In the Matter of Sylvan Lawrence, Deceased.---------------Richard S. Lawrence, et al., Respondents,v.Graubard Miller, et al., Appellants,----------------Richard S. Lawrence, et al., Intervenors-Respondents.

Brief

N.Y.September 9, 2014

APL-2013-00264 New York County Surrogate’s Clerk File No. 175/82 Court of Appeals STATE OF NEW YORK In the Matter of a Petition to Compel Payment of Legal Fees for Services Rendered in Connection with the Estate of SYLVAN LAWRENCE, Deceased. RICHARD S. LAWRENCE and PETER A. VLACHOS, as Executors of the Estate of Alice Lawrence, Deceased, Respondents-Plaintiffs-Respondents, against GRAUBARD MILLER, Petitioner-Defendant-Appellant, C. DANIEL CHILL, ELAINE M. REICH and STEVEN MALLIS, Defendants-Appellants, and RICHARD S. LAWRENCE, SUZANNE LAWRENCE DECHAMPLAIN and MARTA JO LAWRENCE, Intervenors-Respondents. >> >> BRIEF FOR INTERVENOR-RESPONDENT RICHARD S. LAWRENCE To Be Argued By: Norman A. Senior Time Requested: 15 Minutes GREENFIELD STEIN & SENIOR, LLP 600 Third Avenue New York, New York 10016 212-818-9600 nsenior@gss-law.com Attorneys for Intervenor-Respondent Richard S. Lawrence Of Counsel: Norman A. Senior Angelo M. Grasso Date Completed: December 27, 2013 TABLE OF CONTENTS TABLE OF AUTHORITIES .......................................................................... ii, iii PRELIMINARY STATEMENT ......................................................................... 1 STATEMENT OF QUESTIONS PRESENTED ................................................. 9 STATEMENT OF FACTS ................................................................................ 10 ARGUMENT ..................................................................................................... 25 POINT I GRAUBARD AND THE GRAUBARD ATTORNEYS ENGAGED IN MISCONDUCT WHILE REPRESENTING RICHARD ............................. 25 A. Graubard’s Inclusion of a Clause In the Modified Retainer Expressly Designed to Limit Richard’s Rights Was an Act of Disloyalty ........................................ 25 B. Graubard’s Failure to Disclose the Modified Retainer ............................................................................... 28 C. Graubard’s Failure to Disclose the Gifts ............................ 31 POINT II BECAUSE OF GRAUBARD’S MISCONDUCT, THE ONLY FEE IT WAS ENTITLED TO IS THE ONE AWARDED BY THE APPELLATE DIVISION ........................................................................... 33 CONCLUSION .................................................................................................. 35 -i- TABLE OF AUTHORITIES Cases: Pages: Brill v. Friends World College 133 A.D.2d 729, 520 N.Y.S.2d 160 (2nd Dep’t 1987) .................................... 34n Diamond v. Oreamuno 24 N.Y.2d 494, 301 N.Y.S.2d 78 (1969) ......................................................... 34n Doviak v. Finkelstein & Partners LLP 90 A.D.3d 696, 934 N.Y.S.2d 467 (2nd Dep’t 2011) ........................................ 33 Eadie v. Town Bd. of North Greenbush 7 N.Y.3d 306, 821 N.Y.S.2d 142 (2006) ......................................................... 25n Feiger v. Iral Jewelry, Ltd. 41 N.Y.2d 928, 394 N.Y.S.2d 626 (1977) ....................................................... 34n First Nat’l Bank of Cincinnati v. Pepper 454 F.2d 626 (2nd Cir. 1972) ............................................................................. 34 Lawrence v. Miller 48 A.D.3d 1, 853 N.Y.S.2d 1 (1st Dep’t 2007) ................................................. 21 Lawrence v. Miller 11 N.Y.3d 588, 873 N.Y.S.2d 517 (2008) ......................................................... 21 Matter of Clarke 12 N.Y.2d 183, 237 N.Y.S.2d 694 (1962) ....................................................... 34n Matter of Cooperman 83 N.Y.2d 465, 611 N.Y.S.2d 465 (1994) ................................................. 27, 27n Matter of Lawrence 106 A.D.3d 607, 965 N.Y.S.2d 495 (1st Dep’t May 23, 2013) ..................... 4, 25 Matter of Sherbrunt 134 A.D.2d 723, 520 N.Y.S.2d 885 (3rd Dep’t 1987) ...................................... 28 -ii- -iii- Matter of Winston 214 A.D.2d 677, 625 N.Y.S.2d 927 (2d Dep’t 1995) ........................................ 33 New York Times Co. v. City of New York Comm. on Human Rights 41 N.Y.2d 345, 393 N.Y.S.2d 312 (1977) ....................................................... 25n Orendick v. Chiodo 272 A.D.2d 901, 707 N.Y.S.2d 574 (4th Dep’t 2000) ....................................... 34 Pessoni v. Rabkin 270 A.D.2d 732, 633 N.Y.S.2d 338 (2d Dep’t 1995) ........................................ 34 Quinn v. Walsh 18 A.D.3d 638, 795 N.Y.S.2d 647 (2d Dep’t 2005) .......................................... 33 Simpson Elec. Co. v. Leucadia, Inc. 72 N.Y.2d 450, 534 N.Y.S.2d 152 (1988) ....................................................... 25n Yannitelli v. D. Yannitelli & Sons Constr. Corp. 247 A.D.2d 271, 668 N.Y.S.2d 613 (1st Dep’t 1998) ....................................... 33 Statutes and Regulations: N.Y. CPLR § 1013 ............................................................................................. 21 N.Y. SCPA § 2110 ............................................................................................. 21 DR 1-102(a)(7) ................................................................................. 2, 22, 28, 28n DR 5-101 ........................................................................................ 22, 28, 28n, 30 DR 5-104 ............................................................................................................ 22 DR 5-105 ............................................................................................................ 22 EC 5-1 .................................................................................................. 22, 28, 28n EC 5-5 .................................................................................................................. 2 PRELIMINARY STATEMENT This proceeding concerns serious, repeated ethical lapses and violations committed by Graubard Miller (“Graubard”) and three of its partners, C. Daniel Chill (“Chill”), Elaine M. Reich (“Reich”) and Steven Mallis (“Mallis,” together, “the Graubard Attorneys”), who accepted an “unprecedented” $5.05 million in gifts from its client, Alice Lawrence (“Mrs. Lawrence”), and acquired a 40% stake in the litigation between the Lawrences and the estate of Seymour Cohn (“Cohn Estate”) without disclosing either to their joint client, Richard Lawrence (“Richard”). At a fifteen-day hearing before Referee Howard A. Levine (“Referee”), it was proven that: 1. The Graubard Attorneys accepted $5.05 million in gifts from Mrs. Lawrence, which they failed to disclose to their co-clients, Richard and his sisters, Marta Jo Lawrence (“Marta Jo”) and Suzanne De Champlain (“Suzanne”)1, even though the gifts provided Graubard with a motive to favor Mrs. Lawrence over the Children because of the existence of a continuing conflict of interest. 