Which law firm is rumored to be failing this week, and who will be next? Although, inevitably, the target firms insist that retaining bankruptcy counsel does not mean a filing is imminent, such legal industry headlines are catnip for strong firms hoping to bolster their own talent by luring lateral hires away from weak ones. With those opportunities, however, comes the real risk of being sued later by the failed firm’s bankruptcy trustee. Such lawsuits have already produced years of litigation in the on-going bankruptcies of Brobeck, Heller, Howrey, Coudert, Thelen, Dewey and others. The trustees have won some of the opening rounds against the hiring firms premised upon the Jewel doctrine—also known as the Unfinished Business Rule—but none of the suits have yet gone to trial on the merits, and appeals challenging the trustees’ right to bring such actions are pending in multiple jurisdictions. Just last week, the bankruptcy court in the Heller case certified that the case is ready for trial and recommended its transfer to the U.S. District Court.1 We may soon have more guidance.
In the meantime, despite the uncertainties, hiring firms can take steps now to evaluate and minimize their Jewel risk for any lateral hire. Hiring firms should consider the following:
- First, will Jewel arguably apply to the lateral candidate? Threshold questions to consider include:
- The candidate is a partner;
- of a law firm facing a risk of imminent failure;
- that did not have a Jewel waiver agreement in place before its current financial difficulties; and
- the candidate is working on one or more matters expected to continue at the new firm.
- Second, if the rule might arguably apply, what can minimize the hiring firm’s risk? You may wish to consider the following:
- Adopt special intake procedures for matters opened by the lateral partner to identify any that were pending at the former firm and might be subject to the rule.
- Carefully assess the continuing matter and consider declining the transfer.
- Approach the candidate’s firm to resolve potential disputes before taking on the matter. For example, in addition to resolving potential Jewel claims in advance, firms might also consider agreeing to accept lease liabilities or other expenses of the dissolving firm, such as associate or staff salaries or pending pro bono matters. Actions of this nature could provide “reasonably equivalent value” in exchange for the alleged transfer of the revenue- generating matter. Although impractical in many situations, such settlements or agreements could provide defenses to a Jewel action.
- Third, remind the candidate to abide by his or her fiduciary duties to their current firm.
This has become a difficult area to navigate. The law is, however, quite unsettled and evolving.