September 2, 2011 12:45 PM

From One Bankrupt Firm to Another: Brobeck Asks Heller For $471,000

Posted by Sara Randazzo

In the course of its nearly decade-old bankruptcy, the $470,988 settlement that Brobeck, Phleger & Harrison's estate proposed late last month won't change the course of its Chapter 7 proceedings. But when the party handing over the money is Heller Ehrman, another bankrupt law firm, the settlement turns a few heads.

The agreement, which must be approved by U.S. bankruptcy judge Dennis Montali, settles a long-running dispute over who deserves to get paid for work six Brobeck partners took with them to Heller after Brobeck dissolved in 2003.

Both firms agreed to the sum, which represents just 17.5 percent of the nearly $2.7 million in fees the former Brobeck partners collected while at Heller, according to the settlement agreement filed in court August 30. Based on the terms of Heller's bankruptcy, the $470,988 the firm's estate agreed to pay Brobeck will eventually be reduced--just recently, Heller struck a deal to pay unsecured creditors between 24 cents and 33 cents on the dollar for outstanding claims.

Heller, which filed for Chapter 11 bankruptcy in 2008, has made similar claims against dozens of former partners in its own bankruptcy, a situation that likely caused the firm to take the high road in its dispute with Brobeck, says Jonathan Hughes, an attorney with Howard Rice Nemerovski Canady Falk & Rabkin in San Francisco who represented five of the six former Brobeck partners.

"I think Heller had no choice but to agree to be treated the way it’s asking everybody else to be treated," Hughes says." If Heller hadn't been willing to settle the case reasonably, "law firm defendants would have howled."

Under the unfinished business doctrine established in Jewel v. Boxer, a 1984 California Court of Appeals case, bankrupt law firms in the state can recoup profits from work originated at the defunct firm and taken elsewhere. Brobeck has taken action against hundreds of former partners based on Jewel v. Boxer, including a settlement with Morgan, Lewis & Bockius for $10.2 million and another with Clifford Chance for $3.75 million, both in 2004.

Heller sued 49 firms on those grounds last November and December. In August, Heller agreed to a $5 million settlement with Covington & Burling and 17 former Heller partners now at that firm to recover proceeds under Jewel v. Boxer. Many of the 48 other cases have been dismissed or settled, and more than a dozen still remain.

Such cases rarely go to trial, says Hughes, whose practice focuses on attorney liability. One case that did, brought by bankrupt intellectual property boutique Lyon & Lyon against Orrick, Herrington & Sutcliffe, resulted in a complete defense verdict for Orrick, according to Hughes.

Initially, Brobeck named each of the six former partners--Chris Andrews, Roy Crawford, Michael Kagnoff, Martin Nichols, Richard Parker, and Hayden Trubitt--as individual defendants in a lawsuit filed in March 2009, since Heller was no longer an operating law firm with the means to defend them. The next month, Brobeck filed a similar suit against the Heller estate, and the proposed settlement releases the individual lawyers from any personal liability. Today, Kagnoff and Nichols are partners at DLA Piper; Andrews is of counsel at DLA; Crawford is counsel at McDermott Will & Emery; Trubitt is a partner at Stradling Yocca Carlson & Rauth; and Parker is retired.

Outside of California, case law is less clear on how to collect on unfinished business. Ten law firms being sued by Coudert Brothers, which went bankrupt in 2006, asked a U.S. bankruptcy court judge in New York to move the claims against them out of bankruptcy court and into federal district court. The request cites a recent U.S. Supreme Court decision that found a claim based on a private right, not a public right, does not belong in bankruptcy court. Last year, Coudert Brothers secured $6.65 million from Baker & McKenzie over unfinished business fees.

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