Opinion
2628-04.
Decided May 6, 2008.
Robert L. Folks Associates, LLP, Melville, New York, (for Plaintiffs in the Suffolk Co. Action), Philips Nizer, Esq., Garden City, New York, COUNSEL FOR PLAINTIFFS.
(for Paul V. Craco), Craco Ellsworth, Esqs., Huntington, New York, (for Mark D. Mermel), L'Abbate, Balkan, Colavita Contini, LLP, Garden City, New York, (for Randolph Froehlich), Certilman, Balin, Adler Hyman, LLP, Hauppauge, New York, (for The Christopher Companies), Berkman, Henoch, Peterson Peddy, P.C., Garden City, New York, Michael LoTurco — pro se, Huntington, New York, COUNSEL FOR DEFENDANTS.
This action arises out of a business/real estate venture which failed to materialize. Plaintiff, Daniel Ehrlich ("Daniel") and Defendant, Michael Loturco ("Loturco") were partners in a project which included the planned purchase of property located on East Main Street in Yaphank New York ("Yaphank property"), which was to be operated as a sand mine and, eventually, a residential subdivision.
Daniel, a real estate broker, was to secure initial financing and Loturco was to provide mining expertise, labor and heavy equipment. The mine was expected to generate sufficient profit to finance the purchase of the property. Daniel secured initial funding in the amount of $145,000 from his father, Plaintiff, Mel Ehrlich ("Mel"). The venturers were represented by separate attorneys. Defendant, Paul V. Craco Esq. ("Craco") represented Loturco and R. Bruce Claro Esq. (Claro") represented Plaintiffs.
The Yaphank property was owned by Defendants Randolph ("Randolph") and William Froehlich (Collectively "Froehlich"). It was the subject of litigation in Suffolk County for breach of a contract of sale, return of a $100,000 down payment and specific performance. Loturco had an interest in the purchase of the Yaphank property with Defendant, The Christopher Companies, the contract vendee. However, he was seeking a new source to fund the purchase without The Christopher Companies.
Daniel agreed to join Loturco in the venture. The Froehlichs, however, could not convey the property to Daniel and Loturco until the Suffolk litigation was concluded, inasmuch as a lis pendens was filed against the property by Zion Investments, Inc. ("Zion"), an entity related to The Christopher Companies.
Zion agreed to accept $145,000 in settlement of the Suffolk action against the sellers, Froehlich. Loturco negotiated with Randolph to purchase the Yaphak Property in the name of a company not yet formed.Mel wired $145,000 to Defendant Mark D. Mermel Esq. ("Mermel"), attorney for Zion, on August 23, 2001. Releases were exchanged between Zion and the Froehlichs and the settlement funds were disbursed. The Froehlichs then forwarded a draft contract of sale to Loturco's attorney, Craco. They left the purchaser's name blank to be inserted by Loturco once his company was formed.
Critically, at the time of the wire transfer on August 23, 2001, Daniel and Loturco had not executed security agreements of any kind securing the $145,000 loan. Mel testified at his deposition that, based upon information provided to him by his attorney, he believed that Loturco had executed the security document in the form of a deed of sale for heavy equipment owned by Loturco. The plan was for Mel to return the equipment once the property was purchased in exchange for UCC financing statements. In September 2001 Mel's counsel, Claro forwarded correspondence to Craco forwarding a promissory note and security agreement for Loturco's signature. Loturco refused ostensibly because no security was demanded from Daniel.
The Yaphank property sale did not go through. As a result Mel attempted to reach Loturco to get his money back. After filing a complaint with the District Attorney's Office, Plaintiffs commenced this action to recover the $145,000 loan plus $10,000 paid to Liberty Funding to process a "letter of interest" regarding a loan to finance the project. Plaintiffs have alleged fraud and conversion against Craco, conversion and breach of fiduciary duty against Mermel and fraud, conversion and unjust enrichment against Randolph.
