SAN FRANCISCO — The U.S. Court of Appeals for the 9th Circuit on Feb. 27 issued an order to stay a case until the District of Columbia Court of Appeals can answer three certified questions the 9th Circuit says will determine how to rule in a bankruptcy case.
The case involves a trustee for the now-defunct law firm, Howrey LLP, who filed a slew of lawsuits against the former law firm’s partners, claiming that they owe profits to Howrey after taking clients with unfinished business to their new law firms.
Judge Ronald M. Gould, Judge Mary H. Murguia, and Chief District Judge Nancy Freudenthal sat on the panel for the court and noted in the opinion that “in the bankruptcy context, the District of Columbia Court of Appeals’ answer to these questions will have important implications for both the suppliers operating in the District of Columbia and the law firms practicing law there.”
The 9th Circuit has requested that the District of Columbia Court of Appeals examine three questions it believes will clarify the case against partners from the former Washington, D.C., law firm and determine how they will rule. The D.C. Court will need to answer whether under Washington, D.C., law a disassociated former partner of a law firm owes “a duty to his or her former law firm to account for profits earned post-departure on legal matters that were in progress but not completed at the time of the partner’s departure, where the partner’s former law firm had been hired to handle those matters.”
The second question is, if the answer to the first question is yes, “then does District of Columbia law allow a partner’s former law firm to recover those profits from the partner’s new law firm under an unjust enrichment theory?"
The third question is, “what interest, if any, does a dissolved law firm have in profits earned on legal matters that were in progress but not completed at the time the law firm was dissolved, where the dissolved law firm had been retained to handle the matters on an hourly basis, and where those matters were completed at different pre-existing firms that hired partners of the dissolved firm post-dissolution?”
The 9th Circuit ordered the case stayed pending answers from the D.C. Court of Appeals regarding what rights Allan B. Diamond has, as trustee, to recover what he claims are Howrey's assets. Noting the complexity of the case, the opinion stated, “these questions are best answered by a court sitting in the applicable jurisdiction that will have greater familiarity with the local concerns of lawyers practicing in the District of Columbia and suppliers to those firms in a supporting marketplace.”
Diamond brought adversary lawsuits against multiple law firms to recover profits he says belong to Howrey, claiming the former firm’s partners took unfinished business to these new firms. The suits would provide these funds to the bankruptcy estate and the creditors.
Diamond was named as the bankruptcy trustee by a California court for Howrey in October 2011 after the firm went belly up that March. Proceeds from any unfinished business the nine partners carried with them belong to Howrey, Diamond argued. Diamond said the Howrey partners created a “Jewell waiver,” which was designed to “free any departing partner from any obligation to account for profits related to the winding up of unfinished business,” according to the background information in the opinion. Diamond claims this waiver does not protect the former partners because it is fraudulent, intended to leave Howrey with nothing.
Diamond began the lawsuits in 2013 and is seeking to recover profits from several law firms that the former Howrey partners joined after Howrey’s dissolution. Diamond’s suit alleges that as trustee, he is entitled to recover any profits the new firms have gained from Howrey’s unfinished business, brought over to the new firms by the former Howrey lawyers.
Howrey was an antitrust and intellectual property law firm, employing more than 750 attorneys in 17 offices across the U.S., Europe and Asia. Profits began to decline after the economic crisis of 2008 and many of the firm’s top attorneys began to resign. By 2010 the firm was insolvent, and the remaining partners of the firm chose to dissolve the firm in March 2011.
Diamond is represented by Andrew B. Ryan, James D. Sheppard and Michael Fishel of Diamond McCarthy LLP and Eric A. Nyberg and Chris D. Kuhner of Kornfield Nyberg Bendes & Kuhner PC.