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