From September 15, 2011 to September 17, 2011, Yann Geron, as Chapter 7 Trustee in the bankruptcy of the former law firm Thelen LLC, filed 98 adversary proceeding complaints in the Southern District of New York against  former Thelen partners and their new law firms and former Thelen clients.    The Trustee sets the stage for each of these mass filing by describing Thelen’s rapid demise — from December 2006, when Thelen had 630 attorney’s, including 219 equity partners, to Thelen’s decision in October 2008 to dissolve the firm leaving $223 million in liabilities in excess of assets. Registered users can view the APScans report of these adversary proceedings by clicking this link.

The Proceedings against Law Firms

The Trustee targets 16 law firms  where  Thelen’s remaining partners went to work following Thelen’s decision to dissolve.   The Trustee alleges that in October 2008, Thelen’s remaining partners approved an amendment to the partnership agreement as part of the Thelen plan of dissolution.  This amendment  included a purported waiver of the rights that Thelen  had to “unfinished business” as defined in the California Court of Appeal’s decision in Jewel v. Boxer, 156 Cal.App.3d 171 (Cal.App. 1 Dist. 1984).  Accordingly, the Trustee refers to this purported waiver as the “Jewel Waiver”.  Following the adoption of the Jewel Waiver, the remaining Thelen partners allegedly took with them Thelen clients with “unfinished business” .

In his complaints against the law firms, the first and second causes of action seek the avoidance of the Jewel Waiver on both actual and constructive fraudulent conveyance grounds under 11 U.S.C. § 548(a)(1)(A) and 11 U.S.C. § 548(a)(1)(B), respectively.   The third and fourth causes of action seek avoidance of the Jewel Waiver under the California state law counterparts of these Bankruptcy Code Sections, Cal. Civ. Code §§ 3439.04, 3439.05 and 3439.07.

The shared theory of recovery for all of these causes of action is simple.  Former Thelen partners took with them to their new firms one or more open matters.  These open matters constituted “unfinished business” of Thelen.  The Jewel Waiver, by allowing this transfer of unfinished business without Thelen’s receipt of reasonably equivalent value, is subject to avoidance.

If the Trustee is able to avoid these “transfers”, he requests recovery from each of the defendant law firms “the profits and benefits derived or arising from the completion of the Unfinished Business transferred by the Jewel Waiver, pursuant to section 550(a) of the Bankruptcy Code.”  The Trustee also requests an accounting and a turnover of profits from the unfinished business, which profits the Trustee claims “are held in trust for Thelen” under California law.

The Trustee’s complaint pushes the holding and conclusions of the California Court of Appeal in Jewel v. Boxer to new ground.  In that case the law firm being dissolved failed to have a partnership agreement.  The California Court of Appeal stated that the law firm partners had the ability to provide for a different result in a written partnership agreement.  Jewel v. Boxer, 156 Cal.App.3d at 179-180.  Also, the decision never discusses any interest of the partnership itself in the unfinished business.

Possibly recognizing that seeking recovery against the defendant law firms likely will entail protracted litigation, the Trustee  brought in Diconza Traurig Magaliff LLP  of New York, New York as special litigation counsel to pursue these claims.

The Proceedings against former Thelen Partners and Thelen Clients

The Trustee also brought  59 adversary proceedings against individual, former Thelen partners.  The theories of recovery in these complaints vary from defendant to defendant.   Certain of the defendants are alleged to have received more than he or she was otherwise entitled to under the Thelen partnership agreement.  Other of the defendants allegedly  failed to make a  capital contribution required under the Thelen partnership agreement.  Still other individual defendants purportedly received loans from Thelen that are required to be repaid.  The Trustee frames these claims within four theories of recovery – breach of contract, turnover of estate property under Bankruptcy Code Section 542, unjust enrichment and fraudulent conveyance.

Perhaps anticipating that these claims will be readily resolved, the Trustee’s own firm, Fox Rothschild LLP, New York, NY,  is acting as plaintiff’s counsel in these proceedings.

In the last grouping of adversary proceedings, the Trustee has filed 23 collection actions against former clients of Thelen who are alleged to have declined to pay outstanding invoices for Thelen legal services.   The Trustee has farmed out these collection actions to yet a third firm – Platzer, Swergold, Karlin, Levine, Goldberg & Jaslow, LLP (New York, NY).

The Stern v. Marshall Effect

One must wonder how many of the 16 adversary proceedings against law firms will still be before the bankruptcy court in 6 months.  All the claims seek recover funds to supplement the estate, all are founded on the expanded application of a developing area of California law  and none involve the claims resolution process.   However, Northern District of California U.S. Bankruptcy Judge Dennis Montali minced no words in his recent recommendation to the District Court against the motions of sixteen law firm defendants to withdraw of the reference in adversary proceedings before him seeking avoidance of a Jewel Waiver under similar circumstances. See note: Northern District of California Bankruptcy Judge – Post Stern, Business as Usual in Hearing “Jewel Waiver” Fraudulent Conveyance Claims

Notwithstanding the views of Judge Montali to the contrary in Heller Ehrman LLP v. Arnold and Porter, LLP (In re Heller Ehrman LLP), Adv. Proc. No. 10-03203 (Bankr. N.D. Cal. September 28, 2011), for any of these defendants who is unable to reach a swift and favorable settlement, the recent Supreme Court decision in Stern v. Marshall, 131 S. Ct. 2594 (2011),  will likely be viewed as an opportunity, either immediately or ultimately, to have the claim heard in federal district court.

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Adversary Proceedings Overview

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