Thursday, November 18, 2010
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S.C. Will Not Review $7.5 Million Attorney Fee Award
By a MetNews Staff Writer
The California Supreme Court yesterday left standing an arbitrator’s award requiring a real estate developer to pay more than $7.5 million in fees to a Northern California law firm that represented it in complex environmental litigation.
The justices, at their weekly conference in San Francisco, unanimously denied review of a ruling by the First District Court of Appeal, Div. Five, in Cotchett, Pitre & McCarthy v. Universal Paragon Corporation (2010) 187 Cal.App.4th 1405.
Both the Court of Appeal and San Francisco Superior Court Judge Peter Busch ruled that the award was neither unconscionable nor against public policy.
The Cotchett firm was retained by Universal Paragon Corporation to develop a litigation strategy regarding the onetime Schlage Lock factory site in the Brisbane area of San Francisco. UPC, developer of the 20-acre, $500 million Brisbane Baylands project, purchased property adjacent to the site in 1989.
The Schlage Lock site was contaminated with acid used in metal works and with fuel from nearby railroad operations, and the contamination was migrating to the property acquired by UPC, which wanted to acquire the Schlage site for its project.
UPC, not represented by the Cotchett firm, sued Ingersoll-Rand, the owner of the Schlage site, in 1996, but the parties agreed to dismiss the action and toll the statute of limitations in order to consider a joint remediation plan or an arrangement for UPC to buy the site. Those discussions failed, and UPC cut off talks in 2005 when Ingersoll-Rand insisted that it would not sell without complete indemnity for future litigation related to the contamination, secured by a $200 million line of credit.
UPC then hired the Cotchett firm, paying a limited retainer while longer-term arrangements were discussed. After months of discussion, a retainer agreement was signed granting the firm a 16 percent contingency fee, plus an hourly rate—below the firm’s usual rates—provided that one-half of fees billed on an hourly basis were to be deduced from the contingency.
The agreement also recognized the possibility that real estate might be exchanged as part of a settlement of the action, in which event it was agreed that the 16 percent contingency would be applied to “the greater of (i) the Fair Market Value of the Property, or (ii) the Total Damages as contained in [UPC]’s most recent damages assessment made for settlement purposes.”
The parties also agreed that any dispute regarding fees would be submitted to JAMS in San Francisco for binding arbitration.
The environmental litigation was eventually settled, with Ingersoll-Rand giving UPC the property plus $6 million, along with an assignment of any claims that Ingersoll-Rand might have against the railroad.
The law firm, based on estimates that the settlement value of the case was between $86.5 million and $155.7 million, requested legal fees of over $19 million, or 16 percent of the midpoint, and invoked its right to JAMS arbitration.
The arbitrator, after a two-day hearing, issued a 36-page decision setting the firm’s fees at $7.554 million.
She reasoned that the company’s estimate that it had lost $86.5 million or more was inflated as part of a negotiating strategy, but that a letter from the company to the law firm in 2006, estimating damages at between $50 million and $80 million, was the “most recent damages assessment” as used in the fee agreement.
She thus awarded the firm 16 percent of $50 million, or $8 million, less half of what it had already billed at an hourly rate, and less costs.
The arbitrator rejected the company argument that the contingency agreement was unconscionable, finding that the firm did not have superior bargaining power, that the client was sophisticated and represented by independent counsel, and that 16 percent was a reasonable contingency in comparison to those usually charged. She also noted that the company had called the settlement “stupendous.”
Justice Harry Needham, writing for the Court of Appeal, questioned whether the prohibition on unconscionable fees in the Rules of Professional Conduct opens a binding arbitration award to judicial review.
While an unconscionable fee agreement may be unenforceable, the justice explained, “it does not necessarily follow that public policy requires the court, rather than an arbitrator, to finally determine whether a fee is unconscionable under the Rules of Professional Conduct.”
Assuming that an unconscionable fee award in binding arbitration is subject to judicial review, the justice went on to say, a finding of unconscionability would not be appropriate in this case, either under the Rules of Professional Conduct or the general standard applied in contract cases.
The jurist acknowledged that the fee was several times the firm’s usual hourly rates. But other factors justified it, including the value of the services to the client, the extraordinary complexity of the case and the skill of the lawyers in achieving the result, and the fact that the client—negotiating from a position of equal strength—had given informed consent to the fee arrangement, Needham said.
In other conference action, the justices:
-Left standing an Aug. 3 ruling by Div. One of this district’s Court of Appeal that judges who retire under both the Judicial Retirement System and the Los Angeles City Employees’ Retirement System are not entitled to have their city benefits calculated using their highest salary earned under either one.
The panel in Khan v. Los Angeles City Employees Retirement System (2010) 187 Cal.App.4th 98 ruled 2-1 that the systems do not have reciprocity provisions that would allow Los Angeles Superior Court Judge Abraham Khan, who worked in the Los Angeles City Attorney’s Office before joining the bench, to retire from the city benefit system at his higher judicial salary.
A contrary ruling by a visiting Orange Superior Court judge was based on a misreading of the relevant statutes, the Court of Appeal said.
-Rejected the tendered resignations of several attorneys facing disciplinary proceedings, including former Woodland Hills criminal defense lawyer Robert Michael Nudelman.
Nudelman surrendered his license and consented to the State Bar’s takeover of his insolvent practice in 2007. Officials said he lost financial control of his practice as a result of spending advanced retainer fee deposits—typically in the amount of $50,000 each—instead of using them to pay the firm’s business expenses, such as attorney salaries.
The State Bar said at the time that it had seized 700 files and identified at least 162 active matters. The firm had employed at least 10 lawyers and handled matters in California and in other states.
The Supreme Court last February ordered the State Bar Court to determine whether grounds existed to reject Nudelman’s resignation for failure to refund unearned client fees, or on other grounds, as provided by State Bar rules. Nudelman remains on inactive status, and will be required to pay restitution and penalties if he seeks to resume practicing now that his resignation has not been accepted, the high court said.
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