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Cotchett, Pitre & McCarthy v. Universal Paragon Corp.

August 31, 2010


(San Francisco County Super. Ct. No. CPF-09-509649).

The opinion of the court was delivered by: Needham, J.


Appellant Universal Paragon Corporation, formerly known as Tuntex (USA), Inc. (UPC) hired respondent law firm Cotchett, Pitre and McCarthy (CP&M) to represent it in complex environmental litigation. After a settlement in the underlying action was reached, UPC and CP&M were unable to agree on the amount of fees owned to CP&M under their written fee agreement. The parties proceeded to binding arbitration, as provided for in the agreement, and the arbitrator awarded CP&M $7,554,149.13 in attorney fees and expenses. UPC appeals the superior court judgment confirming the award (Code Civ. Proc., § 1285 et seq.), arguing that the amount is unconscionable and violates public policy. We affirm.


A. The Schlage Lock Site and UPC's Development Plans

UPC is a real estate development firm. In 1989, it purchased real property in the Brisbane area adjacent to a property owned by the Ingersoll-Rand Corporation (Ingersoll-Rand), known as the Schlage Lock site. The Schlage Lock site was contaminated with acid used in metal works and with fuel from railroad operations by the Southern Pacific Railroad. This contamination was migrating to UPC's property. UPC wished to acquire the Schlage Lock site so it could control the environmental clean-up of that site as well as that of its own property. It planned to develop both properties as part of a larger project.

In 1996, UPC sued Ingersoll-Rand in federal court, seeking to gain control of the Schlage Lock site. The parties agreed to dismiss the case and toll the statute of limitations to see if they could agree on a joint remediation plan or an arrangement for UPC to purchase the property. This tolling agreement expired when UPC's then-counsel (not CP&M) failed to renew it and Ingersoll-Rand refused to execute a new agreement. In early 2005, UPC attempted to negotiate the purchase of the Schlage Lock site, but those talks ceased because Ingersoll-Rand insisted on complete indemnity for future litigation arising from the contamination, to be secured by a $200 million line of credit.

B. UPC Retains CP&M as Counsel & Negotiates a Retainer Agreement

In May 2005, UPC retained CP&M to develop a litigation strategy for acquiring the Schlage Lock site so that UPC could clean up the property and proceed with development. UPC initially hired CP&M on an hourly basis, not to exceed $20,000 in fees and costs, for the limited purpose of rendering an opinion on the best way to move forward.

Both UCP and CP&M recognized the risks and extreme difficulties of litigation against Ingersoll-Rand. UPC wanted to avoid up-front attorney fees and allocate some of the risk of litigation to CP&M through a contingency fee agreement. Because UPC was seeking to acquire the Schlage Lock property, another concern was determining the value of any settlement that included the acquisition of that property. CP&M was concerned that a contingency fee based on the value of the contaminated property alone would be too low.

Between May and July of 2005, UPC and CP&M negotiated the details of a contingency fee retainer agreement designed to meet the parties' various concerns. Attorney Phillip Gregory represented CP&M in the negotiation and UPC was represented by Steve Hanson, its general manager, and attorney Mike McCracken, its outside counsel. CP&M initially proposed a hybrid agreement under which CP&M would charge a reduced hourly rate, plus costs, as well as a 16 percent contingency on any monies received in the resolution of the case with "one-half of hourly billed subtracted from 16%." This proposal was memorialized in a June 2005 draft of the agreement, which also provided that if UPC received property rather than cash, CP&M would get paid with a 2.0 multiplier.

In response to this proposal, Hanson sent an e-mail to CP&M stating that instead of the 2.0 multiplier (the "double fee system," as he put it), UPC "would prefer to agree to value the property and pay 16% including that same percentage on any other settlement cash. In other words we are going to sue for damages, these damages most probably would be over and above the property value anyway." An internal memorandum circulated by CP&M suggested that under this proposal, if UPC made a settlement demand of $20 million, and in response was offered the property for $1, CP&M would get a percentage of $20 million. After CP&M indicated that it would agree to some version of this proposal, the parties continued to work on the language.

