Thursday, June 6, 2013

NYC Judge, State Appeals Court Slam Lawyers For Milking Dead, Big-Time Real Estate Operator's Estate For $40+ Million In Unconscionable Legal Fees, $5M In 'Secret, Extraordinary Gifts' From Widow

In New York City, the New York Law Journal reports:

  • A state appeals panel has thrown out a $16 million contingency fee for work Graubard Miller performed for Alice Lawrence, the late widow of New York real estate magnate Sylvan Lawrence, finding the firm's fee agreement "unconscionable."

    Manhattan Surrogate Nora Anderson had already slashed the $44 million initially sought by Graubard Miller down to $16 million (NYLJ, Sept. 13, 2011).

    The First Department's May 23 decision in Lawrence v. Graubard Miller, 175/82, found that Anderson's fee award, which was meant as a compromise, had to be vacated and replaced with a purely hourly fee.

    Daniel Kornstein of Kornstein Veisz Wexler & Pollard, who represents Ms. Lawrence's estate, estimated that the hourly fee award, including interest, would be about $3 million.

    The Appellate Division, First Department, panel also affirmed Anderson's ruling that three individual Graubard partners—Daniel Chill, Steven Mallis and Elaine Reich—must return more than $5 million in cash gifts they received from Ms. Lawrence.(1)
  • In his final report, [Referee Howard] Levine said the contingency fee the firm stood to earn, which would be the equivalent of $11,000 an hour, was "astounding" and should be reduced. He rejected the estate's argument that the fee award should be calculated on a purely hourly basis, yielding about $1.7 million, and suggested the final $16 million figure as a compromise.

    He also recommended that the individual Graubard partners should not have to return their gifts. Anderson upheld the fee award, but ordered the gifts returned as well. Both sides appealed.

    Firm's Risk Disputed

    The First Department ruled May 23 in an unsigned decision that the entire contingency agreement was unconscionable and should be replaced by an hourly rate plus interest.

    "The revised retainer agreement is both procedurally and substantively unconscionable," the panel wrote. "The evidence shows that the widow believed that under the contingency arrangement, she would receive the 'lion's share' of any recovery. In fact, as it operated, the law firm obtained over 50 percent of the widow's share of proceeds. Thus, the law firm failed to show that the widow fully knew and understood the terms of the retainer agreement—an agreement she entered into in an effort to reduce her legal fees."

    The panel also said the firm did not seem to have taken any risk to justify the large fee.

    "The law firm had internally assessed the estate's claims to be worth approximately $47 million so that the contingency fee provision in the revised retainer would have meant a fee of about $19 million," the panel wrote. "Contrary to the law firm's assertion, on this record it seems highly unlikely that the firm undertook a significant risk of losing a substantial amount of fees as a result of the revised retainer agreement's contingency provision. Rather, the Referee accurately characterized this attempt by the law firm to justify its action as 'nothing but a self-serving afterthought.'"

    A compromise like the one ordered by the surrogate, the panel said, was not satisfactory.(2)
For more, see Firm Takes Another Hit in Bid to Collect 'Unconscionable' Fees.

For the court ruling, see In re Lawrence, 2013 NY Slip Op 03759 (May 23, 2013).

(1) With regard to requiring the lawyers to return the $5 million in gifts they received from the real estate operator's widow, the court observed:
  • The claims relating to the gifts the widow made to the three individual defendants are not time-barred. Rather, they were tolled under the doctrine of continuous representation (Glamm v Allen, 57 NY2d 87, 93-94 [1982]).

    Contrary to the individual defendants' contention, the doctrine applies where, as here, the claims involve self-dealing at the expense of a client in connection with a particular subject matter (cf. Woyciesjes v Schering-Plough Corp., 151 AD2d 1014, 1014-1015 [4th Dept 1989], appeal dismissed 74 NY2d 894 [1989]).

    As to the merits, the individual defendants failed to meet their burden of showing by clear and convincing evidence that the widow gave the gifts willingly and knowingly (Matter of Clines, 226 AD2d 269, 270 [1st Dept 1996], lv dismissed 88 NY2d 1016 [1996]).

    Indeed, the secrecy surrounding the gifts, and their extraordinary amounts, which the individual defendants accepted without advising the widow to seek independent counsel, preclude a finding in the individual defendants' favor (see Code of Professional Responsibility EC 5-5).
(2) On this point, the court stated:
  • The amount the law firm seeks ($44 million) is also disproportionate to the value of the services rendered (approximately $1.7 million) (see Lawrence v Graubard Miller, 11 NY3d at 596). The record shows that the law firm spent a total of 3,795 hours on the litigation after the revised retainer agreement became effective, resulting in an hourly rate of $11,000, which, as the Referee stated, is "an astounding rate of return for legal services."

    However, the remedy recommended by the Referee and adopted by the Surrogate — namely, a new "reasonable" fee arrangement for the parties — was improper. Where, as here, there is a preexisting, valid retainer agreement, the proper remedy is to revert to the original agreement (Matter of Smith [Raymond], 214 App Div 622 [1st Dept 1925], appeal dismissed 242 NY 534 [1926]; Naiman v New York Univ. Hosps. Ctr., 351 F Supp 2d 257 [SD NY 2005]).

    For the reasons found by the Referee, we reject the firm's suggestion that it receive a reduced contingency fee. Accordingly, the matter is remanded for the determination of the fees due the law firm under the original retainer agreement. Given that the firm is entitled to fees under the original retainer agreement, it is also entitled to prejudgment interest from the date of the breach (see CPLR 5001).

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