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CONVERSION OF FUNDS AND IOLA ACCOUNTS

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  • Posted on: Jun 2 2021

Conversion is a tort that “takes place when someone, intentionally and without authority, assumes or exercises control over personal property belonging to someone else, interfering with that person’s right of possession.”  Colavito v. New York Organ Donor Network, Inc., 8 N.Y.3d 43, 49-50 (2006) (citation omitted).  “In order to establish a cause of action to recover damages for conversion, the plaintiff must show legal ownership or an immediate superior right of possession to a specific identifiable thing and must show that the defendant exercised an unauthorized dominion over the thing in question to the exclusion of the plaintiff’s rights.”  Berkovitz v. Berkovitz, 190 A.D.3d 911 (2nd Dep’t 202) (citations, internal quotation marks and brackets omitted); see also, Colavito, 8 N.Y.3d at 50 (citations omitted) (“Two key elements of conversion are (1) plaintiff’s possessory right or interest in the property and (2) defendant’s dominion over the property or interference with it, in derogation of plaintiff’s rights.”)  In circumstances where “the original possession is lawful, a conversion does not occur until the defendant refuses to return the property after demand by the property’s rightful owner.”  Simpson & Simpson, PLLC v. Lippes Mathias Wexler Friedman LLP, 130 A.D.3d 1543, 1545 (2015) (citation and internal quotation marks omitted.

While the concept of conversion is readily understandable in the context of converted things, the analysis becomes more difficult when a plaintiff brings a claim for the conversion of money.  “’It is well-settled that an action will lie for the conversion of money where there is a specific, identifiable fund and an obligation to return or otherwise treat in a particular manner the specific fund in question.’”  Amity Loans, Inc. v. Sterling Nat. Bank & Trust Co. of New York, 177 A.D.2d 277, 279 (1st Dep’t 1991) (quoting Manufacturers Hanover Trust Co. v. Chemical Bank, 160 A.D.2d 113, 124 (1st Dep’t 1990)).  “Money may be the subject of a cause of action for conversion only if ‘it can be identified and segregated as a chattel can be….’”  Heckl v. Walsh, 122 A.D.3d 1252, 21254-55 (4th Dep’t 2014) (quoting Payne v. White, 101 A.D.2d 975, 976 (3rd Dep’t 1984)).

The parties in Simpson & Simpson, supra, were law firms. Defendant law firm employed a bookkeeper that resigned and commenced employment with plaintiff law firm.  Thereafter, defendant discovered that a bookkeeper embezzled over $270,000 while employed by it.  When approached by defendant, the bookkeeper admitted the theft, agreed to restitution and delivered to defendant a promissory note for the amount embezzled.  The bookkeeper then embezzled money from plaintiff law firm to pay the note to defendant.  Plaintiff discovered the embezzlement of its funds and defendant rebuffed plaintiff’s demand that the funds be returned.  Plaintiff commenced its action and, inter alia, asserted a cause of action sounding in conversion in which it sought the return of the embezzled funds.  Supreme court granted defendant’s motion for summary judgment dismissing, inter alia, the conversion claim.  The Fourth Department found that supreme court erred “in determining that the comingling of the embezzled funds in the employee’s joint checking account precluded a cause of action for conversion” because “the embezzled funds are sufficiently identifiable and traceable to sustain a cause of action for conversion.”  Simpson & Simpson, 130 A.D.3d at 1544-45.  The Simpson & Simpson Court also noted that conversion “is an unauthorized assumption and exercise of the right of ownership over personal property belonging to another to the exclusion of the owner’s rights.”  Simpson & Simpson, 130 A.D.3d at 1545.  While the defendant disavowed any knowledge of the bookkeeper’s wrongdoing that led to the funds embezzled from plaintiff coming into defendant’s hands, the Court found that questions of fact existed as to the extent of defendant’s knowledge given the “unique” facts presented because the “circumstances known to defendant[] were so obviously suspicious that no honest person (not just a reasonably prudent person) could turn a blind eye thereto, thus requiring defendant[] to investigate.”  Id. (citations and internal quotation marks omitted).

These issues concerning conversion claims involving money were at the fore, in SH575 Holdings LLC v. Reliable Abstract Co. L.L.C., a case decided by the Appellate Division, First Department, on June 1, 2021.  The plaintiff in SH575 transferred $1,000,000 into the IOLA account of a debtor’s lawyer in conjunction with a transaction pursuant to which plaintiff was going to purchase debtor’s real estate in its bankruptcy proceeding.  Plaintiff demanded the return of the funds after he cancelled the transaction.  Unfortunately, “as part of a Ponzi scheme, [debtor’s lawyer] transferred most of plaintiff’s funds out of the IOLA account to the moving defendants prior to plaintiff’s demand upon him.”  The Court affirmed supreme court’s dismissal of the conversion claim, finding that plaintiff “failed to show that the funds at issue were ‘specifically identifiable.’”  The Court relied on the unique aspects of an IOLA account.  “An IOLA account is ‘an unsegregated interest-bearing deposit account with a banking institution for the deposit by an attorney of qualified funds” (Judiciary Law § 497; see also Lerner v Fleet Bank, N.A., 459 F3d 273, 281 [2d Cir 2006]).  Because the account was “unsegregated”, “plaintiff’s funds, upon their transfer therein, became commingled with monies that were already in it, rendering them no longer specifically identifiable.”

Additionally, the Court found that plaintiff’s claim was defective because plaintiff never “made demands for return of the funds upon the moving defendants.”

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