California Supreme Court rules that dissolved law firm has no claim to profits from ex-partners

By Amanda Thomas | Mar 27, 2018

By Tobias Kleinlercher / Wikipedia (Own work) [CC BY-SA 3.0 (], via Wikimedia Commons

SAN FRANCISCO – A ruling out of the California Supreme Court will help settle a long-simmering dispute between a dissolved law firm and its former members who moved on to other firms and brought their cases with them.  

On March 5, the California Supreme Court ruled that a dissolved law firm had no property interest in the profits earned by former partners working on cases that were pending at the time of the firm’s dissolution. 

“A mere possibility of unearned, prospective fees cannot constitute a property interest,” the court said. 

The U.S. Court of Appeals for the 9th Circuit asked the Supreme Court to rule on the unfinished business question under the California partnership law in the case Heller Ehrman LLP v. Davis Wright Tremaine LLP. The case will now return to the appeals court.

According to the Supreme Court's opinion, Heller Ehrman was a global law partnership with more than 700 attorneys when it started experiencing financial distress. The firm subsequently notified its clients it wouldn’t be able to provide legal services as of Oct. 31, 2008, the opinion states. Heller’s former members joined at least 16 other law firms, including Davis Wright Tremaine LLP. 

In December 2010, Heller’s bankruptcy administrator filed suit to reclaim earnings from its former shareholders at their new firms. Heller’s dissolution plan included a provision known as a Jewel, or “unfinished business,” waiver. The provision waived Heller’s claims to hourly fees generated after the departure date of its former attorneys.

The bankruptcy administrator sought to set aside the waiver, which encouraged its members to move to new firms and reduce its expenses. The bankruptcy judge ruled in favor of Heller, but the district court reversed the decision, holding that “Heller did not have a property interest in the hourly fee matters pending dissolution,” the opinion states. Heller then appealed to the U.S. Court of Appeals for the 9th Circuit, which asked the Supreme Court to provide guidance. 

The question before the Supreme Court was whether a dissolved law firm retains a property interest in “legal matters that are in progress – but not completed – at the time of dissolution," the opinion states.        

“What we hold is that under California law, a dissolved law firm does not have a 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 opinion said.

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