Tuesday, November 27, 2007

Nice Work If You Can Get It

A law firm that had been paid over $18 million in legal fees on an hourly basis in an estate matter negotiated a 40% contingency fee agreement after the client had asked about the possibility of a non-hourly fee arrangement. Three firm partners also had received "bonuses or gifts" from the client of over $5 million. When the matter settled 4 1/2 months later, the client retained new counsel and refused to pay under the contingency agreement. The firm filed a petition that sought an amount of 40% of "not less than $110 million plus 40% of any additional sums paid to the estate, less $348,272.78 paid by [the client] to [the firm]" after the new agreement had been executed.

The client sought to remove the case from Surrogate's Court, but the New York Appellate Division for the First Judicial Department held that Surrogate's Court had subject matter jurisdiction. The fee arrangement was held not to be unconscionable on its face, requiring a trial on that issue.

Judge Catterson dissented: "Because I believe that as a matter of law a legal fee of $40 million for five months work following years of litigation which was fully compensated on an hourly basis, is unconscionable, I respectfully dissent and would void the agreement embodying that fee."Judge Catterson agrees that the fee-related issues are properly resolved in Surrogate's Court, but:

"Regardless of the procedural aspects of the parties' negotiations, no court can condone such an exorbitant fee, where the risks taken by [the law firm] were virtually nonexistent (having been paid $18 million in legal fees already and negotiated another $1.2 million for the ensuing year, plus its disbursements) and the [law] firm only added, at most, another seven months of legal work to its 22 years of service. See Ween v. Dow, 35 AD3d 58, 822 N.Y.S.2d 257 (1st Dept. 2006) (finding that the "very nature" of the retainer agreement provision, allowing Ween to recover attorneys' fees in collection action, was fundamentally unfair and unreasonable, and was, on its face, unconscionable and unenforceable). Without the costs and risks generally associated with contingency fee arrangements, such a fee agreement is nothing short of plain greed. See King, 7 NY3d at 192, 818 N.Y.S.2d at 841 (policy behind allowing contingency fee arrangements is based upon providing access to the courts and the fact that attorneys risk their time and resources in endeavors that could prove fruitless). "

As to the "bonus or gift" (i.e. prohibited business transaction/excessive fee), the dissent recites the following averments from the client:

"C. Daniel Chill arrived at her home in Ridgefield, Connecticut; he claimed that, given the favorable results that he, along with Reich and Mallis, had obtained in the estate litigation, they were each entitled to a bonus; and, he explained that this type of bonus payment was routinely made to attorneys based upon excellent service. Alice then made payments to the three attorneys of the firm, defendants Chill, Elaine Reich, and Steven Mallis, in the amounts of $2,000,000, $1,550,000 and $1,500,000, respectively. Upon handing the checks to the individual attorneys, however, Chill told her to indicate on the check that this was a "gift" in bold letters. It is uncontroverted that the checks were then deposited into the respective attorneys' personal accounts. Then, in or about April 1999, Chill called Alice and advised her that due to the tax implications of her payments, the bonus amounts due to each of them would be dramatically reduced. Chill stated that in order to assure that the amounts paid over were indeed received in full, it was necessary that she file a gift tax return for 1998 and pay the appropriate taxes on behalf of the three attorneys. This tax amounted to approximately $2,700,000."

The dissenting judge also would refer the matter to the Departmental Disciplinary Committee for investigation of possible ethical violations.

This case is worth a close look and could be a very useful teaching example for inquiry into the ethics of charging and collecting fees for legal services. (Mike Frisch)

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