NEW YORK, Sept 4 (Reuters) - A federal judge in Manhattan ruled Tuesday that the estate of bankrupt law firm Thelen can't claw back profits from legal matters Thelen partners took with them to one firm, but allowed a lawsuit involving similar claims against a second firm to proceed.
The decision by U.S. District Judge William Pauley further clouds the debate over whether failed law firms can treat hourly billed lawsuits pending at the time of their closing as assets of their estates. It could also impact other law firm bankruptcies, including that of Dewey & LeBoeuf.
The first lawsuit was brought by California-based Thelen against Seyfarth Shaw, whose New York office hired 11 former Thelen partners. In dismissing those claims, Pauley found that "under New York law, a dissolved law firm's pending hourly fee matters are not partnership assets."
However, Pauley also acknowledged the controversy over hourly fees and certified the matter for an appeal to the 2nd Circuit Court of Appeals.
That court already is mulling whether to accept an appeal of a May ruling in a clawback lawsuit brought by the failed law firm Coudert Brothers against several big firms. In the suit, U.S. District Court Judge Colleen McMahon found that Coudert could recoup profits earned on its former partners' cases.
Brian Kiefer, a spokesman for Seyfarth, said the firm was "very pleased and believe that the court came to the right decision."
In ruling on a second case brought by Thelen -- this one against Robinson & Cole, which hired nine Thelen partners -- Pauley allowed the lawsuit to proceed under California law, which "may still" recognize hourly fee cases as a dissolved firm's assets, he said.
A spokesman for Robinson & Cole declined to comment.
Yann Geron, the trustee for Thelen's bankruptcy estate and a partner at Fox Rothschild, said in a statement that while he was pleased Pauley's holding regarding Robinson & Cole, he was "disappointed" about Seyfarth Shaw's win.
"We recognize the differences noted by Judge Pauley between New York and California law, and differences in viewpoints even between judges in the Southern District of New York in recent decisions," he said, noting that it will be up to the appeals court to sort the issues out.
Pauley's decision could have repercussions for other failed law firms, including Dewey & LeBoeuf, which filed for Chapter 11 in May. Dewey's advisers have estimated they have $60 million in potential claims they could assert related to unfinished business that partners took with them to other law firms.
Thelen, a 400-lawyer law firm founded in San Francisco, dissolved in 2008 and filed for Chapter 7 bankruptcy a year later in U.S. Bankruptcy Court in Manhattan.
It has sought to claw back profits on unfinished business taken from a number of firms, including Pillsbury Winthrop Shaw Pittman, Holland & Knight and DLA Piper. The estate has to date recovered $1.32 million from 20 law firms, court records show.
But Seyfarth and Robinson & Cole resisted settling, arguing that neither New York nor California law today treat hourly fee cases as partnership assets, unlike contingency fee matters.
In his decision Tuesday, Pauley said under New York law a bankrupt law firm does not have a property interest in pending hourly fee matters. Recognizing a property interest would "violate New York's public policy against restrictions on the practice of law," Pauley wrote.
A ruling to the contrary would create "bizarre consequences," he added, as under the bankruptcy code a bankrupt law firm might auction off its pending cases to the highest bidder.
"These unworkable results militate powerfully against extending the unfinished business doctrine to hourly fee matters," Pauley wrote.
The cases are Yann Geron, as Chapter 7 Trustee of Thelen v. Seyfarth Shaw et al, U.S. District Court for the Southern District of New York, Nos. 12-01364, 11-08967. . . .