Friday, May 24, 2013
The New York Appellate Division for the First Judicial Department has remanded a matter involving legal fees charged to and gifts received from a wealthy widow in an estate matter:
Beginning in 1983, defendant law firm represented the family of Sylvan Lawrence in litigation concerning the administration of his estate. In 1998, Alice Lawrence, Sylvan's widow, paid three of the firm's partners, the individual defendants, a bonus or gift totaling $5.05 million and also paid the firm $400,000 as a bonus or gift. By the end of 2004, the widow had paid, approximately $22 million in legal fees on an hourly fee basis.
In the hope of reducing her anticipated legal fees in the ongoing litigation, the widow entered into a revised retainer agreement with the law firm in January 2005. The revised retainer agreement provided, inter alia, for a 40% contingency fee. In May 2005, the estate litigation settled with a payment to the estate of more than $111 million and, in accordance with the revised retainer agreement, the firm sought a fee of 40% of that amount. When the widow refused to pay the 40% contingency fee, this litigation resulted, in which, among other relief, the return of the gifts the widow made in 1998 is sought.
The court held
The revised retainer agreement is both procedurally and substantively unconscionable (Lawrence v Graubard Miller, 48 AD3d 1, 6 [1st Dept 2007], affd 11 NY3d 558 ). 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% 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...
In considering the substantive unconscionability of the revised retainer agreement, the Referee correctly considered such factors as the proportionality of the fee to the value of the professional services rendered, the sheer amount of the fee, and the risks and rewards to the attorney upon entering into the contingency agreement. With regard to the last factor, 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. 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."(citations omitted)
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. 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. (citations omitted)
Because the individual defendants acted alone, and in secret from the rest of the law firm, with respect to the gifts, we decline to rule that such conduct by the individual defendants results in the firm's forfeiture of its lawful fees from the date the individual defendants received the gifts.
The Surrogate's Court (opinion linked here) had awarded the law firm fees in the amount of $15,837,374.02 but found that the gifts solicted by the attorneys (concealed from their law firm and the widow's children) emanated an "odor of overreaching too potent to be ignored." (Mike Frisch)