New York Law Review

Tag: unconscionability

  • Lawrence v. Graubard Miller, 11 N.Y.3d 588 (2008): Enforceability of Revised Attorney Retainer Agreements

    Lawrence v. Graubard Miller, 11 N.Y.3d 588 (2008)

    A revised attorney retainer agreement entered into after representation has begun is enforceable if it is not procedurally or substantively unconscionable, considering the client’s understanding, the risks assumed by the attorney, and the proportionality of the fee to the services rendered.

    Summary

    Alice Lawrence, after paying Graubard Miller approximately $18 million in legal fees related to a protracted estate litigation, entered into a revised retainer agreement for a 40% contingency fee. After a favorable settlement, Lawrence disputed the fee and sought to reclaim gifts she had given to the firm’s partners years earlier. The court found the revised retainer agreement enforceable because Lawrence understood its terms, the firm bore significant risk, and the fee, while substantial, was proportional to the result achieved. The claims regarding the gifts were deemed time-barred due to the lack of continuous representation tolling.

    Facts

    Alice Lawrence retained Graubard Miller in 1983 to litigate her late husband’s estate against his brother, Seymour Cohn. Over two decades, Lawrence paid the firm $18 million in hourly fees. In 2004, facing uncertain outcomes and high costs, Lawrence sought a new fee arrangement. Following an unfavorable ruling and settlement negotiations, she agreed to a 40% contingency fee. In 1998, after a large distribution from the estate, Lawrence gifted substantial sums to three Graubard partners. After the case settled in 2005 for over $100 million, Lawrence disputed the contingency fee and sought return of the gifts.

    Procedural History

    Graubard Miller sued in Surrogate’s Court to compel payment of its fees. Lawrence sued Graubard and the attorneys in Supreme Court, seeking rescission of the revised retainer agreement and return of fees and gifts; the Supreme Court action was removed to Surrogate’s Court. A Referee found the revised retainer agreement not unconscionable when made, but unconscionable in hindsight. The Surrogate affirmed the fee ruling but set aside the gifts. The Appellate Division modified, finding the revised retainer agreement unconscionable, reinstating the original hourly agreement, and upholding the return of the gifts. The Court of Appeals reversed the Appellate Division’s order.

    Issue(s)

    1. Whether the revised retainer agreement was procedurally unconscionable because Lawrence did not fully understand it?

    2. Whether the revised retainer agreement was substantively unconscionable because the fee was disproportionate to Graubard’s risk and effort?

    3. Whether the statute of limitations on the Lawrence estate’s claim for return of the gifts was tolled by the continuous representation doctrine?

    Holding

    1. No, because Lawrence was a sophisticated client who understood the agreement and sought it herself, and her accountant reviewed it.

    2. No, because Graubard undertook significant risk, and the $44 million fee was proportional to the $111 million recovery.

    3. No, because the gifts were a separate financial transaction, not the subject of ongoing legal representation.

    Court’s Reasoning

    The Court of Appeals found that the revised retainer agreement was not procedurally unconscionable, as Lawrence was fully informed and understood the agreement. The court emphasized that Lawrence was a sophisticated businesswoman, actively involved in the litigation, and had the agreement reviewed by her accountant. The court rejected the argument that Graubard exerted undue influence over Lawrence, noting her history of firing professionals at will.

    The court also determined that the agreement was not substantively unconscionable. It acknowledged that while $44 million was a large fee, Graubard undertook significant risk in entering the contingency fee arrangement, including the risk of Lawrence terminating the agreement or the litigation continuing for years without additional compensation. The court stated that “the contingency system cannot work if lawyers do not sometimes get very lucrative fees, for that is what makes them willing to take the risk.” Further, the court considered the value of Graubard’s services to be the $111 million recovery obtained for Lawrence.

    Finally, the court held that the statute of limitations on the claim for return of the gifts was not tolled by the continuous representation doctrine. The court reasoned that the gifts were a separate financial transaction, not the subject of ongoing legal representation. The court emphasized that the continuous representation doctrine applies only where there is a claim of misconduct in the provision of professional services and ongoing representation regarding the same matter. The court stated, “when an attorney engages in a financial transaction with a client…the attorney is not representing the client in that transaction at all.” Therefore, the claims seeking to recoup the gifts were time-barred.

  • King v. Fox, 7 N.Y.3d 181 (2006): Ratification of Attorney’s Fee Agreement During Continuous Representation

    7 N.Y.3d 181 (2006)

    A client can ratify an attorney’s fee agreement, even during continuous representation or if attorney misconduct occurred, provided the client is fully informed and acquiesces knowingly and voluntarily.

