Robert A. Mittelstaedt

Heller Ehrman LLP's 2008 dissolution and 2009 bankruptcy continue to have reverberations throughout the legal community.

"Even more so now with the bankruptcies of Howrey and Dewey, and no doubt more to come," Mittelstaedt said.

At issue is the Heller estate's efforts to recoup fees from firms that took on its former partners and clients that, he said, Heller could no longer handle.

Of the 25 law firms sued by the estate, only four remain as defendants: Jones Day, Orrick, Herrington & Sutcliffe LLP, Foley & Lardner LLP and Davis Wright Tremaine LLP. The rest have settled.

"We are trying to establish the principle that firms that mismanage themselves into dissolution are not entitled to the profits earned by firms that bail them out," said Mittelstaedt, who is representing his firm, Jones Day, in the dispute. "We believe that the firms that do the work have the right to keep the fees paid by the clients."

The suits are based on the fraudulent transfer laws, he said, alleging that the case of Jewel v. Boxer gives them a right to profits from so-called "unfinished business."

"That 1984 case held that a dissolving law firm should divide profits from winding up its business according to partnership shares unless the partners agreed otherwise," Mittelstaedt said.

In order to facilitate its dissolution, he added, Heller agreed to waive any claims against its partners under the Jewel theory, and that is now being challenged as a fraudulent transfer.

"In effect, the Heller trustee is seeking to impose 100 percent tax on profits of any ongoing matters brought to firms by clients from bankrupt firms," he said. "That outcome would not be good for clients, lawyers, law firms or their creditors."

The Jewel waiver helped the transition of lawyers and clients, Mittelstaedt said, and improved Heller's collection of old client bills, while minimizing its expenses and exposure to malpractice cases by "abandoned clients."

Most of the firms have settled by paying what Mittelstaedt said was less than the cost of defense.

"But that will just encourage trustees of the next round of bankrupt firms to pursue the same theories against firms that take on partners from bankrupt firms," he said. "This is a crazy theory that hurt not just law firms and lawyers, but clients and creditors of the law firms, because there is less money to be distributed. We have drawn a line in the sand and we are going to fight it."

Mittelstaedt said that unless it gets summary judgment, Jones Day's case will be the first of the four to go to trial, probably next year.

- PAT BRODERICK