Opinion
No. 6094/13.
10-10-2014
Jeffrey E. TOMEI, Esq., Plaintiff, v. Jeffrey S. SCHWARTZ and A–Z House Corp., Defendants.
Jefferey E. Tomei, Tomei & Associates, Staten Island. Jeffrey S. Schwartz, Law Office of Jeffrey S. Schwartz, Woodbury.
Jefferey E. Tomei, Tomei & Associates, Staten Island.
Jeffrey S. Schwartz, Law Office of Jeffrey S. Schwartz, Woodbury.
PHILIP S. STRANIERE, J.
The matter of fees is important, far beyond the mere question of bread and butter involved. Properly attended to, fuller justice is done to both lawyer and client. An exorbitant fee should never be claimed. As a general rule never take your whole fee in advance, nor any more than a small retainer. When fully paid beforehand, you are more than a common mortal if you can feel the same interest in the case, as if something was still in prospect for you, as well as for your client. And when you lack interest in the case the job will very likely lack skill and diligence in the performance. Settle the amount of fee and take note in advance. Then you will feel that you are working for something, and you are sure to do your work faithfully and well. [Abraham Lincoln, "Notes for a Law Lecture," July 1, 1850(?), Collected Works of Abraham Lincoln, 2:82 (Roy P Basler, ed 1953) ].
"A lawyer's time is his stock in trade." Attributed to Abraham Lincoln.
Probably attributed to Lincoln because the quote has been around for a long time and Lincoln said a lot of really smart, quotable things. The quote is often looked on as the founding doctrine of the billable hour for legal compensation. A system that has generated more than a handful of jokes such as:
Client: Do you charge for consultations?
Lawyer: Yes. I charge $500.00 for three questions.
Client: Isn't that a lot of money?
Lawyer: Yes it is. What's your third question?
Of course, if the lawyer in the joke had executed a written retainer agreement with the client, the incident would not have occurred and there would be no joke.
Plaintiff, Jeffrey Tomei, Esq., as escrowee (Tomei), commenced this stakeholder action pursuant to CPLR § 1006, against the defendants, Jeffrey S. Schwartz (Schwartz) and A–Z House Corp. (A–Z), asking the court to issue an order directing plaintiff as to how to distribute monies being held in escrow from the sale of real property. Defendant Schwartz is an attorney at law and represented himself. Tomei represented himself as the escrow agent, and also appeared on behalf of defendant A–Z House Corp.
BACKGROUND:
The genesis of this litigation arose in September 2008 when Schwartz was representing A–Z in regard to A–Z's purchase of the premises known as 474 Greene Avenue, Brooklyn, New York from Walter Taylor for $260,000.00 pursuant to a written contract. The contract was dated October 14, 2008 and was an "all cash deal." The court notes that unlike contracts in Richmond County, this Kings County real estate contract is actually dated. The closing date in the contract was November 24, 2008. This transaction was scheduled to close on December 22, 2008 but did not when allegedly Taylor became disenchanted with the terms and upset that Schwartz was representing his sister in regard to her interest in this transaction and their mother's estate. Taylor's sister, Ronnielyn Taylor, on October 2, 2008 apparently issued a power of attorney in favor of Schwartz. Why this was relevant is a mystery in that the seller is Walter Taylor individually and not an estate. Also Taylor had his own independent counsel in negotiating the contract of sale to A–Z. In any case it is conceded that Taylor refused to close title as scheduled on December 22, 2008.
A–Z then orally retained Schwartz to commence litigation to compel specific performance of the October 14, 2008 contract. Schwartz undertook to provide this legal service with the commencement of an action in December 2008 for specific performance of the contract. This resulted in the order of the Supreme Court, Kings County from Justice Parthow dated September 8, 2009 directing Taylor to honor the October 14, 2008 contract and close title within thirty days of the order. In spite of achieving the legal goal for which Schwartz had been directed to commence the litigation, for some reason A–Z did not seek to enforce this judgment and compel Taylor to close. The closing took place on January 27, 2011 with Taylor apparently on different terms and conditions than set forth in the October 14, 2008 contract.
A search of the New York City Register–Kings County records in regard to this property, reflects the January 27, 2011 deed being recorded in February 2011. However, there are different parties. The seller is the aforementioned Walter Taylor and the heirs of Brooker Taylor being added as grantors. The buyer is not A–Z, but a new entity, Professional Settlement Services, LLC. The purchase price was $250,000.00. Another deed was recorded in March 2011 between Professional Settlement Services, LLC as seller and Breucklen Properties I, LLC as purchasers, with a purchase price of $425,000.00. In September 2011, Breucklen Properties I, LCC sold the property to parties named Flicker and Mundy for $770,000.00. Apparently someone either severely undervalued the real estate in January 2011 or someone did a major renovation and rehabilitation of the property in a very short period of time.
