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Referee Backs Sanctioning Estate in Case Alleging 'Unconscionable' Contingent Fee
New York Law Journal
November 03, 2008
A high-profile court battle over an allegedly "unconscionable" contingent legal fee agreement has taken a strange turn following the death of the client who was to have paid the fee.
Alice Lawrence, who died Feb. 16 at the age of 83, sued her former lawyers at the New York firm of Graubard Miller over a 40 percent contingent fee agreement executed in January 2005, only a few months before the settlement of a mammoth estate case for $105 million.
The contingent fee would have garnered Graubard Miller $42 million, on top of $18 million in hourly bills paid over the two decades it represented Lawrence, plus another $5 million in "gifts" to individual partners. The New York Court of Appeals heard arguments Oct. 23 on Lawrence's motion to dismiss Graubard Miller's enforcement petition on the grounds that the fee deal was "unconscionable on its face."
But a referee appointed by Manhattan Surrogate Renee Roth, who is overseeing the case at the trial level, recommended last week that Lawrence's suit be thrown out if issues raised by her failure to appear for a deposition before she died cannot be resolved.
In a 38-page report, former Court of Appeals Judge Howard Levine said sanctioning Lawrence's estate might be warranted because, though she knew she was gravely ill, she nonetheless went out of her way to avoid giving critical testimony about how the fee agreement came to be. New York's Dead Man's Statute, CPLR §4519, now bars her former lawyers from testifying about the negotiation of the fee themselves.
"Because of the nature of the issues involved in these matters and the burden of proof imposed upon Graubard and the Individual Attorneys, it appears that, as a practical matter, the Dead Man's Statute will make it impossible for them to prevail in this litigation," the judge wrote in Lawrence v. Graubard Miller, 175/82. "Under the circumstances, it might well be appropriate to strike Ms. Lawrence's pleadings."
The Graubard Miller fee deal has proven controversial both for its size and the fact that it was adopted at the very end of a decades-long case in which millions in fees had already been paid. Most contingent fees of similar magnitude are introduced at the beginning of the case, in lieu of hourly fees, with the lawyer facing a risk of non-recovery. In representing Lawrence, the widow of a real estate developer, in a battle over a portfolio once valued at over $1 billion, Graubard Miller had faced no such risk.
Appearing before the Court of Appeals, the lawyer for Graubard Miller, Marc Zauderer of Flemming Zulack Williamson Zauderer, argued that Lawrence was a sophisticated client who proposed the contingent fee herself. Her lawyer, Leslie D. Corwin of Greenberg Traurig, has argued that Graubard Miller partners pushed the deal on a woman who was in a weakened state and under medication at the time.
Such claims made Lawrence's testimony "highly relevant," said Levine, who ordered in 2006 that her deposition be taken as soon as possible because of her advanced age. But Lawrence consistently sought to delay testifying and then skipped a deposition scheduled on Aug. 21, 2006. Her resistance "went beyond what can be legally justified," the referee said.
According to Levine, Lawrence's attempts to avoid a deposition continued even after she was diagnosed with lung cancer in November 2007 and told by doctors she had only months to live. Instead, the referee said, she continued to insist there was no medical reason she would not be able to testify at some date in the future.
Levine said Lawrence's case should be thrown out unless her estate agrees to waive any objections to testimony about the fee by Graubard Miller partners based on the Dead Man's Statute. The referee's recommendation is subject to confirmation by Roth.
Even if confirmed, the sanction recommendation is not expected to impact Court of Appeals' deliberations, though Corwin said Friday it was "certainly strange" that Levine had issued his report just a week after the Court of Appeals heard arguments on whether the agreement was unconscionable. He declined further comment on the referee's report.
At the Oct. 23 hearing, several judges had expressed skepticism about Graubard Miller's agreement. Judge Robert S. Smith wondered if it was fair for lawyers to receive "so much money for so little work."
Zauderer said Friday he was confident the judges would find the agreement was not unconscionable. Even an adverse ruling from the Court of Appeals would not prevent Graubard Miller from receiving some further payment, he said. The firm has argued in court papers that it would still be entitled to millions in fees on a quantum meruit basis.
The Court of Appeals judges had also questioned the 1998 payment of monetary "gifts" to three Graubard Miller partners. Lawrence's estate, which is seeking recission of the gifts, claims partner C. Daniel Chill requested the gifts, insisting they were typical of lawyer-client relationships.
Lawrence subsequently wrote a personal check to Chill for $2 million and also wrote $1.6 million and $1.5 million checks respectively to Graubard Miller partners Elaine Reich and Steven Mallis. At Chill's alleged request, she also paid $2.7 million in gift taxes.
Mallis appeared before the Court of Appeals on Oct. 23 and said the gifts were "utterly and totally voluntary."
"Based upon what I knew at the time, there was absolutely no impropriety and I can tell your honor that if I thought there was one iota of impropriety, that check would have gone back to Mrs. Lawrence in a heartbeat," Mallis responded when Judge Eugene F. Pigott asked why he accepted the gift.
"[W]hile at first blush such agreement might arguably seem excessive and invite skepticism, before any determination regarding unconscionability can be made, the circumstances underlying the agreement must be fully developed, including any discussions leading to the agreement, as well as the prospects at that time of successfully concluding the litigation in favor of Mrs. Lawrence," Justice Richard T. Andrias wrote for a majority that included Justices David Friedman, George D. Marlow and Eugene Nardelli.
But Justice James M. Catterson wrote a blistering dissent in which he said, "Regardless of the procedural aspects of the parties' negotiations, no court can condone such an exorbitant fee."
