NO NEED FOR TEARS: The limits of fiduciary duty for attorney trust accounts

In the classic film noir Too Late For Tears, a blackmail victim throws a suitcase full of cash into the back of the wrong convertible.  In the fevered imagination of Hollywood storytellers, multiple murders follow.  In the real world of New Jersey real estate transactions, one person anonymously throwing funds into a prominent law firm’s trust account for the benefit of another leads to years of litigation.   And, ultimately, to the highest court of the state and the issuance of a unanimous opinion.

Fox Rothschild’s client, Eliyahu Weinstein, had a trust account at the law firm, into which appeared about $2.4 million by wire transfer from a London company, allegedly acting on behalf of Moshe Meisels, who claims that the funds belonged to him and that he and Weinstein had a real estate deal.  Weinstein instructed the firm to distribute the funds to him, allegedly for purposes other than the agreed-upon real estate transaction, defrauding Meisels.  Meisels sued Fox Rothschild and one of its attorneys.  The claims: conversion and breach of fiduciary duty.

The trial court granted summary judgment on both counts, and the Appellate Division split the difference: affirming the dismissal of the fiduciary duty count and sending the conversion count back for trial.  The Supreme Court granted certification and threw out both counts.  Meisels v. Fox Rothschild LLP (January 9, 2020).

On the facts of the case, no court had trouble in finding a lack of any fiduciary duty to plaintiff.  Meisels was not a client of the firm.  Further, he “admits that defendants had no knowledge of his existence, had no contact with him, possessed no knowledge about any purported agreement between him and Weinstein, and made no representations to Meisels.”  No client, no knowledge, no claim, no notice equals no duty.  Reference to the rules of professional conduct was also to no avail to plaintiff.  “Attorneys carry substantial responsibility, but it is folly to suggest it is limitless.”

Nor did the firm become an escrow agent simply by the deposit of funds into the trust account of one of its clients.  Becoming an escrow agent, the court found by relying on the cases cited, required knowledge of a competing claim to proceeds and an affirmative understanding of its role to hold funds in escrow.  There is “no duty on lawyers involved in their client’s real estate transaction to inquire into the origins and possible third-party interests of every source of funds that flows [sic] into a trust account for purposes of closing on a transaction.”  The burden of a contrary rule would be impractical, frustrate closings, and encourage malpractice actions “due to the delay such investigatory obligations would require.”

Finding no legitimate action for conversion, the court had a field day in examining the development in the state of the doctrine by examining the common law as far back as 1878.  For all of us, the discussion provides an excellent refresher course in torts.  Trover anyone?

In rejecting the Appellate Division’s holding that conversion does not require demand, the Supreme Court engaged in commendable and simple logic.  On two grounds, conversion fails.  First, since the funds were lawfully in the possession of the law firm, the law firm’s holding of the assets in trust could not have been conversion because they did not conflict with the true owner’s rights (the true owner being the client).  No one alleged that the funds were not properly placed in the trust account.  In order to convert lawful possession into a wrongful act, something must happen.  Nothing did.  “The demand is the linchpin that transforms an initial lawful possession into a setting of tortious conduct.”  And, second, the firm never exercised “independent dominion and control” over the funds because “[f]unds held in an attorney’s trust account are the client’s funds, not the firm’s.”  And, here again, the court relies on Meisels’s silence and the concomitant lack of knowledge by the firm.

Hanging over this case is the failure of Meisel to make himself known for five years after the transaction was complete.  The delay, although apparently not outside the statute of limitations, strips Meisels of any sympathy whatsoever and places a pall of suspicion on the bona fides of the claim, a suspicion further touched on by the court in a footnote where it recited Meisels’s shifting position on where the money came from.

Whatever the reason for the certification and the lengthy opinion, it serves several salutary purposes.  First, whatever the public thinks we ought to be, attorneys are not fiduciaries to the world.  Only to our client.  Period.   The rules of professional conduct dictate how we may act in pursuing our obligations to our client, but do not create a fiduciary relationship to anyone else.

The opinion also limits a lawyer’s duty to inquire as to the sources of funds in a client’s trust account.  Without actual knowledge of a competing claim to funds deposited in the account, they must be disposed of in accordance with the client’s wishes.  Period.

While Lizabeth Scott’s character should have turned the funds thrown in her back seat to the police and not killed her husband or the blackmailer to keep them for herself, Fox Rothschild did nothing wrong in distributing the assets in the client’s trust account in accordance with its client’s instructions.  Maybe the result in this case could not supply the plot for a Hollywood movie, but it more than satisfies the interests of justice.

Arthur F. Fergenson is a Senior Counsel in our Maryland office.