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NY Court of Appeals upholds $44 million contingency fee for 5 months work, concluding that to assess fairness would be "dangerous business"

The New York State Court of Appeals has ruled that a contingency fee agreement that netted Graubard Miller $44 million for five months' work was valid and enforceable. According to the court, the law firm took substantial risks by making the agreement with Alice Lawrence in January 2005, and the fact that the real estate matter on which it had long represented Lawrence unexpectedly settled in May 2005 did not make it unconscionable.

In the proceedings below, the Manhattan Surrogate Nora Anderson, adopting a referee's determination, reduced Graubard's fees to just under $16 million. The First Department found the contingency agreement unconscionable and reduced it to $3 million based on the firm's hourly fees plus interest.

Writing for the Court of Appeals in Matter of Lawrence, Deceased, Judge Read concluded that it was "dangerous business" to assess the fairness of a contingency fee arrangement, especially when the objection is that "the size of the fee seems too high to be fair." Explaining the inherent risk/reward nature of contingency fees, Read stated: "[i]t is the nature of a contingency fee that a lawyer, through skill or luck (or some combination thereof), may achieve a very favorable result in short order; conversely, the lawyer may put in many years of work for no or a modest reward."

Adding only that "[a]bsent incompetence, deception or overreaching, contingent fee agreements that are not void at the time of inception should be enforced as written." Addressing the challenger's unconscionable claim, Read stated that invalidating agreements in hindsight should be done with great caution because it is "not unconscionable for an attorney to recover much more than he or she could possibly have earned at an hourly rate." "Whether $44 million is an unreasonably excessive fee depends on a number of factors, primarily the risk to the attorneys and the value of their services in proportion to the overall fee."

Here, Read noted, Graubard spent nearly 4,000 hours preparing for a trial in May 2005 that was averted by the surprise settlement, and the firm risked several more years of litigation with no guarantee of payments beyond the hourly fees guaranteed during the first year of the agreement.

Alice Lawrence was married to real estate developer Sylvan Lawrence, who died in 1981. She became embroiled in a long and financially draining legal battle with Sylvan Lawrence's partner, his brother Seymour Cohn, beginning in 1983.

By 2004, Alice Lawrence had paid Graubard about $18 million in hourly fees with no end in sight to the real estate dispute with Cohn. It was then that Alice Lawrence sought a contingency fee arrangement with Graubard, with the proviso that she would pay no more than $1.2 million to the firm in hourly fees in the first year of the new approach.

Five months later, however, Cohn agreed to a $110 million settlement with Alice Lawrence and her children, apparently after Graubard discovered documents that suggested self-dealing by Cohn in his disposition of his brother's real estate holdings. It was 40 percent of that $110 million, $44 million, which prompted the nearly decade-long fight between Graubard and Alice Lawrence and her children. No question of deception was raised at the oral argument or in the court's decision about the timely discovery, following the contingency fee arrangement, of the smoking-gun document resulting in the speedy resolution of the case for $110 million.

Lawyers for the Lawrences maintained that Alice Lawrence was not properly apprised of the risks she was taking by insisting on a new basis of payment and that she was not as sophisticated as she led people to believe.

Read, however, was influenced by Graubard's claim that Lawrence was "no naif," but rather a strong-willed businesswoman who personally managed an investment portfolio of $200 million. She also frequently clashed with her attorneys or ignored their advice, and part of the risk that Graubard took with the contingency fee agreement was that the firm could be fired at any time by its volatile client. "She was a competent and shrewd woman who made a business judgment that was reasonable at the time, but which turned out in retrospect to be disadvantageous, or at least less advantageous than it might have been." Nonetheless, Read noted in a footnote that the over $100 million Lawrence recovered "far exceeded her reasonable expectations at the time" when she entered the contingency deal. She died in 2008, leaving it to her heirs to fight the contingency fee battle.

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