University of California (1990) 51 Cal.3d 120, 165–166 (dis. opn. of 
Mosk, J.) [“the concept of property is often said to refer to a ‘bundle of rights’ that 
may be exercised with respect to that object — principally the rights to possess the 
property, to use the property, to exclude others from the property, and to dispose 
of the property by sale or by gift”].)  By helping to structure expectations that 
people can reasonably hold in their dealings with each other, conceptions of 
property facilitate social and economic relationships.  The circumstances giving 
rise to a property interest, in turn, include not only familiar arm’s-length 
transactions but also certain sufficiently reliable expectations, such as unvested 
retirement benefits.  (E.g., In re Marriage of Green (2013) 56 Cal.4th 1130, 1140–
1141 [“Nonvested retirement benefits are certainly contingent on various events 
occurring — such as continued employment — but this does not prevent them 
from being a property right for these purposes.”].)  In this case, we consider the 
question of whether a sufficiently strong expectation exists in the context of a law 
firm partnership performing hourly work on legal matters.  We find that it does 
not. 
A property interest grounded in such an expectation requires a legitimate, 
objectively reasonable assurance rather than a mere unilaterally-held presumption.  
(See Bd. of Regents v. Roth (1972) 408 U.S. 564, 577 [discussing property 
interests protected by procedural due process and stating that “[t]o have a property 
interest in a benefit, a person . . . must have more than a unilateral expectation of 
it.  He must, instead, have a legitimate claim of entitlement to it”]; Paramount 
Convalescent Center, Inc. v. Department of Health Care Services (1975) 15 
Cal.3d 489, 495 [stating that plaintiff’s case turned on whether it “had a legitimate 
claim of entitlement to a new contract, i.e., a property right of which [it] could not 
be deprived without a hearing, or whether it had a mere expectancy or hope that 
future contracts would be forthcoming”].)   What Heller claims here is not merely 
 
10 
that a firm has a legitimate interest in the hourly matters on which it is working.  
Rather, Heller claims a legitimate interest in the hourly matters on which it is not 
working — and on which it cannot work, because it is a firm in dissolution that 
has ceased operations.  In doing so, it seeks remuneration for work that someone 
else now must undertake.  Because such a view is unlikely to be shared by either 
reasonable clients or lawyers seeking to continue working on these legal matters at 
a client’s behest, Heller’s expectation is best understood as essentially unilateral. 
A client may ordinarily find that it makes little sense to continually change 
the allocation of work on legal matters billed on an hourly basis to different 
lawyers or firms, because of the value of the relationships formed in the course of 
representation, the accumulation of knowledge by the lawyers involved in the 
case, or simply the cost of identifying and transacting to retain suitable new 
counsel.  Even so, hanging over all agreements involving legal representation –– 
especially those involving work paid on an hourly basis –– is the possibility that a 
client will change the nature of the work requested, the terms on which the work is 
to be performed, or the lawyer the client prefers.  (See, e.g., General Dynamics 
Corp. v. Superior Court (1994) 7 Cal.4th 1164, 1174–1175, 1172 (General 
Dynamics) [stating that it is “bedrock law” that a client has the right “to sever the 
professional relationship [with its attorney] at any time and for any reason,” 
although carving out a limited exception for in-house counsel whose relationship 
with the client is not a “ ‘one shot’ undertaking”].)  Such uncertainty is rooted not 
only in the reality that hourly fees are paid in increments, but also in the extent to 
which the client legitimately retains flexibility to change the terms of the bargain 
for legal services after a lawyer has been retained.  (See, e.g., id. at pp. 1174–
1175; Gage v. Atwater (1902) 136 Cal. 170, 172–173 [“The interest of the client in 
the successful prosecution or defense of the action is superior to that of the 
 
