January 4, 2012 5:53 PM

Orrick Wins Bid to Move Clawback Claim Out of Bankruptcy Court

Posted by Sara Randazzo

In the latest in a string of recent developments involving law firms hoping to transfer so-called unfinished business claims out of bankruptcy court, Orrick, Herrington & Sutcliffe has triumphed in its bid to move a claim brought against it in the Coudert Brothers bankruptcy to federal district court.

U.S. district court judge Colleen McMahon's December 23 ruling in Orrick's favor is her second related to the Coudert Brothers bankruptcy that lets law firms targeted by the Coudert estate shift claims against them out of the jurisdiction of U.S. bankruptcy court judge Robert Drain. 

In November, McMahon approved a similar move by ten firms—including Akin Gump Strauss Hauer & Feld, Duane Morris, and Jones Day—sued by the Coudert estate in 2008 over profits tied to work that originated at Coudert and was taken elsewhere by former partners before and after the firm's late-2005 dissolution.

McMahon's earlier ruling relied in part on the U.S. Supreme Court's 2011 decision in Stern v. Marshall, which law firms have cited in attempting to relocate claims in the Coudert, Heller Ehrman, and Thelen bankruptcies.

In Stern, which involved the bankrupt estate of deceased former Playmate of the Year Anna Nicole Smith, the Court found that district court judges, not their bankruptcy court counterparts, have the constitutional authority to rule on common law questions such as the unfinished business claims sometimes known as clawback claims that can arise in bankruptcies.

In Orrick's case, Development Specialists, the plan administrator for the Coudert estate, sued the firm in 2010 to be repaid for work Orrick picked up from former Coudert partners, mainly in London and Moscow. Unlike the other firms sued by the Coudert estate, Orrick also faces allegations stemming from failed merger talks between the two firms and Orrick's eventual acquisition of Coudert's three-office China practice for $5 million, plus the assumption of a few million dollars in liabilites. Those additional claims include tortious interference with business relations, aiding and abetting breach of fiduciary duty, and breach of contract.

Barbra Parlin, a Holland & Knight partner in New York who represents Orrick in the Coudert litigation, says she and her client are "pleased with the decision" and that it didn't come as much of a surprise given McMahon's November ruling in the related case. Orrick's next step, she says, depends on how the judge rules on a motion for partial summary judgment currently being briefed in the case involving the ten other firms. David Adler, a McCarter & English partner who represents Development Specialists, did not immediately return a call seeking comment Wednesday.

While the Stern decision was a boon to Orrick, it was less helpful to four firms being sued by the Heller Ehrman estate.

U.S. district court judge Charles Breyer in San Francisco ruled on December 13 that claims against the firms must remain under the watch of U.S. bankruptcy court judge Dennis Montali. (Sixteen firms were orginally signed on to the September motion seeking to have the Heller claims moved out of bankruptcy court, but the other 12 had settled or planned to settle with the estate at the time of Breyer's ruling, according to a footnote in his decision.)

Breyer did decide, however, that while Montali can handle all pretrial proceedings and submit proposed findings of fact and conclusions of law to the district court in connection with the Heller estate's unfinished business suits, he may not enter final judgment in them. 

Citing Breyer's order, McMahon agreed in her December 23 recent ruling that under many circumstances, it "would be foolish" not to allow bankruptcy court judges—already familiar with the details of the bankruptcies at issue in unfinished business litigation—to do the pretrial work involved in such suits. As a point of comparison, she cited the way that district courts often employ magistrate judges to supervise discovery and rule on nondispositive motions.

The Orrick suit, however, should be fully transferred to federal district court, McMahon ruled, in part because it involves novel issues of New York law in which the bankruptcy court has no special expertise. Once the unfinished business claim issue is resolved, McMahon wrote that she plans to consult with Drain so the matters "will not impede final resolution of the bankruptcy."

In a third law firm bankruptcy, this one involving Thelen, a judgement has yet to made on a November 4 motion filed by Thompson Hine in which the firm seeks to remove to district court a claim brought by Chapter 7 trustee Yann Geron over profits brought to Thompson Hine by former Thelen partners.

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