2. Chill solicited a $400,000 gift to Graubard from Mrs. Lawrence, which was also not disclosed to Richard and his sisters. 3. After receiving in excess of $22 million in hourly legal fees over a 22-year period, Graubard and Mrs. Lawrence entered into a new undisclosed retainer (the “Modified 1 Richard and his two sisters are sometimes referred to as the “Children.” -2- Retainer”) that gave Graubard a 40% stake in the litigation. 4. For the express purpose of ensuring that it could collect its fee if Richard or his sisters objected, Graubard inserted a provision in the Modified Retainer making it binding upon Mrs. Lawrence’s successors and assigns. At trial, the Graubard Attorneys admitted that they: 1. Did not consider Richard and Mrs. Lawrence to be “equal clients”; 2. Deliberately concealed the existence of the gifts and the Modified Retainer from Richard and his sisters; and 3. Purposely crafted the Modified Retainer to limit Richard’s and his sisters’ ability to challenge it. After a three-week hearing, the Referee found, inter alia, that: − The Graubard Attorneys violated EC 5-5 by failing to advise Mrs. Lawrence to seek advice from independent counsel on the gifts. (Joint Appendix (“JA”), Vol. I, p. A121a-122a) − By accepting gifts of “unprecedented” magnitude and failing to comply with EC 5-5, the Graubard Attorneys may have violated DR 1-102(a)(7). (JA, Vol. I, p. A119a-120a) − Graubard engaged in a clear “act of disloyalty” to Richard by making the Modified Retainer binding on Mrs. Lawrence’s “heirs, executors, successors and assigns.” (JA, Vol. I, p. A133a) − The behavior of the Graubard Attorneys was “contrary to the standards . . . the profession should uphold.” (JA, Vol. I, p. A128a, n.12) − The Modified Retainer was substantively unconscionable. (JA, Vol. I, p. A187a) -3- − Chill and Mallis were not credible witnesses: (a) Chill’s testimony that he advised Mrs. Lawrence to speak with independent counsel concerning the gifts was “incredible,” “inconsistent,” and “implausible”, as was his testimony that he did not solicit the firm’s $400,000 gift; and (b) Mallis’ lengthy testimony about the allegedly devastating effect of losing a summary judgment motion was “contrived,” “patently erroneous,” and without basis in fact. (JA, Vol. I p. A117a-119a, A179a) Despite these findings, the Referee declined to hold Graubard or the Graubard Attorneys accountable for their serious misconduct. He did not set aside the $5.05 million in gifts and, based on a formula he derived, awarded Graubard approximately $16 million in attorney’s fees for five months of what he characterized as unexceptional work. The two courts that have reviewed the Referee’s Report and the underlying evidence have agreed with the Referee’s findings, but disagreed with his legal conclusions. On the motions to confirm and modify the Referee’s Report, the Surrogate set aside the gifts, finding there existed “a combination of dubious circumstances that emit an odor of overreaching too potent to be ignored” and that the Graubard Attorneys “played their cards too close to the vest to satisfy the standard of strict forthrightness to which lawyers have long been held in relation to their clients.” (JA, Vol. I, p. A80a-81a) The Appellate Division affirmed, finding that the clandestine gifts should be set aside because the Graubard Attorneys “failed to meet their burden of showing by clear and convincing evidence that the -4- widow gave the gifts willingly and knowingly.” Matter of Lawrence, 106 A.D.3d 607, 608-9, 965 N.Y.S.2d 495, 497 (1st Dep’t May 23, 2013). Although the Surrogate affirmed the Referee’s report as to the nearly $16 million in legal fees, the Appellate Division disagreed, and after finding the Modified Retainer procedurally and substantively unconscionable, awarded Graubard a fee based on its prior valid time charge agreement with Mrs. Lawrence. 106 A.D.3d at 609, 965 N.Y.S.2d at 497. The Appellate Division’s holding was correct in all respects. The additional finding of procedural unconscionability is amply supported by the record. Graubard’s Misplaced Concern for the Demise of the Contingency Fee It stretches credulity to contend, as Graubard does (GM Br., p. 3-8), that if it is not awarded the $44 million it seeks for five months’ work, the “disposition of every contingent fee case” would be put at risk. No other contingency fee case in the past or in the future will likely involve the gargantuan amount of fees sought under these circumstances. Nor will any future contingency fee case -- so “vitally important to the civil justice system” (GM Br., p. 7) -- likely involve an eve of trial fee renegotiation conducted by a lawyer who had received a $2 million undisclosed “gift” from one of his four clients. -5- The “stunning” recovery in 1998 that Graubard claims justifies the three gifts occurred after fifteen years of litigation for which Graubard had billed and already received in excess of $8.4 million. The “victory” only resulted in the Lawrences receiving some of the money to which they were already entitled. The contentious and disparaging remarks concerning Mrs. Lawrence’s conduct and reputation seek to divert the Court’s attention from the core issues in this case -- the modified fee arrangement and the outsized secret gifts. Mrs. Lawrence’s reputation for being “tough,” “sophisticated,” “astute,” “mean- spirited,” etc., has nothing to do with an attorney’s fiduciary obligations to all of his or her clients -- not just the one who pays the bills. They also have no bearing upon the fact that Mrs. Lawrence clearly did not understand that Graubard, and not she, would receive the “lion’s share” of any recovery under the Modified Retainer. The fee award of nearly $1.6 million (plus interest) for five months’ of “unexceptional” work is in fact generous. A review of Graubard’s time records (JA, Vol. X, p. A3177-3263) shows that Chill routinely billed Mrs. Lawrence for work that was most unlikely to be performed by the senior partner in charge of the litigation. For example, he billed Mrs. Lawrence 36.8 hours to prepare for a single conference with the Referee; Mallis and Reich combined billed less than 16 hours preparing for the same conference. (JA, Vol. X, p. A3180-3181, A3185-3186, A3192-3193) In April 2005, Chill billed 