By letter dated December 2, 2010 A–Z notified Schwartz his services would no longer be needed to complete the closing with Taylor. Plaintiff Tomei became the attorney for A–Z in regard to the purchase. Closing of title took place on January 27, 2011. At that closing a written escrow agreement was entered into between Schwartz and the principal of A–Z. The agreement directed Tomei to hold the sum of $10,000.00 in escrow pending resolution of Schwartz's claim for the legal fees incurred in representing A–Z in the contract negotiations and subsequent litigation concerning 474 Greene Avenue. The agreement recites that Schwartz is asserting a "charging lien" in regard to the services he rendered on behalf of A–Z. It is conceded that the January 27, 2010 date on the escrow agreement is incorrect as it was executed at the closing on January 27, 2011.
As noted above, A–Z does not appear to have been a party to the title transfer on that date. Although there was no testimony in this regard, there is an explanation as to what happened that day which would account for the need to terminate Schwartz's services in regard to a transaction in which A–Z was apparently not participating and would clarify why A–Z was receiving money at that time and was willing to enter into an escrow agreement with Schwartz. The explanation would be that A–Z had entered into a new contract with Taylor at an amount less than the original $260,000.00 sale price, and A–Z had either assigned or "flipped" its rights in the contract to Professional Settlement Services for the $250,000.00 consideration recited on the deed from that transaction. This would have produced monies payable to A–Z which Schwartz could in theory assert a "charging lien" against and would also have provided a fund for the $10,000.00 which A–Z agreed to place in escrow.
There is no indication that Schwartz was discharged for cause which could be used to defeat his claim, nor was there any testimony in that regard.
In spite of this written escrow agreement, Schwartz commenced an action in Supreme Kings on February 3, 2011(Index No. 2454/11) by "emergency order to show cause" to restrain Tomei from distributing the $10,000.00 held in escrow from the closing. In this special proceeding, Schwartz named Tomei, A–Z and A–Z's principal, Linwood Roberts as defendants. This matter was resolved by a "so ordered" stipulation on February 8, 2011 in which Tomei agreed not to release the monies until either directed to by a court or as result of an agreement between the parties. At no time did Schwartz ask the court to hold a hearing or trial to fix the amount of the "charging lien."
Over two years later, Tomei, still holding the $10,000.00 in escrow, commenced this stakeholder action in Civil Court, Richmond County seeking an order instructing him as to how to disburse the monies between the respective claimants.
IT'S A LESSON TOO LATE FOR THE LEARNING
A line from Tom Paxton's "The Last Thing On My Mind."
This litigation is a prime example of the importance of the following rules governing the practice of law.
Rule # 1:GET A WRITTEN RETAINER FOR ALL LEGAL SERVICES–ITINFORMS THE CLIENT OF THE SERVICES TO BEPERFORMED FOR THE FEE, ELIMINATESMISUNDERSTANDINGS, PROVIDES A METHOD TO RESOLVEDISPUTES WITHOUT LITIGATION WHILE IT ENABLES THEATTORNEY TO COLLECT AN EARNED FEE
Rule # 2:There is no Rule # 2.
The above is not a rule that will be taught in an accredited law school or some other academic setting. It is rule generated by the continuing number of graduates from the "Hardknocks School of Law" who are now used car salespersons or who spent an inordinate amount of time trying to preserve their law licenses in response to grievances filed by clients who did not understand the role for which they retained the attorney or costs involved.
This litigation is also a case in point of what happens when attorneys enter into relationships most commonly with real estate brokers or, in this case with an apparent real estate investor, which somehow create the impression in the broker's/investor's mind that the broker/investor "owns" the attorney, his/her time and his/her services because the broker/investor refers some closings to the attorney. If the broker is merely referring a seller or purchaser, then obviously the lawyer is to be retained by that person as the client and has no obligation to the referring broker. If the investor is the client then the agreement should be with the investor. In either situation, the lawyer is not to sacrifice his or her independence to the whims of the client.
The entire misunderstanding which arose between Schwartz and A–Z could have been avoided had Schwartz entered into a written retainer agreement with the principal of A–Z in regard to each transaction separately. It would have made clear what services the attorney was to perform in regard to the purchase or sale of this and any other parcel of real estate A–Z sought to either buy or sell. It would have made it clear to the client that litigation is not included in the legal fee to be paid for services in regard to those services customarily performed in the purchase and sale of real estate. If the attorney wants to give the client unlimited control of attorney's time by including services rendered in all litigation, and appeals as part of the legal fee for the real estate transaction whether it is $500.00, $1,500.00, $2,500.00 or some other flat rate fee, at least the parties would know what are their respective obligations. The fact that many attorneys often fall into creating this "free legal service mentality on the part of their clients trap," shows that in legal education more time should be spent on the "ins and outs" of the everyday practice of law, how to be a professional and maintain client relationships, and less on the rule against perpetuities.
