N.Y. High Court Skeptical of $40 Million Payoff From Contingency Fee Deal

New York's high court appeared skeptical Thursday about a 40 percent contingency fee agreement that allowed law firm Graubard Miller to get a $40 million payoff in just five months. Attorneys for Graubard Miller's late client, Alice Lawrence, argued that the law firm is seeking to collect an unconscionable amount for little work and after assuming little or no risk under the arrangement. Several members of the court questioned the propriety of Graubard Miller seeking to collect the entire fee amount.

Joel Stashenko

New York Law Journal

2008-10-24 12:00:00 AM
Graubard Miller did not like a contingent fee agreement that produced a $40 million payoff in just five months, but it accepted the arrangement to keep a 22-year client with the firm, lawyers told the New York Court of Appeals Thursday.

Members of the court appeared skeptical during an hour of oral arguments about the size of the fee and several questioned the propriety of Graubard Miller seeking to collect the entire amount.

Judge Robert S. Smith echoed several of his colleagues when he wondered whether a legitimate contingency agreement, "where it works out so favorably to the lawyer, where it is so much money for so little work," could be considered unconscionable.

Attorneys for Graubard Miller's late client, Alice Lawrence, argued that the law firm is seeking to collect an unconscionable amount for little work and after assuming little or no risk under the arrangement.

The contingency arrangement, under which the firm was to receive 40 percent of a final settlement sought by Lawrence in a legal battle over her late husband Sylvan's real estate empire, was Lawrence's idea, attorney Mark Zauderer told the judges Thursday.

"The firm did not want to undertake this on a contingency arrangement," Zauderer, of Flemming Zulack Williamson Zauderer, argued on behalf of Graubard Miller. "They didn't request it. They're not a contingency law firm. They don't do that kind of work. She said, 'Put your money where your mouth is.'"

The agreement signed by Lawrence and Graubard in January 2005 replaced an hourly arrangement under which the firm had billed her $18 million over 21 years.

Five months later, a $100 million settlement was reached to end Lawrence's dispute with the estate of Seymour Cohn, Sylvan Lawrence's brother and former business partner, over real estate holdings of the two men that were once valued at more than $1 billion.

Lawrence subsequently refused to pay the contingent fee.

Zauderer suggested that Graubard Miller brought a complex and contentious case to a close and that the $40 million fee only looks questionable in retrospect because a settlement was reached unexpectedly in a short period of time.

Zauderer said Graubard Miller assumed considerable risk in going from an hourly fee agreement with Lawrence to the contingency arrangement because of how long the case had dragged on before 2005 and a setback Lawrence had just suffered in the case in Surrogate's Court in Manhattan.

"Many lawyers would not have taken this case in January 2005 on a contingency basis ... . It was not a slam dunk," Zauderer said.

But judge after judge Thursday kept returning to the sheer size of the fee and, no matter the agreement Graubard Miller signed with Lawrence, whether the firm was entitled to it.

Smith said he could understand that Graubard Miller may well not have expected to see the Lawrence case settle so quickly.

"You never anticipated anything like this," he told Zauderer. "You anticipated a much smaller amount, much more work, much higher risk of recovery. This was a complete surprise. Are you still entitled to take 40 percent of a $100 million surprise?"

"Yes, you are," Zauderer replied.

"What case says that?" Judge Smith asked.

"There's no case that says you can't. I would infer from all the cases that have addressed what is an unconscionable fee in terms of a percentage," Zauderer said.

Chief Judge Judith S. Kaye repeatedly asked Zauderer and Graubard Miller partner Steven Mallis, who also appeared Thursday to defend the fee, what precisely the firm's attorneys had done from January to May 2005 to justify the $40 million fee.

"It had to do with skill and negotiating strategy and bluffing," Mallis told the ourt. "It had to do with a whole lot of factors."

With some exasperation, Chief Judge Kaye kept trying to push for more details.

"You're not even giving us a clue," she told Mallis. "All you're saying is 'skill' and 'risk.'"

"What else is there?" Mallis said.

Mallis also faced sharp questioning from the court about his acceptance of a $1.5 million gift from Lawrence in 1998 and about her payment of $2.7 million to cover gift taxes for Mallis and two other Graubard Miller partners who received a total of $3.5 million in gifts.

"Why wouldn't you mail the check back and say, 'You can't give me a gift, I'm your lawyer?'" Judge Eugene F. Pigott Jr. asked.

"I was satisfied, for reasons which do not appear in the record, that this was utterly and totally voluntary and I am perfectly happy to have a full evidentiary exposition of all the facts and circumstances surrounding it," Mallis responded. "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."

Lawrence's estate is also seeking the return of the 1998 gifts from Graubard Miller.

Leslie D. Corwin of Greenberg Traurig, attorney for Lawrence's estate, told the court the contingent arrangement was unconscionable both when the agreement was signed and when it became clear how large the fee payment would be.

"Under both of those circumstances ... at the time that it was signed and also at the time when the fee was requested and the court looks in hindsight at that fee, under both scenarios this revised fee agreement could never pass muster," Corwin argued.

The Court of Appeals had originally scheduled the case on an expedited basis on its March calendar, but it was moved back to Thursday following the Feb. 16 death of Lawrence. She was 83.

Lawrence first retained Graubard Miller, then known as Graubard Moskovitz McGoldrick Dannett & Horowitz, in 1983 to represent her in matters related to Lawrence's estate.

When Lawrence died in 1981, he and his brother held a real estate portfolio that included several Wall Street office towers and the former Port Authority building at 111 Eighth Ave. Over the course of the long dispute, before the $100 million settlement, another $350 million had been paid out of the estate.

Litigation over the property dragged on for more than 20 years, with Lawrence seeking the sale of the portfolio and Cohn opposing her.

A 1983 retainer called for an hourly billing arrangement under which Lawrence ultimately paid Graubard Miller $18 million.

Lawrence's estate is seeking rescission of the contingent fee agreement as well as the return of all previous fees on the grounds of unjust enrichment and breach of fiduciary duty.

A former member of the Court of Appeals, Howard Levine, reviewed the fee arrangement at the direction of Manhattan Surrogate Renee Roth. He concluded that as a referee, he did not have the authority to find the contingent fee unconscionable without knowing more about the circumstances of how it came to be substituted for the long-standing hourly billing arrangement between Lawrence and Graubard Miller.

The Appellate Division, 1st Department, affirmed by a 4-1 vote, holding that while the fee might "seem excessive and invite skepticism," it was not unconscionable on its face.

The 1st Department majority observed that before any determination regarding unconscionability could be made, "the circumstances underlying the agreement must be fully developed," including any discussions leading to the agreement as well as the prospects of successfully concluding the litigation in Lawrence's favor.

However, a sternly worded dissent from Justice James A. Catterson referred to the fee as "nothing short of greed" and said he would have referred the firm to the Departmental Disciplinary Committee.

Corwin urged the court Thursday to find the contingent fee arrangement unconscionable without further court proceedings.

Zauderer and Mallis told the court Graubard Miller has never adequately been allowed to present the facts, from the firm's standpoint, that support the fee arrangement.

Norman A. Senior and Robert L. Berchem appeared on behalf of Lawrence's three children.