Let’s Make a Bad Deal: Appellate court invalidates mid-stream switch to contingent fee

janusThere is an inherent conflict between the lawyer’s professional and ethical duties to the client and the lawyer’s business relationship with the client, especially when it comes to the most primal urge to maximize profit.  In many instances, a greedy lawyer can manipulate the situation — and the client — to make more for the lawyer at the expense of the client.  This may include, for example, everything from jacking up hourly rates, padding hours, overstaffing, passing through inflated expenses, and other billing games right on up to fiddling with the lawyer’s advice, analysis, and delivery of information to induce a client to settle or fight when it’s best for the lawyer.  Sometimes it’s painfully obvious what the lawyer has done, but many times it’s quite subtle — like the lawyer who recommends filing suit.

The lawyer has two faces in dealing with clients:  The professional/fiduciary face the client came to the lawyer for in the first place, and the lawyer’s personal/business face, which needs to make a living off the client.  This dilemma is unique to the lawyer-client relationship.

The business relationship between lawyers and clients is subject to special scrutiny — there’s not supposed to be a caveat emptor feeding frenzy on clients.  But many lawyers take advantage of their clients, especially the ones who are most trusting and vulnerable.  There are ethical and legal rules and precedents attempting to enforce a healthy relationship between lawyer and client, but sometimes the client never knows what really happened or doesn’t have the patience or resources to engage in a prolonged malpractice or fee dispute case.  And bar authorities generally shy away from all but the most blatant irregularities, instead steering the client into fee arbitration.

Even the most sophisticated clients are presumed to need legal advice from lawyers and they go to a lawyer for that advice, except that when it’s time to work out the deal with the lawyer, the client and the lawyer are on opposite sides of the table.  Many clients do not understand this.

It’s rarely a level playing field in dealings between lawyer and client — even a sophisticated client cannot penetrate the hourly billing honor system — but this is especially true when the client has some special vulnerability.  One common area of concern is when the lawyer represents a client who may not be able to understand the advice or rationally consider the options — a child, incompetent person, or someone with a temporary disability, such as a medical problem.  Mix in valuable assets, a substantial claim, or something else of value that the lawyer can draw on for fees and you’ve got one of the most common patterns for abuse of a client.  This happens all the time, for example, when the lawyer is handling an estate or calling the shots for an elderly client.  (Many lawyers feel entitled to milk these clients because they resent the wealth of the deceased client or perceived windfall to the client-heirs when the lawyer feels that it is he or she who has worked the hardest and been paid only for their high rates and inflated time.)

Another element found in many examples of abused clients consists of the firm inducing the client to alter the fee arrangement part way through the engagement.  For example, the client with dwindling resources is pressured to sign over property or sign an onerous promissory note, or a family member is forced to sign a guarantee, or an hourly arrangement suddenly becomes a contingent fee, sometimes on top of the hourly fees.  (Such changes are presumptively void in many jurisdictions for this reason.)  The lawyer typically tells the client this is routine, or the lawyer threatens to quit, or whatever else it takes to get the client’s uninformed or reluctant agreement.

Here’s a recent example that made the news because the amounts involved were astronomical.  It seems the firm switched from hourly billing — for which it was amply paid already — to a contingent fee on the theory that the client would save money that way.  So an appellate court reduced their fee from $44 million to $2 million.  Apparently the client’s side did not argue for a total fee forfeiture under the circumstances — a remedy available in many states.  There’s also no word whether the bar is taking any steps to address the ethics issues, if any.

The state Appellate Division reduced the fees owed by the estate of Alice Lawrence to the firm Graubard Miller from an ‘astounding’ $44 million to $2 million….

The state Appellate Division … held the retainer agreement she had signed was “unconscionable.”

Lawrence, the widow of commercial real estate giant Sylvan Lawrence, had approved the deal, which reworked an earlier contract for representation. But she challenged its terms prior to her 2008 death, arguing she had undergone knee surgery before it was struck and was loopy on pain meds when she signed.

… The epic court battle pitted Alice Lawrence — the main beneficiary of her husband’s estate — against the estate’s executor for control of the properties.

[Apparently this wasn't the only work the firm did for this client and the firm had already made over $20 million over the years.] …

In 2005, the firm convinced Lawrence, then an 80-year-old, to rework their retainer agreement, telling her it would save her money, court papers charge….

Five months after signing the deal, the firm negotiated a settlement for $111 million of the assets, an agreement that socked her with the $44 million bill. … The firm said it worked over 3,795 hours on the case. By that accounting, Graubard Miller was paid roughly $11,000 an hour for its work — a rate a court referee called “astounding.” Court records show the firm’s lawyers generally charge in the $500 an hour range, although those rates can vary….

“Thus, the law firm failed to show that the widow fully knew and understood the terms of the retainer agreement — an agreement she entered into in an effort to reduce her legal fees,” the judges said. …

The firm plans to appeal — so you can expect even bigger headlines in a few months.

Another aspect of this situation is also another example of a common problem with estate work:  The executor of the estate triggered this battle with the client-heir so the executor to retain control of her husband’s estate.  Be very careful before you entrust anyone who stands to make substantial sums by fighting your heirs for control of your estate.

For Clients:  You need to obtain a reasonable, client-friendly fee agreement to begin with and insist that the firm provide itemized budgets, reconciled with reasonable, itemized bills.  Be particularly wary if the fees are higher than expected, the results are worse than expected, or the firm is pressuring you to pay more than you can afford or to renegotiate the terms.  Sometimes you’re better off making a clean break and finding a more reasonable lawyer.

Local Story:  State appellate judge rules $11G per hour a bit steep in billionaire estate case

About JWT

John Toothman founded The Devil's Advocate, the legal fee management and litigation consulting firm, in 1993. He graduated from Harvard Law School, with honors, in 1981. John has been a lawyer with large and small law firms and the US Dept. of Justice. He's tried over sixty cases. He has testified as an expert witness in over sixty more. ... He is the author of several books and dozens of articles about lawyers, law firms, legal fees, ethics, litigation and trial practice, and related issues. Books include: Trial Practice Checklists 2d (West), Legal Fees: Law & Management (Carolina Acad. Press), and the Civilian's Guide to Lawyers series. His pro bono activities include teaching and speaking at seminars. ... John is admitted to practice law in DC and Virginia. More information: http://www.DevilsAdvocate.com
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