Another pitfall of this scenario is what happens if the attorney, as the closing attorney and now litigation counsel for the client, such as A–Z in the specific performance case, has to become a witness at a trial on the issues arising at the aborted closing? Does an attorney really want to be questioned under oath about the details of the transaction? How do you do direct or cross-examination of yourself? What happens if the attorney finds himself/herself now in a conflict with the position of the client? And when you inform the client that you now have to hire someone else to participate in the trial, who do you think the client will expect should pay for the additional legal assistance? Does anyone else think not having a written retainer at the inception of the relationship is a bad idea?
The parties indicated that Schwartz had been representing the principal of A–Z from the mid–2000's in regard to A–Z's purchase and sale of real estate. Apparently A–Z is in the business in purchasing homes, doing some renovation, and "flipping" them to a new purchaser. A search of Department of State licensing records discloses that neither A–Z nor Linwood Roberts are licensed real estate brokers. No broker is listed in the contract as having been involved in the transaction.
Traditionally attorneys charge a flat fee for residential real estate transactions and do not do them on an hourly basis. The "thudding" sound you hear is that of all the hourly billing Manhattan attorneys passing out and hitting the floor at the thought of such an arrangement. Lawyers agree to a flat fee arrangement in residential real estate transactions because if they actually charged on an hourly basis for the services rendered on a residential real estate transaction their legal fee might approach the commission received by the real estate broker, and of course, no one would want to hire a lawyer under those circumstances. Especially because when there is a problem after the closing the first person the client calls is the real estate broker right? Not it is the lawyer; the professional, with a license and a fiduciary duty to the client and whom the client expects to fix the situation whether the lawyer had any involvement in creating it.
Apparently on none of the real estate transactions over a several year period where Schwartz represented A–Z did Schwartz and A–Z ever have a written retainer agreement. This system works perfectly well if there are no problems, but unlike "fairy tales," such an arrangement rarely leads to the parties "living happily ever after." Once a dispute develops, the lawyer as the professional is going to be the party with the burden of establishing that the client was informed and not misled. One way to avoid this situation is to have a written retainer.
Linwood Roberts, as the principal of A–Z testified, the understanding between them and the practice over the course of their dealings, was that the lawyer, Schwartz, would only get paid if a transaction actually closed. This too, is a common practice in residential real estate transactions, the attorney only collects a fee if the deal closes. In effect, the lawyer consents to become the "partner" of the client sharing the "profits" and "losses." This practice is accepted by many members of the bar as a standard method of conducting business. The 13th Amendment to the U.S. Constitution only abolished "involuntary servitude" so there is no prohibition against "voluntary servitude," that is agreeing to work for free.
Although, as testified as what was the practice here, if the lawyer and the referring broker who is also a participating principal in the transaction, are only getting paid if title closes, is the lawyer engaging in a practice that is prohibited by ethics rules? At the time this situation arose in 2008 it was a violation of the Code of Professional Responsibility to form a partnership with a non-lawyer where any of the activities consists of the practice of law [22 NYCRR § 1200.18] This rule is still in the Rules of Profession Conduct as Rule 5.4(b) which went into effect as of April 1, 2009.
Query. So if the lawyer is only paid if the title closes, is the lawyer entering into a business relationship with a non-lawyer whose livelihood is to buy and sell buildings by linking compensation to the activities beyond the attorney's control which are conducted by non-lawyers?
Another problem that this relationship raises is that although labeled a flat fee compensation system, is it not really a "contingency fee arrangement?" Schwartz is only agreeing to be paid if the matter closes. His compensation is determined not by the extent of the legal services rendered on every transaction, but only if his client A–Z is successful in buying or selling the property. Although contingent fee relationships are customary in litigation, nothing in the rules prohibits it from being used to obtain legal services in other matters. If it is a contingency relationship then the Rules of Professional Conduct, Rule 1.5(c), is applicable. This Rule provides:
A fee may be contingent on the outcome of the matter for which the service is rendered, except in a matter in which a contingent fee is prohibited by paragraph (d) or other law. Promptly after a lawyer has been employed in a contingent fee matter, the lawyer shall provide the client with a writing stating the method by which the fee is to be determined, ...
As set forth below, there is no penalty set forth either in any statute or the Rules if an attorney fails to provide the client with a written retainer or letter of engagement. Although the failure to do so may trigger a disciplinary complaint by the client.
A question not to be addressed in this decision is whether attorneys can report the time spent on uncompensated "busted" closings as pro bono legal services.
A much better practice would be to have a written retainer with the client setting forth what services will be provided and the fee to be incurred for such services. For instance, differentiating between the charge for: negotiating, drafting and reviewing the contract of sale; reviewing title reports and eliminating objections of title; reviewing mortgage commitments and complying with the terms and conditions therein which are of a legal nature and not the client's responsibility; and preparing and attending the closing. If the deal does not close, an attorney would at least be compensated for services rendered to date and the client would know those expenses had been incurred in advance. The current "contingent fee" system lets an attorney work for free and to forfeit an earned fee solely due to events not under the attorney's control.