11 
attorney, and he has the right to employ such attorney as will in his opinion best 
subserve his interest.”].) 
Of course, to assume that firms routinely acquire business simply through 
the good offices of a single lawyer belies the reality that firms exist for a reason — 
no matter how much business that individual appears to generate alone.  Partners 
pool not only physical resources but human capital.  They hold out not only 
themselves but their firm as capable of deploying the necessary resources to 
handle matters effectively.  In doing so, lawyers often leverage the preparatory 
work and reputation of an entity in which they have a shared stake, and to which 
they owe a shared fiduciary duty.  These realities certainly make it difficult to 
deny that lawyers in the same firm would ordinarily feel some shared interest in 
each other’s work — indeed, some degree of mutual interest is all but implicit in 
the very nature of a firm. 
But a shared interest can differ from a property interest, which under 
California law must reflect more than a mere contingency or a certain probability 
that an outcome — such as further hourly fees remitted to the firm — may 
materialize.  (Civ. Code, § 700 [“A mere possibility . . . is not to be deemed an 
interest of any kind.”]; accord In re Marriage of Brown (1976) 15 Cal.3d 838, 
844–845 [distinguishing between an expectancy and a contingent interest in 
property and explaining that “[t]he term expectancy describes the interest of a 
person who merely foresees that he might receive a future beneficence” and that 
such an interest cannot be enforced].)  While Heller was a viable, ongoing 
business, it no doubt hoped to continue working on the unfinished hourly fee 
matters and expected to receive compensation for its future work.  But such hopes 
were speculative, given the client’s right to terminate counsel at any time, with or 
without cause.  As such, they do not amount to a property interest.  (Civ. Code, 
§ 700; In re Thelen LLP (2014) 20 N.E.3d 264, 270–271 [“no law firm has a 
 
12 
property interest in future hourly legal fees because they are ‘too contingent in 
nature and speculative to create a present or future property interest’ ”]; Heller 
Ehrman LLP v. Davis, Wright, Tremaine, LLP (N.D.Cal. 2014) 527 B.R. 24, 30–
31 (Heller) [“A law firm never owns its client matters.  The client always owns the 
matter, and the most the law firm can be said to have is an expectation of future 
business.”].)  Dissolution does not change that fact, as dissolving does not place a 
firm in the position to claim a property interest in work it has not performed — 
work that would not give rise to a property interest if the firm were still a going 
concern. 
A dissolved law firm therefore has no property interest in the fees or profits 
associated with unfinished hourly fee matters.  The firm never owned such 
matters, and upon dissolution, cannot claim a property interest in the income 
streams that they generate.  This is true even when it is the dissolved firm’s former 
partners who continue to work on these matters and earn the income — as is 
consistent with our partnership law. 
To find otherwise would trigger or exacerbate a host of difficulties.  The 
more fees a former partnership can claim, the less remain available to compensate 
the people who actually perform the work.  Reduced compensation creates 
incentives that are perverse to the mobility of lawyers, clients’ choice for counsel, 
and stability of law firms.  Former partners of a dissolved firm may face limited 
mobility in bringing unfinished matters to replacement firms when those 
unfinished matters are unattractive because the fees they generate must be shared 
with the dissolved firm.  It was for this reason that Heller’s shareholders executed 
the Jewel waiver, intending it as “an inducement to encourage Shareholders to 
move their clients to other law firms and to move Associates and Staff with them.”  
Indeed, partners and their associates and staff are valuable hires to some extent 
precisely because of the business they bring.  That lawyers sometimes have reason 
 
13 
to switch firms does not diminish the importance of certain fiduciary duties that 
facilitate the existence of any firm.  (See Corp. Code, § 16404, subd. (a) 
[specifying that a partner owes the partnership the duty of loyalty and the duty of 
care], subd. (b) [listing the obligations subsumed under the duty of loyalty, which 
includes, for example, the duty “[t]o refrain from dealing with the partnership . . . 
as or on behalf of a party having an interest adverse to the partnership”], subd. (c) 
[specifying that, under the duty of care, a partner must refrain “from engaging in 
grossly negligent or reckless conduct, intentional misconduct, or a knowing 
violation of law”].)  Yet neither the scope of those duties nor a reasonable 
understanding of the scope of property under California law supports the inference 
that a dissolved firm owns the fees from matters its attorneys once handled on an 
hourly basis.   
Recognizing a property interest even in hourly matters would also risk 
impinging on the client’s right to discharge an attorney at will, a right that has 
been recognized in both statute and case law.  (Fracasse v. Brent (1972) 6 Cal.3d 
784, 790, citing Code Civ. Proc., § 284; General Dynamics, supra, 7 Cal.4th at pp. 
1174–1175.)  To allow a firm like Heller to share in fees paid by a client who has 
discharged it (and paid it in full) necessarily reduces the fees available to 
compensate the client’s substituted counsel of choice.  In such a situation, clients 
with pending matters who prefer any of the firms that hired Heller’s former 
shareholders may — in recognition of the fact that these firms will not receive the 
full fees paid and therefore will not be as incentivized to work on their matters — 
opt for second-choice counsel.  In other words, allocating fees to Heller alters the 
freedom that clients have in choosing attorneys after Heller stopped representing 
them.  To protect this freedom, we affirm that client matters belong to the clients, 
not the law firms, and the latter may not assert an ongoing interest in the matters 
once they have been paid and discharged. 
 
