Kasowitz, Benson, Torres & Friedman, LLP, Appellant,v.Duane Reade, et al., Respondents.BriefN.Y.Mar 19, 2013WRITER'S DIRECT DIAL NUMBER 212-506-1700 KASOWITZ, BENSON, TORRES & FRIEDMAN LLP 1633 BROADWAY NEW YORK, NEW YORK 10019-6799 212-506-1700 FACSIMILE: 212-506-1800 ATLANTA HOUSTON MIAMI NEWARK SAN FRANCISCO November 14, 2012 New York State Court of Appeals 20 Eagle Street Albany, New York 12207-1095 Re: Kasowitz, Benson, Torres & Friedman LLP v. Duane Reade and Duane Reade, Inc. Dear Your Honors: We represent our firm, Kasowitz, Benson, Torres & Friedman LLP ("KBT&F"), as the Plaintiff-Appellant in the above-referenced appeal. This letter is submitted pursuant to section 500.11 of this Court's rules of practice.' For the reasons discussed below, the Decision and Order of the Supreme Court of the State of New York, Appellate Division, First Department entered on August 7, 2012 (the "Order") that affirmed the granting of the motion to dismiss of Defendants- Respondents Duane Reade and Duane Reade, Inc. ("Duane Reade") should be reversed. DISCLOSURE STATEMENT Pursuant to section 500.1(f) of this Court's rules of practice, KBT&F states that it has no parents, subsidiaries or affiliates. STATEMENT OF JURISDICTION This Court has jurisdiction over this appeal pursuant to CPLR 5601(a) because the Order contained a dissent by two justices of the First Department on questions of law. 1 This appeal was designated by the Court on its own motion for examination of the merits pursuant to Section 500.11 of the Court's rules of practice. See Letter from Richard A. Reed, Deputy Clerk, New York State Court of Appeals, dated October 12, 2012. KASOWITZ, BENSON, TORRES & FRIEDMAN LLP BACKGROUND This is an action for breach of a legal fee agreement between KBT&F and its client Duane Reade. Duane Reade and KBT&F had an attorney-client relationship that pre-dated the matter at issue. In fact, the KBT&F partner in charge of the relationship with Duane Reade, Daniel Goldberg, did work for Duane Reade when he was at a prior law firm. With respect to the matters preceding the representation at issue here, KBT&F charged Duane Reade fees only on a traditional hourly rate basis. The representation at issue began in 2006 when Duane Reade retained KBT&F in connection with a dispute with Cardtronics, L.P. ("Cardtronics") concerning an ATM placement agreement (the "Cardtronics ATM Agreement"). (R. 50-51 ¶ 8; 72 ¶ 12; 259 TT 3-4.) Under the terms of the Cardtronics ATM Agreement, Cardtronics placed ATM machines in Duane Reade's stores, charged surcharge fees to users, and was required to pay a percentage of those surcharge fees to Duane Reade. (R. 69 ¶ 4; 86-113.) The dispute arose because Duane Reade believed Cardtronics allegedly had been, and intended to continue, underpaying Duane Reade with respect to the surcharge fees. (R. 50-51 TT 7-8; 58- 59 11117-8; 69 IT 4; 70 ¶6; 259 4E13; 260 ¶ 7.) KBT&F and Duane Reade's fee agreement for the Cardtronics matter was memorialized in a series of e-mails between Goldberg and Duane Reade's then- General Counsel, Michelle Bergman. Instead of a straight hourly billing arrangement, KBT&F and Duane Reade agreed that Duane Reade would pay KBT&F (i) a flat fee of $1 million in ten installments, (ii) disbursements, and (iii) 20% of everything recovered above $4 million as result of a settlement or other resolution of the Cardtronics matter. (R. 259-60 ¶ 4; 71 ¶ 10; 115-16.) Mr. Goldberg's email setting forth the fee arrangement provided, in relevant part: We can do the Cardtronics case for a flat $1 million, payable over 10 months as you suggested (exclusive of disbursements), plus 20% of amounts recovered above some number, as opposed to a a [sic] percentage payable from dollar one. Based on the numbers we have, which obviously are approximations, we actually think the damages could be between $10 and $11 million over the life of the contract. So, I'm thinking of 20% of everything above $4 million as the success fee portion. 