Overview
In a fraudulent transfer case brought by the trustee for Thelen LLP against law firms where former Thelen partners took work, Judge Pauley ruled today that the billable matters (as compared to contingency cases) were not “property” of the bankruptcy estate. Although “unfinished business” is generally an asset of a dissolved partnership, Judge Pauley concluded that “applying the unfinished business doctrine to pending hourly fee matters would result in an unjust windfall for the Thelen estate, as compensating a former partner out of that fee would reduce the compensation of the attorneys performing the work.” He also observed that deeming billable matters "property" to be shared with the estate would conflict with ethical rules against dividing fees, and “would have bizarre consequences”:
If such an interest exists, it becomes property of the estate upon the filing of a bankruptcy petition. It would appear, then, that the Bankruptcy Code empowers a debtor law firm to sell its pending hourly fee matters to the highest bidder. When this Court asked the Trustee whether a debtor firm could auction offits pending matters, the Trustee was unable to answer definitively. And the Trustee's reticence is understandable, as allowing such a sale of “property” is inconsistent with a client's right to choose attorneys. Similarly, under the Trustee's interpretation of the unfinished business doctrine, it is unclear whether a client who discharges a debtor law firm and transfers his case to a new firm violates the automatic stay.Noting that “[t]hese issues impact a large number of cases, and they present substantial grounds for difference of opinion,” Judge Pauley sua sponte certified the matter for an interlocutory appeal.
