By Maria Chutchian

Law360, New York (January 24, 2014, 8:49 PM ET) — As New York’s highest court considers whether defunct law firms’ estates may collect hourly fees made by other firms that take up the collapsed firm’s

client matters, experts say the decision will boil down to how heavily the judges value a client’s right to choose its lawyers.

Though the provision of the Uniform Partnership Act known as the unfinished business rule says collapsed firms are entitled to “any property, profit or benefit” a partner receives that derived from the firm after that partner leaves, courts have differed on whether that applies to profits gleaned from hourly fee matters attorneys take from their old firm to their new firm. Determining which firm rightly owns the profits of those cases will depend to some degree on how the courts view the importance of lawyer autonomy and clients’ right to choose who represents them, attorneys said.

“On one side of the equation, you have lawyer mobility and the ability of a client to choose its counsel,” said Paul Labov, an Edwards Wildman Palmer LLP attorney.

On the other, trustees overseeing the dissolved firm’s wind-down can argue that under the unfinished business doctrine, the profits made really belong to the firm in which the work began because the attorney used the now-defunct firm’s resources to obtain the client in the first place, he said.

“The court could say … ‘You signed a retainer. This is a client of the firm, not any particular lawyer,’” Labov said.

The New York Court of Appeals recently agreed to address how the unfinished business doctrine applies to hourly fees made by partners for work performed on matters that they took from their old firm to a new

firm, as well as what defines “client matter.” Until now, that question has not made its way through the appellate courts because in most situations, the trustees and the firms that took on the dissolved firms’ casework settle.

But the trustees overseeing Thelen LLP and Coudert Brothers LLP’s wind-down in New York bankruptcy court aren’t backing down. In both cases, the trustees took on law firms that hired former Thelen and Coudert partners who brought clients work with them, and both cases made their way to the Second

Circuit.

The Second Circuit decided, with respect to both proceedings, that there is not enough precedent in New York regarding hourly fee matters and who owns unfinished matters for it to make a finding, and it asked the New York Court of Appeals to weigh in.

If the court ultimately lands on the side of the trustees and finds that the hourly fees belong to the defunct firms’ estates, attorneys’ ability to move to other firms could be jeopardized because firms won’t want to hire an attorney who has clients but can’t bring in profits, Labov said.

“In modern day law firm practice, it’s not always about the firm — sometimes it’s about the lawyer,” he

said. “If lawyers aren’t able to be mobile, it’s like indentured servitude.”

Labov isn’t the only attorney to see the issue in that light. In June, the Association of the Bar of the City of New York came down on the side of the new firms, arguing before the Second Circuit in Thelen’s fee dispute with Seyfarth Shaw LLP that allowing defunct firms to claw back the fees could destroy client- attorney relationships.

It’s also difficult to see how the courts could apply the reason they have historically applied to awarding profits from contingency fee arrangements to fallen firms to hourly fee matters, according to Charles Luce of Moye White LLP.

In cases where there is a contingency fee arrangement, the details and groundwork have already been laid out at the first firm. If the new firm ultimately wins a favorable ruling for the client, it’s easier to argue that the firm where the matter originated is owed some credit.

Contingency fee matters also have the benefit of Jewel v. Boxer, the 1984 decision from the California Court of Appeals that found that absent a provision in the partnership agreement saying otherwise, former partners of a defunct law firm must hand over profits earned from client matters that were resolved after the firm dissolved.

But judges don’t have such concrete precedent to rely on for hourly fee disputes, making their decisions more difficult when trustees attempt to claw back those funds. In the Thelen and Seyfarth dispute,

Seyfarth contended that a waiver partners signed in October 2008 did away with Thelen’s right to any unfinished business. In September 2012, a New York federal judge ruled that New York law does not treat unfinished hourly fee matters as recoverable partnership assets, which was appealed to the Second Circuit.

In Coudert Brothers, a case in which the trustee went after a lengthy list of firms who hired former Coudert partners, a different New York federal judge held in May 2012 that the hourly fees were the property of

the fallen firm.

The decision U.S. District Judge Colleen McMahon relied on in finding in favor of the Coudert trustees was the 1920 New York appellate decision Stern v. Warren, which involved architecture partnerships and found that unfinished business is the property of the dissolved firm. She concluded that the method by which the leftover business is billed does not alter a firm’s stake in any payments.

Since Jewel v. Boxer, courts have issued wildly different opinions on unfinished business matters, Luce said. But now that it has the opportunity to provide some clarity to hourly fee matters, the New York appellate bench is likely to make a definitive distinction between the two different types of payment methods and find that the collapsed firms are not as entitled to hourly fees as they are contingency fees,