Opinion ID: 2642357
Heading Depth: 3
Heading Rank: 2

Heading: Unfinished Business Under New York Law

Text: New York’s law of partnerships is codified in the New York Partnership Law, itself a codification of the Uniform Partnership Act, see N.Y. P’ship Law § 1 6 To the extent it could be argued that the fraudulent conveyance was effected when the Fourth Partnership Agreement was executed, the record does not reflect where that occurred. It is a reasonable inference that it occurred at Thelen’s principal place of business. 7 See Restatement (First) of Conflict of Laws § 377 n. 4 (“When a person sustains loss by fraud, the place of wrong is where the loss is sustained . . . .”); accord Cooney, 81 N.Y.2d at 72 (“If conflicting conduct‐regulating laws are at issue, the law of the jurisdiction where the tort occurred will generally apply . . . .”). 13 (McKinney 1919). The Partnership Law, which applies to every trade, occupation or profession, id. § 2, sets “default requirements that come into play in the absence of an agreement,” Ederer v. Gursky, 9 N.Y.3d 514, 526 (2007). These default rules define partnership property, N.Y. P’ship Law § 12, and define the rights and duties of partners, id. §§ 40, 43. The parties do not dispute that New York’s lower courts have uniformly read these provisions to mean that, in the absence of an agreement to the contrary, pending contingent fee cases of a dissolved partnership are firm assets subject to distribution.8 We explored this rule, generally known as the unfinished business doctrine, in Santalucia v. Sebright Transportation Inc., 232 F.3d 293 (2d Cir. 2000). There, following the settlement of a wrongful death action, the plaintiff sought an order apportioning the contingent fee award between himself and his former law firm. Id. at 294. Prior to its dissolution, the firm had been retained as counsel in the action. We surveyed the New York cases and determined it “beyond cavil . . . that a member of a law firm owes a fiduciary duty to other members of 8 See Grant v. Heit, 693 N.Y.S.2d 564, 565 (1st Dep’t 1999); Shandell v. Katz, 629 N.Y.S.2d 437, 439 (1st Dep’t 1995); DelCasino v. Koeppel, 615 N.Y.S.2d 454, 455 (2d Dep’t 1994); Dwyer v. Nicholson, 602 N.Y.S.2d 144, 146 (2d Dep’t 1993); Kirsch v. Leventhal, 586 N.Y.S.2d 330, 332 (3d Dep’t 1992). 14 the firm.” Id. at 297; see also Graubard Mollen Dannett & Horowitz v. Moskovitz, 86 N.Y.2d 112, 118 (1995) (“[L]aw partners, no less than any other business or professional partners, are bound by a fiduciary duty requiring the punctilio of an honor the most sensitive.”) (internal quotation marks omitted). We concluded, therefore, that “where a lawyer departs from a dissolved partnership and takes with him a contingent fee case which he then litigates to settlement, the dissolved firm is entitled only to the value of the case at the date of dissolution, with interest.” Id. at 298. We acknowledged, however, that the New York Court of Appeals had not addressed the application of the unfinished business doctrine to a law firm’s contingent fee matters. Id. at 297. While the unanimous view of New York’s intermediate appellate courts that the unfinished business rule applies to such matters enabled us confidently to predict that the Court of Appeals would take a similar view, the absence of binding authority from that court counsels caution in determining whether the rationale of those decisions extends to hourly fee matters. In sharp contrast to the uniform view of New York’s appellate courts that the unfinished business doctrine applies to contingent fee matters, there is scant 15 New York authority with respect to whether the rule also applies to hourly fee matters. No New York appellate court appears to have addressed the issue, and the one New York trial court to address whether the doctrine applies to a firm’s pending hourly fee matters concluded that it does not. See Sheresky, 2011 WL 7574999, at  4 (“It is logical to distinguish between contingency fee arrangements and cases which are billed on the basis of hourly work.”). In light of this doctrinal uncertainty, it is unsurprising that courts in the Southern District of New York have split on whether the unfinished business doctrine applies to a law firm’s pending hourly fee matters.9 There are strong legal and policy arguments on both sides of the issue. Several considerations favor application of the rule to hourly fee cases. First, the New York Partnership Law, which, to reiterate, sets only default rules, makes no distinction between types of partnerships. N.Y. P’ship Law § 2. In applying 9 Compare Coudert Brothers, 480 B.R. at 163 (“[U]nless the Firms can suggest a meaningful distinction between law partnerships and other partnerships, or a meaningful difference between legal business that is billed by the hour versus handled on contingency, I can predict with reasonable certainty that the New York Court of Appeals would find that the Client Matters in this case were Coudert’s property in the absence of an agreement to the contrary.”), with Geron, 476 B.R. at 741 (“New York law does not recognize a debtor law firm’s property interest in pending hourly fee matters.”). 16 these default rules, the New York Court of Appeals has determined that executory contracts to perform professional services are partnership assets unless a contrary intention appears, even where such a contract is terminable at will. See Stem v. Warren, 227 N.Y. 538, 546‐47 (1920); see also Scholastic, Inc. v. Harris, 259 F.3d 73, 89 (2d Cir. 2001) (“[U]nder Stem, if an executory contract with a third party contemplates that it should survive dissolution, it remains a joint venture asset and the co‐venturers have an obligation to perform with the concomitant right to its benefits.”). Arguably, therefore, the unfinished business rule applies to all partnerships including law firms, and to all types of business conducted by such firms. Second, the Partnership Law instructs New York courts to adopt interpretations of its provisions that conform to those of other Uniform Partnership Act states. N.Y. P’ship