Taking On Some Lawyers From a Bankrupt Firm? Better Go Slow

Here's a recent decision by a federal judge in New York that could potentially shake the very foundations of law practice here in the United States.

The ruling relates to the movement of lawyers from firms that declare bankruptcy, to other ongoing practices, and whether the bankrupt firm has any claim on the ongoing client work that the departing attorneys take with them. Usually, billable hour rate work like this travels freely with the departing lawyer, and the old firm has no right to any of the proceeds.

That changes with this ruling.  Relying on New York partnership law, the partnership agreement of the bankrupt firm, and the authorization for declaration of bankruptcy by the remaining partners, the court determined that ongoing but unfinished work, even unbilled work, was the property of the bankrupt law firm. In other words, the lawyers who took that work with them to other firms and subsequently billed for it have to account for the value of that work, and repay it to the bankruptcy estate of  their former firm.

This return of billable proceeds potentially represents tens of millions of dollars of losses to the firms that hired these lawyers following the bankruptcy.  The ruling should greatly restrict the movement of lawyers from a bankrupt firm, especially those who leave with active client engagements involving litigation or transactions. Moreover, the sweeping nature of the court's opinion and analysis indicates that firms might be able to assert ownership over ongoing work taken by a departing partner even without the bankruptcy proceeding.

If that's the case, then I would expect the loyalty factor at major law firms to go up substantially, because it would mean the end of the so-called "portable book of business" that most firms hiring laterals seek to acquire.  Such a ruling would dramatically reduce the movement of lateral partners by making them far less attractive to acquiring firms. And it might do a lot to reinvigorate the collegial model of law firm practice, where partners remain in one place for virtually their entire careers.

UPDATE:  An expert on law firm breakups provides more details and background here.