ISSUES PRESENTED:
A. Does a Charging Lien Exist in Schwartz's Favor?
The law recognizes two categories of liens that an attorney may assert. There is a general or retaining lien which arose at common law and applied to papers or property of the client in the possession of the attorney. A retaining lien applies to any amount due the attorney for professional services rendered to the client with respect to any matter. For instance, Schwartz might have been able to assert a retaining lien in regard to the Greene Avenue, closing, the subsequent litigation and any other files of A–Z on which he was working. However, he did not. A charging lien applies only to the proceeds obtained from a particular piece of litigation and may be enforced to obtain the reasonable value of the legal services and disbursements incurred in that lawsuit [Kaplan v. Reuss, 113 A.D.2d 184 (1985) ].
The escrow agreement and the Supreme Court action filed by Schwarz both refer to Schwartz only asserting a "charging lien" and not a "retaining lien." Charging liens are recognized by statute. Judiciary Law § 475"attorney's lien in action, special or proceeding" provides:
From the commencement of an action, special or other proceeding in any court ..., or the service of an answer containing a counterclaim, the attorney who appears for a party has a lien upon his client's cause of action, claim or counterclaim, which attaches to a verdict, report, determination, decision, judgment or final order in his client's favor, and the proceeds thereof in whatever hands they may come; and the lien cannot be affected by any settlement between the parties before or after judgment, final order or determination. The court upon the petition of the client or attorney may determine and enforce the lien.
Because Schwarz commenced an action for specific performance in Supreme Court, Kings County and was successful in obtaining that relief, the statute would seem to permit Schwartz to assert a "charging lien" in regard to the litigation only. No charging lien would exist for the fees claimed due in regard to negotiating the purchase of the real property as that is not work performed in regard to the litigation. It should be noted in that Supreme Court action Schwartz only sought specific performance and did not seek the alternative relief of money damages.
The above being said, there is a major problem with claiming a statutory charging lien. There is no money awarded in an action for specific performance. The theory supporting the existence of the charging lien is that the lawyer's labor created a fund from which the client will be compensated by the defendant or some third party. "In other worlds, the litigation or settlement must result in more than the mere entry of a judgment on behalf of a client; there must be proceeds from the litigation upon which the lien can affix" [Chadbourne & Parke, LLP v. AB Recur Finans, 18 AD3d 222 (2005) quoting Banque Indosuez v. Sopwith Holdings Corp., 98 N.Y.2d 34, 44 (2002) ]. That there is no fund generated in this specific performance litigation against which to assert the charging lien is further supported by the fact that A–Z was the purchaser seeking to compel transfer of title to it and would be paying the seller monies to complete the transaction and not receiving any funds.
In would seem then that Schwartz should be denied any right to assert the charging lien. However, the written agreement entered into by the parties on January 27, 2011 created a charging lien by its terms where none previously existed. The principal of A–Z being represented by counsel other than Schwartz at that time, by contract created a charging lien in favor of Schwartz and posted the sum of $10,000.00. The record of the January 2011 transaction discloses that A–Z was not even the buyer at that closing, it was Professional Settlement Services. Unless A–Z was somehow being compensated at the closing in a manner not made part of this court's record, at that time A–Z was not paying out money and should not have been receiving any to fund the escrow amount.
The fact that A–Z was not a party to the January transaction further undercuts reaching a conclusion that Schwartz had a right to even assert a "charging lien" that would in any way effect the real property. A–Z by abandoning its judgment authorizing specific performance of the October 2008 contract also negated any legal interest it might have had in the real property. Had Schwartz known that he was not going to be paid when he obtained the judgment of specific performance in 2009, he could have made application in that action to have the court fix a charging lien in his favor for the services rendered in the litigation [Phillip v. Zanani, 21 Misc.3d 1130(A) (2008) ] Although there is case law that appears to prohibit filing a motion in the underlying action to fix a charging lien limiting the lawyer to commence a special proceeding it that regard to enforce the right to collect legal fees [Pemberton v. Dolphin Development Corp., 134 A.D.2d 23, (1987) ]. By the time he learned he was not going to be paid, it was more than a year later, A–Z was no longer purchasing the property, so their was no interest in the property to which the charging lien could attach. Apparently had A–Z actually went into title, Schwartz could have reduced the charging lien to a judgment, asserted the judgment of the charging lien against the real property, taken steps to perfect it as a lien, and including enforcing it against any real property A–Z owned in the event A–Z sold the property.
As a result A–Z voluntarily created a fund against which Schwartz could assert the charging lien. Based on what is before the court, A–Z could have refused to enter into the agreement and told Schwartz, the same thing that Nathan Detroit told Miss Adelaide in Frank Loesser's "Guys and Dolls," that is "Sue Me."
The parties by agreement created a "charging lien" where none existed in favor of Schwartz for his work in obtaining a judgment of specific performance.
B. Was a Retainer Agreement Required?
It is agreed that there was no written retainer agreement between Schwartz and A–Z in regard to representing A–Z for the 2008 purchase of 474 Greene Avenue. Judiciary Law § 474 states: "The compensation of an attorney or counsellor for his services is governed by agreement, express or implied, which is not restrained by law, ..." The statute does not require a written retainer.
