$44 Million Contingency Fee In Estate Litigation Thrown Out As “Unconscionable”
The incomparable ability of estate litigation to drag on is literally a joke, a joke so old and so well-known that more than 150 years ago Charles Dickens opened the novel Bleak House with reference to the fictional Jarndyce and Jarndyce estate proceeding that had been going on for generations.
Sylvan Lawrence was one of the largest owners of real estate in downtown Manhattan when he died in December 1981. Last week, a mere 31 years, 5 months, and 2 weeks later, an appellate court in New York decided the fee dispute between his estate and Graubard Miller, the firm his wife (who died in 2008) hired in 1983 to represent the estate in litigation against one of his partners (who died in 2003). New York Law Journal article here; New York Appellate Division opinion here.
By the end of 2004, Lawrence’s widow, Alice Lawrence, had paid approximately $22 million in legal fees on an hourly fee basis for the estate litigation. Though by that point there was a $60 million offer to settle the case, and her attorneys had internally valued the case at $47 million, Lawrence thought she deserved more, but she was tired of those bills and the uncertainty. Lawrence thus asked the firm to represent her on a contingency fee agreement (40%) and they agreed.
Five months later, in May 2005, after the firm had put another 3,795 hours into the case, the case settled for $111 million.
Lawrence refused to pay the 40%. I wrote about the case before, back in 2007, noting “Ms. Lawrence obviously had the funds available to hire a large corporate firm on an hourly (or flat fee) basis, and to pay all costs of the litigation herself upfront. In so doing, she would have borne all the risk of spending enormous sums of money without a guaranteed return. Instead, she contracted with a firm to bear all of that risk; within five months, it had achieved a result with which she was content.”
I am quite sympathetic to claims of “unconscionability” when they involve, for example, consumers cheated by large corporations hiding behind arbitration agreements and class action waivers snuck into form agreements that are uniformly adopted across an industry. But a billionaire trying to score a deal on legal services while pursuing a large settlement? If she didn’t want to pay more in legal fees, she could have taken the $60 million offer. If she wanted to take on the risk of pursuing a large settlement or verdict — and the possibility that the case could drag on for many more years, with thousands of more hours of attorney time required — she already had the means to do so. She didn’t want to take the risk of investing her money into what could be another Jarndyce and Jarndyce, so she chose to minimize her costs and her risks, while the firm chose to take on those costs and risks for a chance at a larger recovery.
But contingency fee practitioners don’t make the law, courts do. Lawrence’s estate argued the firm should take home approximately $1.7 million, the hourly value of its services. The firm argued they were entitled to the agreed-upon 40%, or $44 million. A “referee” appointed by the court tried to reach a compromise, reasoning that $44 million for 3,795 hours of work, or $11,000 an hour, was “an astounding rate of return for legal services,” while mere market rate wouldn’t account for the risk of the contingency fee, and so awarded the firm about $16 million. The New York Appellate Division just reversed, saying that was too much, and that the firm was entitled “the fees due the law firm under the original retainer agreement,” i.e., the hourly fee, plus prejudgment interest. The prejudgment interest, which is mandated by law, helps somewhat, but let’s not forget that the firm hasn’t been paid a dime on the case in eight years.
The opinion is a disappointment for contingent fee practitioners. As I wrote before, “Maybe there’s some mischief not identified by these stories; maybe she’s mentally impaired and the firm took advantage of her. That would be a different story.” It seems that, back in 1998, Alice Lawrence paid some of the attorneys sizable cash “gifts,” and that’s suspicious, but the court’s decision was not based on any sort of finding that the widow was mentally incompetent or that she was manipulated into the fee agreement. Rather, the court simply looked at her claimed subjective beliefs about the agreement — e.g., “The evidence shows that the widow believed that under the contingency arrangement, she would receive the “lion’s share” of any recovery” and “the law firm failed to show that the widow fully knew and understood the terms of the retainer agreement” — and took that as reason enough to throw out the firm’s contingency fee agreement.
But to me the most disturbing part is the reference to the “$11,000 an hour” effective rate. Sure, it ended up being “$11,000 an hour,” but it could just as easily been $11 an hour, or $0 an hour, if the litigation had turned out differently. Looking at the fee and calculating an hourly rate in retrospect ignores the very essence of the contingency fee bargain: the law firm agreed to take on all the future risk of the case, including the risk that Lawrence would refuse to settle at a reasonable amount, with the hope that it would be resolved favorably in a way that warranted the contingency fee agreement as compared to an hourly rate. As I’ve written before, even $35,000 an hour retroactive rate isn’t an unreasonable contingency fee if the case is risky enough and the benefit to the client is large enough.
After all, a contingency fee lawyer never knows if they have just signed onto the beginning of Jarndyce and Jarndyce.