    Summary

    This case addresses whether a client can ratify an attorney’s fee agreement, even one that is potentially unconscionable or arises during ongoing representation where attorney misconduct occurred. Edward King, a musician, sued his attorney, Lawrence Fox, alleging the fee agreement was unconscionable. The Second Circuit certified questions to the New York Court of Appeals regarding ratification. The Court held that ratification is possible under these circumstances if the client had full knowledge of the facts, understood their rights, and voluntarily agreed to the terms. The burden is on the attorney to prove the client’s informed acquiescence, free from fraud or misconception.

    Facts

    Edward King hired Lawrence Fox in 1975 to recover royalties from his work with Lynyrd Skynyrd. Fox, a personal injury lawyer with limited entertainment law experience, agreed to a one-third contingency fee. King signed a retainer agreement reflecting this. In 1978, a settlement was reached, and Fox advised King that the one-third fee would apply to both past and future royalties. King was surprised but proceeded with the settlement. King’s wife wanted another lawyer to review settlement documents, but Fox misrepresented a deadline, leading King to accept. For years, MCA sent royalty payments to Fox, who deducted his fee and remitted the balance to King. This arrangement continued until 1995 when King started receiving full royalty checks directly. Fox then demanded his share, leading to the lawsuit.

    Procedural History

    King sued Fox in the Southern District of New York, alleging the fee agreement was unconscionable. The District Court initially granted summary judgment to Fox based on the statute of limitations, which was reversed and remanded by the Second Circuit. On remand, the District Court again granted summary judgment to Fox, finding King had ratified the agreement. King appealed, and the Second Circuit certified three questions to the New York Court of Appeals.

    Issue(s)

    1. Is it possible for a client to ratify an attorney’s fee agreement during a period of continuous representation?
    2. Is it possible for a client to ratify an attorney’s fee agreement during a period of continuous representation if attorney misconduct has occurred during that period? If so, can ratification occur before the attorney has committed the misconduct?
    3. Is it possible for a client to ratify an unconscionable attorney’s fee agreement?

    Holding

    1. Yes, because continuous representation does not preclude ratification if the client possesses full knowledge of relevant facts and acquiesces.
    2. Yes, because misconduct does not automatically invalidate ratification, so long as the client’s agreement is not procured by that misconduct. Ratification cannot occur *before* the misconduct takes place, since the client must be aware of the misconduct to knowingly ratify the agreement despite it.
    3. Yes, but with qualifications, because ratification of an unconscionable agreement is rare and requires a fully informed client with equal bargaining power who knowingly and voluntarily affirms the agreement, understanding the facts making it voidable and their rights.

    Court’s Reasoning

    The Court of Appeals held that New York law allows a client to ratify an attorney’s fee agreement even during continuous representation, despite potential attorney misconduct, or even if the agreement is unconscionable. The Court emphasized that for ratification to be valid, the attorney bears the burden of proving the client’s acquiescence was made with full knowledge of all material circumstances and was not induced by fraud or misrepresentation. The Court recognized the unique fiduciary duty attorneys owe their clients, requiring fee agreements to be fair, reasonable, and fully understood. Quoting Greene v Greene, 56 NY2d 86, 92 (1982), the court stated the attorney must show the client acquiesced “with full knowledge of all the material circumstances known to the attorney,” and that the client was not influenced by fraud or misconception. Even though the client’s continuous representation by the attorney may toll the statute of limitations for legal malpractice, it does not prevent the client from ratifying the fee agreement. The court noted, quoting Shaw v Manufacturers Hanover Trust Co., 68 NY2d 172, 176 (1986), that “courts as a matter of public policy give particular scrutiny to fee arrangements between attorneys and clients, casting the burden on attorneys who have drafted the retainer agreements to show that the contracts are fair, reasonable, and fully known and understood by their clients”. The Court acknowledged that unconscionable agreements are generally voidable, but a fully informed client with equal bargaining power can knowingly and voluntarily affirm the agreement if they understand the facts that make the agreement voidable and know their rights as a client. The Court did not decide whether ratification occurred in this particular case, leaving that determination to the lower courts.

  • Bloomfield v. Bloomfield, 97 N.Y.2d 188 (2001): Enforceability of Prenuptial Agreements and Waiver of Support

    Bloomfield v. Bloomfield, 97 N.Y.2d 188 (2001)

    A prenuptial agreement that waives only property rights does not constitute a waiver of spousal support; however, the agreement remains subject to review for unconscionability at the time of enforcement.

