BOTEIN, P.J.
Upon a joint record in this combination of an aborted derivative stockholders' action and a completed Burchill Act reorganization proceeding (Real Property Law, §§ 119-123), ten appeals are taken by various parties, all addressed to the adequacy of allowances to attorneys and appraisers.
The Burchill Act proceeding, to reorganize the subject real property which secured publicly held trust mortgage bonds, was originated in 1939, but was reactivated more recently by recourse to a provision in the 1940 judgment of reorganization retaining jurisdiction in the court to reopen the proceeding for certain purposes. The 1940 reorganization had resulted in the incorporation of Forty Wall Street Building, Inc., which had taken title to the property securing the trust mortgage, located at 36-42 Wall Street, in the Borough of Manhattan. This corporation had issued its stock to the bondholders in exchange for their bonds.
Prior to October 1, 1957, defendant Webb Knapp, Inc., had acquired two thirds of the stock of Forty Wall Street Building, Inc. By notice dated October 11, 1957, at the request of Webb Knapp, Forty Wall called a special meeting of stockholders for October 25, 1957, to consider a proposal made by Webb Knapp that the assets of Forty Wall be offered for sale at public auction, with a minimum upset price of $15,000,000. Webb Knapp itself agreed to pay at least this amount.
This proposal precipitated two stockholders' derivative actions, which sought, among other things, to enjoin the proposed auction sale. In view of the short interval of time before the date of the stockholders' meeting, the attorneys for the two plaintiffs were required to telescope legal services that would ordinarily be performed in several months into a few driving days. They were successful in procuring orders enjoining the proposed auction sale pendente lite, and further providing that any of the parties might apply to the court, pursuant to its retained jurisdiction in the Burchill proceeding, for further instructions with regard to the proposed sale.
Accordingly, Forty Wall petitioned the court in the Burchill proceeding for a determination as to whether the subject premises should be offered for sale, and if so, upon what terms and conditions. It also moved for consolidation of the derivative actions with the Burchill proceeding. The Justice presiding at the Additional Special Term for Trust Mortgages appointed a Referee to inquire into the value of the property and report as to whether it should be offered for sale; and he reserved decision on the application for consolidation.
Hearings were held on 16 separate days before the Referee. Thereafter he recommended that the property be put up for sale at public auction, at an upset price of $17,000,000. The Additional Special Term confirmed the Referee's report, consolidated the derivative actions with the Burchill proceeding and dismissed the former. On October 27, 1959, the property was offered for sale at public auction with an opening price of $17,000,000, and after spirited bidding was sold to Webb Knapp for $18,150,000.
Application for awards of fees and disbursements in the derivative actions and Burchill Act proceeding were then made by counsel and real estate appraisers, who participated either in the derivative suits, the reorganization proceeding hearings, or both.
The principle is now too firmly established to require discussion that a stockholder bringing a successful derivative action that benefits the corporation is entitled to reimbursement for expenditures necessarily made or incurred in the prosecution of the action. And it is generally recognized that almost invariably plaintiff stockholders and their attorneys arrange that counsel fees will be contingent upon success, and paid from corporate funds, not by the stockholder clients. If stockholders had to pay or commit themselves to pay lawyers to prosecute lawsuits on behalf of a class constituting a number of other uncommitted stockholders as well as themselves, it is unlikely that many derivative actions would be instituted.
For the same reasons, arrangements to pay counsel representing bondholders or, as here, stockholders once bondholders, in a Burchill Act reorganization proceeding are also uniformly made on a contingent basis. The outcome is not as speculative in a Burchill Act proceeding, however, for unlike most derivative actions, the fund from which fees are to be paid is already in existence; and the criteria justifying the payment of fees in a Burchill Act proceeding are much easier to fulfill. Section 122 Real Prop. of the Real Property Law provides that the expenses and compensation of "any committee or person who shall have submitted a plan of reorganization or modifications thereof shall be fixed at such sum as the court may deem reasonable". The only contingency, therefore, that might defeat an application for compensation in a Burchill Act proceeding is that the court may find that the applicant has contributed nothing to the ultimate result of the proceeding.