DISCUSSION
A. Mermel's Motion for Summary Judgment
1. Breach of Fiduciary Duty
Mel avers that Mermel owed him a fiduciary duty as holder of the escrowed $145,000. He claims that the escrow agreement was breached when Mermel released the funds before Loturco executed and delivered a security agreement in favor of Mel.
He further avers that receipt of the signed security agreement was a condition precedent to release of the wired funds.
Relying upon 22 NYCRR 1200.46(c)(1) [Code of Professional Responsibility Disciplinary Rule (DR) 9-102], Mel claims that Mermel, as escrowee, had an ethical duty to notify him that he received the wired funds. Had he done so Mel would have notified him of the condition for release of the escrow leaving Mermel unable to release the funds prior to delivery of a signed security agreement from Loturco.
The Disciplinary Rule relied upon by Mel requires an attorney to "promptly notify a * * * third person of the receipt of funds * * * in which the * * * third person has an interest" and then "promptly pay or deliver to the * * * third person as requested * * * the funds * * * in the possession of the lawyer which the * * * third person is entitled to receive". Under circumstances where a third party contemplates distribution by an attorney to his client and fails to put that attorney on notice that he intended to retain entitlement to the proceeds, notification would be "pointless" and it is "highly dubious whether DR 9-102 has any application to [such a] controversy." Shapiro v. McNeill, 92 NY2d 91, 96 (1998). In any event "an ethical violation will not, in and of itself, create a duty that gives rise to a cause of action that would otherwise not exist at law." Id. at 97.
Moreover, with respect to Mermel's disbursement of his own attorney's fees, he may withdraw funds from his attorney escrow account as they are earned. Indeed, he must do so in order to avoid commingling of client and attorney funds. In re Biegelson, 25 AD3d 124 (2nd Dept. 2005).
In addition, Mermel's client was entitled to receive the settlement proceeds once releases were exchanged among the parties to the Suffolk litigation.
Plaintiffs have offered no evidence of any escrow agreement which required Mermel to retain the settlement funds on behalf of anyone other than his client, the Plaintiff in the Suffolk litigation, or any conditions other than an exchange of releases in that action. There is no evidence to support Mel's claim that Mermel was aware of his condition to release of the fund or his interest in the funds as a stranger to the Suffolk litigation.
"An escrow is a written instrument, which by its terms imports a legal obligation, deposited by the . . . promisor . . . or his agent with a stranger or third person, who is not a party to the instrument, to be kept by the depositary until the performance of a condition . . . and then to be delivered over to take effect." Silberstein v. Murdoch, 216 App. Div. 665, 670-671 (1st Dept. 1926), quoting 21 C. J. 865. Its purpose is "to assure the carrying out of an obligation already contracted for" and it need not be in writing. Russell v. Demandville Mtg. Corp., 11 Misc 3d 1056(A) (Sup.Ct. Kings Co. 2006).
The record does not support Mel's claim that there was an escrow agreement binding Mermel to hold the wired funds in escrow until he received security from Loturco. Nor does the deposition testimony of any party or non-party witness support Mel's claim, including that of his son, Daniel, or his former attorney, Claro. Mel could not force Mermel "against his will . . . to act as an escrow agent." Tinker Nat. Bank v. Grassi, 57 Misc 2d 886 (Sup.Ct. Suffolk Co. 1968).
Although Mel knew that the purpose of the wired funds was to settle a lawsuit between the Christopher Companies and Froehlich, it was his erroneous belief that, because he wired funds to an attorney escrow account, he was protected and the funds would remain in escrow until he received security documents from Loturco. His belief rests upon a legally erroneous understanding of an attorney's duties with regard to attorney escrow accounts.
Mermel acted in accordance with his ethical obligations to the parties and the settlement agreement in the Suffolk litigation. The releases were held in escrow until the settlement funds were received, and he promptly distributed the funds to his client except for that portion which constituted his legal fees.