    Summary

    This case addresses the enforceability of a prenuptial agreement executed in 1969. The New York Court of Appeals held that the agreement, which waived spousal property rights, did not implicitly waive the right to spousal support. The Court emphasized that contracts should be construed to favor legality when possible. Because the agreement was silent on the issue of support, it did not violate the General Obligations Law in effect at the time of its creation. However, the Court remitted the case to the Supreme Court to determine whether the agreement was unconscionable, considering the circumstances at the time enforcement was sought. This ruling underscores the importance of clear and explicit language in prenuptial agreements and the ongoing scrutiny of such agreements for fairness.

    Facts

    The husband, a 30-year-old attorney, and the wife, a 24-year-old antiques dealer, married in 1969. Before the marriage, the husband drafted a prenuptial agreement where the wife waived her rights to any of the husband’s property, present or future. The wife was not represented by counsel. In 1995, the husband initiated divorce proceedings, and two years later, he invoked the prenuptial agreement as a defense against the wife’s claim for equitable distribution.

    Procedural History

    The Supreme Court declared the prenuptial agreement void, citing violations of the 1969 General Obligations Law and non-compliance with Domestic Relations Law. The Appellate Division affirmed, holding the agreement constituted an impermissible waiver of support and allowed the wife to challenge the agreement’s validity due to the marriage tolling the statute of limitations. The husband appealed to the New York Court of Appeals.

    Issue(s)

    Whether a prenuptial agreement that waives spousal property rights also constitutes a waiver of spousal support, and whether such an agreement is enforceable.

    Holding

    No, because the agreement explicitly waived only property rights, not the right to support. The case was remitted to determine if the agreement was unconscionable at the time of enforcement.

    Court’s Reasoning

    The Court of Appeals reasoned that the agreement’s plain language only waived the wife’s right to the husband’s property, lacking any explicit or implicit reference to a waiver of support obligations. The Court stated, “A waiver of rights to present and future interests in plaintiffs property, without more, does not constitute a waiver of the right to receive support.” Construing the agreement to include a support waiver would be an improper addition to the contract’s terms. The Court emphasized the principle that contracts should be construed to favor legality when possible, citing Galuth Realty Corp. v Greenfield, 103 AD2d 819. Regarding the timing of applicable law, the Court noted that public policy changes, as reflected in the updated General Obligations Law § 5-311, should be considered at the time of enforcement, not just at the time of the agreement’s creation. The Court remanded the case to Supreme Court to address the unresolved issue of unconscionability, acknowledging the Appellate Division’s concerns about the agreement’s fairness but emphasizing that this issue was not fully addressed in the prior rulings. The Court acknowledged a “strong public policy favoring individuals ordering and deciding their own interests through contractual arrangements” (Matter of Greiff, 92 NY2d 341, 344), but also implicitly recognized the need for fairness when enforcing prenuptial agreements, especially when significant time has passed since their execution.

  • Sablosky v. Edward S. Gordon Co., Inc., 73 N.Y.2d 133 (1989): Enforceability of Arbitration Clauses Absent Mutuality of Remedy

    Sablosky v. Edward S. Gordon Co., Inc., 73 N.Y.2d 133 (1989)

    An arbitration agreement supported by consideration is valid even if it lacks mutuality of remedy, meaning one party has the option to litigate while the other is bound to arbitrate.

    Summary

    Thomas Sablosky, a former commission salesman, sued Edward S. Gordon Company, Inc., for commissions he claimed were owed from a real estate sale. The company moved to compel arbitration based on an arbitration clause in Sablosky’s employment agreement, which allowed the company to elect arbitration while Sablosky was bound to it. The New York Court of Appeals held that the arbitration clause was enforceable, even though it lacked mutuality of remedy, as the overall employment contract was supported by consideration. The court also found no basis for deeming the agreement unconscionable.

    Facts

    Thomas Sablosky was employed by Edward S. Gordon Company, Inc., as a commission salesman. He claimed he was owed a $3.6 million commission for his role in the sale of the Exxon Building. Sablosky’s employment contract contained an arbitration clause that gave the company the option to demand arbitration for any disputes, while Sablosky did not have the same option. The company moved to stay the lawsuit and compel arbitration.

    Procedural History

    The Supreme Court granted the company’s motion to compel arbitration. The Appellate Division reversed, holding that the arbitration agreement was unenforceable due to a lack of mutuality of obligation. The Court of Appeals granted the company leave to appeal.

    Issue(s)

    Whether an employment contract containing an arbitration clause that compels one party to arbitrate but allows the other party the choice of arbitration or litigation is invalid for lack of mutuality of remedy or obligation.

    Holding

    No, because mutuality of remedy is not required in arbitration contracts as long as the entire agreement is supported by consideration. The court also found the agreement was not unconscionable.

