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Can Legal Fees Ever Be Per Se Unconscionable?

Perhaps our profession has grown so jaded with stratospheric jury verdicts, multi-million dollar fee awards in bankruptcy proceedings and $1,000-an-hour billing rates that by comparison, $42 million fee for five months of work doesn't seem unreasonable on its face.  Fair enough. But what if the $42 million fee comes on top of $18 million in legal fees, paid on an hourly basis for an estate matter, plus additional "gifts" of $5 million?  And what if the $18 million in fees that were paid produced a $60 million settlement offer that was on the table when the lawyers renegotiated their fee agreement so as to entitle them to a 40 percent cut of the total proceeds received?  And finally, what if after renegotiating the agreement, your client still came away with the same $60 million settlement that she would have received anyway, after the lawyer took his 40 percent cut (or $42 million) of the eventual $100 million award?  Would all of those considerations make you change your mind about the reasonableness of the fee and the underlying fee agreement? least if you're one of the New York Appellate Division (First Department) justices who signed onto the majority opinion in Lawrence v. Miller.  As reported in the New York Times,  the court ruled that "the 40 percent fee, worth about $42 million --  that was claimed by the law firm Graubard Miller, from Alice Lawrence the 83-year-old widow of the real estate developer Sylvan" was not excessive on its face, and that the reasonableness of the fee should be determined at trial.  However, one justice called the fee "exorbitant," finding that the retainer agreement had been signed when a $60 million settlement offer was on the table, and that when the case settled just five months later for $100 million, the firm's 40 percent cut ($42 million) was essentially equal to the additional amount that it won.  In other words,  the petitioner herself received no benefit whatsoever from the renegotiated fee agreement, while her lawyers walked away with a $42 million windfall.

So why did the Lawrence even agree to this retainer?  According to the decision, after mounting legal bills of about $1 million dollars a quarter (total fees amounted to roughly $18 million), Lawrence approached her attorneys for relief.  So they offered her a "win-win deal" (for themselves).  Lawrence would pay her lawyers an additional $1.2 million for hourly work, which would be capped.  Thereafter, her lawyers would receive 40 percent of the proceeds for additional work (as an aside, the attorneys originally sought 50 percent, but Lawrence bargained them down.  The court found that because Lawrence successfully negotiated a better deal, that her lawyers were insulated from a claim that they violated New York's ethics rules governing contingency percentages). 

And that's still not the extent of it.  Consider these added details from Mike Frisch at the Legal Profession Blog, who (politely) calls this case "a very useful teaching example for inquiry into the ethics of charging and collecting fees for legal services:"

Daniel Chill arrived at her home in Ridgefield, Connecticut; he claimed that, given the favorable results that he, along with Reich and Mallis, had obtained in the estate litigation, they were each entitled to a bonus; and, he explained that this type of bonus payment was routinely made to attorneys based upon excellent service. Alice then made payments to the three attorneys of the firm, defendants Chill, Elaine Reich, and Steven Mallis, in the amounts of $2,000,000, $1,550,000 and $1,500,000, respectively. Upon handing the checks to the individual attorneys, however, Chill told her to indicate on the check that this was a "gift" in bold letters. It is uncontroverted that the checks were then deposited into the respective attorneys' personal accounts. Then, in or about April 1999, Chill called Alice and advised her that due to the tax implications of her payments, the bonus amounts due to each of them would be dramatically reduced. Chill stated that in order to assure that the amounts paid over were indeed received in full, it was necessary that she file a gift tax return for 1998 and pay the appropriate taxes on behalf of the three attorneys. This tax amounted to approximately $2,700,000."

After reading the facts of this case, I wonder:  if the fee agreement isn't unconscionable in this case, then does per se unconscionability even exist?  Moreover, if I were representing the defendants in this matter, I wouldn't be touting the Appellate Division's decision to set the reasonableness of the fee agreement as a victory.  After all, do they really want someone to inquire even further into this dirty, shameful set of facts?  Mark Zauderer, who represented the law firm was quoted in the Times as saying “What the courts recognize is that a fee agreement is not unconscionable simply because it can produce a big fee,” he said. “You have to look at the value rendered to the client.”

OK, right.  So where's the value here?

[update] So what's my view on fair payment? Given the lawyers' conduct in this case, I wouldn't find it per se unconscionable to deny them any payment beyond the $18 million already collected. However, if I'd been asked to propose an ethical way to renegotiate the fee agreement when Lawrence initially asked for a change, I might have suggested a 40 percent cut of any proceeds that the lawyers were able to recover above the $60 million already on the table. Lawrence's $18 million paid for the work that produced the $60 million fee, so giving the lawyers a 40 percent cut of the total amount produces a double recovery. But providing a 40 percent cut of those amounts beyond the $60 million would reward the lawyers for uncompensated work - and would have resulted in a $16 million payday for the lawyers, and a $24 million gain for the clients. Lawrence would have gotten relief from skyrocketing bills, while her lawyers would receive adequate incentive and ample compensation for the extra work. That seems like a true "win win" to me.

Posted by Carolyn Elefant on November 29, 2007 at 05:14 PM | Permalink | Comments (1)


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