New Bankruptcy Court Decision about law firm that filed bankruptcy
New Bankruptcy Court Decision about law firm that filed bankruptcy: Heller Ehrman LLP, Liquidating Debtor v. Jones Day (In re Heller Ehrman, LLP), Bankr. Case No. 08-32514DM, Adv. No. 10-3221DM (Bankr. N.D. Cal. March 11, 2013).
Summary:
Judge Dennis Montali, of the Bankruptcy Court for the Northern District of California, recently granted partial summary judgment in favor of the plaintiff debtor, a dissolved law firm, on the basis that the debtor’s waiver of rights under Jewell v. Boxer, 156 Cal. App. 3d 171 (1994) constituted an avoidable transfer under 11 U.S.C. section 548 and the California Uniform Fraudulent Transfer Act, entitling the debtor to recover profits from unfinished business.
Discussion:
In its dissolution plan, Heller included a provision ("the Jewel Waiver") purporting to waive the firm’s rights to payment of the profits from unfinished matters which former shareholders were expected to take to their new firms. These payment rights were established by the California Supreme Court in its seminal Jewel v. Boxer decision. The debtor filed adversary proceedings against law firms that hired former Heller shareholders on the theory that the Jewel Waiver constituted actually or constructively fraudulent transfers to the shareholders and their new law firms.
With regard to the debtor’s constructively fraudulent transfer argument, the court found that the shareholders did not provide reasonably equivalent value in exchange for the Jewel Waiver. The defendants had argued that Heller received various indirect benefits. For example, they claimed that the Jewel Waivers encouraged shareholders to move clients to new law firms, which helped ensure that client matters were attended to and that existing accounts receivable were collected. It also assisted associates and staff in finding new jobs, thereby limiting WARN Act liability. However, the defendants did not show that these indirect benefits were given in exchange for the Jewel Waiver, and thus the debtor prevailed on this issue.
The defendants also asserted the safe harbor defenses of Section 550(b)(1), available to subsequent transferees who take for value, in good faith, and without knowledge of the voidability of the transfers. Some of the defendants took in good faith and without knowledge of the avoidability of the Jewel Waiver. Nevertheless, these defenses are cumulative and, because the defendants could not prove that they took for value, they were not shielded by Section 550(b)(1).
The court reserved for trial the amount of Heller’s damages.
Author’s Commentary:
This decision discusses extensively In re Brobeck, Phleger & Harrison LLP, 408 B.R. 318 (Bankr. N.D. Cal. 2009), also presided over by Judge Montali, in which the bankruptcy court found that a waiver designed to avoid the consequences of Jewel was a transfer of the debtor’s property for which it received less than reasonably equivalent value. To law firms acquiring talent from dissolving former competitors: caveat emptor.