Mel contends that he was misled because the funds were wired per instruction to an attorney's escrow account and he believed there would be no reason for an escrow if it would not be held for his benefit. Contrary to this contention, the funds settling the Suffolk action were not improperly wired to an escrow account. In accordance with Judiciary Law § 497 and Disciplinary Rule 9-102, which regulate attorney fiduciary funds, Mermel had a fiduciary duty to insure the integrity of the funds due to his client and entrusted to him by segregating such funds in a special account. Disciplinary Rules require an attorney to identify the special account as an Attorney "Special Account", "Trust Account", or "Escrow Account" ( 22 NYCRR 1200.46[a][1][2]) (DR 9-102).
Based upon his erroneous belief, Mel did not wire instructions with the funds and has offered no authority that Mermel had a duty of inquiry regarding the source of the funds. Indeed, the law is to the contrary. Mermel did not have a duty to inquire with regard to any conditions Mel, a third party, may have placed upon the wired funds merely because it was payable to his attorney trust account. That the wire "was made payable to Defendant's escrow account did not transform Defendant into an escrow agent with a fiduciary duty to inquire . . . as to any conditions attached to the payment of the check." Shapiro v. Snow Becker Krauss P.C., 208 AD2d 461 (1st Dept. 1994), lv. app. den. 85 NY2d 803 (1995). See also, Shapiro v. McNeill, 92 NY2d 91, 96 (1998); and Rosenberg v. Canetti Troodler, 309 AD2d 914 (2nd Dept. 2003). Accordingly, the cause of action for breach of fiduciary duty must be dismissed.
2. Conversion
The conversion cause of action holds no greater merit. United Credit Corp. v. J.L.E. Industries, 251 AD2d 69 (1st Dept. 1998). Conversion is the "unauthorized exercise of dominion or control over specifically identified property which interferes with the owner's rights." Hoffman v. Unterberg , 9 AD3d 386 , 388 (2nd Dept. 2004). Money may be converted, and when funds are designated for a particular purpose "the use of those funds for an unauthorized purpose constitutes conversion." Id. Where, as here, possession is "initially lawful" conversion occurs when "there is a refusal to return the property after a demand." Id. Mel's failure to demand a return of the wired funds before their distribution precludes his claim of conversion. United Credit Corp. v. J.L.E. Industries, supra. Even after it was clear that the Yaphank property purchase had fallen through, Mel did not approach Mermel for a return of the funds wired to his escrow. Rather, he sought their return from Loturco. As a matter of law, there was no demand before or after disbursement of the escrow. Accordingly, the complaint as against Mermel must be dismissed.
B. Randolph Froehlich's Motion for Summary Judgment
1. Fraud and Conversion
Randolph moves for dismissal of fraud, conversion and unjust enrichment claims against him. He avers that he never spoke to either of the Plaintiffs and did not make any representations to them. Neither did he ever exercise dominion over the fund or interfere with Plaintiff's ownership. Accordingly, he cannot be held liable for conversion ( Colavito v. New York Organ Donor Network , 8 NY3d 43 , 50) or fraud ( Jo Ann Homes at Bellmore, v. Dworetz, 25 NY2d 112, 119).
Plaintiffs' opposition addresses only the unjust enrichment claim against Froehlich, thereby conceding that summary judgment is warranted with respect to the fraud and conversion claims.
2. Unjust Enrichment
With respect to the claim for unjust enrichment, the context is the Suffolk action. Zion, the Suffolk Plaintiff, sought specific performance or a return of a $100,000 down payment from Randolph and agreed to discontinue the lawsuit in exchange for the $145,000 payment. Randolph agreed to sell the Yaphank premises to Loturco's company in exchange for settlement of the lawsuit against him. After the funds were wired to Mermel's escrow account, Zion provided documents discontinuing the action and vacating the lis pendens. Froehlich provided Loturco with a proposed contract of sale for the Yaphank property with the purchaser to be designated by Loturco.
Plaintiffs now claim that Froehlich's retention of the $100,000 down payment from the Christopher Companies constitutes unjust enrichment, relying upon 3105 Grand Corporation v. City of New York, 288 NY 178 (1942).
