The opinion of the court was delivered by: LEVET
OPINION, FINDINGS OF FACT and CONCLUSIONS OF LAW
As indicated by the amended title above set forth, two actions are involved in this matter, to wit, (1) an action by Elizabeth K. Knapp, as assignee of Tanner and Friedman, for the collection of legal fees, as more particularly hereinafter set forth; (2) an action by McFarland against Tanner and Friedman for repayment of monies heretofore paid on account of legal services upon the ground of certain alleged breaches of fiduciary obligations by said attorneys. Since this action contemplated the return of monies from Tanner and Friedman, the assignors, it became necessary to permit the institution of the second action and its joinder with the original action for trial.
Plaintiff, Elizabeth K. Knapp (hereinafter "Knapp") has instituted an action as the assignee of Lester J. Tanner and Arthur S. Friedman (hereinafter jointly referred to as "Tanner and Friedman"), attorneys at law, to recover moneys allegedly due them for legal services rendered on behalf of, and disbursements incurred for, the benefit of defendant Walter P. McFarland (hereinafter "McFarland") in connection with and following from the enforcement of various claims and rights under certain existing judgments and decrees of this court in an action therein entitled, "WALTER P. McFARLAND, EDWARD P. JOHNSON and JOHN LOUGHRAN, plaintiffs, against GEORGE S. GREGORY, ALEXANDER WESTREICH, N.V. HANDELMAATSCHAPPIN ANTILIA, SOL DRESCHER and LOUIS ROSENBERG, defendants," Civil No. 424-259 (hereinafter referred to as the "Gregory action" or "the suit").
Knapp's complaint sets forth four alleged causes of action which are briefly described as follows:
The first cause of action alleges an express contract under which McFarland and Edward P. Johnson (hereinafter "Johnson") jointly and severally agreed to pay to Tanner and Friedman the sum of $155,000 (in addition to time charges) if McFarland and Johnson acquired the leaseholds to Arlington Towers (hereinafter "the Towers"), the subject matter of the Gregory action above referred to. Knapp contends that such a "bonus" was payable to Tanner and Friedman regardless of the purchase price required by McFarland and Johnson to obtain title to the leaseholds. Knapp thus claims that McFarland is indebted to her in the sum of $77,500, which is one-half of the $155,000 "premium" allegedly due. This cause of action has come to be referred to as the "bonus claim" or the $155,000 claim" or the "155 claim."
McFarland's answer to this cause of action admits an agreement to pay Tanner and Friedman $155,000 but contends that this obligation was conditioned upon his ability to purchase Arlington Towers for no more than $18,425,000. McFarland asserts that the parties agreed that if a greater sum was necessary in order to acquire the Towers, then the $155,000 "bonus" was to be reduced by the legal fees which had been paid or were due to be paid prior to the date of purchase and, further, McFarland maintains that the agreement contemplated that said payment was only to be made when the financial condition of Arlington Towers rendered payment financially feasible and prudent.
In response to McFarland's claim that a reduction was to be made if reacquisition was accomplished at more than $18 1/2 million, Knapp asserts that if this "version" of the contract is found by the court to prevail, then she is entitled to recover $48,641. This figure is derived by deducting from $155,000 the total amount of fees paid or owed to Tanner and Friedman prior to the purchase on August 21, 1965, to wit, $106,309.
2. Second Cause of Action
Knapp's second cause of action (as amended by the withdrawal of certain contingent claims) also alleges that McFarland and Johnson agreed to pay to Tanner and Friedman fees and disbursements for legal services for the period of September 1, 1965 through June 30, 1968 at the rate of $30 per hour for partners and $15 per hour for associates; that the remaining unpaid balance on said time charges and disbursements is $75,228.61 of which $37,614.31 (one half) is claimed by Knapp against McFarland. This claim has come to be referred to as the "$30-15 claim," the "30-15" and the "time charges claim."
McFarland's answer admits the agreement to pay at such rates, including disbursements. McFarland, by stipulation, has admitted the reasonableness of this retainer (TR-I-3).
McFarland, however, denies that Tanner and Friedman performed all of the legal services that he was billed for, and further contends that certain services, which were rendered, were not properly chargeable to him in that they were not within the scope of the retainer agreement.