2 KASOWITZ, BENSON, TORRES & FRIEDMAN LLP (R.71 ¶ 10; 115-16 (emphasis added).) Bergman's separate, unconnected email accepting the arrangement consisted of one word: "Go." (R. 71 ¶ 11; 260 ¶ 5.) Over the next couple of years, KBT&F litigated and provided extensive strategic advice to Duane Reade in connection with the Cardtronics matter, including initiating the lawsuit, see Duane Reade, Inc. v. Cardtronics, L.P., No. 603545/06 (Sup. Ct., NY County), drafting pleadings, engaging in discovery, motion practice — including motions to dismiss and for summary judgment (and a successful appeal thereof) — and conducting settlement negotiations. (R. 51 ¶ 10; 72-73 TT 14-15; 58-59 TT 7-8; 129-43.) KBT&F also conducted a court-ordered mediation on Duane Reade's behalf, during which terms were negotiated that ultimately were included in the settlement of the Cardtronics matter described below. (R. 52 ¶ 15; 61 ¶ 15; 260-61 ¶ 7; 74-75 ¶ 20.) Two of the proposals discussed at the mediation included (i) the termination of the Cardtronics ATM Agreement so that Duane Reade could enter into a more lucrative ATM agreement with Chase and (ii) increasing the surcharge fee to be paid by consumers as a mechanism to increase the fees Duane Reade would realize. (R. 260-61 1117-8; 74- 75 ¶ 20.) KBT&F also wrote a memorandum analyzing for Duane Reade "provisions that Duane Reade might utilize to cancel the Cardtronics relationship" so that Duane Reade could enter into a new ATM agreement directly with Chase. (R. 261 ¶ 9; 75 ¶ 21-23; 176-77.) Throughout this period, all parties understood that trying to achieve termination of the Cardtronics ATM Agreement in favor of another provider was part of KBT&F's engagement. (R. 259-61 ¶¶ 7, 9; 69-70; 72 II 14; 74 19; 1019 ■IT 4.) On October 24, 2008, following KBT&F's advice, Duane Reade sent a default notice to Cardtronics, which KBT&F drafted. (R. 1001-03; 999-1000.) In the default notice, Duane Reade advised Cardtronics that it would "pursue ... its right to terminate the ATM Placement Agreement" unless Cardtronics remedied its defaults. (R. 999-1000.) Duane Reade and KBT&F also planned to amend the complaint after the cure period expired to add an express claim for the relief of termination, something that for its own business reasons Duane Reade did not want included in the complaint initially. (R. 75 TT 23-24; 178-81.) In November 2008, after the termination notice was served but before the cure period expired, Ms. Bergman left Duane Reade. (R. 52 ¶ 16; 61-62 ¶ 16; 262 ¶ 10; 76 1[[ 25.) At that point a new general counsel, Phillip Bradley, took Ms. Bergman's place. (R. 52 ¶ 16; 61-62 ¶ 16; 76 ¶ 25.) In February 2009, Mr. Bradley secretly settled the Cardtronics Matter without first advising KBT&F. (R. 52 ¶ 16; 61-62 ¶ 16; 76-77 11125-28.) 3 KASOWITZ, BENSON, TORRES & FRIEDMAN LLP Pursuant to the settlement, Duane Reade received (i) $1 million in cash from Cardtronics; (ii) termination of the below-market Cardtronics ATM Agreement; and (iii) an increase in the surcharge fees payable by Cardtronics for a five-month period. (R. 208-210; 218-223.) On the same day that Duane Reade executed the Cardtronics settlement agreement and terminated the Cardtronics ATM Agreement, May 8, 2009, Duane Reade also entered into a new ATM placement agreement with Chase (the "Chase ATM Agreement"), pursuant to which Duane Reade was to receive, among other things, a doubling of the surcharge fees Duane Reade received from each ATM transaction (from $.50 to $1), for the 5 year period that remained on the Cardtronics Agreement and beyond. (R. 188-207; 192-193 § 6.) Duane Reade refused to pay KBT&F any legal fee based on the increased surcharges the company received as part of settling and entering into the Chase ATM Agreement. (R. 81 ¶¶ 40-41; 250-57.) This action followed. KBT&F moved for partial summary judgment as to Duane Reade's breach of the fee agreement. (R. 66-67.) Duane Reade cross-moved for summary judgment, arguing that the $4 million threshold had not been exceeded and that, as a matter of law, KBT&F was not entitled to a contingency fee. (R. 263-64.) In a decision and order entered March 18, 2011 and a judgment entered April 7, 2011, the trial court granted Duane Reade's cross-motion for summary judgment. (R. 13-30; 31-45.) The trial court agreed that KBT&F was instrumental in achieving the settlement and achieving, among other things, the termination of the Cardtronics ATM Agreement. (R. 27 at 15.) The trial court also agreed that "Kasowitz may be entitled to part of the increased surcharge fees Duane Reade collected from Cardtronics after the settlement as part of its success fee." (R. 28 at 16.) However, the trial court refused to credit KBT&F for the increased surcharge fees Duane Reade received from Chase — not even those that related to the same period that would have remained on the Cardtronics ATM Agreement. On that basis, as the $4 million threshold was not met, the court dismissed KBT&F's complaint in its entirety. (R. 13-30; 31-45.) On appeal, the First Department affirmed, agreeing with the lower court that no success fee was owed because Duane Reade's "recovery" under the settlement was limited to the $1.75 million cash that Duane Reade had received directly from Cardtronics. See Order at 10. The First Department, like the trial court, held that "Nile language in the fee agreement does not contain any ambiguity," id. at 11, 4 KASOWITZ, BENSON, TORRES & FRIEDMAN LLP and therefore declined to consider extrinsic evidence in the form of two affidavits from Duane Reade's former general counsel, Michelle Bergman, supporting KBT&F's interpretation of the term "recovered" or "recovery" as including money received by Duane Reade as a result of the termination of the Cardtronics ATM Agreement and its replacement with a more lucrative fee deal from Chase (that covered the same period as the terminated Cardtronics ATM Agreement and beyond). Id. at 10-11. For example, Ms. Bergman's reply affidavit stated, in relevant part, that It was my understanding that, as Duane Reade's General Counsel and the officer who both negotiated the fee arrangement with Kasowitz and managed the Cardtronics litigation, achieving a termination of the Cardtronics ATM agreement would be considered a successful outcome, and such a termination would be included in calculating the contingency fee. While we did not know at the time we made the fee agreement what the actual value of such a termination would be (that would hinge on the deal we were able to obtain to replace the Cardtronics agreement), that is certainly something I anticipated and expected under our fee agreement to be worked out and calculated at the appropriate time, if a termination ended up being part of a resolution. (R. 1019 ¶ 4.) Duane Reade submitted no evidence to contradict either of Ms. Bergman's affidavits. In the dissent, Justice Catterson (with whom Justice Saxe joined) disagreed with the First Department majority, arguing that summary judgment "is particularly inappropriate in this case" because the fee agreement is ambiguous as to whether the monies received by Duane Reade in connection with the Chase replacement agreement constitute a "recovery." (Order at 14; see also id. at 25 (noting that "[t]here is simply nothing in the Goldberg e-mails that is 'precise.'"). Justice Catterson correctly recognized that "'recovery' can mean many things" and thus "a dispute over the meaning of 'recovery' can only be resolved through the prism of the parties' intent at the time." (Id. at 26; see also id. at 23 (noting that the scope of the fee agreement was "uncertain because the language is ambiguous. The key term at issue is 'recover.'"). According to Justice Catterson, "Bergman's and Goldberg's affidavits, when read in conjunction with the disjointed language of the e-mails, create issues of fact that surely survive a motion for summary judgment." (Id. at 26-27.) 5 KASOWITZ, BENSON, TORRES & FRIEDMAN LLP Justice Catterson found that the lower court and the majority's rejection of Ms. Bergman's affidavits was "clear error for many reasons..." (Order at 23.) Justice Catterson recognized that, in her reply affidavit, Ms. Bergman "maintained that Duane Reade understood that the value of the termination of the Cardtronics litigation was more than simply getting out of its contractual obligations" and that the actual value would be "worked out and calculated at the appropriate time, if a termination ended up being part of a resolution." (Id. at 23.) Justice Catterson found it "beyond dispute that Bergman's affidavit cannot be categorized as 'self- serving' because Ms. Bergman "is not a party to the action, is not employed by either party, and on the facts of this record has no