Mercurius Investments v. Aranha

• Decision Date: 04 April 2001
• Docket Number: No. 00-2306,00-2306
• Citation: 247 F.3d 328
• Parties: (1st Cir. 2001) MERCURIUS INVESTMENT HOLDING, LTD., Appellant, v. WAYNE J. ARANHA AND ISHMAEL LIGHTBOURNE, OFFICIAL LIQUIDATORS OF THORNHILL GLOBAL DEPOSIT FUND, LTD., Appellees. Heard
• Court: U.S. Court of Appeals — First Circuit

Page 328

247 F.3d 328 (1st Cir. 2001)

MERCURIUS INVESTMENT HOLDING, LTD., Appellant, v. WAYNE J. ARANHA AND ISHMAEL LIGHTBOURNE, OFFICIAL LIQUIDATORS OF THORNHILL GLOBAL DEPOSIT FUND, LTD., Appellees.

No. 00-2306

United States Court of Appeals For the First Circuit

Heard April 4, 2001

Decided May 3, 2001

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Rya W. Zobel, U.S. District Judge]

[Copyrighted Material Omitted] Peter J. Haley, with whom Stephen F. Gordon, Gordon & Wise, Gardere & Wynne LLP, John C. Nabors, and Holland Neff O'Neil were on brief, for appellant.

Richard A. Oetheimer, with whom Goodwin Procter LLP, Daniel M. Glosband, and Colleen A. Murphy were on brief, for appellees.

Before Selya, Boudin, and Lynch, Circuit Judges.

LYNCH, Circuit Judge.

This is a dispute over the control of $3 million deposited in February 1999 in a client-fund account of a Boston law firm. The essence of the dispute is whether the account was a valid escrow account. If it was, then the funds may be within direct reach of Mercurius Investment Holding, Ltd., which invested the same amount of funds in Thornhill Global Deposit Fund, Ltd., now in liquidation in the Bahamas; if it was not, then the funds are under the control of the foreign liquidators of Thornhill, and Mercurius is simply one of a long list of claimants in line in the Bahamas proceedings. We affirm the holding of the lower court that Thornhill and Mercurius never created an escrow account, so that the funds properly belong with Thornhill's liquidators.

I.

The following facts are not in dispute. After its $3 million investment in Thornhill went sour, Mercurius brought suit for fraud in Massachusetts state court in December 1998. Seeking prejudgment security, Mercurius requested that the court issue a preliminary injunction barring Thornhill from distributing any of its assets. Instead, the court issued an order that Thornhill place the contested funds in escrow. The order, issued on January 11, 1999, stated in relevant part:

THAT, the Defendant Thornhill Global Deposit Funds Limited shall deposit into an escrow account within the United States jointly held by counsel for the Plaintiff . . . and counsel for the Defendants . . . the amount of three million dollars ($3,000,000.00 U.S.), in accordance with the terms and conditions of an escrow agreement between counsel (or absent such agreement upon further order of the Court) . . . .

Counsel for the parties then exchanged a series of letters, in which both parties proposed draft escrow agreements wherein various banks were nominated to serve as the escrow agent. In the middle of this exchange, on February 2, counsel for Mercurius sought assurances that Thornhill intended to fund the escrow account. In response, on February 4, Thornhill's counsel, Hill & Barlow, called Mercurius' counsel to verify that Thornhill had deposited $3 million into the firm's client-fund account. That same day, counsel for Mercuirus faxed a one-sentence letter to Thornhill's counsel suggesting that the funds were now held in escrow. The letter stated: "This is to confirm our recent telephone conversation in which you informed me that your client . . . has deposited three million dollars ($3,000,000.00) into your firm's escrow account pursuant to [the state court's] January 11, 1999 Order." Hill & Barlow did not answer the letter, and negotiations between counsel for the two parties continued. On February 10, Hill & Barlow sent another draft escrow agreement to counsel for Mercurius for his consideration; counsel for Mercurius responded by asking for an electronic copy of the draft so that he could more easily make edits.

Negotiations had proceeded no further when, on February 24, 1999, Thornhill went into bankruptcy in the Bahamas. A suggestion of bankruptcy was filed in the Massachusetts state court the next day. Thereupon, counsel for Mercurius again sent a letter indicating that he believed the $3 million had already been placed into escrow: the letter advised counsel for Thornhill that "Mercurius continues to expect that you . . . will take no action to transfer or alienate the $3 million escrow account." In a follow-up letter some weeks later, counsel from Hill & Barlow denied that any escrow account had ever been created, and noted that, due to the initiation of the Bahamian bankruptcy proceedings, the contested funds were now under the authority of Thornhill's liquidators. Subsequently, the liquidators requested that Hill & Barlow transfer the funds to them; but Hill & Barlow refused, citing the risk of being found in contempt of the state court escrow order.

On March 25, 1999, Thornhill's liquidators brought this ancillary proceeding in U.S. Bankruptcy Court under 11 U.S.C. § 304 to enjoin continuation of the state court action and to order the turnover of the $3 million for administration in the Bahamian bankruptcy proceedings. The bankruptcy court, in a well-reasoned decision, entered summary judgment in favor of the liquidators. Thornhill Global Deposit Fund, Ltd. v. Eagle Fund, Ltd., 245 B.R. 1 (Bankr. D. Mass. 2000). The court found that no escrow account had been created, so ownership of the funds remained in Thornhill; accordingly, it ordered that the funds be turned over to Thornhill's liquidators. Id. at 4. The district court affirmed the bankruptcy court's ruling. Mercurius requested a stay pending appeal from this court, which was denied. Thereupon, Hill & Barlow transferred the $3 million to Thornhill's liquidation estate, where it is presently being administered.

II.

Under Massachusetts law, which controls here, "[t]o deposit a sum in escrow is simply to deliver it to a third party to be held until the performance of a condition or the happening of a certain event." Childs v. Harbor Lounge of Lynn, Inc., 255 N.E.2d 606, 608 (Mass. 1970); see also Black's Law Dictionary 565 (7th ed. 1999) (defining escrow as "[t]he general arrangement under which . . . property is delivered to a third person until the occurrence of a condition"). An escrow agreement need not be embodied in a formal contract and may be inferred from an exchange of letters. See, e.g., Kaarela v. Birkhead, 600 N.E.2d 608, 609-10 (Mass. App. Ct. 1992). Moreover, while cases often speak of funds in escrow as being held by a third party, one party's counsel may act as an escrow holder so long as the...