Tuesday, February 9, 2010

Equitable Considerations

The New York Appellate Division for the First Judicial Department held that a law firm was not entitled to interest on an arbitration award and had acted in contravention of duties regarding entrusted funds. The law firm was awarded $30,000 less than it had claimed but did not disburse the balance to the client. The court concluded that the law firm should not benefit from its conduct:

..[law firm] petitioner is not entitled to post-award, pre-judgment interest since it was holding the $310,000 at issue in escrow and chose not to avail itself of the funds when the arbitrators' award of $280,000 became final. Although petitioner asserts that it could not pay itself from the escrowed funds without respondent's consent and also asserts that appellant never gave its consent, the relevant [ethics] rule...does not require client consent under these circumstances. To the contrary, it provides that the lawyer may withdraw the funds being held upon final resolution of the dispute. Nonetheless, when the award became final, petitioner did not pay itself the amount of the award and transmit the balance (approximately $35,000) to respondent. Rather, in addition to seeking respondent's written authorization for payment of the award from the escrow account, petitioner improperly sought to obtain a benefit from its former client by refusing to transmit the balance unless respondent and its principal executed releases. The balance belonged to respondent and petitioner had no legal claim to it. Accordingly, petitioner was required to "promptly pay" to respondent the funds to which it was entitled after the arbitrators' award became final...

In short, petitioner both deprived itself of the use of the funds awarded to it and deprived respondent of the use of the balance of the funds being held in escrow. Under settled law, petitioner's statutory right to interest is far from absolute. To the contrary, as then Justice Bergan stated for a panel of this Court, "[t]he holder of the judgment may be estopped by equitable considerations, or by his own acts, from enforcing the interest which the statute gives him" ...Given the "special and unique duties" petitioner owed to respondent, including "safeguarding client property and honoring the client['s] interests over [its own]"... we think it would be particularly inequitable to require respondent to pay statutory interest to petitioner and thus recompense petitioner for its own failure to pay itself. (citations omitted)

Because petitioner was holding more than the $280,000 it was awarded by the arbitrators on the date the award became payable, March 13, 2007, respondent is entitled to the balance that would have remained in the escrow account after payment of the award on that date, with interest on such balance from that date. In addition, because Supreme Court erred in awarding interest to petitioner and respondent was thereby required to pay an additional sum to petitioner to satisfy the judgment, respondent is entitled to the amount it paid over $280,000 to satisfy the judgment with interest from the date the sum was paid.

(Mike Frisch)


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