111.9 hours for purportedly reviewing -6- and excerpting the deposition transcripts of five witnesses. Mallis, Reich and two of Graubard’s associates - attorneys much more likely to be reviewing and digesting depositions than the senior partner - billed significantly less time doing substantially the same work in April and May 2005. (JA, Vol. X, p. A3217-3219, A3222-3253) As for Mrs. Lawrence’s failure to be deposed - in the end, Graubard was not prejudiced, but Mrs. Lawrence’s estate and her children were. The estate and Mrs. Lawrence’s children were required to waive the Dead Man’s Statute or else have their pleadings dismissed. This enabled Messrs. Chill and Mallis and Ms. Reich to testify without contradiction about their alleged discussions with Mrs. Lawrence concerning the gifts and the renegotiated fee arrangement. Despite this huge litigation advantage, the Referee rejected most of Mr. Chill’s testimony as incredible (JA, Vol. I, p. A117a-119a) and found that Mr. Mallis’ conduct bordered on perjury, his testimony having been contrived solely for trial (JA, Vol. I, p. A179a). Graubard’s Disregard for Richard and His Sisters In its 126-page brief, Graubard mentions Richard, also a client for over two decades, only in passing, and ignores the fact that it had a separate, hourly retainer agreement with him. This is consistent with Graubard’s routine treatment of Richard and his sisters as afterthoughts. At trial, Chill testified that he -7- did not consider Mrs. Lawrence and her children to be “equal clients” and did not owe Richard an undivided duty of loyalty. (JA, Vol. VI, p. A779-780) Chill’s testimony is supported by Graubard’s conduct. The Graubard Attorneys did not disclose to Richard that Mrs. Lawrence had given them over $5 million in gifts at a time when there was a conflict of interest between Mrs. Lawrence and the Children concerning the computation of their respective fractional share interests in the Estate. Graubard’s own ethics expert testified that the gifts should have been disclosed to Richard because of the possibility that “the gift was a quid pro quo to favor” Mrs. Lawrence at his expense. (JA, Vol. VII, p. A1435) Seven years later, Graubard continued to disregard its ethical duty to Richard by failing to advise him that Graubard and Mrs. Lawrence had executed the eve of trial Modified Retainer, making the firm Richard’s business partner. Worse, Graubard drafted the Modified Retainer to make it binding on Richard and his siblings, Mrs. Lawrence’s “heirs, executors successors and assigns,” in order to prevent them from challenging the agreement. (JA, Vol. VI, p. A705-706) Graubard’s actions and inactions concerning the gifts and Modified Retainer showed a blatant disregard for professional ethics and their fiduciary duty to Richard. The Appellate Division’s decision should be affirmed and Graubard -8- should receive nothing more than its hourly time charges under the valid prior agreement. -9- STATEMENT OF QUESTIONS PRESENTED 1. Did the Appellate Division, First Department correctly set aside the Modified Retainer? Yes. 2. After setting the Modified Retainer aside, did the Appellate Division, First Department correctly revert to the 1983 retainer agreement to calculate the compensation owed to Graubard? Yes. -10- STATEMENT OF FACTS The following statement of facts is primarily directed to Graubard’s breach of its ethical obligations to Richard during its 22-year representation of him. Graubard’s Representation of Richard Lawrence. Sylvan Lawrence (“Sylvan”) died on December 8, 1981, survived by Mrs. Lawrence and the Children. Sylvan and his brother, Seymour Cohn (“Seymour”), were partners in Sylvan Lawrence Co., a real estate empire that owned properties in New York City worth hundreds of millions of dollars. Seymour was appointed executor of Sylvan’s estate in 1982 and served until his death in 2003. (JA, Vol. V, p. A134) From 1983 through 2005, Graubard represented the Lawrences in connection with litigation against Seymour in his capacity as executor of Sylvan’s estate. Graubard entered into separate time charge retainer agreements with Mrs. Lawrence, Richard and Marta Jo on or about August 4, 1983. (JA, Vol. X, p. A2726; Vol. XVI, p. A6318, A6319) Although Graubard billed both Mrs. Lawrence and Richard (JA, Vol. X, p. A3177-3293), by agreement within the family, Mrs. Lawrence paid Graubard’s fees. (JA, Vol. VII, p. A1207) Through the end of 2004, Mrs. Lawrence had paid Graubard over $22 million in legal fees and disbursements. (JA, Vol. X, p. A2723-2725) -11- As a client of Graubard for over twenty years,2 documents were routinely submitted on behalf of Richard, along with his mother and sisters. (See, e.g., JA, Vol. XIII, p. A4715-4744, A4776-4917, A4922-4925, A4937-4941) Graubard repeatedly represented to the Court that it was Richard’s counsel. For example, in an April 1, 1998 letter to Judge Silverman, Reich wrote: We, as attorneys, represent the children in three of the captioned proceedings pursuant to which the motion compel a fractional interest was made - namely, the two captioned accountings and the dissolution proceeding. The children thus have appeared in those proceedings by this firm, as attorneys. (JA, Vol. XI, p. A3380-338) Similarly, when Judge Levine became Special Referee, Chill informed him that Graubard was “the attorneys for the four beneficiaries.” (JA, Vol. XI, p. A3562) As its client, Graubard stated it had kept Richard abreast of the status of the litigation, sent him status letters, and copied him on key letters to Mrs. Lawrence. (See, e.g., JA, Vol. XI, p. A3382-3383, A3390-3392, A3398-3401, 2 Graubard’s representation of Richard ended in September 2005, when Graubard sued him for tortious interference with contractual relations, a claim Graubard withdrew when Richard moved for summary judgment. In granting Richard’s motion, the Referee found that the claim was based on “nothing more than unsubstantiated allegations and speculation” because, by Graubard’s own admission, the firm’s claim hinged on obtaining favorable testimony from Mrs. Lawrence who had died two years earlier and was suing Graubard for the return of the gifts, rescission of the Modified Retainer, and refund of all fees previously paid. (JA, Vol. XVII, p. A7132-7142) -12- A3404, A3409-3410, A3411-3412, A3422, A3518, A3608, A3807-3809) Notably, Graubard’s 2004 memorandum analyzing a proposed $60 million settlement offer was addressed to Mrs. Lawrence, Richard, and his sisters. (JA, Vol. XI, p. A3625- 3642) Richard was also present for the follow-up meeting with Graubard regarding the settlement