A $44 million contingency fee sought by Graubard Miller for its work on behalf of the widow of a New York real estate magnate should be cut to less than $16 million, according to a court referee’s report.

If confirmed, Graubard Miller’s award, with interest, could climb to about $25 million. But the sum is less than what the firm would have earned under the original 40 percent contingency arrangement Graubard had with its longtime client, Alice Lawrence, whose estate claimed the fee was unconscionable.

Howard A. Levine, a former New York Court of Appeals judge who served as referee in the case, also recommended dismissing claims by Mrs. Lawrence’s estate and her children seeking to invalidate on ethics grounds more than $5 million in gifts she made to three Graubard Miller lawyers in 1998. Mr. Levine said Mrs. Lawrence fully understood that she was making the gifts and was free from undue influence. The referee also sided with Graubard in allowing it to keep $18 million in fees it earned in hourly billings prior to switching to the contingency arrangement.

The report, dated Aug. 27, requires confirmation by Manhattan Surrogate Nora S. Anderson. But the surrogate’s ruling will likely not be the final word in the litigation, which has already reached the Court of Appeals once before on the issue of whether the 40 percent contingency fee was “unconscionable.”

Daniel J. Kornstein, a lawyer for the Lawrence estate, sent a letter Aug. 30 to Surrogate Anderson saying the estate planned to move to have her modify, reject or disaffirm the report. Mr. Kornstein, of Kornstein Veisz Wexler & Pollard, said his team was studying the report “very carefully to determine our next steps.”

“We are heartened by certain conclusions the referee reaches, and we disagree with certain other provisions,” he said.

Mark C. Zauderer, a lawyer for Graubard Miller at Flemming Zulack Williamson Zauderer, said while his client disagreed with the referee’s limit on the contingency fee’s amount, “we are gratified that he found that Mrs. Lawrence fully understood the revised fee agreement that she herself requested, and that Graubard did not overreach.”

While Mr. Levine declined to invalidate the $5 million in gifts, he said the three lawyers who received the money—C. Daniel Chill, Elaine Reich and Steven Mallis—had not complied with guidance accompanying the state’s disciplinary rules at the time by not advising Mrs. Lawrence to seek independent advice about whether to issue the gifts.

In a footnote, Mr. Levine said gaps in the current law and disciplinary rules allow for gifts to be found valid even if “most would find them contrary to the standards we believe the profession should uphold.” He urged the Legislature “to consider adopting legislation to provide black letter rules to better protect clients who consider making substantial gifts to non-family member attorneys.”

Michael A. Carvin, of Jones Day in Washington, D.C., who represents the three Graubard attorneys, acknowledged the referee appeared to have preferred a different result on ruling on the gifts. Still, Mr. Carvin welcomed the result as “a complete across-the-board vindication and dismissal of the claim.”

Bitter Feud

The report in Estate of Sylvan Lawrence, 175/82, is the latest chapter in the bitter falling out between Graubard Miller and Mrs. Lawrence, a client of more than two decades who died in 2008. Graubard Miller began representing Mrs. Lawrence in 1983 in litigation surrounding the estate of her husband, Sylvan Lawrence, the co-owner of a New York real estate empire. After his death, Mrs. Lawrence wanted to liquidate the real estate holdings, but Seymour Cohn, Mr. Lawrence’s brother and business partner, had been named executor of the estate and did not want the buildings sold.

Near the end of 2004, after Graubard Miller had billed more than $18 million in hourly billings and its client had recovered more than $350 million, Mrs. Lawrence said she was concerned about the size of her bills and asked about switching to a new fee arrangement. The resulting arrangement called for fixed quarterly fees and a 40 percent contingency.

Less than five months later, the final piece of the litigation settled for more than $100 million, putting the firm in line for the windfall fee. Mrs. Lawrence refused to pay it and hired new lawyers.

Graubard subsequently began a proceeding in August 2005 in Surrogate’s Court seeking an order compelling payment of the roughly $40 million. Mrs. Lawrence opposed the petition, and she filed a separate suit in Manhattan Supreme Court seeking recision of the agreement, return of the $18 million in fees she had already paid the firm, the return of the $5 million in gifts, and reimbursement of the $2.7 million she paid in taxes on them.

