Chris Lazarini Analyzes Case Claiming Entitlement to Funds Held in Trust After Sale of Business

November 4, 2019
Securities Online Litigation Alert

Bass, Berry & Sims attorney Chris Lazarini analyzed a case in which two defendants – a former employee and a company that assisted in the sale of the business – both claimed entitlement to funds held by an attorney in trust following the sale of the company. The trial court determined neither defendant proved their claim. Instead, the court held the funds belonged to the company, which was not a party, and entered an order of disposition in its favor. The individual claiming the funds then asked the court to enforce a writ of execution he had obtained against the company in a separate proceeding. The court recognized the writ, and ordered the funds be paid to the individual.  The appellate court affirmed, even though it found the underlying action “procedurally misguided.”

Chris provided the analysis for Securities Online Litigation Alert (SOLA). The full text of the analysis is below and used with permission from the publication. If you would like to receive additional content from the SOLA, please visit the SOLA website to sign up for the newsletter.

Webb vs. Fioravanti, No. A-5122-17T3 (N.J. Super. App. Div., 10/4/19)

*An attorney who knows of a client’s debt has no duty to pay the creditor from client assets held in trust, unless the creditor can show an equitable basis for relief such as detrimental reliance on the attorney’s representations that the debt would be satisfied.

**An interpleader plaintiff is one who is or may be exposed to double or multiple liability.

Webb, an attorney, represented Arete Development, Inc. (“Arete”), in the sale of the business. Defendant Fioravanti had an employment agreement with Arete giving him a “success fee” if the firm sold all of its assets during the term of his employment. Arete engaged Defendant PCE Investment Bankers, Inc. (“PCE”), to assist in the sale. PCE’s contract provided for payment of the greater of 5% of the consideration paid to Arete or $200,000. A buyer was found and the sale consummated, however, the proceeds of the sale were insufficient to meet Arete’s obligations to Fioravanti and PCE, and both made a demand on Webb for $40,000 he held in trust for Arete. Webb filed an interpleader action against Fioravanti and PCE.

PCE cross-claimed against Fioravanti alleging he fraudulently omitted to disclose his “success fee” and, had it known of the fee, it would have passed on the engagement or required Fioravanti to subordinate his fee to PCE’s fee. The trial court allowed Webb to deposit the $40,000 into the court and dismissed him with prejudice. Following a bench trial, the trial court determined neither PCE nor Fioravanti proved their claimed entitlement to the funds. Instead, the court held the funds belonged to Arete, which was not a party, and entered an order of disposition in its favor.

A former Arete shareholder, purporting to act on the firm’s behalf, then moved to withdraw the funds. Fioravanti opposed the motion, asking the Court to enforce a writ of execution he had obtained against Arete (now named Teleios) in a separate action. PCE also opposed, arguing Arete no longer existed and the shareholder had no standing to seek the funds. PCE also moved to vacate the order, presenting new evidence; a letter from one of Arete’s successor’s shareholders to Webb disclaiming any interest in the funds. The trial court then recognized and enforced Fioravanti’s judgment, determined the Arete shareholder’s motion was mooted by the writ, denied PCE’s motion to vacate finding even if its claims proceeded to judgment they would be subordinate to Fioravanti’s writ, and allowed Fioravanti to levy on the funds.

On PCE’s appeal, the Court states the action was “procedurally misguided” from the outset. First, as an attorney holding funds in his trust account, the Court explains, Webb was not exposed to liability to any defendant and was not a proper plaintiff in an interpleader action. Second, because Arete was never joined as a party and because PCE never instituted suit against Arete for its fee (as Fioravanti did in a separate action), PCE never judicially established its underlying claim for the funds. This, the Court states, was required before PCE’s claim of priority over Fioravanti could be adjudicated. Had a true interpleader action been filed by Arete, the Court continues, PCE’s claim could have been resolved, and had Fioravanti and his claim been joined, the trial court could have determined the parties’ respective rights, if any, to the funds. The procedural errors, the Court concludes, thwarted an efficient and fair process, but they were not “so wide of the mark” as to compel a new trial. Instead, deferring to the trial court’s assessment of the evidence, the Court agrees that the funds belonged to Arete and Fioravanti’s writ was enforceable.