A state appeals panel has thrown out a $16 million contingency fee for work Graubard Miller performed for Alice Lawrence, the late widow of New York real estate magnate Sylvan Lawrence, finding the firm’s fee agreement "unconscionable."

Manhattan Surrogate Nora Anderson (See Profile) had already slashed the $44 million initially sought by Graubard Miller down to $16 million (NYLJ, Sept. 13, 2011).

The First Department’s May 23 decision in Lawrence v. Graubard Miller, 175/82, found that Anderson’s fee award, which was meant as a compromise, had to be vacated and replaced with a purely hourly fee.

Daniel Kornstein of Kornstein Veisz Wexler & Pollard, who represents Ms. Lawrence’s estate, estimated that the hourly fee award, including interest, would be about $3 million.

The Appellate Division, First Department, panel also affirmed Anderson’s ruling that three individual Graubard partners—Daniel Chill, Steven Mallis and Elaine Reich—must return more than $5 million in cash gifts they received from Ms. Lawrence.

Justices David Friedman (See Profile), Karla Moskowitz (See Profile), Helen Freedman (See Profile) and Rosalyn Richter (See Profile) sat on the panel.

Anderson’s ruling had mostly confirmed a report prepared in 2010 by Howard Levine, a former New York Court of Appeals judge who served as referee (NYLJ, Sept. 8, 2010).

Graubard Miller began representing Ms. Lawrence in 1983 in litigation over the estate of her deceased husband. Ms. Lawrence wanted to liquidate his 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 already billed more than $18 million, Ms. Lawrence asked to switch to a new fee arrangement, under which the firm would receive a 40 percent contingency of recovered funds.

Less than five months later, the final piece of the litigation against Cohn, who had since died, settled for more than $100 million, which would have entitled the firm to a $44 million fee. Ms. Lawrence refused to pay, claiming the agreement was unconscionable.

In August 2005, Graubard began a proceeding in Surrogate’s Court to compel Ms. Lawrence to pay the fee. Ms. Lawrence filed a separate suit in Manhattan Supreme Court seeking to rescind the contingency agreement. She also sought the return of the $5 million in gifts to the three Graubard attorneys.

The Surrogate’s Court denied Ms. Lawrence’s motion to dismiss the law firm’s case. 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). Ms. Lawrence, however, had since died, leaving her estate in charge of the litigation.

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

In his final report, Levine said the contingency fee the firm stood to earn, which would be the equivalent of $11,000 an hour, was "astounding" and should be reduced. He rejected the estate’s argument that the fee award should be calculated on a purely hourly basis, yielding about $1.7 million, and suggested the final $16 million figure as a compromise.

He also recommended that the individual Graubard partners should not have to return their gifts. Anderson upheld the fee award, but ordered the gifts returned as well. Both sides appealed.

Firm’s Risk Disputed

The First Department ruled May 23 in an unsigned decision that the entire contingency agreement was unconscionable and should be replaced by an hourly rate plus interest.

"The revised retainer agreement is both procedurally and substantively unconscionable," the panel wrote. "The evidence shows that the widow believed that under the contingency arrangement, she would receive the ‘lion’s share’ of any recovery. In fact, as it operated, the law firm obtained over 50 percent of the widow’s share of proceeds. Thus, the law firm failed to show that the widow fully knew and understood the terms of the retainer agreement—an agreement she entered into in an effort to reduce her legal fees."

The panel also said the firm did not seem to have taken any risk to justify the large fee.

"The law firm had internally assessed the estate’s claims to be worth approximately $47 million so that the contingency fee provision in the revised retainer would have meant a fee of about $19 million," the panel wrote. "Contrary to the law firm’s assertion, on this record it seems highly unlikely that the firm undertook a significant risk of losing a substantial amount of fees as a result of the revised retainer agreement’s contingency provision. Rather, the Referee accurately characterized this attempt by the law firm to justify its action as ‘nothing but a self-serving afterthought.’"

A compromise like the one ordered by the surrogate, the panel said, was not satisfactory.

"Where, as here, there is a preexisting, valid retainer agreement, the proper remedy is to revert to the original agreement," the panel said.

It also ruled that the individual lawyers must return their gifts because they "failed to meet their burden of showing by clear and convincing evidence that the widow gave the gifts willingly and knowingly."

The panel added, "Indeed, the secrecy surrounding the gifts, and their extraordinary amounts, which the individual defendants accepted without advising the widow to seek independent counsel, preclude a finding in the individual defendants’ favor."

Kornstein, the attorney for Ms. Lawrence’s estate, called the ruling a "great decision."

"It’s an excellent example of a court telling the bar what professional ethics should be followed in certain situations," he said.

Mark Zauderer of Flemming Zulack Williamson Zauderer, who represents Graubard, said he would seek leave to appeal.

Zauderer said the decision sets a harmful precedent.

"We think that quite apart from our client’s obvious desire to see justice done, this decision will have unfortunate consequences for the bar and for clients, who may find it difficult to get lawyers to take cases on a contingency," he said.

Michael Carvin, a Jones Day partner who represents the individual attorneys, could not be reached for comment.