New Hires and Unfinished Business

Thinking of bringing a new person with clients on board or “we like her, she has a nice portfolio of ongoing work.”

As lawyers, we call that having a book of business.  It can be costly for the acquiring firm.  Take the recent case involving the dissolution of Howrey and Simon.  At one time one of the largest firms, it is now a debtor in bankruptcy court in California.  The Trustee sued a large firm that took in some of the departing lawyers claiming the right to its interest in profits realized or to be realized from its work in progress.  Just before voting to dissolve, the Partners adopted into their partnership agreement an “Unfinished Business” provision that said that neither the Partners nor the partnership shall have any claim to clients or matters on-going at the time of dissolution.  Finding this provision to be a fraudulent transfer of assets that could be recovered by its creditors, the bankruptcy judge agreed with the Trustee and wrote that the profits from future unfinished business could be used to satisfy creditors.  In re Howrey LLP, Bkr Case #11-31376 DM (BK ND Cal. Feb. 7, 2014)So let’s assume you have just taken on a new hire who brings on-going work to your firm.  Does he or she, and thereby your firm, have a duty to account for the profits billed to the old firm?  An argument by an extension of Howrey may make you vulnerable.  Shouldn’t your agreement with the new hire have some indemnity or other protection?Otherwise, the initial attractiveness of the new hire may be for naught.

A general counsel whom you have on a monthly retainer primed to think proactively like this may have just saved your firm.