92 N.Y.2d 91 (1998)

An attorney holding funds in escrow for a client generally does not owe a duty of care to a non-client third party who provided those funds unless the attorney has knowledge that the funds belong to the third party or the attorney engages in conduct suggesting bad faith.

Summary

Dr. Shapiro invested in a fraudulent scheme orchestrated by McNeill and DeRosa. DeRosa funneled funds through attorney Bleecker’s escrow account. Shapiro sued Bleecker, alleging Bleecker breached a duty of care by failing to inquire with Shapiro before disbursing the funds according to DeRosa’s instructions. The Court of Appeals held that Bleecker owed no duty to Shapiro because Bleecker lacked knowledge the funds belonged to Shapiro and because the circumstances did not suggest bad faith, distinguishing the case from scenarios where a duty of inquiry might arise.

Facts

Shapiro invested with McNeill based on McNeill’s representations of a profitable real estate venture, advised by DeRosa. Shapiro made checks payable to “Lloyd Bleecker as attorney” believing Bleecker, as DeRosa’s attorney, was handling mortgage purchases. Shapiro noted on one check “For Qualified Enterprises— Total investment is $25,000” and on another “115 Hickory — Mt. Sinai, NY.” McNeill delivered the checks to DeRosa, who deposited them into Bleecker’s attorney trust account. DeRosa told Bleecker the deposits were payments from Shapiro for investments, providing written instructions to disburse the funds for various legal transactions. Bleecker disbursed the funds per DeRosa’s instructions without contacting Shapiro. Shapiro became suspicious, reported the scheme, and DeRosa was convicted of grand larceny.

Procedural History

Shapiro sued McNeill and Bleecker. McNeill was discharged in bankruptcy. Shapiro and Bleecker cross-moved for summary judgment. The Supreme Court granted Bleecker’s motion, dismissing the complaint. The Appellate Division affirmed. The Court of Appeals granted leave to appeal.

Issue(s)

1. Whether attorney Bleecker owed a duty of care to non-client Shapiro, arising from DR 9-102 of the Code of Professional Responsibility, to contact him before disbursing funds deposited in Bleecker’s escrow account.
2. Whether Bleecker, by allowing DeRosa to deposit checks personally into his escrow account, assumed a common-law duty similar to that of a bank to ascertain the drawer’s intention before disbursing the funds.

Holding

1. No, because an ethical violation, in and of itself, does not create a duty that gives rise to a cause of action that would otherwise not exist at law, and because Shapiro did nothing to put Bleecker on notice that he intended to retain entitlement to any of the proceeds of the checks.
2. No, because there was no comparable contractual relationship between Shapiro and Bleecker to create such a duty, and because the circumstances did not suggest bad faith or the total absence of any apparent authority on the face of the checks that would put Bleecker on notice of an irregularity possibly triggering a duty to inquire.

Court’s Reasoning

The court reasoned that DR 9-102 imposes ethical duties on attorneys to non-clients when the attorney receives funds known to belong to the third party. However, Shapiro’s notations on the checks supported DeRosa’s representations that the funds belonged to DeRosa. Even if Bleecker violated DR 9-102, an ethical violation alone doesn’t create a legal duty. Citing Drago v. Buonagurio, 46 N.Y.2d 778, 779-780, the court noted that courts have not recognized liability based on ethical violations outside established tort or contract categories.

Regarding the common-law duty argument, the court distinguished the case from situations where banks owe a duty to inquire before disbursing funds, emphasizing the lack of a contractual relationship between Shapiro and Bleecker. The court distinguished Rochester & Charlotte Turnpike Rd. Co. v. Paviour, 164 N.Y. 281 and Munn v. Boasberg, 292 N.Y. 5, noting that, unlike those cases, here “there were neither circumstances suggesting bad faith nor the total absence of any apparent authority on the face of the checks which would put Bleecker on notice of an irregularity possibly triggering a duty to inquire.” The court emphasized that Shapiro made the checks payable to Bleecker “as attorney” without providing any instructions, leading Bleecker to reasonably believe the funds belonged to his client, DeRosa. Bleecker accepted the funds as DeRosa’s agent, not as a custodian of Shapiro’s property. Therefore, Bleecker didn’t assume the duties of a banking institution.