Robert T Abney & Associates bankruptcy law: When law firms go bankrupt

When a law firm throws in the towel, what happens to its lawyers? They move on, that’s what. And a lot of times, their clients and cases move right along with them to their new firms.

In the wake of a recent New York decision, those new firms may be resting a bit easier. But here in Maryland, there’s a 33-year-old reason to toss and turn.

First, the news: As Bloomberg reported, New York’s highest court has rejected the notion that a bankrupt firm has any claim on the hourly-fee matters the partners take with them, aside from payment for past services.

The bankruptcy trustees for Thelen LLP and Coudert Brothers LLP had argued that the pending matters were partnership property or “unfinished business” that belonged to the defunct firm under New York law. The cases resulted in a split that went to the 2nd U.S. Circuit Court of Appeals, which asked the New York Court of Appeals to interpret the state law.

“Pending hourly fee matters are not partnership ‘property’ or ‘unfinished business’ within the meaning of New York’s Partnership Law,” the New York Court of Appeals decided (pdf).  “A law firm does not own a client or an engagement, and is only entitled to be paid for services actually rendered.”

That tracked closely the reasoning of the American Bar Association, which filed an amicus brief in the matter. (HT: ABA Journal’s Law News Now).

Here in Maryland, however, the Court of Special Appeals expressly rejected the client’s-right-to-choose argument in a 1981 decision, Murray I. Resnick v. Solomon Kaplan et al.

“The proposition [that a client has the right to elect the attorney he prefers] is sound; but it does not mean, as appellant contends, that the fees thereafter earned by the partner chosen by the client are not subject to division in accordance with the partnership agreement. Nor does it mean that the fiduciary duty imposed upon partners to render a faithful accounting to the partnership for fees earned is diminished in the slightest.”

The court in Resnick affirmed a summary judgment ruling in favor of the partnership.

Now, 1981 was a long time ago, but Resnick v. Kaplan is still a factor in disputes over law firms’ “unfinished business” on dissolution, showing up in footnotes as recently as this year.

In writing about the New York case, Bloomberg’s Bill Rochelle noted that it gives “comfort to the legal community, which has been roiled for 30 years by an obscure California decision” from 1984, Jewel v. Boxer.

Now, Jewel not only cites Resnick but discusses it at some length, and concludes, “The decision in Resnick v. Kaplan… is closely analogous to the present case” and “The reasoning in Resnick… is sound.”

Jewel, of course, was never binding on New York courts. No decision of the New York Court of Appeals, or the 2nd Circuit, can overturn Jewel. Nor are the decisions of the New York Court of Appeals and the 2nd Circuit binding in Maryland courts or the federal courts here.

Robert T Abney & Associates bankruptcy law on GM ‘Economic Victims’ Fight Bankruptcy

A judge on Wednesday set a schedule for General Motors Co.’sGM -0.27% bankruptcy court fight with the so-called “economic victims” of GM’s ignition switch defect, urging both sides to work together toward a resolution.

Judge Robert Gerber of U.S. Bankruptcy Court in Manhattan must ultimately decide, among other issues, whether his approval of a 2009 sale of the so-called “old GM” absolves “new GM” from lawsuits brought by those who say their cars lost value because of the ignition switch defect.

The judge Wednesday said he wants written briefs filed on when they were denied due process by the 2009 sale approval, what their remedies should be and whether any of their claims are against “old GM.” The next status conference is set for Aug. 5.

“We’re going to do as much as we can to keep things moving forward as quickly as possible consistent with getting a result that’s just,” the judge told lawyers gathered in court Wednesday. He later said the disagreement concerns “very complicated issues.”

The judge particularly urged both sides to continue building a set of facts that they can agree upon so that their arguments will be over matters of law. That, he said, would help move along the proceeding without slowing down the actual lawsuits themselves.

“Deferring these matters to a wait of discovery would materially, dramatically, seriously, I keep adding adverbs…I think it’s all really bad,” Judge Gerber said.

The judge said he wants both sides also to agree to facts related to the allegations that the bankruptcy court itself was defrauded in the 2009 sale.

The new GM in early May asked Judge Gerber to halt class-action fraud lawsuits filed by GM owners following the auto maker’s recall of 2.6 million vehicles with a faulty ignition switch.

At a May bankruptcy-court hearing, a lawyer for plaintiffs who have been financially harmed by the faulty switches said that among other things, they were denied due process as part of the company’s government-orchestrated 2009 bankruptcy and sale.

The judge is being asked to consider whether General Motors is discriminating against the economic-loss plaintiffs by treating personal-injury claimants separately.

In 2009, General Motors’s healthy assets were sold to a government-backed entity, forming the new GM. As part of GM’s bankruptcy plan, burdensome liabilities were left with the old GM.

The auto maker says plaintiffs in some 60 class-action lawsuits can pursue claims only against the old GM’s liquidating trust, which had more than $1 billion as of March 31, according to filings.

Robert T Abney & Associates bankruptcy law, commercial law: Inherited IRAs lose bankruptcy protection

In a landmark decision Thursday, the Supreme Court ruled unanimously, 9-0, that inherited IRAs are not protected in bankruptcy under federal law.