Statute is not gender neutral.
Not having a written retainer apparently was the custom and practice between the parties. When the 2008 transaction did not close, A–Z hired Schwartz to bring a specific performance action in Supreme Court, Kings County (Index # 34460/08). It is agreed that there was no written retainer for the litigation either. A–Z's principal testified he believed that bringing the litigation was included in the services he expected Schwartz to render as part of the oral agreement for Schwartz to be counsel on the purchase. Schwartz denied that the understanding was one for "all inclusive" service.
At trial Schwartz presented his records indicating the services performed, time spent and amount billed. Clearly Schwartz successfully fulfilled his role in the litigation and obtained a court order of specific performance of the 2008 contract.
However, as the relief granted in the Supreme Court action was only for specific performance, there is no money award in favor of A–Z. As there was no monetary award, then what is there for Schwartz to assert his charging lien against? Schwartz will have to establish the value of his legal services based on "quantum meruit" and from his books and records in a plenary action. To date he did not commence such an action. The litigation he commenced was to compel Tomei to hold the money in escrow pending resolution of the dispute and not to have the court fix his legal fee.
For some unexplained reason, A–Z did not seek to enforce the court order and pursue the closing of title at that time. Had A–Z done so, at a minimum Schwartz would have been paid his fee for the work done in connection with the closing. The parties might also have resolved any fee dispute arising because of Schwartz's expectation of payment for the litigation.
Although there is no statute mandating a written retainer between lawyers and their clients, the Rules of Professional Conduct do provide some guidance to lawyers in this regard.
Part 1215 of the Rules of Professional Conduct sets forth the rules for requiring a "Written Letter of Engagement" between an attorney and a client. It provides:
§ 1215.1 Requirements
(a) Effective March 4, 2002, an attorney who undertakes to represent a client and enters into an arrangement for, charges and collects any fee from a client shall provide to the client a writtenletter of engagement before commencing the representation, or within a reasonabletime thereafter;
(1) if otherwise impracticable; or
(2) if the scope of services to be provided cannot be determined at the time of the commencement of representation....
(b) The letter of engagement shall address the following matters:
(1) explanation if the scope of the legal services to be provided;
(2) explanation of attorney's fees to be charged, expenses and billing practices; and
(3) where applicable, shall provide that the client may have a right to arbitrate feedisputes....
(c) Instead of providing the client with a written letter of engagement, an attorney maycomply with the provisions of subdivision (a) of this section by entering into a signed written retainer agreement with the client, before or within a reasonable time after commencing representation, provided that the agreement addresses the matters set forth in subdivision (b) of this section.
§ 1215.2 Exceptions
(a) representation of a client where the fee to be charged is expected to be less than $3000;
(b) representation where the attorney's services are of the same general kind as previouslyrendered to and paid for by the client; or
(c) representation in domestic relations matters....
It should be noted that the Rule does not provide any penalty when an attorney fails to comply with the Rule [Seth Rubinstein, PC v. Ganea, 41 AD3d 54 (2007) ]. Common sense would suggest that forfeiture of the fee should be a penalty, but that is not the case. Courts have held that there is no penalty in non-matrimonial actions because the rules governing matrimonial retainers do provide that an attorney cannot to collect a fee in the absence of a written retainer matrimonial action [Part 1400; Rule 1.5(d)(5)(ii) ] and the absence of any similar language in regard to non-matrimonial retainers, creates a presumption that the fee recoverable. However, when an attorney fails to comply with Rule 1215.1 the attorney must seek payment under "quantum meruit." In order prevail on a quantum meruit claim the attorney has the burden of proving the terms of the retainer and establishing that the terms of the alleged fee arrangement were fair, fully understood, and agreed to by the client [Gary Friedman, PC v. O'Neill, 115 AD3d 792 (2014) ].
The reason for not including a penalty in non-matrimonial situations is noted in Reingold & Tucker v. Golia, 38 Misc.3d 1214(A) (2013), where the court cited then Chief Administrative Judge Lippman's statement that, "this rule is not about attorney discipline in any way, shape or form, and we certainly do not expect in any significant degree there to be a large number of disciplinary matters coming out of this rule." The idea was that establishing some standards for attorneys to use as guidelines when first being hired by a client would motivate the attorney and client to use fee arbitration if a dispute arises. But, as a practical matter, without a written retainer, how is the client going to be made aware of the fee dispute arbitration program?
In spite of that well intentioned motivation, in reality what happens is that the client seeks redress by filing a "grievance" or ethics complaint against the lawyer alleging a fee is due. The lack of a monetary penalty in the Rule means the lawyer is permitted to bring a civil action to recover his fees based on quantum meruit. In all likelihood such an action results in the client raising as a defense, "legal malpractice." This means the lawyer is now notifying his malpractice insurance carrier to defend the client's counterclaim. Let us think about this. Responding to an ethics complaint or walking away from the fee? Defending a malpractice counterclaim with a potential increase in premiums or forgoing the fee? It would seem to be a "no brainer." When there is a fee dispute it is obvious that the attorney faces potential problems on at least two fronts and "You don't need a weatherman to know the way the wind blows. " Anytime an attorney is defending a malpractice claim or responding to a grievance it is not good.