The case has already travelled through the appellate courts once, with the New York Court of Appeals ruling in December 2008 in Lawrence v. Graubard Miller, 11 NY3d 588, that more information was needed to determine if the fee was unconscionable. Judge Theodore T. Jones Jr. at the time said that while the fee “on its face” seemed “disproportionate” to the work Graubard Miller did, “we have not been presented with facts to refute or support this hypothesis, or to evaluate the agreement’s unconscionability” (NYLJ, Dec. 3, 2008).

Trial commenced before Mr. Levine in October 2009. By the time it ended two months later, 15 witnesses had testified and 269 exhibits had been entered into evidence. The transcript, Mr. Levine’s report notes, runs more than 2,700 pages.

At trial, Graubard Miller contended it took on an enormous risk entering into the contingency arrangement and that a 2004 report issued by Mr. Levine on 95 Wall St., one of the real estate properties that was still at issue in the Lawrence litigation, had undermined most of Mrs. Lawrence’s remaining claims prior to entering into the fee deal.

But Mr. Levine said the $44 million fee could not be justified based on the risk the firm took. Mr. Levine, who has been a referee in this case since 2003, said he was “completely unpersuaded” that his 2004 report was a “devastating blow” to Graubard’s chances in the proceeding or that it compounded the firm’s risk.

While the law covering contingencies recognizes the fees can result in recoveries higher than what the firm would have earned on an hourly basis, Mr. Levine said the $11,000 an hour the firm stood to earn for the contingency fee was “astounding.” The fee should be adjusted downward, he said, since the firm had not shown all of its services resulting in the settlement were performed before entering into the contingency arrangement or that the firm’s services resulted in the production of the critical documents that drove settlement.

But Mr. Levine said it was not appropriate to reduce the firm’s fees to what it would have earned on an hourly basis, which the estate estimated would have been $1.6 million. Mrs. Lawrence was the one who insisted on abandoning the prior arrangement, he said, and while a “very substantial” fee reduction was warranted, “it cannot be said that risk was entirely eliminated in this complex multi-issue litigation.”

Mr. Levine said the fees should be reduced to $15.84 million, a number arrived at by applying 40 percent to the first $10 million of recovery, 30 percent to the next $10 million, and 10 percent to the remainder.

Gifts Issue

With regard to the $5.5 million in gifts, Mr. Levine was skeptical of testimony given by Mr. Chill, the lead Graubard lawyer on the estate matter. His testimony “is simply implausible in many respects and demonstrably inconsistent in others,” Mr. Levine wrote.

At trial, Mr. Chill claimed to have told Mrs. Lawrence on the night she gave them the gift that she should get advice from independent counsel. Yet, Mr. Levine noted, Mr. Chill at trial also acknowledged he had done no research regarding ethical issues that might arise from a client’s large gift and said he was unfamiliar with the rules in place at the time in New York.

When asked if by recommending Mrs. Lawrence hire independent counsel he recognized an ethical issue, he said “no,” a response Mr. Levine said contradicted his other testimony. The two other attorneys, Ms. Reich and Mr. Mallis, testified that Mr. Chill never told them about advising Mrs. Lawrence to hire independent counsel and that they did not give such advice themselves.

The referee found that Mr. Chill and the two other attorneys violated an ethical consideration—essentially a best practice recommendation—contained in New York’s disciplinary rules in place at the time by failing to advise Mrs. Lawrence to seek independent counsel about giving gifts to attorneys. But Mr. Levine found the widow understood the implications of making the gifts and was under no undue influence.

Her estate argued Mrs. Lawrence, while mentally competent at the time, did not understand she would be hit with $2.7 million in gift taxes as a result of the $5 million in gifts. But the estate could point to no law requiring lawyers must provide advice about that tax implications of a gift.

Mrs. Lawrence had a history of “spontaneous and grandiose generosity,” and had filed four previous gift tax returns before giving the three lawyers theirs, demonstrating she was aware that taxes would result from large gifts, Mr. Levine ruled. Hand-written notes to each of the attorneys with their gift checks “are manifestly sincere and genuine expressions of Alice’s deep appreciation to each of the members of her ‘team’ for their efforts and loyalty,” Mr. Levine wrote.