So generally, and most pointedly in these particular consolidated matters, the attorney for a successful plaintiff in a derivative stockholders' action should receive a larger fee than an attorney rendering similar services in a Burchill Act proceeding. It therefore becomes important to determine whether this is exclusively a derivative stockholders' action, as contended by the minority opinion; and if not, to allocate the services rendered between the two types of litigation.
As a catalytic aid in resolving this question, we should ask what would have happened had this litigation ended with the termination of the derivative action — namely, the granting of the injunction restraining temporarily the sale proposed by Webb Knapp. Certainly no business enterprise of the size of the office building comprising the subject property could be left in such an indeterminate condition. The parties had to proceed further, to find whether the property should be sold, and if so, for what price, and upon what terms and conditions. The temporary injunction was a major victory, but a victory which, like Antietam, could be frittered away by inaction.
As the minority opinion states, these "are the exact issues that would have been litigated had the injunction proceeding gone to trial." But the Justice at Special Term who granted the temporary injunction, the Justice who reopened the Burchill Act proceeding, and all of the parties to the initial action and the later proceeding, clearly intended that those "exact issues" should be litigated instead in the Burchill Act proceeding. In his opinion granting the temporary injunction the Justice at Special Term made specific and pointed reference to the retention of jurisdiction under the 1940 Burchill Act proceeding, "to pass upon the merits of a sale of its property ending its existence." After noting the appropriateness of the Burchill Act design to determine the issues remaining to be litigated, he went on to say: "Here, it will be noted there was an express reservation of jurisdiction with regard to any and all applications as might from time to time seem necessary `fully to consummate and carry out' the plan of reorganization. The final act of consummation of the plan is, of course, the sale of this property."
The court had ample authority to litigate the unresolved issues and effectuate a sale under the Burchill Act. It would, therefore, be grossly unfair to some of the lawyers and experts who expended substantial time and effort in that proceeding to hold that their compensation must be fixed, perhaps denied them, under rules governing allowances in derivative actions which everyone in those cases had virtually abandoned.
The Burchill Act formula was uniquely adapted to resolve the impasse created by the granting of the temporary injunction in the derivative action. The statutory reorganization procedures of the Burchill Act were created in 1933 to furnish a pattern of protection to real estate bondholders — mostly small investors — whose investments were mired in a depressed real estate market. To cope with the varied and manifold problems posed in those critical times, the court was endowed with very broad powers placing a premium on creativity and resourcefulness — all subject, however, to bondholder approval. The court and interested parties could explore and command the situation much more comprehensively and creatively than if the derivative action had been pursued to its conclusion. We are persuaded that court and parties adopted the sensible course in electing to turn from the derivative action to the Burchill Act proceeding. And in any event, and as a practical consideration in reviewing these allowances, it is highly unlikely that the cost to the corporation of litigating the derivative actions to their conclusion would have been less than the cost of the Burchill Act proceeding. Courts and counsel appear to have become conditioned to the granting of more generous allowances in the former than in the latter.
It would be most unrealistic, therefore, and unfair to the corporation, to hold with the minority opinion that this litigation was in effect all one unrelieved derivative action. The services rendered must be allocated to the related yet separate derivative action and reorganization proceeding, and a much higher scale of compensation allowed in the former than in the latter. This holds true particularly on the instant appeal, since the Burchill Act proceeding developed into nothing more than an appraisal proceeding.
Upon our holding that a separate Burchill Act proceeding ensued, the attorneys for the majority stockholder are entitled to an allowance for services rendered in that proceeding in which they contributed importantly to the evolution of the plan of sale. They are not entitled to compensation for their role in the derivative action, in which they opposed the granting of the temporary injunction.
