Hero Judge of the Day: Justice James A. Catterson on Exorbitant $40 Million Fee

Billable Riddle: NY Firm's $40 Million Fee Has High Court Curious
The New York Law Journal by Joel Stashenko - December 3, 2008

ALBANY - More information is needed to determine if a Manhattan law firm's fee of $40 million for five months' work is unconscionable, the Court of Appeals ruled yesterday. The Court declined to grant a motion by the estate of Alice Lawrence to dismiss Graubard Miller's petition for payment. Rather, it sent the matter back to Manhattan Surrogate's Court, where the contingency fee and other payments have been in dispute since August 2005. "Petitioner Graubard Miller has not had the opportunity to lay bare admissible proof as to, among other things, whether the revised retainer agreement was fair, reasonable, and fully known and understood by Mrs. Lawrence," Judge Theodore T. Jones Jr. wrote for a unanimous Court in Lawrence v. Graubard Miller, 76. "Further, appellants have not submitted admissible, conclusive proof that the firm's petition is somehow deficient and/or that dismissal is otherwise warranted." At issue is a January 2005 contingency fee agreement under which Graubard Miller was to get 40 percent of a final settlement of the disputed real estate holdings of Mr. Lawrence's late husband. That agreement was adopted after the firm had received some $18 million in hourly fees from Ms. Lawrence over the previous 22 years under a retainer arrangement.

Judge Jones, citing King v. Fox, 7 NY3d 181 (2006), and Gillman v. Chase Manhattan Bank, 73 NY2d 1 (1988), noted that the Court has reserved the authority to review the unconscionability of contracts, both as of when they are entered into and retrospectively. "Our case law clearly provides that circumstances arising after contract formation can render a contingent fee agreement - not unconscionable when entered into - unenforceable where the amount of the fee, combined with the large percentage of the recovery it represents, seems disproportionate to the value of the services rendered," Judge Jones wrote. As to the Graubard Miller fee, the judge continued, "On its face, the amount of the fee seems disproportionate to the five months of work since the agreement's revision. However, we have not been presented with facts to refute or support this hypothesis, or to evaluate the agreement's unconscionability." Most members of the Court had challenged Graubard Miller's attorney, Mark C. Zauderer, and Graubard Miller partner Steven Mallis about the firm's compensation during oral arguments (NYLJ, Oct. 24). Mr. Zauderer countered that Ms. Lawrence was a savvy, competent client who pushed for the contingency fee agreement.

Ms. Lawrence's estate contends that she was ill and incapable of understanding the ramifications of the agreement when she signed it in January 2005. The contingency fee provided for Graubard Miller to receive 40 percent of a final settlement of the real estate holdings of her husband Sylvan Lawrence, who died in 1981 and whose brother and partner Seymour Cohn fought Ms. Lawrence and her children over the disposition of the properties. Graubard Miller, which was known as Graubard Moskovitz McGoldrick Dannett & Horowitz when it was first retained by Ms. Lawrence in 1983, argued that it had secured the payment of $350 million from Sylvan Lawrence's holdings to Ms. Lawrence and her children before the final $105 million settlement it reached with Mr. Cohn's estate in May 2005. It is a 40 percent fee on that final $105 million settlement that Ms. Lawrence's estate is contesting. She died of cancer earlier this year at 83. The Lawrence-Cohn holdings, which once included several Manhattan office towers, were valued in excess of $1 billion.

Lower Courts Affirmed

Yesterday's ruling affirmed findings in lower courts. Former Court of Appeals Judge Howard A. Levine, who was asked to review the fee arrangement at the direction of Manhattan Surrogate Renee Roth, decided he did not have the authority to find the fee agreement unconscionable without knowing more about the circumstances of how it came to be substituted for the 1983 retainer and hourly fee agreement. Surrogate Roth adopted Mr. Levine's report and recommendations in July 2006. An Appellate Division, First Department, panel ruled 4-1 that the contingent fee was not unconscionable on its face, though the majority acknowledged that the size of the fee might "arguably seem excessive and invite skepticism." It ruled that the "circumstances underlying the agreement must be fully developed" to determine the fairness of the arrangement.

The dissenter, Justice James A. Catterson, called the fee "exorbitant" and wrote that he would have referred Graubard Miller to the Departmental Disciplinary Committee. In a footnote yesterday, Judge Jones wrote that if agreements between competent adults are entered into knowingly and without deception, they should be invalidated in hindsight "only with great caution." "It is not unconscionable for an attorney to recover much more than he or she could possibly have earned at an hourly rate," the Court noted. "Indeed, the contingency system cannot work if lawyers do not sometimes get very lucrative fees, for that is what makes them willing to take the risk - a risk that often becomes reality - that they will do much work and earn nothing." Mr. Zauderer and Leslie D. Corwin, an attorney for Ms. Lawrence's estate, both said yesterday their positions would be vindicated in Surrogate's Court. "We are delighted with the ruling and we're gratified that the Court has affirmed Graubard's view that all the facts of this relationship need to be developed before any conclusion can be made on Ms. Lawrence's claim or that of her estate that the fee was unreasonable," Mr. Zauderer said in an interview. "We believe the facts, when they come out, will demonstrate conclusively that she was a sophisticated person who knowingly chose to go forward in a contingency arrangement and that the result for her was spectacular."

Mr. Corwin, of Greenberg Traurig, said he continues to believe the contingency fee arrangement was unconscionable. "We are confident that after the record in this matter has been fully developed, the estate of Alice Lawrence will prevail," Mr. Corwin said yesterday. Also at issue in the case are $5 million in gifts that Ms. Lawrence made to three Graubard Miller partners in 1998, plus her payment of $2.7 million to cover gift taxes for those payments. The Court concluded yesterday that the validity of the gifts and payments could not be determined until a judgment is made on the validity of the contingency fee agreement. In November, Mr. Levine recommended in a 38-page report that Ms. Lawrence's suit against Graubard Miller be thrown out if issues raised by her failure to appear for a deposition before her death to describe the circumstances of the fee arrangement cannot be resolved. Mr. Levine concluded that the suit should be dismissed by Surrogate Roth unless Ms. Lawrence's estate agrees to waive any objections to testimony about the fee by Graubard Miller partners based on the Dead Man's Statute. The statute provides that the verbal statements of a person who is dead or mentally incapacitated cannot be testified to at trial by an interested party. Thus, it would bar her former lawyers from testifying about the negotiation of the fee themselves.