S. Stern, Henry & Co. v. McDermott

• Decision Date: 17 December 1962
• Parties: S. STERN, HENRY & CO., Plaintiff, v. J. Joseph McDERMOTT, doing business as Brooks & Brooks, and as surviving partner of and successor to the co-partnership doing business under the firm name and style of Brooks & Brooks, Millicent Brooks, as Executrix of the Last Will and Testament of Frederick W. Brooks, and Amity Fabrics, Inc., Defendants.
• Court: New York Supreme Court

Page 778

236 N.Y.S.2d 778

38 Misc.2d 50

S. STERN, HENRY & CO., Plaintiff, v. J. Joseph McDERMOTT, doing business as Brooks & Brooks, and

as surviving partner of and successor to the co-partnership

doing business under the firm name and style of Brooks &

Brooks, Millicent Brooks, as Executrix of the Last Will and

Testament of Frederick W. Brooks, and Amity Fabrics, Inc., Defendants.

Supreme Court, Special Term, New York County, Part I.

Dec. 17, 1962.

Casey, Lane & Mittendorf, New York City, for plaintiff (Samuel M. Lane and Preben Jensen, New York City, of counsel).

Samet, Gordon & Riseman, New York City, for defendant J. Jos. McDermott (Frank H. Gordon and Edward Robin, New York City, of counsel).

Louis J. Paley, New York City, for N. Y. County Lawyers Ass'n, amicus curiae.

Hugo E. Rogers, New York City, for Ass'n of Customs Bar.

GEORGE TILZER, Justice.

At the start it must be noted that pursuant to application made on the return day by Louis J. Paley, Esq., the New York County Lawyers' Association was granted leave to appear amicus curaie in support of defendants motion for summary judgment.

Pursuant to further request of Hugo E. Rogers, Esq., the Association of the Customs Bar was also granted leave to file a brief amicus curiae in support of the motion to dismiss the complaint.

The issue presented in this case is whether customhouse brokers may share in the contingent fees paid to attorneys by importers for legal services rendered in recovering excessive import duties.

The plaintiff is a customhouse broker. The defendant McDermott is an attorney at law, the surviving partner of Brooks & Brooks, a firm of customs lawyers. Since 1951, the plaintiff had acted as customs broker for defendant Amity Fabrics, Inc., and its predecessor corporation. Since 1952, Brooks & Brooks had had a retainer arrangement with the various Amity corporations, providing for a contingent fee, in customs rebate cases, of 50% of any recovery. Commencing in the year 1955, Amity and other importers paid duties on certain imported velveteen cloth. Plaintiff believed that these goods should have been classified under a different paragraph of the Tariff Act of 1930, which would have made them dutiable at a lower rate. Accordingly, plaintiff referred the problem to Brooks & Brooks, as attorneys, pursuant to a long-standing implied agreement and custom known to and approved by Amity, under which the attorneys agreed to divide equally with the plaintiff their contingent fee, if, as and when a refund was obtained from the Government. Brooks & Brooks' contingent fee, so far as these velveteens were concerned, was modified in March of 1955, at plaintiff's suggestion, the attorneys agreeing with Amity to reduce their fee from 50% to 33 1/3% of refunds in excess of $20,000.

Brooks & Brooks filed a series of protests in the United States Customs Court, running through March, 1960. As a result, refunds from the Government became due and payable to Amity, and on the basis of the retainer between Brooks & Brooks and Amity, there became due and owing to Brooks & Brooks total fees in the sum of $18,770.21, of which $13,329.41 was paid, and $5,440.80 remained unpaid. Plaintiff has demanded of Brooks & Brooks its share of said fees ($6,669.71) and has demanded of Amity one-half of the sum still owed by that defendant ($2,720.42), but its demands have been refused. Amity has not appeared formally in the action. Its president, however, has submitted an affidavit in support of plaintiff.

Both plaintiff and Brooks & Brooks, or McDermott, as defendant will hereafter be called, move for summary judgment.