offer. (JA, Vol. V, p. A158) The Fractional Share Conflict. Sylvan’s Will divides his residuary estate into two shares: one for Mrs. Lawrence and one for the Children. (JA, Vol. I, p. A130a-131a, n. 13) The proportion that each share received was determined by a calculation colloquially called the “fractional share” or “shifting fraction.” As Mallis explained at trial: Under Sylvan’s will there was - there is what is known as a shifting fraction, which means that expense of the estate, administration expense, also legal fees, executor expenses, were charged solely against the three children’s share, the B share. That meant every time there was an...estate administrative expense, the fraction of Alice...vis-à-vis her children’s shifted, theirs went down, hers went up, relative to each other. (JA, Vol. V, p. A91- 92) Because Mrs. Lawrence’s and the Children’s shares were inversely proportional, Graubard had a clear conflict of interest when it calculated and set the fraction (a process that began in 1997). Every percentage point that Mrs. -13- Lawrence gained came at the Children’s expense.3 (JA, Vol. V, p. A445; Vol. VI A902-903) Cognizant of this conflict, and aware that Mrs. Lawrence was simultaneously pressuring Richard and his sisters to “maintain a united front” against Seymour, Graubard sent the Children multiple letters describing the conflict and advising them to consider retaining separate counsel. (JA, Vol. XV, p. A6055-6071; Vol. XVI, p. A6320-6325, A6331-6348) The Children repeatedly waived the conflict and permitted Graubard to represent them in computing the fractional share. Id. In connection with advising the Children of this conflict and drafting the relevant disclosures and waivers, Chill and Reich sought advice from Susan Brotman, Esq., outside counsel who they consulted on ethics issues. (JA, Vol. VI, p. A721-722) Ms. Brotman provided them with sample language for the conflicts letters, which they adopted. (JA, Vol. XVI, p. A6326-6330) Despite the Fractional Share Conflict The Graubard Attorneys Fail to Disclose the Gifts They Received from Mrs. Lawrence. In November 1998, almost seventeen years after Sylvan’s death, Seymour distributed nearly $125 million from Sylvan’s Estate: $84.3 million to Mrs. Lawrence and $40.5 million to the Children. (JA, Vol. X, p. A2727) When the distribution was made, the fractional share had not been set. (JA, Vol. XVI, p. A6351-6352) 3 It is undisputed that Mrs. Lawrence wanted her share to be as large as possible. (JA, Vol. VI, p. A613) -14- In December 1998, Mrs. Lawrence made $5.05 million gifts to the Graubard Attorneys: $2 million to Chill, $1.55 million to Reich, and $1.5 million to Mallis. In 1999, she paid over $2.7 million in gift tax on the gifts. (JA, Vol. XVI, p. A6161-6165) The only witnesses to the conversation that preceded the gifts were Chill and Mrs. Lawrence. At trial, the Referee found Chill’s unrebutted testimony about the gifts “simply implausible in many respects and demonstrably inconsistent.” (JA, Vol. I, p. A117a) According to Chill, Mrs. Lawrence invited him to her home and advised him that she wished to make “substantial” gifts to him, Reich and Mallis. (JA, Vol. VI, p. A673) He claims that in response, he told her that she should make the gifts to the firm, but that Mrs. Lawrence refused because she did not like the firm. (JA, Vol. VI, p. A674) Although Chill testified that he told Mrs. Lawrence that since they “are in some kind of transaction that puts us at arms’ length,” she should consult with independent counsel, (JA, Vol. VI, p. A675) the Referee found “implausible [Chill’s] claim that he instinctively knew during his visit with Mrs. Lawrence...that it was his duty to advise her to consult with independent counsel.” (JA, Vol. VI, p. A117a) Chill also testified that at the conclusion of their meeting, Mrs. Lawrence instructed him not to tell Richard about the gifts. (JA, Vol. VI, p. A677) -15- Several days later Chill received an envelope containing three envelopes addressed to him, Reich and Mallis, and a note reading: Danny You were kind to suggest you distribute the enclosed envelopes for me. Thank you again and yet again! From all the Lawrences. Alice. (JA, Vol. VI, p. A681-682; Vol. XV, p. A6023) (emphasis in original) The envelope addressed to Chill contained a check for $2 million and a note from Mrs. Lawrence. (JA, Vol. VI, p. A682-683; Vol. XV, p. A6024) Chill then distributed the remaining envelopes to Reich and Mallis with a strict admonition: “Mrs. Lawrence attached one condition...not to reveal to anyone the giving of the gifts.” (JA, Vol. VI, p. A684, A901) Reich’s and Mallis’ envelopes contained checks for $1.55 million and $1.5 million, respectively, together with handwritten notes. None of the notes told the recipients not to disclose the gifts. (JA, Vol. XV, p. A6027-6031) Jay Wallberg, Mrs. Lawrence’s accountant, testified that Reich later showed him the note she received and said “this is the note we had Alice write to us.” (JA, Vol. VIII, p. A1932) It is undisputed that all three Graubard Attorneys kept these “unprecedented” gifts a secret from Richard, Marta Jo and Suzanne, as well as their partners. (JA, Vol. VII, p. A1311) Reich, who characterized the gift as “life altering,” did not even tell her husband, an acting Supreme Court justice. (JA, Vol. -16- VI, p. A895, A1028-1029) It is also undisputed that neither Reich nor Mallis took any steps to confirm Mrs. Lawrence’s purported instructions to keep the gifts a secret. All three attorneys testified that they perceived no ethical issue with receiving clandestine seven-figure gifts from a client and hiding it from their partners, and co-clients who had a conflict of interest with the donor client, and conceded they did not consult an ethics expert (such as Ms. Brotman, with whom Chill and Reich were in touch with concerning the fractional share issue). (JA, Vol. V, p. A369-371, A457 (Mallis); Vol. VI, p. A719-721 (Chill); Vol. VI, p. A1043-1044 (Reich))4 Chill Solicits a $400,000 Bonus for Graubard. On or about December 7, 1998, Chill received a check from Mrs. Lawrence made out to Graubard for $400,000, accompanied by a handwritten note: Danny I’m not sure just what I should be thanking the firm for (keeping me on as a client?) You write my thank yous. A. (JA, Vol. VI, p. A689; Vol. XVI, p. A6349-6350) (emphasis in original) Chill testified that while he was surprised to receive the check, he did not contact Mrs. Lawrence to ask why she sent a six-figure bonus to a firm she did 4 Richard, his sisters, and the Estate contended below that these violations of the Code of Professional