interest in the outcome of the litigation, financial or otherwise." (Id. at 24 (holding that "[alt the very least, it is reversible error to have refused to consider the Bergman affidavits because of the characterization of them as 'self-serving.'"). ARGUMENT I. Standard of Review New York appellate courts review questions of law, including questions of contract interpretation, de novo. See, e.g., Duane Reade, Inc. v. Cardtronics L.P., 54 A.D.3d 137, 140 (1st Dep't 2008) ("On appeal, the standard of review is for this Court to examine the contract's language de novo."); Gulf Ins. Co. v. Transatlantic Reinsurance Co., 13 A.D.3d 278, 279 (1st Dep't 2004) ("[A] de novo standard of review applies because the ... court interpreted a contract provision ... as a matter of law."). II. The First Department Erred In Holding That No Success Fee Was Owed The First Department majority erred in affirming the trial court's conclusion that no success fee was owed under the fee agreement between KBT&F and Duane Reade. The fee agreement provided that KBT&F would receive 20% of Duane Reade's "recovery" that is in excess of $4 million "over the life" of the Cardtronics ATM Agreement. (R.71 1110, 115-16.) The First Department correctly found that "[t]he only reasonable interpretation of the language employed [in the success fee agreement] is that Kasowitz based its fee proposal on the expected recovery or potential earnings of $10 million from the surcharge fees that Cardtronics had withheld and would owe over the 'life of the contract' between Duane Reade and Cardtronics." (Order at 12.) Nevertheless, the First Department erroneously limited the value of the increased surcharge fees over the "life of the contract" to the cash paid directly by Cardtronics to Duane Reade during a five-month transition period between the settlement and the start of the Chase relationship, and 6 KASOWITZ, BENSON, TORRES & FRIEDMAN LLP refused to include any benefit from the termination of the Cardtronics ATM Agreement and the entry of the Chase ATM Agreement. (Order at 10.) This was error. The fee agreement on its face is not limited to monies actually paid by Cardtronics. Instead, the fee agreement states that KBT&F's fee would be calculated based on "20% of amounts recovered above some number" or "20% of everything above $4 million," through a "settlement or what have you." (R. 115- 16 (emphasis added).) 2 The term "recover" expressly contemplates value achieved as a result of a settlement or otherwise. See, e.g., Beatie v. DeLong, 164 A.D.2d 104, 108 (1st Dep't 1990) (contingency fee calculated based on revenues generated from patents to which lawyer successfully regained rights on behalf of client); Scarola Ellis LLP v. Birnbaum, No. 0106199/2007, N.Y. slip. Op. 32258U, at 4-5 (Sup. Ct. Aug. 11, 2008) (lawyer could seek to recover contingency fee based on the 'valuable consideration' recovered by the client in the form of an employment agreement with the employer-defendant's affiliate); Unger v. Greenhut, 183 F.2d 381, 383 (2d Cir. 1950) (attorney's recovery was "based on the benefit which [the client] realized and not on the particular amount paid in the settlement to [the client] himself."); Order at 23 (Catterson, J., dissenting). Therefore, it was error for the First Department to ignore the value Duane Reade would recover "over the life" of the original Cardtronics ATM Agreement as a result of its new deal with Chase. During the five-month transition period, the ATM surcharges payable to Duane Reade under the amended Cardtronics ATM Agreement doubled from $0.99 to $1.99, resulting in Duane Reade receiving $1 per ATM transaction as opposed to its previous receipt of $.50 per transaction. The Cardtronics ATM Agreement was not scheduled to expire until December 31, 2014. (R. 88 § 6.) The settlement assured that Duane Reade would continue to achieve increased surcharge fees over the life of the original Cardtronics ATM Agreement because the new Chase ATM Agreement — which was entered into as part of the settlement — required the same level of increased surcharge fees that Cardtronics was to pay during the five-month 2 To the extent that there is ambiguity in the plain language of the fee agreement, the uncontroverted evidence submitted by KBT&F established that Duane Reade understood at the time it entered into the fee agreement that the agreement included termination of the Cardtronics ATM Agreement as a potential successful outcome of the litigation and that the "actual value of such termination ... would hinge on the deal [Duane Reade was] able to obtain to replace the Cardtronics agreement." (R. 1019 ¶ 4.) See infra at 9-10. 