National Union Fire Ins. Co. Pittsburgh, Pa. v. Proskauer Rose Goetz & Mendelsohn

• Decision Date: 02 August 1994
• Citation: 165 Misc.2d 539,634 N.Y.S.2d 609
• Court: New York Supreme Court
• Parties: NATIONAL UNION FIRE INSURANCE COMPANY PITTSBURGH, PENNSYLVANIA, Plaintiff, v. PROSKAUER ROSE GOETZ & MENDELSOHN, and Dale A. Schreiber, Defendants.

Page 609

634 N.Y.S.2d 609

165 Misc.2d 539

NATIONAL UNION FIRE INSURANCE COMPANY PITTSBURGH, PENNSYLVANIA, Plaintiff, v. PROSKAUER ROSE GOETZ & MENDELSOHN, and Dale A. Schreiber, Defendants.

Supreme Court, New York County,

IAS Part 14.

Aug. 2, 1994.

Richard Mills, Lambert & Weiss, New York City, for plaintiff.

David Goldblat, Proskauer Rose Goetz & Mendelsohn, New York City, for defendants.

WALTER M. SCHACKMAN, Justice.

Motion numbers 22 and 106 of the February 3, 1994 calendar are consolidated for decision.

The question presented in the motions is whether defendants in their capacity as escrow agents are liable to plaintiff for the dissipation of funds claimed to have been placed in escrow.

Plaintiff moves pursuant to CPLR 3212 for an order granting summary judgment on its first and second causes of action and awarding it $1,200,000 in damages. Defendants cross-move pursuant to CPLR 3212 for an order granting summary judgment dismissing the complaint. By separate motion brought by order to show cause plaintiff moves pursuant to CPLR 6301 for an order preliminarily enjoining defendants from taking any action that will diminish, prejudice or impair plaintiff's right to certain escrow held by defendants and requiring them to deposit in court the sum of $1,200,000, with interest.

Parties

Plaintiff, National Union Fire Insurance Company of Pittsburgh, Pennsylvania, is a Pennsylvania insurance corporation authorized to conduct business in this State, e.g., the issuing of appeal bonds on behalf of a party appealing a judgment entered against it. Plaintiff maintains offices in New York, New York.

Defendant Proskauer Rose Goetz & Mendelsohn is a New York law partnership with offices in New York, New York (the Law Firm). Defendant Dale A. Schreiber (Schreiber) is an attorney licensed to practice law and is a partner of the Law Firm.

Preliminary Background

In February 1991 the Circuit Court of Cook County, Illinois, entered an order and judgment in the amount of $767,986.86, against Towers Financial Corp. (TFC), and in favor of F.H. Prince & Co. (Prince) (F.H. Prince & Co. Inc. v. Towers Financial Corp., No. 89 L 15714). A further order and judgment for attorneys' fees and costs dated April 4, 1991, in the amount of $60,967.39, was also entered against TFC.

On or about May 10, 1991, in consideration of plaintiff's agreement to issue an appeal bond (the Appeal Bond) on behalf of TFC and in favor of Prince, the defendants Law Firm and Schreiber notified plaintiff that TFC executed an escrow agreement wherein TFC agreed to indemnify plaintiff against any loss it might incur as a consequence of issuing the Appeal Bond. To secure this obligation, TFC agreed to deposit collateral, i.e., certificate[s] of deposit, in the amount of $1.2 million, in escrow with the Law Firm (the Application Letter) (see, Defendants' Affs. In Opposition, Ex A).

In the Application Letter dated May 10, 1993 (discussed, infra ), the Law Firm acknowledged it had entered an escrow agreement (the Escrow Agreement, discussed infra ), with TFC whereby the former undertook the obligations of escrow agent with respect to the subject certificate[s] of deposit and that the Law Firm would hold and eventually deliver the collateral to plaintiff in conformity with the terms of the Application Letter and Escrow Agreement. In reliance upon the Application Letter, plaintiff posted Appeal Bond No. 10-12-52, in the sum of $1.2 million, to secure the Prince judgment that is presently pending decision on appeal in the Illinois State courts.

By letter dated April 17, 1992, the Law Firm advised TFC and plaintiff that it was resigning as escrow agent effective May 8, 1992, and that, among other things, as set forth in the Escrow Agreement, it would deposit in court the collateral. The Law Firm never deposited the collateral.

By letter dated January 27, 1993, followed by further correspondence, in March, July, and August of 1993, plaintiff inquired with the Law Firm about the status of the collateral and ultimately requested the Law Firm release the collateral on the ground that the premium for the Appeal Bond had not been paid by TFC, as it was required to do under the terms of the Escrow Agreement. It is noteworthy that prior to plaintiff's request for release of the collateral TFC filed for bankruptcy protection in March of 1993, pursuant to Chapter 11 of the Bankruptcy Code.