The 3105 Grand case is inapposite. There, the defendant was held unjustly enriched at the expense of the plaintiff to the extent that the taxes paid on property of the Defendant were paid with funds stolen from the plaintiff. The defendant, with no claim of right, directly received funds beneficially owned by the plaintiff. Here, although Randolph received $100,000, he was entitled to retain the fund under the settlement agreement in exchange for allowing Loturco's company to purchase the premises. He provided a proposed contract of sale to Loturco's attorney. In addition, Mel's funds were not stolen.
The usual elements required for the imposition of a constructive trust are: (1) a confidential or fiduciary relation; (2) a promise; (3) a transfer in reliance thereon; and (4) unjust enrichment. Sharp v. Kosmalski, 40 NY2d 119, 121 (1976). There was no confidential or fiduciary relation between Mel and Randolph, nor did Randolph make any promises to Mel. Accordingly, there is no basis for a constructive trust claim.
Nor has Mel established grounds for restitution. The essential inquiry in any action for unjust enrichment or restitution is whether "it is against equity and good conscience to permit the defendant to retain what is sought to be recovered" Paramount Film Distributing Corp. v. State, 30 NY2d 415, 421 (1972). The plaintiff "must show that (1) the [defendant] was enriched, (2) at [the plaintiff's] expense, and (3) that it is against equity and good conscience to permit the [defendant] to retain what is sought to be recovered." Cruz v. McAneney , 31 AD3d 54 , 59 (2nd Dept. 2006). A person receives a benefit "where his debt is satisfied or where he is saved an expense or loss." Electric Ins. Co. v. Travelers Ins. Co., 124 AD2d 431, 432 (3rd Dept. 1986).
Generally, the court will "look to see if a benefit has been conferred on the defendant under mistake of fact or law, if the benefit still remains with the defendant, if there has been otherwise a change of position by the defendant, and whether the defendant's conduct was tortious or fraudulent." Paramount Film Distributing Corp. v. State, supra at 421.
Here, Randolph's enrichment consisted of having the Suffolk lawsuit settled against him without the necessity of providing a benefit to Zion. The benefit was not provided under a mistake of law or fact regarding the obligations of Froehlich. Mel understood Froehlich's obligation was to provide a benefit to Loturco, who had arranged for the compensation to be paid to the Suffolk Plaintiffs. He was to provide Loturco with the opportunity to purchase the premises, and he did so by offering a proposed written contract of sale for the Yaphank property.
Mel's loss does not retroactively render retention of the down payment Froehlich received from The Christopher Companies inequitable. Froehlich was not required to surrender the Christopher Company down payment under the agreements reached by the parties concerning settlement of the Suffolk action. Indeed, had he been obligated to surrender the down payment, under ordinary circumstances, that would have been sufficient to settle the action for return of a down payment.
Moreover, the $145,000 money transfer was performed "at the behest of" The Christopher Companies and Loturco. Therefore, Mel may not look to Randolph for recovery. Fountoukis v. Geringer , 33 AD3d 756 , 757 (2nd Dept. 2006). "It is not enough that the defendant received a benefit from the activities of the plaintiff (case cited) if services were performed at the behest of someone other than the defendant, the plaintiff must look to that person for recovery (cases cited)." Kagan v. K-Tel Entertainment, 172 AD2d 375, 376 (1st Dept. 1991).
Accordingly, Mel has not provided any authority to support a recovery of the funds paid to The Christopher Companies on behalf of Froehlich. The complaint as against Randolph must be dismissed.
C. Craco's Motion for Summary Judgment
The claims against Craco are premised upon fraud and conversion. Ehrlich alleges that Craco misrepresented to his attorney that the security documents had been signed by Loturco, and that he reasonably relied upon such representation to his detriment, causing the loss of $145,000.
1. Conversion
The conversion action cannot stand against Craco. A conversion occurs when "someone, intentionally and without authority, assumes or exercises control over personal property belonging to someone else, interfering with that person's right of possession." Colavito v. New York Organ Donor Network , 8 NY3d 43 , 50 (2006). See also, Fiorenti v. Central Emergency Physicians PLLC, 305 AD2d 453 (2nd Dept. 2003). A necessary element of conversion is "defendant's dominion over the property or interference with it, in derogation of plaintiff's rights." Id. It is undisputed that Mel wired funds directly to Mermel's escrow account and that Craco did not exercise dominion over the funds. Accordingly, the conversion cause of action must be dismissed.