Knapp's third cause of action is an alternative claim to the first claim (i.e., the "1155 claim") and it is based upon principles of quantum meruit. It alleges the purported reasonable value of the legal services rendered by Tanner and Friedman from December 1963 through August 31, 1965 and demands judgment for one-half of the unpaid balance.
4. Fourth Cause of Action
Knapp's fourth cause of action is an alternative quantum meruit claim to the $30-15 cause of action.
In addition to various denials to the four causes of action above referred to, McFarland alleges, as an affirmative defense to Knapp's claims, that Tanner and Friedman, as attorneys, breached certain fiduciary obligations to McFarland in various ways and that this bars Knapp from recovery.
McFARLAND v. TANNER and FRIEDMAN
On October 6, 1970, McFarland moved this court for an order permitting leave to institute an action against Tanner and Friedman directly (since the assignee would not be responsible therefor) to recoup attorney fees theretofore paid on the grounds, as above referred to, that Tanner and Friedman breached certain obligations during their representation of McFarland. On October 28, this court granted this motion. The caption in this action has been set out by the court to express, in abbreviated form, the actual alignments of the parties and to simplify the analysis of the court in disposing of this entire controversy.
With respect to McFarland's action against Tanner and Friedman, the attorneys deny the material allegations of McFarland's claim and allege further that McFarland's claim does not state a claim upon which relief can be granted and that it is barred by the three year statute of limitations.
HISTORY OF THE LITIGATION
Pursuant to Rule 42(b) of the Federal Rules of Civil Procedure, the court, at the commencement of trial, conferred with the respective counsel and directed that Knapp's first and second claims be tried initially along with McFarland's affirmative defenses and claims asserted directly against Tanner and Friedman.
The court deferred the trial of Knapp's third and fourth causes of action, based upon quantum meruit, and reserved decision as to whether (1) the law permits these alternative claims; and (2) the presentation of any evidence on that subject until determination of the foregoing claims which were being tried.
On March 31, 1971, the trial was commenced before a jury. On April 6, 1971, Knapp and Tanner and Friedman terminated the employment of their original trial counsel and requested leave to continue with Friedman as trial counsel. The court granted this application, a jury trial being waived by all parties. The jury was thereupon dismissed and the trial continued before the court.
The court, having examined the exhibits, the Proposed Findings of Fact and Conclusions of Law submitted by counsel, and the testimony, makes the following Findings of Fact and Conclusions of Law:
1. Elizabeth K. Knapp, Arthur S. Friedman and Lester J. Tanner at the commencement of this action were and now are residents of the State of New York (Pretrial Order ("PTO") P3(a); TR-I-85). Walter P. McFarland at the commencement of this action was and now is a resident of the Commonwealth of Virginia (PTO P3(a); TR-I-85). The respective amounts in controversy exceed, exclusive of interest and costs, the sum of $10,000 (PTO P3(a); TR-I-85).
2. Tanner and Friedman now are and at all times pertinent hereto were attorneys at law duly admitted to practice in the Courts of the State of New York and the United States District Court for the Southern District of New York, and, with respect to Friedman, the United States Court of Appeals for the Second Circuit, and practicing their profession in the City of New York as co-partners (PTO P3(a); TR-I-95; Tr. 1, 8, 584, 585).
3. On or about May 23, 1969, Tanner and Friedman duly assigned to Knapp their claims against McFarland and Knapp is now the owner thereof (PTO P3(a); TR-I-104).
4. McFarland and Johnson had certain agreements with a certain group (the "Gregory Group") with respect to an apartment house project in Arlington, Virginia called "Arlington Towers" (the "Towers"). These agreements included a "Memorandum Agreement," under which the Gregory Group gave to the owners
of the memorandum rights for a certain time and under various prices to be determined by certain formulas the right to reacquire one or more of the four apartment buildings of the Arlington Towers project (the "Paragraph 9" rights); the right to participate in profits generated by an offer for, or the sale of, the stock and debentures of the corporation owning the entire project (the "Paragraph 7 and 8 rights"); and the right to share in proceeds of, or from, the development or sale of a certain parcel of land called "C Ground" (the Paragraph 6 rights") (Ex. 1).