The applications for allowances to the two appraisers retained by the stockholder plaintiffs in the derivative actions, who also testified as experts in the reorganization proceeding, pose some problems. First, the common law and the Burchill Act provide that the plaintiff in a derivative action and any person or committee submitting a plan in a Burchill Act proceeding, will be entitled to reasonable expenses incurred in the prosecution of his claim. If followed literally, the lawyer would prepare his own affidavit of services and his estimate of their value, together with those of experts or others entitled to compensation, submit them to the client and then to the court with an approving affidavit of the client. This idle ritual has not been required by courts because it would merely encumber the record needlessly. The court, not the client, assesses the value of the services rendered on a contingent basis. It does not evaluate the skill and time expended and the results achieved on the client's notion of their value. If the lawyer or expert should be required to submit a bill in specified amount to the client, then further complications ensue. It would aid the court only if submitted on the basis of an amount previously agreed upon with the rare client who would thus commit himself absolutely; and then would probably be considered by a court only to set a ceiling on the allowance. When the allowances are sought on a contingent basis, as were all those requested here, there is no point to channeling the applications through laymen.
Contingent retainers are indigenous to this country. It is generally believed that the advantages they offer clients — particularly indigent ones — and to lawyers, overbalance the many forms of abuses to which they are susceptible. A pervasive apprehension about contingent retainers — whether with lawyers or experts collaborating in preparation or trial of cases — is that a person whose compensation is thus conditioned on success becomes a sort of joint adventurer with the party hiring him in the litigation enterprise; and that such an arrangement conduces to perjury and other practices that will tend to pervert justice. The contingent retainer between lawyer and client is countenanced because the lawyer is an officer of the court, ordained and disciplined to deal fairly with court, client and adversary. Besides, it is assumed that a lawyer will be as scrupulous and honorable in the performance of his duties, and will labor as devotedly and diligently in the interests of a client, whether he is paid an absolute fee or whether his compensation hinges on the successful outcome of the lawsuit.
A similar confidence does not embrace nonlawyers. Nevertheless, accountants, and less often, appraisers, have been consistently, without demur, awarded allowances in derivative actions and their variants on a contingency basis. As is the case with lawyers, stockholders or bondholders suing in derivative actions or Burchill Act proceedings cannot undertake to pay the substantial fees earned by accountants, appraisers and experts in other fields. In such litigation the complaining security holder seldom possesses the ability to match the enormous resources of management, which can commit itself to the payment of large fees absolutely. And yet, without the services of such experts, meritorious cases may be prejudiced seriously or destroyed.
Except for a long-standing, unarticulated acquiescence in payment of contingent fees to experts for these pragmatic reasons, there appears to be no body of law relating specifically to this subject. There are cases that stamp as illegal agreements to furnish evidence or to testify in order to establish a claim in litigation to be commenced ( Wellington v. Kelly, 84 N.Y. 543; Lyon v. Hussey, 82 Hun 15; Cowles v. Rochester Folding Box Co., 179 N.Y. 87). See in this connection Bergoff Detective Serv. v. Walters ( 239 App. Div. 439), in which the solicitude of the law with the maintenance of the marital relation was an added consideration in holding a contract intrinsically illegal which provided for compensation to a private detective agency contingent upon success in procuring evidence as to adultery on the part of a wife.
In Hough v. State of New York ( 145 App. Div. 718) an agreement to pay an appraiser a stated sum provided his appraisal was substantially less than that of the expert for the adversary party was held to be against public policy and unenforcible. And in Matter of Schapiro ( 144 App. Div. 1), the respondent attorney was disbarred for agreeing, among other things, to pay a doctor a substantial portion of the recovery to testify in a negligence action. The gravamen of the charges was, first, that the amount to be paid the doctor in the event of success was to secure his testimony to a particular set of facts; and second, that the respondent allowed the doctor to testify that he had no interest in the recovery and no understanding as to what his compensation would be.
