Fraudulent transfer in Heller Ehrman bankruptcy

I recently read an interesting piece about the application of fraudulent transfer law in the context of the Heller Ehrman bankruptcy. The trustee sought to avoid the transfer of ongoing legal matters that departing partners brought with them to their new law firms. These ongoing matters were essentially assets that belonged to Heller Ehrman and were transferred to other firms—arguably, for less than reasonably equivalent value. And the trustee was attempting to claw back the profits these other firms made from this work.

 

The challenge was how to value the expenditures made by these firms in representing Heller Ehrman’s former clients, because the estate was only entitled to the profits from the representation. The bankruptcy judge ruled that, instead of looking at the firms’ actual costs, the expenses and overhead costs of a hypothetical firm resembling Heller Ehrman should be used to determine profits. This approach makes sense in that the question is ultimately how much profit would Heller Ehrman have made off the transferred legal matters; not how much did the “receiving” firms make off those matters.  

 

Nonetheless, this strikes me as a unique application of fraudulent transfer law because it is not as though these assets (ongoing legal matters) could readily have been sold off in a standard market transaction. It also would have been necessary to find an immediate “buyer” because pending legal matters cannot be delayed. However, if the pending matters could have been transferred to other attorneys remaining at Heller Ehrman, but instead were taken by the exiting partners, then it would make sense to assign a value to these assets in the manner proposed by the court.

 

Source: Daily Recorder, Jan. 31, 2014.