In 1957, litigation was commenced in the name of McFarland, Johnson and one Loughran against the Gregory Group in the United States District Court for the Southern District of New York ("the suit" or "the Gregory action"). In 1961 the Gregory action resulted in a decree of specific performance (the "Original Judgment") in favor of the Gregory plaintiffs and in 1962, in a further decree (the "Supplemental Judgment"). Under the Memorandum Agreement (Ex. 1) and the Original and Supplemental Judgments of the District Court (Exs. 19 and 20), the owners of the memorandum rights had the option for a certain length of time and under certain prices and other terms and conditions, to reacquire one or more of the Tower buildings. At all pertinent times, McFarland indicated his intention to exercise the Paragraph 9 rights (Tr. 27, 32, 273-274, 592).
II. THE "$155,000 BONUS CLAIM"
5. In or about December, 1963 McFarland and Johnson (the "clients") retained Tanner and Friedman as their attorneys in connection with the enforcement of their claims and rights against the Gregory Group under the Memorandum Agreement and the Original and Supplemental Judgments made by the District Court in the Gregory Action (Answer; PTO P3(d); Ex. 3; TR-I-86; Tr. 29-30).
6. In September 1964, the "clients" agree with Tanner and Friedman that:
"(a) The clients would pay for the legal services rendered on their behalf at the rate of $30 per hour for the partners' time, and $15 per hour for the time of associates. And
"(b) The clients would pay for the disbursements expended in connection with the performance of such legal services; and
"(c) In the event Tanner and Friedman achieved 'a good result * * * either by way of litigation or judgment (of the claims of the clients) there would be an upward adjustment of fees based upon achievement.'"
(TR-I-87, 96; Answer P4; PTO P3(f); Exs. 7 and 8; Tr. 60-64, 261, 265, 589-590, 969) That fee agreement was conceded to be fair and reasonable to the "clients" (Answer P4; TR-I-3, 87).
7. In March, 1965, in the Gregory action, Tanner and Friedman applied for certain relief on account of alleged defaults of the Gregory Group under the Memorandum Agreement and the District Court's Judgments. Thereafter, settlement discussions were held among counsel for the parties, in the presence of the District Judge, looking toward exercise by the owners of the Memorandum rights of the Paragraph 9 option or overall settlement of all disputes existing between the parties (Tr. 233-237).
8. The settlement discussion above referred to failed (Tr. 238-240, 292-293, 371); on August 2, 1965 Tanner and Friedman applied in the Gregory action for a Paragraph 9 acquisition of the Arlington apartment buildings. The application was accompanied by a tender signed by McFarland for the buildings at the then Paragraph 9 formula price (approximately $19,900,000), less a credit of $1,000,000 claimed in exchange for a waiver of Paragraph 7 and 8 rights (Tr. 83, 85, 239, 292-293). In anticipation of the Court's refusal to allow such credit as an advance deduction, between August 2 and August 4, 1965 arrangements were made by McFarland and Tanner to borrow an additional $1,000,000 to support a tender at the Paragraph 9 formula price (Tr. 239-240).
9. On August 4, 1965, McFarland, on behalf of the "clients," and Tanner, on behalf of Tanner and Friedman, agreed that if the "clients" reacquired the Arlington apartment buildings at the then Paragraph 9 formula price of approximately $19,900,000, the "upward adjustment of fees" (pursuant to the September, 1964 agreement bonus clause) would be $155,000 (Ex. 9; Tr. 81-88, 297, 369-370).
10. On August 24, 1965, in Arlington, Virginia, McFarland confirmed that $155,000 was the so-called "upward adjustment" of Tanner and Friedman's fee. At the request of McFarland, Tanner and Friedman agreed then to defer a meeting to set a schedule for the liquidation of this $155,000 debt (Tr. 601-603).
11. On August 30 and 31, 1965, the Gregory Group conveyed to McFarland and Johnson, who were represented by Tanner and Friedman, the four Arlington Towers apartment buildings at the then formula price, to wit, $19,900,000 (PTO P3(g); Exs. 64, 65; TR-I-97; Tr. 105, 240-241, 520, 990).
12. On certain occasions after August 31, 1965, McFarland and Johnson acknowledged that $155,000 was the amount of the additional "bonus" to which Tanner and Friedman were entitled. Thus:
(a) Some time shortly after June 15, 1966, in a conversation relating to time or schedule of payment thereof, McFarland orally acknowledged it to Friedman (Tr. 608-609).