14 
The clients’ ability to retain their preferred counsel is a weighty interest, 
even if counterbalanced by an interest in partnership stability.  This weighing of 
equities is evident in a case like Howard v. Babcock (1993) 6 Cal.4th 409, 412, 
where we deemed enforceable a law partnership’s noncompete agreement, which 
imposed a reasonable cost on departing partners who competed with the firm.  In 
doing so, we sought “to achieve a balance between the interest of clients in having 
the attorney of choice, and the interest of law firms in a stable business 
environment.”  (Id. at p. 425.)  Here, however, both interests are served by cutting 
off the fees going to the dissolved law firm. 
Amici make this argument by pointing to the instability that results under a 
rule that pivots depending on when a partner departs a business.  In particular, 
amici refer to situations where a partner remains with a struggling partnership in 
an effort to help rescue it, the partnership subsequently dissolves, and that 
dissolved partnership is understood to have a continued interest in unfinished 
hourly fee business — but only because the partner remained until dissolution.  
Anticipating such an outcome, partners would leave the firm and take business 
with them at the first sign of trouble so as not to risk being around when the 
partnership dissolves.  We minimize this instability by reducing the incentives for 
partners to “jump ship” — that is, by limiting the dissolved partnership’s 
continued interest in unfinished hourly fee matters as asserted against partners 
who stay until dissolution. 
Against these concerns, Heller raises the policy considerations allegedly 
animating Jewel.  The court in Jewel thought that prohibiting former partners from 
earning “extra compensation” for work done postdissolution was necessary to 
“prevent[] partners from competing for the most remunerative cases during the life 
of the partnership” and to “discourage[] former partners from scrambling to take 
physical possession of files and seeking personal gain by soliciting a firm’s 
 
15 
existing clients upon dissolution.”  (Jewel, supra, 156 Cal.App.3d at p. 179.)  But 
Jewel dealt with contingency fee matters, and whether our conclusion in this case 
extends to such matters is a question we need not address here.  Suffice to say that 
we find nothing in Jewel to advance Heller’s position regarding hourly fee cases. 
Simply put, a Jewel-type rule is unnecessary to prevent competition among 
partners.  Under our partnership law, partners cannot compete with their firm 
during the partnership, even for “the most remunerative cases.”  (Jewel, supra, 156 
Cal.App.3d at p. 179; Corp. Code, § 16404, subd. (b)(3) [stipulating that partners 
have a fiduciary duty “[t]o refrain from competing with the partnership in the 
conduct of the partnership business before the dissolution of the partnership”].)  
Our law also makes clear that the duty to refrain from competing with the 
partnership only pertains to the period before dissolution.  (Corp. Code, § 16404, 
subd. (b)(3); Sen. Com. on Judiciary, Analysis of Assem. Bill 583 (1995-1996 
Reg. Sess.) as amended June 5, 1996, p. 7 [indicating that “a partner is free to 
compete . . . upon dissolution” since “[t]he duty [not] to compete only applies to 
the ‘conduct of the business’ and not to the ‘winding up’ ”].)  This temporal limit, 
perhaps counterintuitively, readily advances the spirit of RUPA’s prohibition 
against competition during the life of the partnership.  When partners know they 
may freely compete after a firm dissolves, they have less reason to compete during 
the life of the partnership. 
Our holding fits comfortably with RUPA’s provisions governing fiduciary 
duty.  Under RUPA, a partner has the duty “[t]o 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.”  (Corp. Code, § 16404, subd. 
(b)(1).)  Because no partnership property or information is at stake here (per our 
previous discussion), we can focus on the textual language specifying that a 
 