In other jurisdictions it has been held that an agreement to compensate a witness conditioned upon recovery is not illegal nor against public policy; but can be shown upon the trial to establish bias or otherwise affect the credibility of the witness ( Lack Malleable Iron Co. v. Graham, 147 Ky. 161; Reed v Firemen's Ins. Co. of Newark, 78 N.J.L. 549; Provident Sav. Life Assur. Soc. v. King, 216 Ill. 416).
While some of the general pronouncements in these New York cases might seem to stamp all contingent fee arrangements made with a witness illegal and as against public policy, each case turned on some unconscionable circumstance that is not even suggested in connection with the retention of the two appraisers whose allowances are under review. In the first place, they were hired to advise the claimants, and if needs be, testify. There is nothing in the record to indicate they were hired to advise and testify as to anything but their honest opinions as to the value of the property. They had no hand in fostering the litigation; and their compensation was not fixed between them and the parties in any sum or percentage dependent upon success, but was to be in an amount allowed by the court. This amount presumably would be reasonable and not immoderate, and would reflect, among other things, the experience, skill and standing of the appraisers, the contribution they made to the litigation complex in reaching a right result, and the time expended. Furthermore, they testified only in the Burchill Act proceeding, and performed a substantial part of their preparation and gave considerable advice to the original plaintiffs in that area of the consolidated matters. By the time the litigation moved into its reorganization phase, the fact that they would be compensated, although not in what amount, was well assured. Certainly, the Judge in considering their testimony was fully aware of the fact that they had not been promised a fee by their clients, that they would look to him for compensation, and that in this aspect of the litigation such compensation would be measured by the fairest contribution they could make to the promulgation of the most desirable and feasible plan of reorganization. Under the circumstances, the allowances made to the appraisers should not be disturbed.
The allowances to the Referee and the court-appointed appraiser were made more than half a year before the allowances brought up on this appeal — upon the motion to confirm the Referee's report. We appreciate that some Justices at Special Term have followed this practice. We deem it more appropriate, however, that there be a uniform procedure in this regard; and are unanimously and firmly of the opinion that allowances to Referees and court-appointed experts should be made subsequent to the filing of the order granting all other allowances.
We are of the opinion that some of the allowances should be modified or eliminated. The allowance to Charles Trynin and Irving Steinman is reduced to $75,000, that to Lynton Saslow, M.B. and D.W. Blumenthal is reduced to $75,000, the allowance to Nemerov Shapiro is reduced to $7,500, and that to Israel Beckhardt is reduced to $3,500. The awards made to Herbert L. Brickman, Samuel Rosenberg and David L. Charal are stricken in their entirety. The three attorneys last mentioned did not participate in the stockholders' derivative actions which led to the reopening of the 1939 Burchill Act proceeding. They contributed nothing to the development of the plan for liquidation of the mortgaged property which was ultimately recommended by the Referee and approved by the court below. In fixing these awards we reiterate that we regard the services rendered in the abbreviated stockholders' derivative actions, prosecuted as they were under the urgency of time pressures resulting from the threatened sale of the property, as much more valuable than those rendered in the protracted Burchill Act hearings. The Burchill Act hearings were in essence an appraisal proceeding. They were devoted almost exclusively to the relatively narrow problem of the fair upset price to be fixed upon the sale of the property, after short shrift was made of the issue as to whether a sale of the property was in the best interests of the corporation and its security holders.
The appeals of Webb Knapp, Inc., and Isaac, Mildred, Louis and Harry Blank, to the extent that they attack the propriety of certain allowances on the ground of excessiveness, are dismissed. Without passing upon the possible standing of stockholders to appeal from allowances made to others under certain circumstances in some derivative actions or reorganization proceedings, we hold that the above-mentioned appellants, in the positions they advance upon this appeal, are not aggrieved parties in respect of allowances made to other applicants ( Matter of Hotel St. George Corp., 277 App. Div. 1125).
The order dated January 20, 1960, should be modified as indicated, on the law, the facts and in the exercise of discretion, and otherwise affirmed, without costs to any of the parties.