(b) On February 7, 1967, McFarland confirmed it in writing (Ex. 27; Tr. 1083-1085).
(c) At the end of February and the beginning of March 1967, Johnson orally admitted and, in writing, confirmed it (Tr. 947, 1147-1148, 1183; Exs. 25, 26, 28).
13. On March 1, 1967, McFarland received from Tanner and Friedman a draft of a proposed fee letter for his approval and signature regarding the outstanding unpaid fees due to Tanner and Friedman (Tr. 1061, 1063). This draft contained a provision for the payment of "the additional fixed fee of $155,000 (heretofore agreed on in connection with the purchase of Arlington Towers)" (Ex. 26).
On March 4, 1967, Tanner and Friedman sent to McFarland, and he later received (Tr. 946, 1065), a letter stating that Johnson had informed Tanner and Friedman that the March 1 letter (above referred to) embodied McFarland's "understanding of, and agreement to, the terms of that fee arrangement with this firm" (Ex. 28).
It is undisputed that thereafter, bills were served by Tanner and Friedman on McFarland which included the fee obligation of $155,000 of the "clients" (Exs. 25, 26, 28; Tr. 630-631, 941, 946, 1063-1068; see also Defendant's memorandum, page 11, dated May 20, 1971).
14. When McFarland came to New York and met with Tanner and Friedman during the period from March 4, 1967 through June, 1967, he voiced no objection to the aforesaid bills for attorney fees sent to him which included a charge for the $155,000 bonus (Tr. 334, 545-550, 623-633, 782).
McFarland admitted that at no time between March 4, 1967 through November of 1967 did he notify Tanner and Friedman in writing of any objection to the inclusion of the $155,000 bonus in the bills that he received (Tr. 630-633, 1067).
15. McFarland has failed to pay to Tanner and Friedman any part of the $155,000 (PTO P3(p); TR-I-101). McFarland is liable to Knapp in the amount of $77,500 (one-half) of $155,000.
II. THE $30-- 15 TIME CHARGES
16. Between September 1, 1965 and June 30, 1968, Tanner and Friedman rendered legal services to McFarland and Johnson under an agreement which provided for the monthly payment of fees at the rate of $30 per hour for partners' time and $15 per hour for associates' time and for disbursements incurred (PTO P3(h); TR-I-91, 97, 105). That fee agreement for the above-mentioned period (the "time charges agreement") was fair and reasonable to the "clients" (TR-I-3).
17. Between the period of September 1, 1965 and June 30, 1968, Tanner and Friedman actually devoted 7,130 hours, 20 minutes of partners' time and 4,141 hours, 15 minutes of associates' time and rendered bills aggregating $276,028.75 in time charges and $27,992.94 for disbursements (PTO P3(q); Ex. 12, pp. 35-36; Tr. 120-138). To date, McFarland and Johnson have paid $201,719.25 with respect to time charges and $27,074.13 for disbursements, leaving a claimed remaining balance of $74,309.50 on account of time charges and $918.61 for disbursements (PTO P3(q); Ex. 57; TR-I-102; Tr. 164-166). McFarland has not paid any part of the foregoing outstanding balance (PTO P3(q); TR-I-102).
18. On April 23, 1969, Tanner and Friedman agreed with Johnson that Johnson would pay $115,114.31. This figure is one-half of the total sum then claimed by Tanner and Friedman to be due from McFarland and Johnson. Tanner and Friedman expressly accepted this partial satisfaction without prejudice to their claims and rights against McFarland for the remainder of the balance due, which included the "$155,000 bonus" and certain unpaid time charges (PTO P3(q) 3(r), 3(s); TR-I-102-103).
19. Tanner and Friedman did not charge McFarland and Johnson for any time not actually expended by them or their associates for services which they reasonably believed were necessary for their "clients'" interests and for services which they believed they had been retained to perform (Tr. 345, 391, 563, 745-746, 810, 824, 842-844).
20. Tanner and Friedman properly charged McFarland, and Knapp is entitled to recover for the time rendered by Tanner and Friedman (and their associates) in the application made by Tanner and Friedman to withdraw as counsel and for in camera treatment in the Gregory action (Ex. D, pp. 10, 13-14, 25, 29-30, 39-41, 52; Tr. 729-735, 737-739, 782-786, 791-792, 1293, 1334-1335; see discussion, infra).
