520 E. 72ND COM. CORP. v. 520 E. 72nd Owners Corp.

• Decision Date: 20 July 1988
• Docket Number: No. 86 Civ. 7581 (MP).,86 Civ. 7581 (MP).
• Citation: 691 F. Supp. 728
• Parties: 520 EAST 72ND COMMERCIAL CORP., 520 East 72nd Garage Corp., and 520 East 72nd Street Laundry Corp., Plaintiffs, v. 520 EAST 72ND OWNERS CORP., Defendant.
• Court: U.S. District Court — Southern District of New York

691 F. Supp. 728

520 EAST 72ND COMMERCIAL CORP., 520 East 72nd Garage Corp., and 520 East 72nd Street Laundry Corp., Plaintiffs, v. 520 EAST 72ND OWNERS CORP., Defendant.

No. 86 Civ. 7581 (MP).

United States District Court, S.D. New York.

July 20, 1988.

Stults & Marshall by John T. Van Der Tuin, Eric D. Balber, New York City, for defendant.

Abrams, Lerner, Kisseloff, Kissin & Lapidus, P.C. by Steven R. Lapidus, Stanford M. Singer, New York City, pro se.

OPINION

MILTON POLLACK, Senior District Judge.

A contingency fee retainer agreement is challenged by a cooperative corporation as unconscionable, unreasonable and out of all proportion to the value of the legal services rendered, prospectively and retrospectively. For the reasons indicated hereafter, the contingent retainer agreement will be declared null, void and unenforceable and the attorney remitted to a reasonable compensation in quantum meruit.

I. Background

520 East 72nd Street Owners Corp. ("520") is a cooperative apartment corporation. In 1984 it was converted from its status as a privately owned apartment building to cooperative ownership under the provisions of N.Y. General Business Law § 352. As part of the offering plan, the sponsor of the conversion ("the Sponsor") obtained for itself three long-term leases from the new cooperative, 520, at rents well below the market rental obtainable therefor. The leases were of (1) the parking garage in the building; (2) a concession for the laundry facility; and (3) a commercial lease with privileges to the lessee to sublet five apartment units for professional offices. The latter was the most valuable of the leases.

The cash flow to 520 from these leases was inadequate and the leases were burdensome to 520. The general counsel to 520, who possessed considerable experience in the field, advised 520 that relief from the burdensome leases might be available under the Condominium and Cooperative Abuse Relief Act, 15 U.S.C. § 3601 et seq. ("the Act"). That Act was designed to remedy abuses by sponsors of cooperative and condominium conversions who, through self-dealing in the course of conversion to cooperative ownership, retained longterm leases for themselves with the new owner-corporation at rentals well below their market values. Such "Sweetheart Leases," so-called, were subject to termination under the statute where it could be shown that they had been entered into at a time when the cooperative association was still under the voting control of the developer of the conversion plan and the leases were for a term of more than three years. Action to terminate such leases was required by the statute to be undertaken within two years after (i) the sponsor lost control or (ii) the date on which the developer owned 25% or less of the units in the conversion project.¹

A vote of two-thirds of the cooperative owners was required to terminate "Sweetheart Leases" as a predicate for a declaratory judgment of validity of the termination.

The law firm of Abrams, Lerner, Kisseloff, Kissin & Lapidus, P.C. ("Abrams, Lerner") had been retained in 1985 by 520 as its general counsel shortly after the conversion to a cooperative, on an annual retainer fee basis of $5400.00 payable in monthly instalments. Abrams, Lerner also earned fees from 520 from the sales of shares of stock and conveyances of proprietary leases. Mr. Lapidus of the law firm handled the 520 account.

There was little precedent in reported case law, but what there was in 1986 indicated that the New York State Courts were more favorably inclined toward terminating such leases than the Federal Court. In a District Court decision which seemed to involve nearly identical circumstances and legal questions applicable to 520, Judge Whitman Knapp had granted a motion for summary judgment by three corporations affiliated with the sponsor of a conversion, on the ground, inter alia, that the cooperative had negotiated the leases with the sponsor as part of an arm's length dealing during the conversion process. West 14th Street Commercial Corp. v. 5 West 14th Owners Corp., 625 F.Supp. 934 (S.D.N.Y. 1986).

Nonetheless, Mr. Lapidus was of the opinion and so advised 520 that termination of the alleged Sweetheart Leases would almost certainly be validated if litigation thereon were instituted in State Court, because there had been no negotiation between the Sponsor and 520 at the time of the conversion. Mr. Lapidus urged 520 to take a vote of the 520 corporation apartment owners and proceed with a suit to terminate the three leases.