Plaintiff's basic position is that the division of the fee between customhouse broker and attorney was pursuant to a time-honored method by which the broker was compensated for a wide range of important services performed for the importer. Defendant's short answer is that the agreement sued upon is one to divide attorney's fees for the procurement of a claim and is contrary to the public policy of the State of New York, illegal and unenforceable.

The sharing of fees was standard practice in the field of customs law. There was nothing clandestine about it; the importing fraternity enjoyed the benefits of it; and the Treasury Regulations (31.10[n]) acknowledged it. The practice was accepted by the Court of Appeals some sixty years ago (Irwin v. Curie, 171 N.Y. 409, 64 N.E. 161, 58 L.R.A. 830), and was defended thirty years ago by the Association of the Customs Bar as 'not within the mischief at which the common-law rules against champerty, maintenance and barratry are directed'. McDermott's own firm had been paying fees to the plaintiff for at least fifty years prior to 1959. However, in October of 1958, by virtue of action taken by the New York County Lawyers' Association and the Association of the Customs Bar, the latter's by-laws were amended by adopting the Canons of Professional Ethics of the American Bar Association and enlarging Canons 34 and 35 so as to prohibit the practice of customs lawyers sharing fees with customs brokers. A grace period of one year was provided. It was McDermott's refusal to share fees with the plaintiff, derived from business which came to fruition after the close of the grace period, which gave rise to plaintiff's action.

We are thus asked to pass judgment on a way of life which has existed for many years, to say whether a procedure established by long tradition shall continue or whether it should be condemned a contrary to the law and policy of this State. We are fully cognizant of the implications of any holding by this court, one of plaintiff's partners having said that if the brokers are no longer to get their portion of the fees from the attorneys, then it inevitably means that there will be a revolution in the brokerage industry. May we say, further, that we appreciate the specialized services performed by customhouse brokers in the administration of the Tariff Act. We realize that the business of the broker encompasses far more than the entering and clearing of goods, concerning which the broker receives a fee for each shipment; that an importer relies upon his broker for suggestions and advice as to every phase of an import operation. The business of customhouse broker, it has been said, is one demanding 'a sense of responsibility and skill', and a license is issued to engage in such business only after an applicant has satisfied the Treasury Department of his knowledge of customs law and procedure and his fitness to render valuable service to importers and exporters (Union Brokerage Co. v. Jensen, 322 U.S. 202, 204, 64 S.Ct. 967, 88 L.Ed. 1227, Frankfurter, J.). Certainly, in his referral of customs claims the customhouse broker may not be equated with the ambulance chaser. This is not to say, nevertheless, that the practice is a salutary one or that it is not violative of law.

The statutes of our State have undergone expansion since Irwin v. Curie, supra, was decided sixty years ago (Mendelson v. Gogolick, 243 App.Div. 115, 276 N.Y.S. 158). The Irwin case was based on a statute which penalized attorneys only for fee-splitting arrangements. The theory of Irwin was that the layman was an innocent party who might be aided by the courts. But, in 1917, Section 270 of the Penal Law was amended to make it illegal for laymen to 'furnish attorneys * * * to render legal services * * *.' And, in 1935, the Legislature enacted section 276 of the Penal Law, which makes it a misdemeanor for any person, other than an attorney, to agree to share, or to share, legal fees as an inducement to the placing of a claim in an attorney's hands. While the plaintiff, in support of its motion, urges that the customhouse broker 'is a kind of limited lawyer and, in every sense, he is a professional man', the law does not recognize such quasi-lawyer status as an exception to the Penal Law. There is but one exception in the statute--the right of attorneys to agree to divide the compensation to be recovered. A plaintiff must bring himself squarely within that exception.

'The statute expressly recognizes the right of attorneys to agree to divide the compensation to be recovered. That is the only exception provided for in section 275-a [renumbered 276]. The rule is well settled that where one relies upon an exception in the statute to take his case out of the rule laid down in the body of the statute, the person insisting upon the exception must bring himself within it. If the plaintiff in an action on agreement with an attorney for the division of fees desires to avail himself of the exception, he must show that he is an attorney.' (Baldwin v. Lev, 163 Misc. 929, 297 N.Y.S. 963, 966.)

Moreover, experience as a customhouse...