A line from Bob Dylan's, "Subterranean Homesick Blues."
Schwartz was not required to have a written retainer with A–Z for either the real estate transaction or the subsequent litigation. He is entitled to prove his allegation that he is entitled to legal fees based on "quantum meruit." In order to recover on a theory of quantum meruit, Schwartz, as the attorney, must establish (1) the services were performed in good faith; (2) A–Z as the person to whom they were rendered accepted the services; (3) there was an expectation of compensation by the attorney; and (4) the reasonable value of the services allegedly rendered [Garfunkel Wild, PC v. Estate of Kaplan, 41 Misc.3d 1220(A) (2013) ].
C. Is Schwartz Entitled to Payment for Services in Regard to the Purchase of 474 Greene Avenue?
Applying the above Rules of Professional Conduct to the facts of this case, it must be concluded that no engagement letter or written retainer was required for the work Schwartz performed for A–Z in regard to the December 2008 transactions. That work fell within exceptions (a) and (b) of Rule § 1215.2 in that the anticipated fee for the real estate transaction is based on past dealings of the parties and, based on the testimony of the parties, would have been in the $2,500.00 range and not in excess of $3,000.00 so as to trigger the need for a written retainer. Further, the terms and conditions of the relationship had been established by the parties over a several year period involving numerous other real estate purchases and sales.
The principal of A–Z testified that in the past if the deal did not close, Schwartz was not paid. Schwartz was unable to contradict this by producing any documentation to establish that he received either the entire anticipated fee or a reduced amount when a transaction did not close. As a result he cannot collect a legal fee for services rendered prior to December 22, 2008 in regard to the purchase of the property. Schwartz cannot prove the terms of his agreement for compensation for the Greene Avenue closing. He did produce a single general statement of account including hours he alleges he spent on the contract phase of the transaction and on the litigation. This totaled $2,615.00 for hours of work in regard to the contract. However, such records cannot be used to establish a right to payment in regard to the closing under quantum meruit because the testimony is that he and A–Z had established a course of dealing whereby no fee was paid unless the transaction closed. It is uncontroverted that the transaction did not close and that the reasons were the actions of the seller and not A–Z.
Schwartz could have avoided this by entering into an engagement letter or retainer agreement with A–Z either when they first started working together which would cover all transactions so long as the relationship existed or have the parties execute a new agreement on each transaction. Schwartz did neither. He is the professional, an attorney at law. The Rules of Professional Conduct strongly recommend reducing the terms of the understanding with the client to writing. Schwartz could have done so and elected not to. He must bear the cost of his own inability to act as a responsible professional. Attorneys should learn that having a written retainer is every transaction should be the rule and not the exception.
Schwartz is not entitled to be paid for any services in regard to the real estate transaction aspect of the purchase of 474 Greene Avenue by A–Z.
D. Is Schwartz Entitled to Payment in Regard to the Litigation?
Unlike the real estate transaction Schwartz may be entitled to payment for the litigation. Schwartz has produced books and records reflecting the work performed obtaining an order of the Supreme Court directing specific performance of the 2008 contract. The fact that A–Z chose not to enforce this right, renegotiated the contract with the seller and subsequently closed the transaction using Tomei and not Schwartz does not deprive Schwartz of the right to be compensated for his legal services in the litigation. There was no denying that A–Z was involved in the ultimate sale although title vested in Professional Settlement Services. The exact role of A–Z was not explained at trial.
The evidence establishes that A–Z asked Schwartz to commence litigation to enforce the original contract, Schwartz did so and was successful. It was also testified to that the deal closed in January 2011 at a lower purchase price because there was a fire at the premises and the seller received insurance proceeds which made him willing to sell at a lower price. Therefore, it appears that A–Z or the ultimate purchaser actually benefited financially by not closing the original transaction and had itself a motive not to enforce its right to specific performance achieved through Schwartz's efforts in the Supreme Court.
Representing a client in litigation arising from breach of a real estate contract of sale, is not the type of service typically included in a flat fee agreement for legal work involved in the closing. It is separate and distinct legal services and attorneys who know what they are doing apprise their client of that fact when they are first hired to do the closing. There is no evidence that Schwartz in the past did litigation for "free" when there was a contract breach that resulted in litigation. But of course, any inkling that the "unsophisticated" client expected the service was included could have been dispelled by Schwartz or any attorney having given the client notice of the services to be rendered in a letter of engagement or some other written documentation such as an e-mail or a letter to the client memorializing what was the extent of their oral understanding as to what services the lawyer would perform for the fee. Because there is none, any misunderstanding arising on the part of the client will be construed against the attorney who if not having the legal and ethical obligation to do so, should have had enough sense to generate some memorandum of the understanding.