    Court’s Reasoning

    The Court of Appeals reasoned that the validity of an arbitration agreement should be determined by the laws applicable to contracts generally, and contract law does not require mutuality of remedy. “If there is consideration for the entire agreement that is sufficient; the consideration supports the arbitration option, as it does every other obligation in the agreement.” The court noted that an increasing number of jurisdictions enforce commercial arbitration clauses despite the lack of mutuality of remedies. It distinguished its prior holdings in Hull Dye & Print Works v Riegel Textile Corp. and Matter of Kaye Knitting Mills [Prime Yarn Co.]. The court also addressed the plaintiff’s arguments regarding unconscionability, stating that the arbitration clause was not unreasonable, and the contract was not one of adhesion. The court explained that the real estate brokerage business is bound to generate disputes, and an employer with many employees should be able to protect itself from costly litigation by including an arbitration clause. Concerning unconscionability, the court held: “[a]n unconscionable contract [is] one which ‘is so grossly unreasonable or unconscionable in the light of the mores and business practices of the time and place as to be unenforcible according to its literal terms.’ ” Furthermore, the Court found that the contract was not procedurally unconscionable simply because it was drafted by the employer, as this is common practice. The court concluded that the plaintiff’s claim of potential bias in the arbitration panel was premature.

  • Gillman v. Chase Manhattan Bank, N.A., 73 N.Y.2d 1 (1988): Enforceability of Security Agreements and Bank’s Right to Set-Off

    Gillman v. Chase Manhattan Bank, N.A., 73 N.Y.2d 1 (1988)

    A security agreement granting a bank a security interest in a customer’s deposit accounts, allowing the bank to segregate funds without notice if it deems itself insecure, is enforceable absent procedural and substantive unconscionability and does not constitute a preferential transfer under Debtor and Creditor Law § 15 (6-a) when the segregation is involuntary.

    Summary

    Gillman, the assignee for the benefit of creditors of Jamaica Tobacco, sued Chase Manhattan Bank, arguing that Chase illegally segregated Jamaica Tobacco’s bank deposit. Chase had issued a letter of credit to Jamaica Tobacco and claimed a security interest in its deposits based on an agreement. Chase segregated $372,920.57 from Jamaica Tobacco’s checking account due to the company’s financial difficulties. The New York Court of Appeals held that the security agreement was not unconscionable and that Chase’s actions were permissible under the agreement. The court found no bad faith on Chase’s part and determined that the segregation of funds did not constitute a preferential transfer.

    Facts

    Jamaica Tobacco obtained a $400,000 letter of credit from Chase to secure a surety bond required for purchasing cigarette stamps on credit. The application included a security agreement granting Chase a lien on all Jamaica Tobacco’s deposit accounts. The agreement allowed Chase to deem itself insecure and apply the deposits to Jamaica Tobacco’s obligations without notice. After the letter of credit was renewed, Chase learned Jamaica Tobacco had violated loan restrictions and subordination agreements. Deeming itself insecure, Chase transferred funds from Jamaica Tobacco’s checking account to another account inaccessible to Jamaica Tobacco, leading to dishonored checks. Aetna eventually drew on the letter of credit.

    Procedural History

    The Supreme Court found the security agreement unconscionable and awarded damages to the assignee. The Appellate Division reversed, finding the agreement conscionable, no bad faith by Chase, and no preferential transfer. The Court of Appeals granted leave to appeal.

    Issue(s)

    1. Whether the security agreement granting Chase a lien on Jamaica Tobacco’s deposit accounts was unconscionable and therefore unenforceable.

    2. Whether Chase acted in bad faith by segregating Jamaica Tobacco’s checking account without notice and dishonoring checks drawn thereon.

    3. Whether Chase’s segregation of the checking account constituted a preferential transfer in violation of Debtor and Creditor Law § 15 (6-a).

    Holding

    1. No, because the agreement was not procedurally or substantively unconscionable.

    2. No, because Chase acted within the terms of the security agreement and had a valid security interest in the account.

    3. No, because the transfer was not voluntary, as required by Debtor and Creditor Law § 15 (6-a).

    Court’s Reasoning

    The court found no procedural unconscionability, noting that Frohlich signed the application with a bold-faced legend referencing the security agreement. The court stated that under general contract law, Jamaica Tobacco was bound by the agreement regardless of Frohlich’s claim that he didn’t read it. The court reasoned that the terms were not substantively unconscionable given Chase’s obligations under the letter of credit and the typical practice of requiring security interests in bank deposits. The court emphasized the importance of allowing the bank to act without notice to protect its security interest. The court stated, “The aim of the Uniform Commercial Code unconscionability provision (UCC 2-302), it has been said, is to prevent oppression and unfair surprise, not to readjust the agreed allocation of the risks in the light of some perceived imbalance in the parties’ bargaining power.” The court found that paragraph 7 of the security agreement granted chase a security interest in the checking account. The court rejected the claim of commercial bad faith, because there was no commercial bad faith in Chase’s actions in segregating the account. The court held that Debtor and Creditor Law § 15 (6-a) applied only to voluntary transfers. The court reasoned that because the segregation was done without knowledge or consent of Jamaica Tobacco, it was not a voluntary transfer.