Responsibility mandated disgorgement of all fees Graubard received from the date of the gifts. While Richard believes that this relief is appropriate, he concedes that this issue is unpreserved for appeal and will not be argued. -17- not like. (JA, Vol. VI, p. A769-770) The Referee concluded that Chill solicited the bonus. (JA, Vol. I, p. A119a) 95 Wall Street and The Modified Retainer. By the end of 2004, Mrs. Lawrence had paid over $22 million to Graubard, including in excess of $1.9 million in 2002, $2.2 million in 2003, and nearly $2.5 million in 2004. (JA, Vol. X, p. A2723-2725) Mrs. Lawrence repeatedly complained to Graubard (mainly Chill) about these fees. (JA, Vol. VI, p. A699) On December 16, 2004, the Referee issued a decision dismissing the “95 Wall Street” objection to Seymour’s accounting. (JA, Vol. XIII, p. A4636- 4661) Mallis and Chill described the decision as a crippling blow, which had a cascading effect “on [Mrs. Lawrence’s] ability to succeed on other claims.” (JA, Vol. VI, p. A697) The Referee, however, expressly found that Graubard’s views as to the impact of his decision on the balance of Mrs. Lawrence’s objections was “patently erroneous” and “contrived.” (JA, Vol. I, p. A173a, A179a) Nevertheless, while Mrs. Lawrence erroneously believed that the upside of the litigation was then only “a few mil” because of what Graubard told her about the 95 Wall Street decision, she and Graubard renegotiated the fee arrangement: -18- − Chill originally proposed that Graubard receive a 50% interest. Mrs. Lawrence rejected this, stating that she would always be the “senior partner.” (JA, Vol. VI, p. A699-700) − Mrs. Lawrence proposed that Graubard receive 30%, which she voluntarily raised to 40%, under the misguided impression that giving Graubard a higher percentage would make the firm “work harder.” (JA, Vol. VI, p. A700) − Mrs. Lawrence did not speak with independent counsel about renegotiating the fee, and there are no contemporaneous writings indicating that anyone at Graubard advised her to seek independent counsel. (JA, Vol. VI, p. A831 (Chill); Vol. VII, p. A1297 (Reich); Vol. I, p. A119a (Referee)) − Less than a year prior to the revision, a co-executor of Seymour’s estate proposed settling all claims between Seymour’s estate and the Lawrence family for $60 million. (JA, Vol. V, p. A144) Although it was rejected, it was never withdrawn, and remained on the table in 2005.5 (JA, Vol. VIII, p. A1880) The Terms of the Modified Retainer On or about January 19, 2005, Mrs. Lawrence executed the Modified Retainer6 (JA, Vol. X, p. A2985-2986), which provides: 1. Graubard would receive hourly fees for 2005 with a cap of $1.2 million ($300,000 per quarter) plus all disbursements. 5 The $60 million offer remaining on the table is consistent with the Referee’s finding that the 95 Wall Street decision did not have a catastrophic effect on the Lawrences’ remaining objections to Seymour’s accounting. (JA, Vol. I, p. A173a-179a) 6 The Modified Retainer only modified the agreement between Mrs. Lawrence and Graubard. The firm’s retainers with Richard and Marta Jo remained in full force and effect, meaning that even if the Lawrences recovered nothing from the Cohn Estate, Graubard had the ability to collect its hourly time charges from Richard or Marta Jo, truly reducing its risk to zero. -19- 2. Graubard would receive 40% of any recovery, less any hourly fees paid in 2005. 3. Graubard’s fees would be paid from Mrs. Lawrence’s share of the recovery but would be calculated based upon the entire recovery. 4. In the event the amount due to Graubard was less than the firm’s time charges, Graubard and Mrs. Lawrence were to “arrive at a fair resolution of the shortfall to the Graubard firm,” essentially reducing the Graubard’s real risk to zero. 5. If anything happened to Mrs. Lawrence, the Modified Retainer was made binding upon her “heirs, executors, successors and assigns.” (“Paragraph 5”) The Epps Documents Four months after the Modified Retainer was executed, the litigation settled for approximately $106 million, because of “smoking gun” documents (the “Epps Documents”) produced in response to earlier served document demands. These documents demonstrated that Seymour had engaged in extensive self- dealing while administering Sylvan’s estate. (JA, Vol. X, p. A2998-3138) The importance of the Epps Documents cannot be overstated. Mallis described them as “explosive,” “a litigator’s dream,” and the litigation’s “turning point.” (JA, Vol. V, p. A499-502) Reich testified that the documents turned the prospects of the litigation from “bleak to rosy.” (JA, Vol. VI, p. A1071-1072) Even the Referee concluded that the Epps Documents were “critical” and had “grave implications.” (JA, Vol. I, p. A186a) -20- Not surprisingly, after discovery of the Epps Documents, Seymour’s Estate offered $100 million to settle all of the Lawrences’ claims against Seymour. Graubard accepted this offer without conducting any meaningful negotiations to improve it.7 (JA, Vol. V, p. A273-274) Commencement of the Fee Dispute Litigation On August 9, 2005, Graubard commenced this proceeding, alleging causes of action against Richard individually for tortious interference with contractual relations, and against Richard in his capacity as successor executor of Sylvan’s Estate. (JA, Vol. I, p. A308a-321a) Richard served his answer on or about August 19, 2005 (JA, Vol. I, p. A322a-329a), and the matter was referred to the Referee to hear and report. (JA, Vol. II, p. A530a) Mrs. Lawrence subsequently commenced an action in Supreme Court for, inter alia, rescission of the Modified Retainer and the return of the gifts and all legal fees paid to Graubard. That action was removed to Surrogate’s Court and also referred to the Referee. (JA, Vol. II, p. A501a) In late 2005, Richard and Mrs. Lawrence made separate motions to dismiss, claiming that the Modified Retainer was unconscionable and that the 7 Mallis testified that he advised the Cohn Estate that the matter would not settle for less than $100 million. Unsurprisingly, the Cohn Estate’s next offer was $100 million, which Graubard accepted with some minor enhancements. (JA, Vol. V, p. A267-268, A273-274) There is no dispute that Graubard made no real effort to increase the final dollar figure. -21- Graubard Attorneys had violated various Disciplinary Rules and Ethical Considerations. Their motions were denied by the Referee (JA, Vol. II, p. A444a- 486a), whose report was confirmed by the Surrogate (JA, Vol. II, p. A487a-488a). The Surrogate’s Order was affirmed by the Appellate Division with dissent (Lawrence v. Miller, 48 