Based on his time sheets, it appears that between September 5, 2008 and May 5, 2009, Schwartz's hourly rate went from $325.00 to $350.00 to $400.00. He alleges that he is owed $16,973.95 for 45.7 hours of legal services, which includes fees and expenses. There is another bill showing more money due ($17,798.95) and commencing at an earlier date. The court is rejecting that bill and accepting the one for the lower amount placed into evidence by Schwartz.
In view of the fact that there is no written agreement between the parties, there is no indication that A–Z ever agreed to any specific hourly rate including the initial rate let alone to any increases. Schwartz did not explain why his hourly rate seemed to increase without notice to anyone or whether the different rate was because work was being performed by a para-legal or another less experienced attorney in Schwartz's office. Schwartz neither testified as to what was his customary hourly rate or produced a witness to testify as to what was the customary and usual hourly rate charged by attorneys in Kings County in 2008 or 2009.
Further review of Schwartz's billing records discloses that he has included time charges for work performed on the Taylor matter between September 5, 2008 and December 22, 2008 the date of the aborted closing. Schwartz is not entitled to assert any lien for work done in regard to the closing. His contractual charging lien can only be asserted against the time he spent on the specific performance litigation. The billing records show eight(8) hours of services totaling $2,615.00 during that period. That amount must be deducted from his claim. This reduces the claim from $16,973.95 to $14,358.95 and the time spent on the litigation to 37.7 hours.
Because of the lack of any such testimony and the lack of any agreement by A–Z to pay a particular rate, the court finds that $250 .00 an hour is a customary and usual legal fee charged by attorneys in Brooklyn and Staten Island for litigation services in 2008 and 2009. As such the court is reducing the hourly rate to $250.00 for all services in regard to the litigation. The total due Schwartz is then $9,425.00 for legal services in regard to the litigation plus expenses of $93.95. This totals $9,518.95. One of the factors the court considered in making this award is that the principal of A–Z is not an unsophisticated first time home buyer. He is experienced in real estate transactions and his business is buying and selling properties. He is well aware that lawyers are paid for their services and have an expectation of compensation when performing legal work for a client.
As noted above, the Rules of Professional Conduct do not provide for any financial penalty for failure to have an engagement letter or written retainer with the client. This means Schwartz is entitled to be paid based on quantum meruit for his litigation services. The court will make a determination solely because the stakeholder has requested that relief. As noted above, Schwartz should have commenced an action to have the value of his services fixed by the court and he did not. A–Z will have to investigate whether it has any redress against Schwartz for his failure to reduce their agreement to writing.
Schwartz could have avoided all of this by merely following the Rules of Professional Conduct.
E. Did Schwartz Have to Offer A–Z Fee Dispute Resolution?
Part 137 of the Rules of the Chief Administrative Judge became effective January 1, 2002 and apply "to all attorneys admitted to the bar of the State of New York who undertake to represent a client in any civil matter." As this dispute arises from a failure of A–Z to pay legal fees, the question must be asked whether Schwartz had to offer A–Z the opportunity to arbitrate pursuant to Part 137.
There is disagreement between the First and Second Department as to whether an attorney is required to send a notice of arbitration to a client in the absence of a fee disagreement with the client. The First Department held that proof of offering notice to arbitrate is a condition precedent to bringing a lawsuit to collect legal fees from a client [Paikin v. Tsirelman, 266 A.D.2d 136 (1999) ]. The Second Department still adheres to the case law arising before Part 137 was instituted in 2002 and is based on prior Part 136 which applied only to matrimonial actions fee disputes [Scordio v. Scordio, 270 A.D.2d 328 (2000) ]. In the Second Department there is no need to offer fee arbitration to a client unless the client specifically disputed the amount of bill. Silence by the client was deemed to be assent or consent to the reasonableness of the charges.
For a full discussion of the idea of silence is consent see Robert Bolt's play and movie "A Man For All Seasons." It should be noted the Sir Thomas More, lost his head over this issue, not just figuratively but actually. More the play also said, "It profits a man nothing to give his soul for the whole world, but for rules?" Lawyers should keep these words in mind when trading there independence for referrals.
There has been some increasing disagreement with the Second Department rule by lower courts in that Department [Noel F. Caracio, PLLC v. Thomas, 29 Misc.3d 1230(A) (2010) ; Messnger v. Deem, 26 Misc.3d 808 (2009) ; Wexler & Burkhart, LLP v. Grant, 12 Misc.3d 1162(2006) ]. These courts have noted that Rule 137.1(b) lists only eight situations where offering arbitration as set forth in Part 137 is inapplicable. Therefore absent one of these eight exceptions an attorney must offer participation in the program to a non-paying client. These cases work from the presumption that if not being paid for any reason, the attorney should offer fee dispute resolution to the client, because not to do so undercuts the very purpose of the Rule to provide "for the informal and expeditious resolution of fee disputes between attorneys and clients through arbitration and mediation" [§ 137.0]. The interpretation requiring the offering of the program to the client would be in conformity with the Chief Administrative Judge's reasoning quoted above from Reingold & Tucker v. Golia, supra.
