The law firm is paid to safeguard escrow deposits in a film industry case.  Proceeds are misapplied and money is said to be missing.  Sue the lawfirm?  But…what about the agreement which states that the law firm in neither required to nor authorized to investigate?  What of the agreement that the escrow shall not be liable absent bad faith or willful disregard?

In Worldview Entertainment Holdings Inc. v Woodrow  2018 NY Slip Op 33372(U)
December 24, 2018  Supreme Court, New York County  Docket Number: 159948/2014,  Judge Melissa A. Crane holds that such exculpatory agreements may not be used by attorneys, who have a higher duty.

“The complaint alleges that Woodrow had primary responsibility for overseeing the financial, management, and employee relations affairs of Worldview, that he was the only person authorized to handle certain transactions with Worldview’s banks, creditors, and investors, and that he used his authority to misappropriate Worldview’s escrow monies. The complaint alleges that Woodrow defrauded Worldview out of at least $700,000 of escrow funds and that Goetz is liable for part of this sum, because Goetz, acting on Woodrow’s instructions, disbursed escrow monies to inappropriate recipients. Allegedly, Woodrow caused Goetz to pay money to Woodrow for his personal uses, to his mother’s estate, to his wife, to three debt collectors to satisfy Woodrow’s personal debts, and to an individual to settle a dispute for Woodrow. Allegedly, from May 2011 to May 2014, Goetz improperly disbursed $242,302 on Woodrow’s behalf, and perhaps more. ”

“Goetz argues that it is excuplated from plaintiffs’ claims under the provisions of the Film Fund Agreements. While exculpatory agreements have applied to escrow agents who were not attorneys (see Platinum Equity Advisors, LLC v SDI, Inc., 2014 WL 3670674, *4 [Sup Ct, NY County 2014]), these agreements are disfavored as to attorneys, particularly when the attorney drafted the agreement with the exculpatory provision (see Galasso, Langione, & Batter, LLP v Galasso, 53 Misc 3d 1202[A], 2016 NY Slip Op 51308[U], n 50 [Sup Ct, Nassau County 2016]). Boyajian drafted the Film Fund Agreements.

Both as escrow agent and as attorney, Goetz owed Worldview a fiduciary duty (Greenapple v Capital One, NA., 92 AD3d 548, 549 [l51 Dept 2012]; Ulico, 56 AD3d at 8). The attorney-client relationship comprises a “unique fiduciary reliance,” whereby the client is entitled to depend on the attorney “maintaining confidentiality, avoiding conflicts of interest, operating competently, safeguarding client property and honoring the clients’ interests over the lawyer’s” (Matter of Cooperman, 83 NY2d 465, 472 [1994]). “An agreement prospectively limiting a lawyer’s liability to a client for malpractice or other kinds of civil liability is unenforceable” (Restatement [Third] of the Law Governing Lawyers§ 54, Comment b).

Section 2 ( e) states that the escrow agent is released from liability provided that it holds the money in accordance with the agreement’s terms and pays such money to the “designated production company … ” This provision does not exculpate Goetz, because plaintiffs allege that Goetz paid at least some money other than to a production company. Goetz points out that the agreement does not require it to investigate any payments provided that the authorizing documents are correct and that the third-party investors and Worldview release Goetz against all claims arising out of Goetz following Woodrow’s instructions (,-r 2 [ e ]). Nonetheless, the court does not see how an attorney can be exculpated in regard to the misappropriation of funds, even if the attorney had no duty to investigate or did not benefit.

The Film Fund Agreements provide that the escrow agent is not liable for any act unless taken in bad faith, willful disregard of the agreement, or gross negligence (,-r 5). Goetz argues  that this provision means that it cannot be charged with negligence. As already stated, that is incorrect. “