A.D.3d 1, 853 N.Y.S.2d 1 (1st Dep’t 2007)), and was affirmed by this Court to allow for the development of a factual record (Lawrence v. Miller, 11 N.Y.3d 588, 873 N.Y.S.2d 517 (2008)). Thereafter, discovery ensued. Graubard eventually moved to withdraw its SCPA § 2110 and tortious interference claims, alleging that the former was “largely redundant”8 with the claims against Mrs. Lawrence and the latter could not be proved. In separate reports, the Referee granted Graubard’s motions. (JA, Vol. XVII, p. A7122-7131 (§ 2110 claim); A7132-7142 (tortious interference claim)) On the eve of trial, Graubard moved to exclude the Children from participating in the hearing. Richard and his sisters moved to permissively intervene pursuant to CPLR 1013 (JA, Vol. XVII, p. A7145-7147 (Richard); A7148-7150 (Marta Jo and Suzanne)), and the Referee granted their motions. (JA, Vol. V, p. A6-8) The Referee then held a fifteen-day hearing. In post-trial briefs, 8 Richard opposed the withdrawal of the SCPA §2110 claim unless conditions were imposed because it was believed that Graubard’s real motive in seeking this withdrawal was because it did not want the Court to review it and Chill’s time records, which the Court must do in an SCPA §2110 proceeding. -22- Richard contended that because Graubard violated four Disciplinary Rules (DR 5- 101, 5-104, 5-105, and 1-102(A)(7)) while representing him, the Modified Retainer should be set aside and Graubard should not be awarded any additional fees. The Referee’s Report. On August 27, 2010, the Referee issued his report, upholding the gifts, finding that the Modified Retainer was substantively but not procedurally unconscionable and awarding Graubard almost $16 million in fees under a formula that he created. With respect to Richard’s claims that Graubard committed numerous violations of the Code of Professional Responsibility9, the Referee found that the insertion of Paragraph 5 into the Modified Retainer was “an act of disloyalty” that “could provide the basis for charging violations of DR 5-101, DR 1-102(a)(7) and EC 5-1;” (JA, Vol. I, p. A132a-133a). The Referee further ruled that Graubard did not violate DR 5-101 by failing to disclose the gifts or Modified Retainer, and also did not violate DR 5-104 or 5-105. Despite finding that Graubard had violated two Disciplinary Rules and one Ethical Consideration, the Referee declined to award Richard any relief. 9 The Referee rejected Graubard’s argument that Richard lacked standing to present a claim, finding that Richard could conform his pleadings to the proof, and that Graubard could not claim surprise or prejudice since all of Richard’s claims were argued during trial. (JA, Vol. I, p. A128a-129a) -23- The Surrogate Voids the Gifts But Affirms the Fee Award. Richard moved to modify or reject that portion of the Referee’s Report that found that Graubard and the Graubard Attorneys did not violate the Code of Professional Responsibility with respect to Richard. On September 8, 2011, the Surrogate issued her Decision and Order, in which she ordered the Graubard Attorneys to repay the $5.05 million in gifts, but confirmed the remainder of the Referee’s Report. (JA, Vol. I, p. A68a-86a) With respect to Richard, the Court confirmed the portion of the Referee’s Report that granted Richard’s motion to intervene. (JA, Vol. I, p. A71a-74a) However, the Court did not revisit the question of which Disciplinary Rules Graubard and the Graubard Attorneys violated and declined to grant Richard any relief for the two violations of the Code of Professional Responsibility. (JA, Vol. I, p. A85a-86a) The Appellate Division Sets Aside the Modified Retainer. On appeal, the Appellate Division set aside the Modified Retainer, finding it both procedurally and substantively unconscionable. (JA, Vol. XVII, p. A7394-7396) Rather than use the Referee’s methodology for computing Graubard’s fees, the Appellate Division looked to the prior retainer and awarded Graubard fees based on hourly time charges. (JA, Vol. XVII, p. A7396) The Appellate Division also affirmed the Surrogate’s decision to void the gifts but -24- declined to reach the merits of Richard’s arguments on appeal, deeming them “academic.” (JA, Vol. XVII, p. A7397) Graubard moved before the Appellate Division for leave to appeal to this Court and its motion was granted. (JA, Vol. XVII, p. A7390) Richard opposes Graubard’s appeal and asks this Court to affirm the First Department’s Decision and Order. -25- ARGUMENT Richard is mindful of the Appellate Division’s statement that whether the Children were permitted to intervene in this proceeding was “academic and need not be addressed,” along with its dicta that if it were to reach the merits of the Children’s claims, it “would find them without merit.” 106 A.D.3d at 610, 965 N.Y.S.2d at 498. The arguments raised below are made based solely on the Referee’s findings of misconduct which remain undisturbed.10 POINT I GRAUBARD AND THE GRAUBARD ATTORNEYS ENGAGED IN MISCONDUCT WHILE REPRESENTING RICHARD A. Graubard’s Inclusion of a Clause In the Modified Retainer Expressly Designed to Limit Richard’s Rights Was an Act of Disloyalty. It is undisputed that Graubard took affirmative steps to limit Richard’s rights and ensure that it was paid under the Modified Retainer. At trial, Chill testified that this provision was included to ensure that Richard could not thwart Graubard’s large payday: 10 The fact that the Appellate Division did not set aside the Modified Retainer because of Graubard’s ethical violations vis-à-vis Richard is irrelevant, as this Court has the inherent authority to affirm a decision below on grounds other than those relied by the Appellate Division. See Eadie v. Town Bd. of North Greenbush, 7 N.Y.3d 306, 821 N.Y.S.2d 142 (2006) [affirming appellate division while disagreeing with one of its bases for the appellate division’s decision]; Simpson Elec. Corp. v. Leucadia, Inc., 72 N.Y.2d 450, 534 N.Y.S.2d 152 (1988) [affirming Appellate Division decision “for different reasons”]; New York Times Co. v. City of New York Comm. on Human Rights, 41 N.Y.2d 345, 393 N.Y.S.2d 312 (1977) [“we would affirm the order of the Appellate Division but on other grounds”]. -26- Once again, the specter of Richard Lawrence appeared in my mind and I was - I was heedful of Mrs. Lawrence’s admonition that be careful of Richard Lawrence’s possible interference in the matter and if I die - if I’m alive you don’t need to worry about it, but if I die and this estate thing is not over, you will have to be protected from Richard Lawrence. And I discussed this with Miss Reich and [this provision] came