7 KASOWITZ, BENSON, TORRES Sc FRIEDMAN LLP transition period. 3 In other words, Duane Reade hired KBT&F to achieve, among other things, increased surcharge fees through December 2014 and that is precisely what Duane Reade obtained by way of the settlement KBT&F achieved. The fact that the new agreement was structured so that Chase, rather than Cardtronics, would pay the increased fees going forward does not change the fact that Duane Reade recovered an increased amount of surcharge fees through December 31, 2014 as a result of the settlement of the Cardtronics matter. Assuming an incremental value to Duane Reade of $150,000 per month from the increased surcharge fees (R. 78-79 IN 32-34) — a number not disputed by Duane Reade — and a 58 month period (May 2009 to December 2014), Duane Reade's earnings from increased surcharge fees would total $8.4 million, clearly exceeding the $4 million threshold required for the contingency fee to be triggered. III. The First Department Erred In Holding That The Fee Agreement Was Unambiguous The First Department majority also erred as a matter of law in holding that the fee agreement constituted an unambiguous contract, and that it therefore did not need to consider extrinsic evidence — including affidavits from Duane Reade's former General Counsel, Ms. Bergman — concerning the parties' interpretation of the term "recover." The fee agreement was described only in a series of unconnected emails between Mr. Goldberg and Ms. Bergman. The relevant language, which referred to "20% of amounts recovered above some number," "[b]ased on the numbers we have," "damages ... over the life of the contract," "20% of everything above $4 million," and recovery from a "settlement or what have you" (R. 115-16) is ambiguous without consideration of the parties' intent, as reflected in the unrefuted evidence submitted by KBT&F. See Korff v. Corbett, 18 A.D.3d 248, 251 (1st Dep't 2005) ("[W]here words used in a written contract are susceptible of more than one interpretation, the courts will look at the surrounding circumstances ... to clear up any ambiguity in the language employed.") (internal quotation marks omitted). As Justice Catterson recognized in his dissent, "when read together as Bergman's affidavit and Duane Reade's argument on appeal propose, the e-mails evince an intent on the part of both parties to be bound to some fee for legal services." (Order at 22-23 (Catterson, J., dissenting).) 3The settlement, the termination, and the new contract with Chase were all signed on the same day. (R. 188-207; 208-16; 218-19.) 8 KASOWITZ, BENSON, TORRES & FRIEDMAN LLP Duane Reade wrongly argued in the First Department that all doubts should be resolved against KBT&F as drafter even if the fee agreement is found to be ambiguous. However, where — as here — an ambiguity exists in a contingency fee retainer agreement, the attorney may still prevail by introducing extrinsic evidence showing that the client fully understood the terms of the contingency fee. See, e.g., Jacobson v. Sassower, 66 N.Y.2d 991, 993, 499 N.Y.S.2d 381, 382 (1985) (attorney can show that an ambiguous agreement was fully understood by the client); Shaw v. Manuf Hanover Trust Co., 68 N.Y.2d 172, 176 (1986) (the burden is on the attorney "to show that the contracts are fair, reasonable, and fully known and understood by their clients."). That is precisely what KBT&F has done here through the Bergman affidavits. IV. The First Department Majority Erred In Refusing To Consider Affidavits From Duane Reade's Former General Counsel On Summary Judgment The First Department majority erred as a matter of law in refusing to consider on summary judgment two affidavits from Duane Reade's former General Counsel concerning the parties' interpretation of the term "recover" in the fee agreement. In support of its