2. Fraud
With regard to the cause of action for fraud, the elements of a cause of action for fraud are "a representation of fact, which is either untrue and known to be untrue or recklessly made, and which is offered to deceive the other party and to induce them to act upon it, causing injury" Jo Ann Homes at Bellmore, v. Dworetz, 25 NY2d 112, 119 (1969). See also, Channel Master Corp. v. Aluminum Limited Sales, Inc., 4 NY2d 403, 407 (1958); and Dalessio v. Kressler , 6 AD3d 57 (2nd Dept. 2004).
As the proponent of a summary judgment motion, Craco "must make a prima facie showing of entitlement to judgment as a matter of law, tendering sufficient evidence to eliminate any material issues of fact from the case." Winegrad v. New York Univ. Med. Center, 64 NY2d 851, 853 (1985). The burden then shifts to Plaintiffs "to produce evidentiary proof in admissible form establishing the existence of material questions of fact." Alvarez v. Prospect Hosp., 68 NY2d 320, 326-327 (1986).
The record contains no admissible evidence that Craco ever represented to Mel or Daniel that the security document providing for a sale of the heavy equipment was signed by his client as Plaintiffs contend. None of the deposition testimony provides evidence of a direct conversation with Craco, but rather hearsay, as they claim that their own attorney, Claro, told them that Craco said Loturco signed the document purporting to sell his equipment to Mel. The only testimony of a direct conversation between Mel and Craco concerned the "location" of Loturco's heavy equipment; not whether Loturco signed a security agreement.
Moreover, the documentary evidence disproves Mel's claim that a representation was made as to Loturco's execution of security agreement prior to the time he wired the funds. A letter dated September 13, 2001 from Claro to Craco states that Claro was forwarding a $145,000 promissory note for signature by Dan and Loturco, as nominees of the company to be formed. Claro includes "the Agreement which my client requires as security for the loan until closing, at which time a UCC will be filed and the equipment transferred to your client." A handwritten note states "UCC as to Mike only" . The document providing for a sale of Loturco's equipment to Mel is also dated in September. Thus, the agreement for a sale of Loturco's heavy equipment was not drawn up by Claro until after August 23, 2001 and could not have been signed by Loturco until that time. Indeed a facsimile memorandum from Craco to Claro dated August 23, 2001, the date on which the funds were wired, discusses additions which Craco would like added to the heavy equipment sale agreement. He requested Claro to "please have the agreement reflect that upon taking possession of the property . . . title to the equipment reverts back to Mike, with a UCC filed by your client . . .". Craco offers to fill in the missing equipment number, presumably once he receives the agreement as he cannot do it before. Accordingly, Plaintiff has failed to raise any factual issue with regard to a misrepresentation by Craco regarding Loturco's execution of the contract of sale for his heavy equipment.
Insofar as Daniel belatedly raises claims concerning aiding and abetting and conspiracy, the claims are without evidentiary foundation, and do not provide evidence of "substantial assistance" or any "specific wrongful acts constituting independent torts." Williams v Sidley Austin Brown Wood, L.L.P. , 38 AD3d 219 (1st Dept 2007); Shalam v KPMG LLP, 13 Misc 3d 1205 [A] (Sup.Ct. NY Co. 2006).
Accordingly, it is,
ORDERED, that the motion of Paul V. Craco for summary judgment dismissing the complaint as to him is granted; and it is further,
ORDERED, that the motion of Mel and Daniel Ehrlich for summary judgment dismissing the complaint as to him is granted; and it is further,
ORDERED, that the motion of Randolph Froehlich for summary judgment dismissing the complaint as to him is granted; and it is further,
ORDERED, that the remaining causes of action are hereby severed and continued; and it is further,
ORDERED, that counsel for the remaining parties shall appear for a status conference on June 20, 2008 at 9:30 a.m.
This constitutes the decision and Order of the Court.