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Clawback Ruling Could Inhibit Mobility

John Fitzgerald, CPA 07.31.2014 | ALA Currents

The bankruptcy and collapse of the law firm Howrey Simon Arnold & White LLP may have repercussions for partners seeking greener pastures and firms thinking of bringing them on board.  A February 7, 2014 ruling 1 by U.S. Bankruptcy Judge Dennis Montali in the Howrey matter opened the gates wider for a dissolved firm to claw back profits from uncompleted business that a partner took to a new firm.  The judge saw “no reason to limit the definition of Howrey unfinished business to matters pending as of dissolution."

While clawbacks are hardly new, this ruling goes further to allow them in cases where the partner departed before the dissolution.  In the wake of the Howrey ruling, a partner who departs a firm before it dissolves may have to return any profits from unfinished work.

The ruling adds a compellingly negative consideration for firms who are weighing whether to bring in an attorney from a firm that has seen better days. The firm will have to balance the potential boost in revenue that would result from the new business the partner brings in with the very real possibility that some or all of the profits might be pulled from their grasp.  

The Howrey ruling is by no means the last word on the subject as some law firms argue that a client should be free to do business with whomever they please. Still further, firms view this decision as one that places an unfair restriction on attorney mobility.

1 Howrey LLP, Chapter 11. Allan B. Diamond, Chapter 11 Trustee for Howrey LLP, Plaintiff v. Pillsbury Winthrop Shaw Pittman LLP et al, Defendant. Bankruptcy Court, N.D. California February 7, 2014

 

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