Law § 4(4). A substantial majority of cases from such jurisdictions have applied the unfinished business doctrine to hourly rate cases.10 Those cases suggest that the New York Court of Appeals would 10 See, e.g., Robinson v. Nussbaum 11 F. Supp. 2d 1, 4‐5 (D.D.C. 1997); Greenspan v. Orrick, Herrington & Sutcliffe LLP (In re Brobeck, Phleger & Harrison LLP), 408 B.R. 318, 333 (Bankr. N.D. Cal. 2009); In re Labrum & Doak, 227 B.R. 391, 409‐10 (Bankr. E.D. Pa. 1998). But see Welman v. Parker, 328 S.W.3d 451, 457 (Mo. Ct. App. 2010) (refusing to apply unfinished business doctrine to 17 decline to create an exception to the usual partnership rule for lawyers who bill their clients on an hourly basis. Third, it can be argued that sound policy reasons counsel against such an exception. To the extent that the unfinished business doctrine applies in contingent fee matters, creating a different rule for hourly fee matters might mean that a law partner’s fiduciary obligations to his firm would vary based on the manner in which clients are billed. Such a rule would undoubtedly encourage the view, now prevailing among many, that an individual partner’s book of business is not an asset of the firm, but instead a piece of personal property to be guarded with a Cerberus‐like ferociousness.11 But substantial arguments may be made for the opposite view. First, the New York Court of Appeals has suggested that the attorney‐client relationship is different from those tying customers to other business partnerships. See Demov, Morris, Levin & Shein v. Glantz, 53 N.Y.2d 553, 556 (1981) (recognizing “unique hourly fee matters). 11 See, e.g., Mark Harris, Why More Law Firms Will Go the Way of Dewey & LeBoeuf, Forbes, May 8, 2012, http://www.forbes.com/sites/forbesleadershipforum/2012/05/08/why‐more‐law‐ firms‐will‐go‐the‐way‐of‐dewey‐leboeuf (“The portability of the partner’s ‘book’ has weakened the bonds that hold firms together and threatens the identity of the law firm as we know it.”). 18 relationship” between attorney and client as “one of the most sensitive and confidential relationships in our society”). Because the client has an unassailable right to discharge an attorney at any time, with or without cause, it is clear that “clients are not merchandise.” Cohen v. Lord, Day & Lord, 75 N.Y.2d 95, 98 (1989) (internal quotation marks omitted). Recognizing a law firm’s property interest in pending client matters might undermine that relationship, and be “inconsistent with the best concepts of [lawyers’] professional status.” Id. (internal quotation marks omitted). Second, unyielding application of the unfinished business doctrine might have unintended consequences. For example, the doctrine may discourage other law firms from accepting lawyers and client engagements from a dissolved law firm for fear that a substantial portion of the resulting profits may be turned over to the dissolved law firm or its creditors. An untoward disruption in client services might result. Third, the New York Rules of Professional Conduct could be interpreted to forbid the unfinished business doctrine altogether. See N.Y. Rules of Prof’l Conduct R. 1.5(g) (prohibiting fee splitting); id. R. 5.6(a) (forbidding agreements restricting lawyer mobility). Although the Rules of Professional Conduct lack the 19 force of law, see Niesig v. Team I, 76 N.Y.2d 363, 369 (1990), New York courts interpret other laws to harmonize with these rules to the extent practicable, id. at 370. As noted above, while New York’s intermediate appellate courts have not accepted these arguments, in the absence of a definitive ruling from the Court of Appeals, we cannot rule out the possibility that, confronted with a novel application of the rule, that court might conclude that the unfinished business rule should not apply to any of a law firm’s cases. Fourth, even if the rule is properly held to apply to contingent fee cases, hourly fee matters are arguably different. In a contingent fee case, the fee that is ultimately earned may be heavily dependent on work done by the dissolved partnership, which has been paid nothing for the work that it contributed to the outcome. In an hourly fee matter, by contrast, the former firm has been fully compensated for the work it has already done, and future work can be directed by the client to a new lawyer or firm that will be paid only for future work. In effect, the hourly work still to be performed, whether or not on an unfinished matter, can be construed as new, rather than unfinished, business.12 These 12 Indeed, it could be argued that a rule denying the former firm a share of future hourly billings is entirely consistent with the contingent fee rule applied in Santalucia, 232 F.3d at 298. There, we permitted the dissolved firm to recover 20 arguments have persuaded the only New York court to have addressed the issue, and one of the two federal courts that have confronted it, that New York law distinguishes hourly from contingent‐fee cases, and does not apply the unfinished business rule to the former. We recognize the strength of all of these arguments, and of the many others raised by the parties, amici, and other litigants.13 Given the significance of these issues to members of the New York bar, we hesitate to definitively resolve them without first seeking the views of the New York Court of Appeals, an issue to which we now turn. only the projected value of the contingent fee case at the time of dissolution, and allowed the new firm to retain any additional value added to the case by its subsequent work. Id. (“[T]he lawyer must remit to his former firm the settlement value, less that amount attributable to the lawyer’s efforts after the firm’s dissolution.”). This rule, it could be contended, is analogous to one that assigns amounts receivable for past work to the dissolved firm, while allowing the new firm to retain the additional value attributable to future work. 13 This panel has taken judicial notice of the arguments raised in the Coudert Brothers appeal. See October 30, 2013 Order, Coudert Brothers, No. 12‐ 4916, ECF No. 138 21