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S.E.C. v. CREDIT BANCORP

June 15, 2000

SECURITIES AND EXCHANGE COMMISSION, PLAINTIFF,
V.
CREDIT BANCORP, LTD., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Sweet, District Judge.

MEMO OPINION

By Notice of Motion dated April 10, 2000, the law firm of Baker & McKenzie moved for clarification concerning ownership of the retainer paid to Baker & McKenzie for services rendered prior to the November 17, 1999 asset freeze order in this action. This motion is opposed by Carl H. Loewenson, Jr. (the "Receiver"). Oral argument was held on May 3, 2000, at which time the matter was deemed fully submitted.

Facts

Prior to the commencement of this action, in January 1998, Baker & McKenzie was retained by Credit Bancorp, Ltd. ("Credit Bancorp") to perform certain legal services. Pursuant to the engagement letter of May 21, 1999, Credit Bancorp deposited funds into a client trust account (the "Trust Account") at Baker & McKenzie (the "Trust Funds").

The relevant paragraph of the engagement letter from Baker & McKenzie to Credit Bancorp states:

As agreed, you are providing us as initial fee in the amount of $100,000, to be delivered as soon as practicable (account details will follow upon acceptance of these terms). This amount will be held in our Trust Account, and we will apply all or a part of that advance in payment of our monthly billing. Subsequent developments in the matter may warrant an appropriate increase or decrease in the amount of the retainer. Upon conclusion of our work for you, we will credit the balance in out Trust Account to our final invoice, and we will return any excess amount to you.
  On June 29, 1999, Baker & McKenzie billed Credit Bancorp for legal services, and on or about the same date caused that amount to be transferred from the initial deposit by Credit Bancorp of $100,000 being held in the Trust Account. Subsequently, Credit Bancorp "replenished" the amount in the Trust Account with two payments of $100,000 each on July 7, 1999 and July 29, 1999.

Due to an unspecified "clerical error," Baker & McKenzie did not send any further invoices to Credit Bancorp until November 16, 1999, hours before the asset freeze was entered in this action. Due to a further unspecified clerical error, Baker & McKenzie did not draw down the Trust Funds to pay any of these invoices prior to the imposition of the asset freeze. As of the asset freeze order, the amount held in this account was $201,144.99. These funds had not been drawn down on or about November 19, 1999, which is when Baker & McKenzie asserts that it became aware of the existence of this action and the asset freeze. Baker & McKenzie further states that it determined in good faith not to draw down the funds at that point pending clarification by this Court.

Discussion

Baker & McKenzie Did Not Own The Funds As Of The Asset Freeze

Baker & McKenzie requests that this Court clarify that the Trust Funds are a Baker & McKenzie asset in which Credit Bancorp has no interest. If Credit Bancorp has no interest in these funds then the funds are not part of the receivership estate and are not subject to the asset freeze. Baker & McKenzie seeks this clarification so that it may transfer those funds from the client trust account to the firm's account and apply them to its outstanding Credit Bancorp invoices totalling more than $302,532.79.

The question of whether Baker & McKenzie is entitled to draw down the Trust Funds turns on whether those funds were still the property of Credit Bancorp as of the imposition of the asset freeze or whether instead they were already the property of Baker & McKenzie. Baker & McKenzie contends that it obtained ownership of the funds at the time that it rendered services to Credit Bancorp. The Receiver responds that there was no change in ownership unless and until Baker & McKenzie actually transferred any funds in the Trust Account and, therefore, that it cannot claim ownership of the funds in the account as of November 17, 1999.

Generally speaking, funds held in an escrow account, such as an attorney trust account, are considered to be funds owned by the client and held by the attorney in a fiduciary capacity. See Gala Enters., Inc. v. Hewlett Packard Co., 970 F. Supp. 212, 217 (S.D.N.Y. 1997). In Securities and Exch. Comm'n v. Princeton Economic Int'l Ltd., 84 F. Supp.2d 443 (S.D.N.Y. 2000), the court also had to determine whether funds deposited by a company into client trust accounts at its three law firms were subject to an asset freeze imposed pursuant to a Securities and Exchange Commission ("SEC") investigation and a receivership. The court held that any funds that were still held in the client trust accounts "at the hour of the signing of the freeze order" were still owned by the client company, rather than by the law firms, and therefore were subject to the freeze order. Id. at 446.

Baker & McKenzie seeks to distinguish Princeton on the ground that the law firms in that case knew or should have known that the monies put into the client trust accounts could be subject to forfeiture because the firms were hired in connection with the SEC investigation itself. Princeton, 84 F. Supp.2d at 446-47. While this circumstance did provide additional support for attaching the funds, however, it was not a necessary condition to the holding in Princeton. See Princeton, 84 F. Supp.2d at 446. Nor is it in the instant case. The fact remains that here, as in Princeton, the Trust Funds were still ...


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