21. Tanner and Friedman properly billed McFarland and Johnson, and Knapp is entitled to recover for the time devoted by Tanner and Friedman at meetings with McFarland, Johnson and their respective Virginia counsel to consider the impact of the Virginia action on the Gregory action (Ex. 41, diary sheets dated February 27, 28 and March 1, 1967; Ex. 51, diary sheets dated February 27, 28 and March 1, 1967; see discussion, infra).
22. Tanner and Friedman properly billed McFarland and Johnson, and Knapp is entitled to recover for the time rendered by Tanner and Friedman in reviewing Johnson's answer to the complaint in the Virginia action in order to protect certain challenges made by the Gregory defendants to the judgment therein (Ex. 42, diary sheets dated December 13, 14, 15, 1967; Tr. 731-735; see discussion infra).
23. Knapp is entitled to recover for the time devoted by Tanner and Friedman to the Fodiman civil contempt proceedings heard before Judge Dimock during the Gregory litigation (Tr. 767-768).
24. After vacating the civil contempt proceedings against Fodiman, above referred to, Judge Dimock cited Fodiman in criminal contempt and appointed Friedman as "special prosecutor."
Before being relieved of that post, Friedman devoted and billed the "clients" for 34 hours, 55 minutes of partners' time and 87 hours of associates' time, totaling $2,352.50, one-half of which is claimed against McFarland by Knapp ($1,176.25).
The Fodiman criminal contempt proceeding is presently pending in this court before another District Judge.
I find that Knapp's claim for the Fodiman criminal contempt time charges is not sustainable since from the inception of that proceeding to date the court has not ruled that any fine (or part thereof) which may be levied against Fodiman might be awarded to the Gregory plaintiffs or that the court might award attorney fees to the Gregory plaintiffs.
Tanner and Friedman's billing of this amount, however, was made in good faith, without any breach of their fiduciary obligations.
25. The attendance of both Tanner and Friedman at the Equitable deposition was necessary for the proper performance of their representation in the Gregory action and was within the scope of their retainer agreement with McFarland and Johnson. Knapp is entitled to recover for the time devoted by them at that deposition (Tr. 391-393, 745-746; see discussion, infra).
26. McFarland is presently liable to Knapp with respect to unpaid time charges and disbursements in the total sum of $36,839.30. This amount has been calculated by deducting from the total unpaid time charges and disbursements billed against McFarland ($37,614.30) one-half of the unpaid time charges for the services devoted to the criminal contempt proceedings ($775.00) ($37,614.30 minus $775.00 = $36,839.30). McFarland has already paid $401.25 to Tanner and Friedman regarding the criminal contempt proceedings but has not requested any reimbursement either from Knapp or Tanner and Friedman for this payment.
27. Knapp is entitled to interest on the $77,500 "bonus" from August 31, 1965 to the date of judgment. Knapp is also entitled to interest on the unpaid monthly time charges and disbursements from the time that each monthly time charge became due to the date of judgment. The following is a list of the unpaid time charges and disbursements at the respective monthly due dates from which I find that interest is due:
Last Day of Month During Which
Services Were Rendered or Monthly
Disbursements Incurred Bill to McFarland
A. Legal Fees
April 30, 1967 $ 505.63
May 31, 1967 5,295.00
June 30, 1967 6,870.62
July 31, 1967 4,028.13
August 31, 1967 4,317.50
September 30, 1967 5,658.12
October 30, 1967 768.75
November 30, 1967 2,565.63
December 31, 1967 924.37
January 31, 1968 2,993.13
February 28, 1968 742.50
March 31, 1968 206.87
April 30, 1968 121.25
May 31, 1968 704.38
June 30, 1968 678.12
December 31, 1967 120.56
June 30, 1968 338.74
IV. ALLEGED ADVERSE INTERESTS AND OTHER ALLEGED BREACHES OF FIDUCIARY OBLIGATIONS
28. In 1966 through at least July 1968, Edward P. Johnson was the major stockholder of Ernst and Company, Inc. (Tr. 321, 724).
29. In or about April 1967, Tanner and Friedman learned that disputes had arisen between McFarland and Johnson with respect to ...