Holding Escrow and Legal Malpractice

In this Case  Egnotovich v. Katten Muchin Zavis & Roseman LLP, 604101/06 , Decided January 23, 2008 ,Justice Bernard J. Fried
NEW YORK COUNTY ,Supreme Court     Plaintiffs joined a vacation club in which they each deposited $ 400,000, and the group was to purchase or lease apartments or houses in prime vacatiion spots.  These spots included Paris, Mexico, Teluride, and other hot spots.  More than $1.6 million was collected, and the Katten law firm drafted escrow agreements in which it was to hold 80% of the collections and pay them out when the club gave the law firm vouchers.  The money was collected and paid out.

For reasons unstated [bad locations? no houses actually available?] some of the members sue the law firm for fraud and escrow violations.  "Plaintiffs are former founding members of nonparty Havens, Inc. (Havens), a resort destination club in the business of acquiring vacation properties to be used by the club members. Funding for these property acquisitions was to be generated principally through the financial contributions of the founding members. To become founding members, plaintiffs were required to sign a membership agreement, and to pay $150,000 in membership dues. A portion of the membership dues was to be held as a deposit in escrow. Defendant Katten Muchin Rosenman LLP, sued here as Katten Muchin Zavis & Roseman LLP (Katten), acted as escrow agent for the escrow account. In 2006, Havens failed as a going concern, and is now apparently without funds to pay damages suffered by plaintiffs. Plaintiffs then brought this action against Katten seeking return of their deposits, and alleging wrongful release of escrowed funds and furtherance of fraud by the club's sponsors. Katten now moves for summary judgment dismissing the amended complaint1 on the ground that it fails to state a cause of action, and is contradicted by clear and unambiguous documentary evidence.

For the reasons set forth below, Katten's motion is granted. "

"absolutely secured were not collateral to the Membership Documents (see e.g. Martian Entertainment , LLC v. Harris, 12 Misc 3d 1190[A], * 5 [representations underlying fraudulent inducement claim must be "collateral to the contract"]). To the contrary, the degree of security backing the Deposits is expressly provided by the Certificates (see Certificate, ¶1 [the membership deposits are subject to refund 30 years from the date of the Certificate and "pursuant to and subject to the terms and conditions of the Membership Agreement and the Membership Plan]"; id., ¶2 [the refund right "is backed by and subject to the availability of the assets of (Havens)"]). Indeed, it is plaintiffs' own position that each of the Membership Documents "discusses Deposits and their use and repayment . . . and thereby implicates use of an escrow" (Pls Facts, ¶¶2, 4, 6). An issue "central" to a contract cannot be construed as collateral to that contract (PSI Intl., Inc. v. Ottimo, 272 AD2d 279 [1st Dept 2000]).

Moreover, even fraudulent inducement requires "misrepresentations of present Facts (rather than merely of future intent)" (Martian Entertainment, LLC v. Harris, 12 Misc 3d 1190[A], * 5). Plaintiffs allege that Havens promised that "deposits would be handled in a specified way," that they "would be held in escrow . . . for the protection and benefit of the Founding Members," and that "[Founding Members] would be protected by the continuing existence of cash on deposit or real estate available to fund repayment if the venture failed" (Opp Br., at 24, 25 [emphasis added]; Egnotovich Aff., ¶6 [emphasis added]; see also Loeb Aff., ¶¶4-5). To the extent, if any, that these representations made by Havens are untrue, they are broken promises, and not fraudulent statements of fact (see e.g. Morgan, Lewis & Bockius LLP v. IBuyDigitial.com, Inc., 14 Misc 3d 1224[A], 2007 NY Slip Op 50149[U], *7 [Sup Ct, NY County 2007] [dismissing counterclaim that plaintiff "fraudulently induced (defendant) into entering the engagement letter by stating that (plaintiff) would be personally involved in handling the IPO, that the fees would be capped at $425,000, that the IPO would be consummated by March 2005 and that the legal fees charged would be limited to work on the IPO"] [emphasis added]; Ullmann v. Norma Kamali, Inc., 207 AD2d 691, 692-693 [1st Dept 1994] ["cause of action for fraud does not arise" based on "failure to perform promises of future acts"] [citation omitted]).

Consequently, the aiding and abetting fraud claim must be dismissed."


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