As noted earlier, In re Brobeck, Phleger & Harrison, LLP (Greenspan v. Orrick, Herrington & Sutcliffe LLP), __ B.R. __, 2009 WL 2045344 (Bankr. N.D. Cal. July 2, 2009), involves the concept of unfinished business. That concept grows out of UPA Section 34(1)(a), which provides that, after dissolution, partners have the power to bind the partnership “[b]y any act appropriate for . . . completing transactions unfinished at dissolution.”
In a law firm, the primary unfinished business would include the representation of clients in matters already begun, but not yet completed. We often associate law-firm unfinished business with contingent-fee litigation, but even matters billed on an hourly basis could have substantial remaining work–consider a major acquisition or commercial litigation, for example. Unfinished business in no different from unbilled hourly matters or unpaid receivable; all must be finished, billed and collected for the benefit of the old firm.
The Brobeck waiver of the firm’s interest in unfinished business amounted to a distribution in kind of that business. It is well-settled that partners may agree to distributions in kind, rather than liquidations by sale and distributions of cash. As noted by the Brobeck court, completing unfinished business of a law firm “can be protracted”. Slip Op. at *8. Given that, the court concluded that
an agreement that immediately disposes of unfinished business and minimizes the disruptive impact of a dissolution is appropriate, and the court will not fault them for complying with this aspect of California law.
Id.
The problem was that the Brobeck firm was not only insolvent, but also an LLP; its partners were not liable for the obligations that the firm could not cover. There is a very real difference between the interests of the firm and those of its partners. In that context, partner consent should not be sufficient to avoid a breach of the duty of loyalty to the partnership. Yet the court treated the duty to account as operating only as among the partners.
The court gestured towards the principle that agreements solely among partners cannot override the rights of creditors. Slip. Op.at *10. That said, the court incorrectly viewed the insolvency of the partnership as relating only to the general creditors’ remedy of the fraudulent transfer laws. The duty to act for the benefit of the partnership cannot allow partners to strip assets from an insolvent firm. any assertion otherwise is “manifestly unreasonable.”
Gary Rosin
Tags: duty of loyalty, Law Firms, unfinished business
This entry was posted on Wednesday, August 12th, 2009 at 3:39 pm and is filed under Cases, Commentary, Law Firms, LLPs, Partnerships. You can follow any responses to this entry through the RSS 2.0 feed.
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Unfinished Business & Law Firms
As noted earlier, In re Brobeck, Phleger & Harrison, LLP (Greenspan v. Orrick, Herrington & Sutcliffe LLP), __ B.R. __, 2009 WL 2045344 (Bankr. N.D. Cal. July 2, 2009), involves the concept of unfinished business. That concept grows out of UPA Section 34(1)(a), which provides that, after dissolution, partners have the power to bind the partnership “[b]y any act appropriate for . . . completing transactions unfinished at dissolution.”
In a law firm, the primary unfinished business would include the representation of clients in matters already begun, but not yet completed. We often associate law-firm unfinished business with contingent-fee litigation, but even matters billed on an hourly basis could have substantial remaining work–consider a major acquisition or commercial litigation, for example. Unfinished business in no different from unbilled hourly matters or unpaid receivable; all must be finished, billed and collected for the benefit of the old firm.
The Brobeck waiver of the firm’s interest in unfinished business amounted to a distribution in kind of that business. It is well-settled that partners may agree to distributions in kind, rather than liquidations by sale and distributions of cash. As noted by the Brobeck court, completing unfinished business of a law firm “can be protracted”. Slip Op. at *8. Given that, the court concluded that
Id.
The problem was that the Brobeck firm was not only insolvent, but also an LLP; its partners were not liable for the obligations that the firm could not cover. There is a very real difference between the interests of the firm and those of its partners. In that context, partner consent should not be sufficient to avoid a breach of the duty of loyalty to the partnership. Yet the court treated the duty to account as operating only as among the partners.
The court gestured towards the principle that agreements solely among partners cannot override the rights of creditors. Slip. Op.at *10. That said, the court incorrectly viewed the insolvency of the partnership as relating only to the general creditors’ remedy of the fraudulent transfer laws. The duty to act for the benefit of the partnership cannot allow partners to strip assets from an insolvent firm. any assertion otherwise is “manifestly unreasonable.”
Gary Rosin
Tags: duty of loyalty, Law Firms, unfinished business
This entry was posted on Wednesday, August 12th, 2009 at 3:39 pm and is filed under Cases, Commentary, Law Firms, LLPs, Partnerships. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.