16 
partner has as duty to account during the “winding up of the partnership 
business.”2  (Corp. Code, § 1604, subd. (b)(1).) 
Winding up is “the process of completing all of the partnership’s 
uncompleted transactions, of reducing all assets to cash, and of distributing the 
proceeds, if any, to the partners.”  (Gregory, The Law of Agency and Partnership 
(3d ed. 2001) § 227, p. 368.)  Under RUPA, “[a] person winding up a 
partnership’s business may preserve the partnership business or property as a 
going concern for a reasonable time, prosecute and defend actions and 
proceedings, whether civil, criminal, or administrative, settle and close the 
partnership’s business, dispose of and transfer the partnership’s property, 
discharge the partnership’s liabilities, distribute the assets of the partnership 
pursuant to Section 16807, settle disputes by mediation or arbitration, and perform 
other necessary acts.”  (Corp. Code, § 16803, subd. (c).) 
We read these provisions to indicate that the process of winding up a law 
partnership’s hourly fee matters extends no further than to certain acts.  These 
include those acts necessary to (1) preserve legal matters for transfer to the client’s 
new counsel or the client itself, (2) effectuate such a transfer, and (3) collect on 
work done pretransfer.  (Jacobson, supra, 29 Cal.2d at pp. 28–29 [stating that 
under the common law “the winding up or settling of the partnership affairs was 
restricted to selling the firm property, receiving money due the firm, paying its 
debts, returning the capital contributed by each partner, and dividing the profits”]; 
King v. Stoddard (1972) 28 Cal.App.3d 708, 712–713 (King) [listing “acts 
approved as ‘appropriate for winding up partnership affairs’ ” to include such 
things as the “assignment of partnership property to repay partnership debt,” 
                                              
2  
The “conduct . . . of the partnership business” language does not apply to a 
firm in dissolution, since such a firm is not conducting its business as usual.  
(Corp. Code § 1604, subd. (b)(1).) 
 
17 
“disposition of partnership property,” “maintenance of action for damages on 
behalf of the partnership,” and “execution of renewal notes after death of 
partner”]; Black’s Law Dict. (10th ed. 2014) p. 1835 [defining “winding up” as 
“[t]he process of settling accounts and liquidating assets in anticipation of a 
partnership’s or a corporation’s dissolution”].)   
So we agree with the district court that “Heller should bill and be paid for 
the time its lawyers spent filing motions for continuances, noticing parties and 
courts that it was withdrawing as counsel, packing up and shipping client files 
back to the clients or to new counsel, and getting new counsel up to speed on 
pending matters.”  (Heller, supra, 527 B.R. at p. 32.)  These are activities 
necessary to “preserve the partnership business” (Corp. Code, § 16803, subd. (c)) 
— here consisting of legal matters — so that the matters can be transferred to the 
client’s new counsel of choice, to physically transfer the matters, and to “settle and 
close” the business (by withdrawing from the pending matters and transferring 
them to the clients or the clients’ new counsel).  In the same vein, any effort to 
collect on work Heller performed but had not billed for at the time of dissolution 
falls into the category of liquidating the business, settling fee disputes with clients, 
and “distribut[ing] the assets.”  (Id.)  Under Corporations Code section 16404, 
subdivision (b)(1), a partner has the duty to account for any profits derived from 
such activities. 
But the duty extends no further.  Specifically, it does not extend to 
substantive legal work done on hourly fee matters to continue what was formerly 
the business of a dissolved partnership.3  Such work falls outside of the definition 
of winding up, despite Corporations Code section 16803, subdivision (c)’s 
reference to the “prosecut[ion] and defen[se] [of] actions and proceedings.”  
                                              