about as a result of that discussion. That’s why it is heirs, executors, successors and assigns. It addressed that potential problem. (JA, Vol. VI, p. A705-706) Chill further testified that whether you owe a client undivided loyalty “depends” on unidentifiable circumstances: Q You have two clients to whom you owe equal fiduciary obligation as an attorney, correct; Mrs. Lawrence and her son, isn't that right? A Based on the assumption that I don't believe is correct. Q What assumption? A Based on an assumption that they were equal clients. * * * Q Aren't all clients owed the highest degree of fiduciary duty by an attorney? A Depending on the nature or the circumstances, the particular duty -27- owed. Depends on the circumstances. No general rule as to the measure and degree of what you have to tell your client by way of a fiduciary relationship on any given situation. (JA, Vol. VI, A779-780) This was clear error as ethics expert Professor Stephen Gillers testified: The law firm is now in the position of negotiating a contract that purports to withdraw that right, that purports to make the agreement binding on their own clients which the client doesn’t know. (JA, Vol. IX, A2272) The Referee agreed with Professor Gillers, finding that “in all dealings with clients, the attorney must act with fairness, honesty and undivided loyalty, which includes ‘safeguarding client property and honoring the clients’ interests over the lawyer’s (Matter of Cooperman, 83 N.Y.2d 465, 472 (1994)11).” (JA, Vol. I, p. A132a) The Referee further found that the sole reason Graubard inserted Paragraph 5 was “to secure its own financial interests at the expense of the Lawrence Children’s interests.” Id. The Referee concluded that Graubard’s 11 In Cooperman, this Court noted the importance of the fiduciary duty an attorney has with a client, holding, “This unique fiduciary reliance, stemming from people hiring attorneys to exercise professional judgment on a client’s behalf-“giving counsel”-is imbued with ultimate trust and confidence. The attorney’s obligations, therefore, transcend those prevailing in the commercial marketplace. The duty to deal fairly, honestly and with undivided loyalty superimposes onto the attorney-client relationship a set of special and unique duties, including maintaining confidentiality, avoiding conflicts of interest, operating competently, safe-guarding client property and honoring the clients’ interests over the lawyer’s.” 83 N.Y.2d at 472, 611 N.Y.S.2d at 467 (internal citations omitted) -28- insertion of Paragraph 5 was “an act of disloyalty” that “could provide the basis for charging violations of DR 5-10112, DR 1-102(a)(7)13 and EC 5-114.” (JA, Vol. I, p. A132a-133a) See Matter of Sherbunt, 134 A.D.2d 723, 725, 520 N.Y.S.2d 885, 888 (3d Dep’t 1987) (“[w]hile respondent's acceptance of the gift and loan was not itself misconduct, the circumstances of the acceptance clearly adversely reflected on respondent's fitness to practice law by presenting the appearance of impropriety. The charging of excessive fees further adds to his aura of a betrayal of a client's trust”). B. Graubard’s Failure to Disclose the Modified Retainer. The Referee further noted that Graubard acted “behind the Lawrence Children’s backs, apparently never intending to disclose the Revised Retainer Agreement during litigation with Seymour and his estate.” (JA, Vol. I, p. A132a- 133a) This was clearly improper, as Richard had a right to know that another party 12 DR 5-101 provides that “A lawyer shall not accept or continue employment if the exercise of professional judgment on behalf of the client will be or reasonably may be affected by the lawyer's own financial, business, property, or personal interests, unless a disinterested lawyer would believe that the representation of the client will not be adversely affected thereby and the client consents to the representation after full disclosure of the implications of the lawyer's interest.” 13 DR 1-102(A)(7) provides that “a lawyer or law firm shall not...engage in any other conduct that adversely reflects on the lawyer’s fitness as a lawyer.” 14 EC 5-1 provides that “the professional judgment of a lawyer should be exercised, within the bounds of the law, solely for the benefit of the client and free of compromising influences and loyalties. Neither the lawyer’s personal interests, the interests of other clients, nor the desires of third persons should be permitted to dilute the lawyer’s loyalty to the client.” -29- had acquired a majority economic interest in the outcome of the litigation. At trial, Professor Gillers testified: A [The Modified Retainer] also implicates the children because the children gave the waiver they gave when the person calling the shots, and the only other person in the interest in the corpus was Alice, but now the children have to know that there is another economic interest in the division between the children and Alice. And that other economic interest has an interest in not diminishing Alice’s share. Therefore...the children have to know the advice Alice is getting is not from a lawyer with no economic interest, but a lawyer with an economic interest and yet it’s an objectivity test and that might affect the children’s decision about whether to revisit the waiver. Because you can always withdraw a waiver within certain parameters. The children might say, well, you know, we’re not so comfortable any longer not being at the table through our own lawyer because it’s not only just our mother there. So the children, they might not say that. We don’t know. But they have a right to make that decision. Q Did the law firm have an ethical obligation to inform the children -30- about the revised fee arrangement when it was made? A An ethical obligation to inform the children and comply with the same DR 5-101 protocol vis-à-vis the children [and] also Alice. Q Does the law firm have an obligation to obtain a conflict waiver from the children regarding the new retainer? A Yes. Because regarding the change in modifications had by the new retainer is how I put it...The children gave their consent in ’97 based on certain facts on the ground, consents to conflicts or to forgo independent counsel or to be pro se, whatever the children did [has] to be fully informed. The law firm went out and hired a person versed in this world and secured a consent based on certain facts. Now, there is a new fact and maybe the children wish that fact to influence their judgment. (JA, Vol. IX, p. A2269-2271) Throughout the litigation, Richard remained Graubard’s client and was entitled to make his own decisions