Protecting Attorneys and Jeopardizing Creditors: In re Thelen LLP and Rejection of the “Unfinished Business Rule”

Author: A.J. Webb, Articles Editor, University of Cincinnati Law Review

In recent years, numerous multinational law firms have declared bankruptcy amidst dwindling demand for legal services. Generally, the bankruptcy of a law firm is similar to that of any other debtor: a trustee must carefully scrutinize the debtor’s assets, ensuring their availability for distribution to outstanding creditors. These assets are essential in repaying the partnership’s previous debts.

The New York Court of Appeals, however, holds a different view of how a bankrupt law firm should be treated, at least with respect to legal fees generated after the law firm declares bankruptcy. In a decision this past July, the Court of Appeals held that the “unfinished business” rule of partnership law, which provides that any “profits arising from work begun by former partners of dissolved law firms are a partnership asset that must be finished for the benefit of the dissolved partnership,” is inapplicable to pending hourly fee matters.[1] Fees generated after the declaration of bankruptcy concerning pending matters prior to the firm’s bankruptcy belong to the attorney, not the bankruptcy estate.[2] This single decision by the Court of Appeals will have major ramifications in bankruptcy law. While rejecting the unfinished business rule increases attorney and client independence, it seriously harms a creditor’s chance of recovery from the firm in bankruptcy.

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