A Manhattan surrogate has slashed to less than $16 million a $44 million contingency fee sought by Graubard Miller for its work on behalf of the widow of New York real estate magnate Sylvan Lawrence, finding that, in retrospect, the firm’s contract was unconscionable.

However, in Estate of Sylvan Lawrence, 175/82, Surrogate Nora S. Anderson rejected a bid by the estate of Alice Lawrence, Mr. Lawrence’s widow, to recoup $18 million in fees already paid to Graubard by Mrs. Lawrence under an earlier contract. Mrs. Lawrence died in 2008, and her three children now control her estate.

The surrogate separately ordered three Graubard partners—C. Daniel Chill, Steven Mallis and Elaine M. Reich—to return more than $5 million in gifts they received from Mrs. Lawrence.

Surrogate Anderson’s order mostly confirmed a report prepared last year by Howard A. Levine, a former New York Court of Appeals judge who served as referee. Mr. Levine recommended that the court reject the Lawrence estate’s claim to recoup fees while reducing the fee still owed the firm, but he also recommended that the partners not be required to return the gifts (NYLJ, Sept. 8, 2010).

Graubard Miller began representing Mrs. Lawrence in 1983 in litigation over the estate of Mr. Lawrence. Mrs. Lawrence wanted to liquidate the real estate holdings, but Seymour Cohn, Mr. Lawrence’s brother and business partner, had been named executor and did not want to sell the holdings.

In 2004, after Graubard Miller had billed more than $18 million, Mrs. Lawrence asked to switch to a new fee arrangement, under which the firm would receive an hourly fee and a 40 percent contingency of recovered funds.

Less than five months later, the final piece of the litigation against Mr. Cohn, who had since died, settled for more than $100 million, which would have entitled the firm to a $44 million fee. Mrs. Lawrence refused to pay and hired new counsel.

In August 2005, Graubard began a proceeding in Surrogate’s Court to compel Mrs. Lawrence to pay the fee. Mrs. Lawrence 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 to the three Graubard attorneys, and reimbursement of the $2.7 million she paid in taxes on those gifts.

The Surrogate’s Court denied Mrs. Lawrence’s motion to dismiss. She appealed, and the case eventually reached the New York Court of Appeals, which ruled in 2008 in Lawrence v. Graubard Miller, 11 NY3d 588, that it did not have enough information to decide whether the fee was unconscionable (NYLJ, Dec. 3, 2008).

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.”

The case was sent back to the surrogate, and Mr. Levine, senior counsel at Whiteman Osterman & Hanna, presided over a trial in 2009.

In his final report, Mr. Levine said the contingency fee the firm stood to earn, which would be the equivalent of $11,000 an hour, was “astounding.” He said the firm had not shown that financial risk it incurred justified that level of compensation, or that its work had led to the settlement.

However, he rejected the claim by the Lawrence estate that the contingency agreement was unconscionable from the beginning because it said Mrs. Lawrence had not been fully informed when she entered into it. The estate had argued that the firm should be paid according to the original hourly agreement, which would have entitled it to only about $1.6 million.

Instead, Mr. Levine devised a new formula for the firm’s compensation that preserved its contingent nature while yielding a lower figure of about $16 million.

Mr. Levine also found that the three attorneys who received gifts from Mrs. Lawrence did not have to return them.

‘Appropriate Credit’

In adopting most of the recommendations, Surrogate Anderson said that Mr. Levine had struck a workable compromise between the parties.

“Having determined that the Revised Retainer had not been unconscionable at its inception, the Special Referee recognized that the parties had indeed entered into a valid contract,” Surrogate Anderson said. “However, he further recognized that, if enforced to the letter of every one of its terms, the contract would in retrospect be unconscionable…i.e., in this case, it would serve as a lawyer’s license to overreach.

“Thus, the size of the award he recommended gives the firm appropriate credit for services rendered and results achieved under a contract that the record disclosed was duly entered into,” the surrogate said.

In rejecting Mr. Levine’s finding on the gifts, Surrogate Anderson said she was persuaded by evidence that Mrs. Lawrence’s gifts were “not the product of [her] unfettered choice.”

She added, “There is here a combination of dubious circumstances that emit an odor of overreaching too potent to be ignored.”

Specifically, Surrogate Anderson said, the partners had kept the gifts secret from Mrs. Lawrence’s three children and from their own law partners. They also had not advised Mrs. Lawrence that, because of gift taxes, the actual cost of the gifts to her would be greater than their face value.

Graubard was represented by Mark C. Zauderer of Flemming Zulack Williamson Zauderer.

“Although we believe that the full amount of the contingency fee should have been awarded, we’re extremely pleased that the surrogate agreed with Mr. Levine that Mrs. Lawrence freely entered into the modified fee agreement with full knowledge of the relevant facts,” Mr. Zauderer said.

However, he said his client would appeal the reduction of the contingency fee.

“We think there was no basis at all for recommending a reduction of the fee,” Mr. Zauderer said.

Michael A. Carvin of Jones Day, who represented the three attorneys, said he “completely” disagreed with the judge’s ruling.

He said the surrogate should have deferred to Mr. Levine, who was more familiar with the details of the case because he presided over the trial. He said the surrogate had ignored evidence favorable to his clients, including thank-you notes they wrote after receiving the gifts.

Mrs. Lawrence’s estate was represented by Daniel J. Kornstein of Kornstein Veisz Wexler & Pollard.

Mr. Kornstein said he will appeal the ruling on the fee and is pleased with the ruling on the gifts.