as facts and circumstances changed. If Richard knew that Graubard had secretly bargained for and received the largest financial stake in the litigation he may well have assumed an active decision- making role, or may have explored the issues together with his siblings and/or engaged other counsel. In particular, the hybrid contingency fee arrangement might have caused him to examine more critically the firm’s opinion on the advisability -31- of accepting the Cohn estate’s initial $100 million settlement offer, which the firm barely negotiated. (JA, Vol. V, p. A273-274) At the time of the settlement, Richard did not know that there was more than $40 million in it for Graubard. This lack of knowledge and inability to objectively evaluate the offer was solely because Graubard failed to disclose the existence of the Modified Retainer. C. Graubard’s Failure to Disclose the Gifts. By failing to disclose the huge gifts, the Graubard Attorneys deliberately withheld information that was pertinent to Richard’s decision to have Graubard continue to represent him while the fraction was being calculated. Professor Gillers testified that as Graubard’s clients, Richard and his sisters: have a right to make that decision. When we deal with these issues, we’re not saying bad things will happen, but respecting the client’s autonomy and so the non-donor client has a right to know about the sizeable gift... There is a duty to keep the client informed about important facts in the professional relationship. And even if the lawyer thinks, well, it won’t make any difference, that’s not the lawyer’s decision. (JA, Vol. IX, p. A2232-2233) Even Graubard’s ethics expert testified that Graubard was ethically obligated to disclose the clandestine gifts to Richard and his sisters: -32- Q Don’t the lawyers have an obligation to inform the children who are also their clients about these large gifts? A It would really depend on the circumstances here. But the children, given the conflict, should generally be aware of the fee arrangement between the parent where there is a conflict with the children. Q So the children should be aware of the fee arrangement with the parent, including gifts? A Right. The fact that a gift was being given and so forth. Anything that would potentially cause-where there was this conflict, the lawyers for the parent. And the concern I would have on a go-forward basis is, if the gift was a quid pro quo to favor [the] parents over the children in this conflict. (JA, Vol. VII, p. A1434- 1435) If Richard knew about the enormous gifts Mrs. Lawrence made to the Graubard Attorneys, he may well have decided to retain separate counsel during the time period when the conflicting fraction was being calculated. Graubard made this impossible by hiding the existence of these gifts from Richard. -33- POINT II BECAUSE OF GRAUBARD’S MISCONDUCT, THE ONLY FEE IT WAS ENTITLED TO WAS THE ONE AWARDED BY THE APPELLATE DIVISION Although the Appellate Division was correct in setting aside the Modified Retainer as procedurally and substantively unconscionable, Graubard’s misconduct also warrants setting aside the Modified Retainer.15 In Quinn v. Walsh, 18 A.D.3d 638, 795 N.Y.S.2d 647 (2d Dep’t 2005), the Second Department stated the general rule that “an attorney who engages in misconduct by violating the Disciplinary Rules is not entitled to legal fees for any services rendered.” 18 A.D.3d at 638, 795 N.Y.S.2d at 648 quoting Matter of Winston, 214 A.D.2d 677, 625 N.Y.S.2d 927 (2d Dep’t 1995). This rule has been repeatedly reinforced by the Appellate Division: − Yannitelli v. D. Yannitelli & Sons Constr. Corp., 247 A.D.2d 271, 272, 668 N.Y.S.2d 613, 613 (1st Dep’t 1998) held that when the attorney has committed “numerous violations of the Code of Professional Responsibility...[he] has, as a result, forfeited any entitlement to fees.” − In Doviak v. Finkelstein & Partners, LLP, 90 A.D.3d 696, 699, 934 N.Y.S.2d 467, 470 (2d Dep’t 2011), the Second Department reaffirmed that “an attorney who violates a disciplinary rule may be discharged for cause and is not entitled to any fees for services rendered.” 15 Richard contended below that these violations should have resulted in Graubard forfeiting all legal fees Graubard received since the gifts were made; however, he concedes that this argument has not been preserved for this appeal. -34- − Orendick v. Chiodo, 272 A.D.2d 901, 902, 707 N.Y.S.2d 574, 575 (4th Dep’t 2000), held that “an attorney who is discharged for cause is not entitled to a fee,” and further provided that misconduct that occurs before the discharge but is not discovered until later “may serve as a basis for fee forfeiture.”16 − Pessoni v. Rabkin, 220 A.D.2d 732, 732, 633 N.Y.S.2d 338, 338 (2d Dep’t 1995) held that it is “well settled” that attorneys who violate Disciplinary Rules “[are] not entitled to legal fees for any services rendered.” − The Second Circuit held in First Nat’l Bank of Cincinnati v. Pepper, 454 F.2d 626 (2d Cir. 1972) that “an attorney discharged for cause or guilty of professional misconduct in the handling of his client’s affairs has no right to payment of fees.” 454 F.2d at 633. Graubard’s drafting of Paragraph 5 in order to limit Richard’s rights under the Modified Retainer, coupled with its non-disclosure of it to Richard, clearly warrant setting the agreement aside.17 16 Accord Brill v. Friends World College, 133 A.D.2d 729, 730, 520 N.Y.S.2d 160, 161 (2d Dep’t 1987). 17 Whether Richard suffered actual damages is irrelevant, as the rule is prophylactic in nature. As this Court noted in Diamond v. Oreamuno, 24 N.Y.2d 494, 498, 301 N.Y.S.2d 78, 81 (1969), proof of damages is dispensed with in a breach of fiduciary claim since “the function of such an action, unlike an ordinary tort or contract case, is not merely to compensate the plaintiff for wrongs committed by the defendant but…to prevent them.” 24 N.Y.2d at 498, 301 N.Y.S.2d at 81; see also Matter of Clarke, 12 N.Y.2d 183, 188, 237 N.Y.S.2d 694, 697(1962); Feiger v. Iral Jewelry, Ltd., 41 N.Y.2d 928, 929, 394 N.Y.S.2d 626, 626 (1977). -35- CONCLUSION For the foregoing reasons, this Court should affirm the May 23, 2013 decision of the First Department and award to Richard such other and further relief which as to the Court seems just, equitable and proper. Dated: New York, New York December 23, 2013 Respectfully submitted, GREENFIELD STEIN & SENIOR, LLP By:________________________________ Norman A. Senior Attorneys for Intervenor-Appellant- Cross-Respondent Richard Lawrence 600 Third Avenue New York, NY 10016 (212) 818-9600 nsenior@gss-law.com Of Counsel: Angelo M. Grasso