A review of the listed exceptions to application of Part 137 does not include the common situation where the client receives a bill, does not object to it but does not pay it. Therefore, unless one of the listed exclusion applies to a particular fact pattern, an attorney must offer fee dispute resolution to the client. This procedure is set forth in § 137.6. There is no indication in the record of this case that Schwartz made such an offer as required by the Rule to A–Z.
Clearly the amount Schwartz claims he is owed for his legal work, $16,973.95, is within the monetary boundaries set forth in § 137.1(b)(2) which excludes amounts less than $1,000.00 or more than $50,000.00. The only clause which would potentially take this dispute out of the coverage of Part 137 is exception number six which provides: "disputes where no attorney's services have been rendered for more than two years" [§ 137.1(b)(6) ].
The court is left to examine if more than two years elapsed since the services were rendered to A–Z which triggered the obligation to notify A–Z of the right to fee dispute resolution. Schwartz rendered the services in regard to the closing of Greene Avenue between September and December 2008. The litigation was commenced with the preparation of the summons and complaint and notice of pendency on or about December 23, 2008 and ended with the court order directing the sale of the property from Taylor to A–Z on September 8, 2009. Schwartz's billing records show time charges being incurred between September 5, 2008 and October 14, 2010 for his work on this litigation.
The escrow agreement memorializing the fee dispute was signed on January 27, 2011 and Schwartz brought his Supreme Court action to obtain an order to compel Tomei holding the $10,000.00 in escrow on February 2, 2011. Clearly the date that Schwartz became aware that A–Z did not intend to pay him, January 27, 2011 was within two years of the last date services were rendered to A–Z, October 14, 2010. Therefore, under Part 137, Schwartz was required to offer A–Z fee dispute resolution. Had Schwartz sought to collect his fee by bringing litigation, as part of his prima facie case he had to assert that notice to arbitrate was sent to the client, and the client elected not to participate or the dispute is not covered by the part [§ 137.6(b) ]. He cannot establish that he complied with this rule.
The fact that Schwartz did not do so at this point is moot. It makes no sense to stay this action and require the parties to exhaust their Part 137 remedies. Even if the parties had participated in the program, they each would have a right to a trial de novo if dissatisfied with the results of the process and would be before a judge seeking judicial resolution of the dispute. Further, this is an application by the stakeholder to resolve the extent of his obligation in that regard. To force fee dispute resolution on the parties at this point would mean Tomei would have to continue to hold the monies in escrow. The court of course could take that tact and order payment of the $10,000.00 into court until that process was completed. The court elects not to.
Conclusion:
Perhaps the following words from Bob Dylan best sums up the results of an attorney failing to have a written retainer with a client.
I ain't a-saying you treated me unkind.
You could've done better, but I don't mind.
You just kinda wasted by precious time.
But don't think twice-it's alright.
From Bob Dylan's "Don't Think Twice."
The escrow agreement entered into between A–Z House Corp. and Schwartz provided that Tomei would hold $10,000.00 posted at the time of the sale of 474 Greene Avenue in January 2011 concerning Schwartz's assertion of a charging lien for his services in regard to the original transaction and litigation. The agreement provided that within seven days the parties would either resolve the matter amicably or one of them would commence litigation. Neither of them took any steps to comply with the terms of the escrow agreement, although Schwartz did bring his Supreme Court proceeding within seven days of the agreement. However, that action did not seek to have the value of the lien determined. The escrow agent brought this action for an order directing him to whom to release the monies.
Based on the foregoing, Schwartz is not entitled to any payment in regard to the legal services rendered in regard to the 2008 contract to purchase 474 Greene Avenue. Schwartz has established that the fair and reasonable value of the legal services he rendered in regard to the Supreme Court specific performance litigation is $9,518.95 including expenses.
Tomei is directed on or before November 15, 2014 to release the $9,518.95 to Schwartz in full payment of his legal fees of $9,518.95 for the specific performance litigation. The balance of $481.05 will be released to A–Z House Corp. The payment to Schwartz and A–Z will relieve Tomei of any obligation as the stakeholder pursuant to the escrow agreement of January 27, 2011. The court is not entering a judgment in Schwartz's favor for $9,518.95 it is merely making a finding that he is apparently entitled to that amount for the services he rendered in the specific performance litigation and that he has a contractual charging lien in that amount against A–Z.
Perhaps lawyers reading this decision will realize the importance of reducing all agreements with clients to writing and adopt these words from Bob Dylan.
Gonna change my way of thinking
Make myself a different set of rules.
Gonna put my good for forward
And stop being influenced by fools.
From Bob Dylan's "Gonna Change My Way of Thinking."
Exhibits, if any, will be available at the office of the clerk of the court thirty days after receipt of a copy of this decision.
The foregoing constitutes the decision and order of the court.