The decision has far reaching ramifications and, depending on your heirs’ specific circumstances, may give you pause as to who — or what — is the best beneficiary for your retirement accounts.

A bit of background

In 2005 President Bush signed into law the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). While, on the whole, the law was designed to make filing for bankruptcy less appealing, it had a silver lining for retirement account owners. BAPCPA afforded a great deal of bankruptcy protection to “retirement funds,” providing IRAs and Roth IRAs with a cumulative $1 million inflation-adjusted (currently $1,245,475) exemption and employer-sponsored plans with an unlimited exemption.

While that may seem fairly straightforward, the seemingly innocuous use of the phrase “retirement funds” in the bankruptcy statute muddied the waters. Bankruptcy trustees eventually began to challenge the exempt status of inherited IRAs, citing that they weren’t “retirement funds” and thus, not protected in bankruptcy under the federal bankruptcy rules. For the past few years, various courts have weighed in on the issue, delivering anything but consistent decisions. Indeed, even the very case brought forth to the Supreme Court and decided Thursday, Clark v. Rameker, had its own roller coaster of a ride before reaching the High Court.

It started in 2010, when Heidi Heffron-Clark filed for Chapter 7 bankruptcy protection, but listed her inherited IRA, worth about $300,000 at the time, as an exempt asset (unavailable to creditors). The bankruptcy trustee and Clark’s creditors objected to this exemption and the Wisconsin bankruptcy court which first heard the case agreed, ruling that Clark’s inherited IRA wasn’t protected in bankruptcy and was an available asset that could be used to satisfy her creditors. Clark appealed to a federal district court, which reversed the bankruptcy court’s initial decision. Later however, the bankruptcy trustee appealed the district court’s decision to the 7th Circuit Court of Appeals, which reversed the district court’s decision — putting things back to where they had started — once again holding that Clark’s inherited IRA wasn’t protected.

Ultimately, with few other options, Clark appealed that decision to the Supreme Court, which brings us all the way to yesterday’s big decision.

The Supreme Court’s conundrum

In deciding the Clark case, the primary issue before the Supreme Court was whether or not an inherited IRA is a retirement account. At first glance, that might seem crazy. After all, an inherited IRA is an inherited individual retirement account. It says retirement in the name. That said, there were, in fact, some very fair arguments to be made on both sides of the coin.

On the one hand, if someone owns a house, and that house is left to their child, would anyone argue that it isn’t a house anymore? Why should an IRA be any different? If it was a retirement account for the original owner — which no one would dispute — then why should its character change merely because the owner dies?

On the other hand, there are a number of reasons why an inherited IRA should not be considered a “retirement” account and ultimately, the Supreme Court felt these factors outweighed their counterparts. Specifically, the Supreme Court felt the following characteristics of inherited IRAs weren’t characteristics of a “retirement” account:

*Beneficiaries cannot add money to inherited IRAs like IRA owners can to their own accounts.

*Beneficiaries of inherited IRAs must generally begin to take RMDs in the year after they inherit the account, regardless of how far away they are from retirement. For instance, a grandchild that inherits an IRA at one-year old must begin taking RMDs by the time they are two. It’s hard to see how that can be for their retirement.

*Beneficiaries can take total distributions of their inherited accounts at any time and use the funds for any purpose without a penalty. IRA owners must generally wait until 59 ½ before they can take penalty-free distributions.

Relying largely on these items, the Supreme Court decided that inherited IRAs don’t contain “retirement funds” and, as a result, the favorable bankruptcy protection afforded to such funds under the federal bankruptcy code should not be extended to them.

Does this decision apply to all inherited IRAs?

Although the Supreme Court’s decision doesn’t explicitly state one way or another, its ruling seems to be limited to IRAs inherited by someone other than a spouse. There are a number of special rules for spousal beneficiaries under the tax code, including the ability for a surviving spouse to rollover a decedent’s IRA into their own IRA. In fact, during oral arguments, the bankruptcy trustee’s attorney even made a point to distinguish Clark’s inherited IRA from that of a surviving spouse.

 

Bankrupt Law Firms Can’t Claim Future Profits From Clients, Court Rules

Robert T Abney & Associates Bankruptcy Law, Commercial Law – A New York court has resolved a long-simmering question about what happens when law firms blow up: Can a bankrupt firm claim the profits from a valuable client relationship even after partners have moved on?

No is the answer, and that could provide the catalyst for more big-firm breakups as partners seek to leave law firms that are saddled with too much debt and shrinking fee revenue.

The opinion earlier this week by the New York Court of Appeals holds that because clients are free to choose who represents them in legal matters, a defunct firm cannot effectively follow them, seeking a piece of their fees, when their lawyer switches firms. The state appeals court issued its opinion upon request from the Second U.S. Court of Appeals in New York, which was considering the issue as it arose in the bankruptcies of Thelen LLP and Coudert Brothers, two examples of large law firms that slipped into bankruptcy as they failed to cut costs fast enough to stay in front of increasingly frugal corporate clients.