3  
We disapprove of Rothman v. Dolin, supra, 20 Cal.App.4th 755, to the 
extent that it conflicts with our analysis. 
 
18 
Winding up implies the conclusion of a firm’s business, not its indefinite 
continuation.  (See King, supra, 28 Cal.App.3d at p. 712 [“the indefinite 
continuation of the partnership business is contrary to the requirement for winding 
up of the affairs upon dissolution”].)  Indeed, if the prosecution and defense of 
routine hourly fee matters were encompassed within the concept of winding up, 
then the process of winding up a law firm could conceivably last indefinitely since 
the ordinary, ongoing business of a litigating law firm is precisely to “prosecute 
and defend actions and proceedings.”  (Corp. Code, § 16803, subd. (c).)  We bear 
in mind, too, that RUPA governs all partnerships rather than simply law 
partnerships.  (Corp. Code, § 16111, subd. (b).)  In the context of general 
partnerships, the language on prosecuting and defending actions must refer to 
actions in which the partnership is a party, i.e., to actions involving disputes over a 
firm’s receivables and liabilities, which must be resolved to liquidate the business.  
To read this provision in any other way would risk treating law firms as distinct 
from all other partnerships.  Law firms would be able to assert a postdissolution 
interest in the business that they normally conduct — the prosecution and defense 
of actions — while other partnerships would have no statutory hooks to receive 
compensation for what they do.  This is a conclusion we cannot support. 
Nor can we conclude that continuation of hourly fee matters can reasonably 
be considered “preserv[ing] the partnership business or property as a going 
concern for a reasonable time.”  (Corp. Code, § 16803, subd. (c).)  Such 
continuing, ongoing work reaches beyond what is necessary to transfer the matters 
or collect on work done before the transfer.  So it lies outside the range of 
activities for which a former partner has a duty to account.  The situation might be 
different in the context of contingency fee matters, where what constitutes “a 
going concern” preserved for a “reasonable time” is considered against a backdrop 
in which the dissolved firm had yet to be paid for the work it performed and will 
 
19 
not be paid until the matter is resolved.  (Id.)  But we have no occasion to 
contemplate such matters here. 
Nothing else in RUPA cuts against our holding.  Of the three new 
provisions in RUPA — governing the fiduciary duty to account, the scope of 
permissible competition, and reasonable compensation for winding up a 
partnership — we have explained how the first two cohere with our conclusion.  
The third, too, is consistent with our analysis:  winding up encompasses a limited 
number of tasks but the partners who perform those tasks are entitled to 
“reasonable compensation” for having done them.  (Corp. Code, § 16401, subd. 
(h).)  RUPA therefore does not change our understanding of what constitutes 
property. 
 
 
 
20 
III. 
Under California partnership law, a dissolved law firm does not have a 
property interest in legal matters handled on an hourly basis, or in the profits 
generated by formers partners who continue to work on these hourly fee matters 
after they are transferred to the partners’ new firms.  To 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. 
So, with the exception of fees paid for work fitting the narrow category of 
winding up activities that a former partner might perform after a firm’s 
dissolution, a dissolved law firm’s property interest in hourly fee matters is limited 
to the right to be paid for the work it performs before dissolution.  Consistent with 
our statutory partnership law, winding up includes only tasks necessary to preserve 
the hourly fee matters so that they can be transferred to new counsel of the client’s 
choice (or the client itself), to effectuate such a transfer, and to collect on the 
pretransfer work.  Beyond this, the partnership’s interest, like the partnership 
itself, dissolves. 
 
 
 
 
 
 
 
CUÉLLAR, J. 
WE CONCUR:   CANTIL-SAKAUYE, C. J. 
 
      CHIN, J. 
 
      CORRIGAN, J. 
 
      LIU, J. 
 
      KRUGER, J. 
                  MANELLA, J.*
                                              
*  
Associate Justice of the Court of Appeal, Two Appellate District, Division Four, 
assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution. 
 
 
See last page for addresses and telephone numbers for counsel who argued in Supreme Court. 
 
