$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.

 

 

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  • Francis Pileggi, Esq

    Well said

    • http://www.litigationandtrial.com/ Max Kennerly

      Thanks. In many ways I would hope there was some deeper issue here, in that the widow had been manipulated into the fee agreement, but there’s not even a hint of that in the opinion. They simply conclude it’s “too much.” Well, if that’s the case, then would they have held it was “too little” if the lawyers had ended up earning, say, $11 an hour for a decade more of litigation? I can only assume not.

  • Mark H.

    Why is the risk that contingency fee lawyers accept minimized, while the risks of entrepreneurs, like the founders of Google, celebrated?

    • http://www.litigationandtrial.com/ Max Kennerly

      A good question. I suppose the counterargument is, “well, lawyers are held to ethical obligations that entrepreneurs aren’t.” That’s the most I’ve ever heard in opposition to contingent fee agreements, and I ask: to what end? What ethical principle is promoted by allowing a billionaire to walk out of an agreement she voluntarily entered into to minimize her out-of-pocket expenses?
      I understand and agree when courts intervene to stop manipulation of incompetent clients, or to prevent lawyers from taking undue advantage in other ways, but this was a simple market transaction. She had ample means and ability to seek out other counsel — she wanted those lawyers but didn’t want to pay out of pocket for them, so they worked out a deal. When the benefit was realized (as a result of her consent to the settlement!), she wanted it all to herself. That doesn’t encourage any ethical principle, it just unsettles the market for contingent fee legal services.

    • gts109

      When entrepreneurs take risks, the result is that we sometimes get amazing, life-changing technology or goods like Google. When attorneys take a risk on a case by representing plaintiffs on contingency fee, they’re just collecting a percentage of a wealth transfer of between two parties in litigation. No new wealth is created. Take this case as an example, what societal good did this case create? Yes, it settled a dispute over a lot of money between very rich people. But, was some new principle established that will greatly advance civil society? Really, is the case noteworthy for anything other than the sums involved? Doubtful.

      Don’t take that as a slam on contingency fee work in particular. All attorney work is looked upon similarly by many in society: as a too large and sometimes wholly unnecessary transaction cost.

      • http://www.litigationandtrial.com/ Max Kennerly

        What “value” is created by lawyers in general? Sounds to me your argument applies equally to imposing fee caps on lawyers as a whole. Indeed, the argument would apply more strongly to hourly billed lawyers than contingent fee lawyers: the latter are paid out of the settlement, whereas the former are paid in addition to the settlement. Did the lawyers on the other side of this case really generate value to society equal to the $700/hour or whatever they charged? Are you willing to cap lawyers’ fees at, say, $200/hour, to prevent the drain on society?
        Yet, contingency fee representation does indeed generate value to society. Laws are meaningless if they are not effectively enforced, and contingency fee representation enables people who are unable or unwilling to pay hourly rates to effectively enforce their rights, thereby both vindicating their personal interests and serving as a deterrent against misconduct by others. (By the same coin, it can be said that a free market for legal defense serves as a deterrent against unworthy claims.)

        • gts109

          My point wasn’t that lawyers aren’t necessary or valuable. They are. Being in the profession myself, I have to believe that.

          My only point was that we shouldn’t compare ourselves to entrepreneurs who truly change the world, or expect anyone to think of us like that.

        • http://www.litigationandtrial.com/ Max Kennerly

          That wouldn’t be my claim, either. It’s not a matter of us changing the world, it’s a matter of the court respecting the risk inherent in contingent fee litigation, and in respecting the marketplace for legal services. If we were talking about ethical violations or manipulation of the client, then I would be all in favor of vigorous court intervention, but that wasn’t the case. The court simply favored a sophisticated client over the law firm they willingly negotiated with, thereby casting doubt on other agreements.

        • Chip Orr

          To say nothing of the irony that those who would use the political process to cap plaintiff lawyer fees are, typically, those who posture as champions of the “free market.”

          That said, I do share gts109′s view that I often feel like I’m not contributing anything (putting aside for the moment Max’s absolutely correct assertions that contingency fee lawyers generate value and, when they do, they deserve to be compensated for the risks they have taken in generating that value). When, e.g., I mow the lawn, I can look at it when I’m done and feel a sense of accomplishment. When I look at an MSA, I usually recoil in horror – is this what it all reduces to?

  • http://www.likelihoodofconfusion.com Ron Coleman

    Very troubling, especially the casual way the court throws out the referee’s recommendation.

  • scammed

    that’s not true about jarndyce and jarndyce -very very few cases ataken are risky. in fact the 40% encourages lawyers to settle at point where theres minimum work to them but max fee for the work irregardless of what the client gets. alos under contingency fee- why work at all. just advertise alot have hundreds of cases stacked up and flip them like a stockbroker churns. its an epidemic in fla for injured legal consumers.

    • http://www.litigationandtrial.com/ Max Kennerly

      If “very few” cases taken are risky, why hire the lawyers at all? And why aren’t more lawyers charging, say, 10%?
      The reason so few lawyers take contingency fee cases, and charge such a fee, is because they’re risky, expensive, and difficult. I have cases that have gone on for years, costing hundreds of thousands of dollars, going through multiple trials and appeals, without a settlement offer in sight.

  • Civil Litigator

    Nice article. A little bit of nitpicking here as to the comments:

    What value does civil litigation confer upon society? Without it, we have the old West. People didn’t like the Old West too much, as I remember it. We can certainly add up all the potential breaches of contract, breaches of warranty, malpractice, etc., that WOULD be incurred by society were there not legal repercussions for engaging in such activities. That is to say, transactions costs are lowered by the predictability of enforced laws. You need only look at what happens when the regulators turn a blind eye to the mortgage market to see how quickly those costs spiral upwards. So, in my view, civil litigators are responsible for a great deal of the wealth redeemed by so-called “entrepreneurs”, without us the transaction costs and uncertainties of the markets would make business and commerce practically impossible but for a small, well-armed cabal.

    Second, I just find it hilarious, being a graduate from a NY law school, and knowing full well how NY considers itself the last bastion of freedom of contract on the earth, that they would overturn a contract freely entered into by a billionaire.

    • http://www.litigationandtrial.com/ Max Kennerly

      It’s true, in a perfect world, there is no need for lawyers, as everyone always does the right thing, and everyone always agrees.
      I hope those folks writing the comments will let us know when they find that perfect world.