“This is a major, major decision, and it’s an issue that’s been out there a long time,” said Les Corwin, a partner with Blank Rome who focuses on law-firm mergers and dissolutions and was involved in the shutdowns of Wolf Block and Gaston & Snow, two venerable firms that failed in recent years.

The New York court said that for reasons of public policy, bankrupt firms couldn’t claim a piece of the profits — the difference between top-line fee revenue and overhead costs — that partners earn from clients they take with them. Not only would such a practice cut down on client mobility, the court ruled, but it would clash with New York ethics rules prohibiting fee-splitting.

Corwin said the main effect will be making it easier for partners to leave failing firms. Under the previous “unfinished business” doctrine, partners might have worried they’d effectively be working for free if they took their clients with them.

“If I’m representing you in a major matter in your life, I can’t pick up the phone and say `I’m going to another firm and I can’t take you because it will cost me a lot of money,’” Corwin told me.

The result might seem puzzling to other professionals, who frequently work under strict non-compete agreements and can be sued if they poach firm clients when they defect. Stockbrokers, for example, generally can’t take their clients with them when they go. A leading New York case that supported the arguments of bankrupt law firms involved the architects who designed Grand Central Terminal; when one of the architects died, the partner in charge of the other firm quickly negotiated a new contract that cut the estate of the dead architect out of the business.

The analogy doesn’t hold to law firms, however, because the Sixth Amendment guarantees a right to counsel. As with consumer-protection laws, malpractice and competition from non-lawyers, attorneys operate by a different set of rules. In this case, however, they had the Bill of Rights on their side.

Robert T Abney & Associates bankruptcy law, Commercial Law: Ruling Limits Defunct Law Firms’ Claims to Unfinished Business

In a blow to law-firm bankruptcy trustees, New York’s high court ruled that defunct law firms cannot recoup profits from unfinished work taken by their former lawyers to new professional homes.

The unanimous decision by the New York Court of Appeals, released Tuesday, roundly rejects arguments brought by those unwinding the law firms Coudert Brothers LLP and Thelen LLP , who have long insisted the so-called unfinished business doctrine gives them authority to claw back money earned on pending legal matters for the benefit of creditors.

Instead, the court found, “A law firm does not own a client or an engagement, and is only entitled to be paid for services actually rendered.”

In siding with the law firms that hired lawyers from Coudert and Thelen, the court said that allowing profits from hourly fee matters to flow back to bankruptcy estates would have “numerous perverse effects” and conflict with basic principles governing the attorney-client relationship.

The threat of clawback claims following a lawyer to a new firm, the court argued, could cause partners to flee a struggling firm at the first sign of trouble. “Obviously, this run-on-the-bank mentality makes the turnaround of a struggling firm less likely,” the ruling, written by Judge Susan Phillips Read with the concurrence of the court’s six other judges, said.

The ruling, while only binding to law firms that operate in New York, is likely to have a broader reach, industry-watchers say—particularly in light of a decision reached last month by a federal judge in California who also found a bankrupt law firm could not collect profits on pending assignments.

“They wanted to put a stake in the heart of unfinished business claims around the country, and that’s what has been accomplished,” William Brandt, the plan administrator in the Coudert case, said of Tuesday’s ruling. “It’s a political and policy decision.”

The ruling will also directly impact the dozens of firms that hired lawyers from Dewey & LeBoeuf LLP around the time of its dramatic 2012 collapse. While no suits have been brought yet in Dewey’s bankruptcy, the defunct firm’s trustee has indicated he plans to pursue millions of dollars in unfinished business claims.

“It’s significant that the court unanimously recognized that clients, not lawyers or law firms, own client matters,” said Shay Dvoretzky, a Jones Day partner who represented his firm in the Coudert appeal. “And that a law firm has a right to be paid only for work that it performed, not for someone else’s work.” Several other firms also appeared in opposition to Coudert in the case, including Dechert LLP and K&L Gates LLP .

Thelen trustee Yann Geron said Tuesday that the decision marks the end of the road for his claims against Seyfarth Shaw LLP, which hired 11 partners from Thelen. “On behalf of creditors, we are disappointed by the court’s decision, but respect that it is a unanimous ruling which gives trustees and law firms a clear path forward in New York,” he said via email.

The pursuit of unfinished business claims has dragged on for years; Thelen dissolved in 2008, and Coudert Brothers closed in 2005. Both estates have already collected millions of dollars through settlements with other successor firms, a move that has also played out in other law firm bankruptcies.

New York’s high court took up the cases at the request of the Second U.S. Circuit Court of Appeals, which asked the court to provide clarity on the hourly fee issue from a state law perspective. New York law already recognizes that some fees should be shared on pending contingency fee matters, which weren’t at issue in the appeals.

During oral arguments in Albany last month, the judges questioned how the unfinished business rule makes sense in today’s legal landscape, one marked by the frequent poaching of top billers by competing firms.

That sentiment appears heavily in Tuesday’s ruling, which concludes: “In the end, the trustees’ theory simply does not comport with our profession’s traditions and the commercial realities of the practice of law today.”

 

2014 SUMMER EMPLOYMENT FOR CURRENT LAW REVIEW MEMBERS

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