Gregory e-mailed Hanson and McCracken, stating, "I will put together a revised contingency agreement tonight and fax it to you. It will provide that in the event of the acquisition of the property by UPC that our Firm receives a 24.5% contingency payment based on the last settlement offer made by UPC to [Ingersoll-Rand], correct?" Hanson responded, "Why would we talk about 24.5% when we were going to pay you some base fees and then pay you 16%[?] That's the deal we like. I guess the question is, can we fairly determine the value of the whole settlement if the property is exchanged? I would think the answer would be reasonably yes."

Gregory sent Hanson a new draft of the fee agreement and copied McCracken on the e-mail. Paragraph 3 of this new version provided, "The settlement of this case may involve [UPC] or a related entity acquiring real property from one or more Defendants. In such an event, the amount of the contingency fee payable to [CP&M] would be difficult to value. If such a settlement occurs, [UPC] has specifically requested that [CP&M] be paid a percentage of the dollar value of the last settlement offer made to Defendants that does not include acquisition of real property as part of the consideration payable to [UPC]. Therefore, in the event that settlement of the case includes a provision whereby [UPC] or any of its related entities acquires real property from one or more Defendants, the fee payable to [CP&M] shall include two parts: (a) [UPC] shall pay [CP&M] a sum equal to . . . (16%) of the dollar value of the last settlement proposal made by [UPC] to Defendants that did not include, as a component of the settlement proposal, a provision for acquisition of the property; and (b) In addition to the contingency set forth in subparagraph 3(a), above, [UPC] agrees to pay attorneys fees under the May 2005 Hourly Agreement [at reduced rates] . . . An example of the foregoing is attached to this Agreement."

Attorney McCracken sent an e-mail to Gregory and Hanson in which he stated that this draft confused him and proposed the following "solution": "If . . . [Ingersoll-Rand] and UPC reach a global settlement, and a transfer of the property is the consideration, then it follows that the property must first of necessity be assigned a fair market value, which, of course, will by done by an MAI [Member of the Appraisal Institute] appraiser. . . . The fair market value must, by appraisal practices, be based upon the highest and best use. This will be an amount certain, without regard for deductions for remediation costs, demolition and diminution in value. This is the number that will serve as the base number for calculating the contingency. I will give two examples to illustrate my point [both assume an appraisal of $20M which may or may not be in the ballpark]: [¶] [1] The property is appraised at $20M. UPC's total damages [e.g., clean-up insurance, demolition, diminution of value] are $19M. Settlement occurs based on these numbers. UPC writes a check to [Ingersoll-Rand] for $1M. [CP&M]'s contingent fee is __% of $20M. [2] The property is appraised at $20M. UPC's total damages are $25M. Settlement occurs based on these numbers. [Ingersoll-Rand] conveys the property to UPC and writes a check to UPC for $5M. [CP&M's] contingent fee is __% of $25M."

Gregory responded that McCracken had captured the basic point and asked McCracken to draft the language for the final agreement. McCracken proposed that to "speed things up," Gregory should "simply revise [CP&M's] contingent fee paragraph to reflect [McCracken's] formula: i.e., use fair market value, as determined by an agreed upon MAI appraiser . . . as the basis for calculating the contingent fee . . . . Total damages [e.g., remediation costs, insurance, demolition, diminution in value] will not enter into this analysis, unless of course they exceed the fair market value. . . ." Gregory responded, "Here's the proposal as I understand it: [¶] UPC will be seeking damages totaling [¶] Past costs of remediation, etc. = X [¶] Future Costs of remediation, etc. = Y [¶] Diminished FMV of the property (based on an appraisal) = Z [¶] UPC's settlement position will be based on X Y or Z. [¶] ...

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