  • Christian v. Christian, 42 N.Y.2d 63 (1977): Enforceability of Separation Agreements in Divorce Actions

    Christian v. Christian, 42 N.Y.2d 63 (1977)

    Separation agreements are subject to strict judicial scrutiny and may be set aside if manifestly unfair to one spouse due to overreaching, even if the agreement meets the statutory requirements for a no-fault divorce.

    Summary

    This case addresses the enforceability of separation agreements, particularly concerning asset division, in the context of a no-fault divorce under New York Domestic Relations Law § 170(6). The Court of Appeals held that while a separation agreement can provide the basis for a no-fault divorce, courts retain the power to scrutinize the agreement for fairness and equity. Even if the statutory requirements for a no-fault divorce are met (i.e., a valid separation agreement, physical separation for more than one year, and substantial compliance with the agreement), a court may still invalidate specific provisions deemed unconscionable or the product of overreaching. The agreement’s validity as a basis for divorce is separate from the enforceability of its substantive terms.

    Facts

    Henrietta and William Christian entered into a separation agreement in 1972. At the time, William earned $40,000 annually, while Henrietta earned $10,000. The agreement included a provision for equal division of jointly and individually held assets listed in Schedule A as of January 1, 1972. William’s stocks were valued at $200,000, while Henrietta’s were valued between $800,000 and $900,000. Henrietta later sued for divorce based on cruel and inhuman treatment. William counterclaimed for divorce based on the separation agreement, requesting its incorporation into the divorce judgment. Henrietta argued the agreement was procured by fraud, misrepresentation, and coercion.

    Procedural History

    The Supreme Court dismissed Henrietta’s complaint, declared the separation agreement void due to fraud, dismissed William’s counterclaim, and ordered reconciliation. The Appellate Division reversed, granting William’s counterclaim for divorce but declared the asset division provision unconscionable and unenforceable. Henrietta appealed to the Court of Appeals.

    Issue(s)

    1. Whether a separation agreement that meets the statutory requirements for a no-fault divorce under Domestic Relations Law § 170(6) is automatically enforceable, regardless of its fairness or equity.
    2. Whether a court can invalidate specific provisions of a separation agreement, such as an asset division clause, while still granting a divorce based on the same agreement.

    Holding

    1. No, because courts have a duty to scrutinize separation agreements for fairness and equity, especially given the fiduciary relationship between spouses.
    2. Yes, because the validity of the separation agreement as evidence of the parties’ intent to live separately is distinct from the enforceability of its substantive terms.

    Court’s Reasoning

    The Court of Appeals emphasized that separation agreements are not ordinary contracts; they involve a fiduciary relationship requiring utmost good faith. The court cited Hendricks v. Isaacs, 117 N.Y. 411, 417, stating that there is a “strict surveillance of all transactions between married persons, especially separation agreements”. Equity allows courts to set aside agreements on grounds insufficient to vitiate an ordinary contract (Hungerford v. Hungerford, 161 N.Y. 550, 553). While encouraging parties to settle their differences, courts must ensure the agreements are arrived at fairly and equitably, free from fraud, duress, and inequity (Scheinberg v. Scheinberg, 249 N.Y. 277, 282-283).

    The court noted that the “no-fault” grounds for divorce, introduced in 1966, require a formal separation agreement as evidence of a genuine separation (Gleason v. Gleason, 26 N.Y.2d 28, 35). However, this does not preclude judicial review of the agreement’s substantive terms. The court quoted Hume v. United States, 132 U.S. 406, 411 defining an unconscionable bargain as one “such as no [person] in his [or her] senses and not under delusion would make on the one hand, and as no honest and fair [person] would accept on the other”.

    The court concluded that even if a separation agreement satisfies the statutory requirements for a no-fault divorce, a court can invalidate provisions deemed unconscionable due to overreaching. The agreement serves primarily as evidence of the separation, allowing the divorce to proceed, but the court retains equitable power to ensure fairness in the economic aspects of the separation.