In August 1993, Schreiber on behalf of the Law Firm refused to release to plaintiff the certificate of deposit on the ground that it was subject to a claim by TFC bankruptcy trustee and the Law Firm's own retaining lien for legal services rendered ¹. At that time, plaintiff learned from the defendants that the $1.2 million that funded the subject certificate of deposit was withdrawn by TFC on or about August 9, 1992, two days after the maturity date of the certificate of deposit and that the certificate of deposit was no longer funded. Consequently, this action was commenced.

The Complaint

Plaintiff commenced this action by service of the summons and complaint on or about September 28, 1993. The complaint sets out eight causes of action against the defendants.

Plaintiff maintains that the collateral of $1.2 million was released to TFC in violation of the express terms of the Application Letter and Escrow Agreement and that the defendants have improperly withheld their refusal to release the subject certificate of deposit. As a result, plaintiff asserts that the defendants are in breach of their fiduciary duty and breach of contract (the first and second causes of action), and must account to plaintiff for the collateral deposited in their custody (the third cause of action). Moreover, plaintiff maintains that as a consequence of defendants' actions and inactions, defendants have been unjustly enriched requiring the imposition of a constructive trust and requiring the defendants to deliver the certificate of deposit and pay over the $1.2 million cash equivalent to the plaintiff (the fourth cause of action). Plaintiff further assert equitable fraud and misrepresentation on the ground that the defendants knew or should have known that plaintiff would rely and relied upon their affirmative representations and passive omissions regarding the preserving, conserving, and reinvesting of the collateral deposited with defendants (the fifth cause of action), and that the defendants' actions constitute conversion (the sixth cause of action), as well as monies wrongfully had and received (the seventh cause of action). Lastly, plaintiff maintains that the defendants were grossly negligent in not acting in accordance with the terms of the Application Letter and Escrow Agreement (the eighth cause of action). Plaintiff seeks compensatory damages and equitable relief.

Answer

Defendants answer and deny the material allegations of the complaint. In their answer the defendants contend that TFC never transferred to defendants control to the $1.2 million that funded the certificate of deposit. Defendants do concede that TFC irrevocably delivered to them the certificate of deposit. They interpose five affirmative defenses: 1) failure to state a claim; 2) plaintiff's negligence was the sole cause of any loss; 3) any property held by defendants belongs to TFC's bankrupt estate; 4) plaintiff failed to join TFC, which is allegedly an indispensable party; and 5) plaintiff failed to mitigate damages in that it could have applied to the Bankruptcy Court for relief.

The Motions

Plaintiff and defendants move and cross-move for summary relief. Plaintiff also moves for preliminary injunctive relief. The Court will first address the summary judgment motions and then the motion for preliminary injunction.

Plaintiff maintains that it has established, as a matter of law, that defendants have breached their fiduciary duty to plaintiff and also breached the terms of the Application Letter and Escrow Agreement, and, therefore, summary judgment is warranted on the first and second causes of action.

Defendants maintain that TFC never delivered to their control the $1.2 million that funded the certificate of deposit although they do not dispute that the certificate of deposit was irrevocably delivered to them. They argue no escrow was ever created regarding the $1.2 million and therefore, as a matter of law, the complaint should be dismissed. Defendants contend no escrow funds in that amount ever came into being and plaintiff's claim for breach of escrow and breach of fiduciary duty based on defendants' alleged failure to pay over to plaintiff the $1.2 million must inevitably fail. Defendants argue that delivery of the certificate of deposit was not a delivery of the funds thereunder because the certificate and the funds are completely separate entities.

As to the certificate of deposit, defendants argue that there are competing claims between the plaintiff and TFC's bankruptcy trustee, and, thus, they have appropriately refused to turn over to plaintiff the certificate in the absence of a court order ².

The movant on a motion for summary judgment must establish its cause of action or defense "sufficiently to warrant the court as a matter of law in directing judgment" in its favor, and it must do so by tender of evidentiary proof in admissible form (CPLR 3212[b]; Zuckerman v. City of New York, 49 N.Y.2d 557, 562, 427 N.Y.S.2d 595, 404 N.E.2d 718 [1980]; Friends of Animals, Inc. v. Associated Fur Mfrs., Inc., 46 N.Y.2d 1065, 1067-1068, 416 N.Y.S.2d 790, 390 N.E.2d 298 [1979].

Both the plaintiff and defendants maintain they have established that each is entitled to judgment as a matter of law and that none of the material facts are in dispute in the instant matter.

Escrow

An escrow is a written agreement that imports a legal obligation to deposit an instrument or property by the promisor (TFC) with a third party (the Law Firm) to be kept by the latter in the capacity of depositary or escrowee until the...