motion, KBT&F submitted, inter alia, three sworn fact affidavits, two from Michelle Bergman and one from Daniel Goldberg, the two individuals who negotiated the fee agreement. (R. 68-82; 259-62; 1018-19.) Indeed, Ms. Bergman — the former General Counsel of Duane Reade — was the sole Duane Reade representative responsible for negotiating and entering into the fee agreement and thus the only person from Duane Reade with personal knowledge of the operative events. (R. 259-60 TT 2-5; R. 70-72 ¶ 8-12; 1019 ¶ 4.) Both Ms. Bergman's initial affidavit and her second, reply affirmation make clear that Duane Reade understood the fee agreement to include a percentage of whatever value above $4 million Duane Reade ultimately received from the Cardtronics litigation. (R. 259-60 ¶ 4 (confirming that Ms. Bergman understood the contingency fee to cover "whatever amounts above $4 million Duane Reade received" as a result of the litigation, including any settlement.) Indeed, Ms. Bergman's reply affirmation leaves no doubt that Duane Reade intended KBT&F's contingency fee to include the value resulting from a termination of the Cardtronics ATM Agreement. (R. 1019 ¶ 4.) As Justice Catterson recognized in his dissent, "[i]t is beyond dispute that Bergman's affidavit cannot be categorized as 'self-serving.' Bergman is not a party to the action, is not employed by either party, and on the facts of this record, has no 9 KASOWITZ, BENSON, TORRES & FRIEDMAN LLP interest in the outcome of the litigation, financial or otherwise." (Order at 24 (Catterson, J., dissenting).) Moreover, because Ms. Bergman's reply affidavit did not contradict her initial affidavit, its "evidentiary value in defeating summary judgment should not be disregarded." Shapiro v. Blvd. Hous. Corp., 70 A.D.3d 474, 476 (1st Dep't 2010); see also Kalt v. Ritman, 21 A.D.3d 321, 323 (1st Dep't 2005) ("Where, as here, a reply affidavit can be reconciled with prior testimony, it `cannot be regarded as merely a self-serving allegation calculated to contradict an admission made in the course of previous testimony.'"); Assing v. United Rubber Supply Co., 126 A.D.2d 590, 591 (2d Dep't 1987) ("Bald, unresponsive allegations to the effect that [movant's] documents were 'self-serving' are no substitute for the submission of evidence establishing the existence of a genuine issue."). Critically, Duane Reade failed to proffer any evidence contradicting anything contained in Ms. Bergman's affidavits. Duane Reade submitted only an inadmissible affirmation of its lead trial counsel, Charles Dorkey, who had no role in negotiating the fee agreement and no personal knowledge of Duane Reade's understanding of the fee agreement. (R. 265 ¶ 2.) The First Department and trial court's decision to disregard Ms. Bergman's affidavits was in effect a determination of Ms. Bergman's credibility. However, credibility is not appropriately considered at summary judgment. (See Order at 24- 25 (Catterson, J., dissenting).) Therefore, at a minimum, the First Department should have found that there was a triable issue of fact warranting denial of both the motion and cross-motion for summary judgment. The majority applied an erroneous level of scrutiny to what is indisputably a contract between KBT&F and Duane Reade. The parties to the contract fully recognized that an additional fee was to be paid to KBT&F in the event that the litigation resulted in Duane Reade realizing value exceeding $4 million over the life of the Cardtronics ATM Agreement. KBT&F should not be denied its fee, and Duane Reade accorded a windfall, simply because the increased surcharge fees it received over the remaining life of the Cardtronics ATM Agreement were paid to Duane Reade by Chase rather than Cardtronics. 10 KASOWITZ, BENSON, TORRES & FRIEDMAN LLP CONCLUSION For the foregoing reasons, KBT&F respectfully requests that this Court reverse the decision of the First Department that affirmed the granting of Duane Reade's motion for summary judgment and denied KBT&F's motion for partial summary judgment. Respectfully submitted, Aaron H. Marks Attorney for Plaintiff-Appellant cc: Charles E. Dorkey II, Esq. McKenna Long & Aldridge LLP 230 Park Avenue, Suite 1700 New York, New York 10169-0005 (without enclosures) Encls.