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A state appeals panel has reversed part of a jury verdict in a legal fee dispute, finding a law firm was not entitled to additional money—outside of a contingency fee—when a former client received non-cash benefits from a settlement.

Scarola Ellis, which is now 10-attorney Scarola Malone & Zubatov, sued its former client, real estate developer Elan Padeh, for legal fees in 2009. The firm claimed Padeh abandoned an underlying lawsuit when he dropped his claims and settled the case, and then was unjustly enriched when possible sanctions threatening his company were withdrawn as part of the settlement.

But a unanimous panel of the Appellate Division, First Department, ruled Thursday that a representation agreement that provided for a contingency fee precluded Scarola’s unjust enrichment claim. “That agreement squarely covers the very subject matter of the unjust enrichment claim, i.e., the legal fees to which Scarola is entitled,” the panel wrote in Scarola Ellis LLP v. Padeh, 113781/09.

Justices Luis Gonzalez (See Profile), David Friedman (See Profile), Dianne Renwick (See Profile), Helen Freedman (See Profile) and Rosalyn Richter (See Profile) joined in the unsigned opinion.

Marc Isserles, Padeh’s appellate attorney in the fee dispute and a partner at Shapiro Arato & Isserles, told the New York Law Journal that the decision “affirms the client’s absolute right to settle the case for whatever reason and for whatever amount” and that an unjust enrichment claim by a lawyer dissatisfied with the client’s settlement decision would interfere with that right.

Scarola members Richard Scarola and Alexander Zubatov did not return messages seeking comment.

In 2003, Padeh had sued real estate company Corcoran Group, where he had worked as a broker. He alleged Corcoran breached an oral agreement to pay him his share of commissions earned from several real estate deals.

Corcoran brought counterclaims against Padeh and third-party claims against a brokerage company he founded, The Developers Group, now known as MNS.

Padeh initially retained attorney George Zelma to represent him against Corcoran. The retainer agreement provided that Zelma would be paid $5,000 up front, plus a 41 percent contingency fee from money recovered from the suit or a settlement.

Because Zelma was a solo practitioner, he asked the Scarola firm to join the case as co-counsel.

In a July 2004 email, Zelma and Scarola entered into a co-representation agreement providing that Scarola would receive up to half of Zelma’s 41 percent fee that could be collected from Padeh’s claims against Corcoran. Zelma and Scarola considered the email to be an enforceable contract.

While litigating the third-party claims, Corcoran alleged that Padeh and other witnesses from the Developers Group had lied during depositions.

Corcoran investigated and in 2007 issued a report alleging that Padeh and officers of the Developers Group had committed perjury. Corcoran sought sanctions in the form of attorney and expert fees incurred during its investigation. These fees totaled more than $800,000, according to court papers.

Padeh signed a retainer agreement with Scarola, in which the law firm acknowledged it had been representing and would continue to represent Padeh as co-counsel with Zelma, and it would share in any contingency fee award in the Corcoran action. The 2006 agreement also provided that Padeh would pay on an hourly basis for Scarola’s services that were outside of Padeh’s claims in the Corcoran action.

According to the Scarola firm’s court papers, work on the third-party-claim perjury issues fell outside the scope of the initial fee agreement, and Scarola charged hourly.

Before a hearing on the perjury issues, Padeh settled and agreed to withdraw his claims against Corcoran, which in turn paid Padeh $200,000. As part of the settlement, Corcoran agreed to drop its counterclaims against Padeh and its third-party claims against Developers Group and agreed to withdraw its sanctions motion seeking sanctions for the alleged perjury.

Zelma negotiated the settlement; Scarola did not approve of the agreement. Zelma received 41 percent of the $200,000 and paid half of that amount to Scarola.

Scarola’s 2009 suit against Padeh alleged that, although the firm received 20.5 percent of the $200,000 settlement, it was entitled to 20.5 percent of additional non-cash benefits Padeh allegedly received in settling the case, including avoiding the sanctions.

After a trial in the legal fee dispute, a jury found that Padeh had breached the retainer agreement by failing to fully pay Scarola its hourly fees and awarding $62,290 in damages. The jury also found that Padeh did not breach the retainer agreement by failing to account for the full value of benefits he received when he settled the Corcoran litigation, but Padeh was unjustly enriched as a result of Scarola’s services.

The jury awarded $172,113 to Scarola for unjust enrichment, for a total of award of $346,961, including interest and costs.

In Padeh’s appeal, the First Department vacated the unjust enrichment award, writing that it was precluded by the 2004 co-representation agreement between Zelma and Scarola. “It is of no consequence that Padeh himself was not a signatory to that agreement,” the panel added.

The court said Scarola “unpersuasively” argued that the unjust enrichment verdict could be sustained because Padeh abandoned the Corcoran suit. “To the contrary, he pursued his claims and reached a settlement with Corcoran for $200,000,” the panel said.

It also said evidence does not suggest that Padeh discharged Scarola before the litigation settled. In any event, the proper measure of damages where a contingency fee attorney is discharged is quantum meruit, a claim the jury rejected, the panel said.

The courtupheld the jury’s verdict awarding hourly fees of $62,290. “The jury could have reasonably concluded that the work performed by Scarola on the perjury investigation was independent of Padeh’s claims in the Corcoran action,” the panel said.