Name of Opinion Heller Ehrman LLP v. Davis Wright Tremaine LLP 
__________________________________________________________________________________ 
 
Unpublished Opinion 
Original Appeal 
Original Proceeding XXX on request pursuant to rule 8.548, Cal. Rules of Court 
Review Granted 
Rehearing Granted 
 
__________________________________________________________________________________ 
 
Opinion No.S236208 
Date Filed: March 5, 2018 
__________________________________________________________________________________ 
 
Court: 
County: 
Judge: 
 
__________________________________________________________________________________ 
 
Counsel: 
 
Diamond McCarthy, Christopher D. Sullivan, Matthew S. Sepuya, Christopher R. Murray, Andrew B. 
Ryan, James Sheppard, Karen K. Diep; Valle Makoff, Jeffrey T. Makoff, Ellen Ruth Fenichel; Schnader 
Harrison Segal & Lewis, Nuti Hart and Kevin W. Coleman for Plaintiff and Appellant. 
 
Felderstein Fitzgerald Willoughby & Pascuzzi and Thomas A. Willoughy for The Official Committee of 
Unsecured Creditors of Heller Ehrman LLP as Amicus Curiae on behalf of Plaintiff and Appellant. 
 
Orrick, Herrington & Sutcliffe, E, Joshua Rosenkranz, Rachel Wainer Apter, Daniel A. Rubens, 
Christopher J. Cariello, Anjali S. Dalal, Eric A. Shumsky, Charles W. Tyler; Arnold & Porter, Pamela 
Phillips, Jonathan W. Hughes and Diana D. DiGennaro for Defendant and Respondent Orrick, Herrington 
& Sutcliffe LLP. 
 
Keker & Van Nest, Keker, Van Nest & Peters, Steven A. Hirsch, Steven P. Ragland, John C. Bostic; 
Snyder Miller & Orton, Luther Orton and Maureen Green for Defendant and Respondent Davis Wright 
Tremaine LLP. 
 
PMRK Law, Peter P. Meringolo, Luther K. Orton; Snyder Miller & Orton, James L. Miller, Luther Orton 
and Maureen Green Defendant and Respondent Foley & Lardner LLP. 
 
Jones Day, Robert A. Mittelstaedt, Jason McDonell, Nathaniel Garrett, Shay Dvoretzky and Emily J. 
Kennedy for Defendant and Respondent Jones Day. 
 
Hinshaw & Culbertson, Anthony E. Davis, Cassidy E. Chivers and Joel D. Bertocchi for The Association 
of Professional Responsibility Lawyers as Amicus Curiae on behalf of Defendants and Respondents. 
 
Morrison & Foerster, Douglas L. Hendricks, Larry Engel, Bradley S. Lui, Brett H. Miller, Erica J. 
Richards, James Sigel, Miriam A. Vogel and Brian R. Matsui for 32 National and International Law Firms 
as Amici Curiae on behalf of Defendants and Respondents. 
 
 
 
 
 
 
 
 
Page 2 – S236208 – counsel continued 
 
Counsel: 
 
Morgan Lewis & Bockius, Thomas M. Peterson and Deborah E. Quick for Professor Geoffrey C. Hazard, 
Jr., and Professor Richard Zitrin as Amici Curiae on behalf of Defendants and Respondents. 
 
McDermott Will & Emery, A. Marisa Chun; Taylor & Patchen, Taylor & Company Law Offices, Stephen 
McG. Bundy and Joshua R. Benson for The Bar Association of San Francisco and The Los Angeles County 
Bar Association as Amici Curiae on behalf of Defendants and Respondents. 
 
Akin Gump Strauss Hauer & Feld and Rex Henke for Professor John Morley as Amicus Curiae on behalf 
of Defendants and Respondents. 
 
William C. Hubbard, Linda A. Klein; Pillsbury Winthrop Shaw Pittman, Kevin M. Fong, David G. Keyko 
and Jay D. Dealy for American Bar Association as Amicus Curiae on behalf of Defendants and 
Respondents. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Counsel who argued in Supreme Court (not intended for publication with opinion): 
 
Christopher D. Sullivan 
Diamond McCarthy 
150 California Street, Suite 2200 
San Francisco, CA 94111 
(415) 692-5200 
 
Eric A. Shumsky 
Orrick, Herrington & Sutcliffe LLP 
1152 15th Street NW 
Washington, D.C.  20005 
(202) 339-8400 
 
Shay Dvoretzky 
Jones Day 
51 Louisiana Avenue NW 
Washington, D.C.  20001 
(202) 879-3939