To prepare the directors on the subject, Mr. Lapidus had furnished the president of 520 and distributed to the other directors a legal memorandum prepared in his office for his guidance outlining the statute, the procedure thereunder and the case law. As one director testified, the memorandum was a piece of "legalese" and was, according to the directors, scarcely understood by them.² For ordinary laymen consumption, Mr. Lapidus testified that he had sent to the president of 520 a packet of materials, including a publication entitled "New York Co-op and Condo Insider" and an article from the New York Law Journal explaining the District Court decision in West 14th Street, which was being appealed.

The termination matter was aired at a stockholders annual meeting held by 520 on May 29, 1986. It was pointed out that a vote to terminate had to be taken before October 17, 1986; but the May 29, 1986 meeting ended without any vote being taken on the question of termination of the leases.

Mr. Zastrow, the Sponsor's attorney, testified that as the crowd was dispersing after that meeting, he approached Mr. Lapidus and conveyed an offer authorized by his client to agree to a standstill of the controversy between the cooperative and the Sponsor until the Second Circuit made its determination in West 14th Street. Mr. Zastrow wished to save his client the expense of litigating the termination before the Second Circuit had ruled. He testified that Mr. Lapidus gave him no real response — "he didn't say yes or no" — but said in substance that he would "think about it." Mr. Zastrow made no note or memorandum of the alleged offer. Mr. Lapidus denied ever conversing with Mr. Zastrow or hearing his suggestion.

The 520 owners were troubled by the specter of large legal expenses to be incurred in a termination suit. They had been forewarned by the Sponsor and its attorneys that immense fees had been built up and incurred in the West 14th Street case. The same sponsor or an entity thereof was the sponsor in West 14th Street and in 520. They spoke of having incurred legal fees and costs of approximately $100,000 in West 14th Street.

Mr. Lapidus dismissed the attempt by the Sponsor "to scare the shareholders into believing that they would be subject to huge legal bills if they took the termination." When asked by the Court at the hearing held herein whether he believed his client would be subject to fees of that proportion, Mr. Lapidus replied, "I did not."

The Court later questioned Mr. Lapidus again regarding the picture painted by the Sponsor of hundreds of thousands of dollars in legal fees:

COURT: You didn't believe that and you told your client that you didn't believe it, didn't you?

LAPIDUS: That's correct, your Honor.

At a meeting of the 520 Board members not affiliated with the Sponsor (the Executive Committee) just shortly before the May 29, 1986 annual stockholders meeting, Mr. Lapidus, on questioning, represented to the Committee that taken at his ordinary hourly charges ($225 per hour), he estimated that a litigation of a termination case through to summary judgment would probably involve fees totaling $10,000. This stated estimate was confirmed by notes taken by one of the Board members, Ms. Farley, the treasurer, by Mr. Hamm's testimony and on cross-examination of Mr. Lapidus at the fee hearing. The notes Ms. Farley produced, taken at the May 19, 1986 Executive Committee meeting, stated:

$10,000 initial filing

If it gets to trial —

would get a settlement offer.

Mr. Hamm also testified that he was told by Mr. Lapidus that the legal fees were "not going to be an outrageous amount."

Mr. Lapidus testified:

I told Hamm that I believed that my hourly fees, absent a trial, absent a trial on the facts, would not exceed $10,000. ... This included preparing the papers to commence the action in State Court, and defending the action ... if there was one in Federal Court. It was my belief at that time that ... the matter would be litigated in State Court, and that it would probably cover the making of a motion for summary judgment. ... To start the summons and complaint in State Court and to get a motion made ... for summary judgment ... I believe that the fees on an hourly basis would not exceed $10,000.

He repeated this testimony several times:

My estimate was to get started on the case the hours might come up to $10,000. ... I thought that that might carry us through a motion for summary judgment.

Mr. Lapidus discussed the $10,000 estimate initially with Mr. Hamm; and he did not dispute also discussing it with Ms. Farley.

In response to an inquiry by the Court as to how Mr. Lapidus was able to convince the shareholders that this was a $10,000 case and not a hundreds of thousands of dollars case as pictured by the Sponsor and its attorneys, Mr. Lapidus prepared a memorandum which Mr. Hamm used in sending out letters to the shareholders, prepared the letters themselves and prepared the arguments that the other directors of the Executive Committee used to discuss termination with the tenants.

This $10,000 estimate reasonably had the obvious effect of conditioning the minds of the 520 Board to a fee expectancy of similar proportions, albeit, it was as a measure of the value of non-contingent services through to summary judgment.

Even that estimate apparently did not produce the necessary support for a successful termination vote; the...