New York Law Review

Tag: Fire Insurance Proceeds

  • LMWT Realty Corp. v. Davis Agency Inc., 85 N.Y.2d 462 (1995): Attorney’s Charging Lien Priority Over Municipal Tax Lien

    LMWT Realty Corp. v. Davis Agency Inc., 85 N.Y.2d 462 (1995)

    An attorney’s charging lien has priority over a municipal tax lien on fire insurance proceeds when the attorney’s efforts created the fund subject to the lien.

    Summary

    LMWT Realty Corp. retained a law firm on a contingency basis to recover fire insurance proceeds after its buildings were damaged in a fire. The City of New York had filed certificates of lien for unpaid property taxes against the insurance proceeds under General Municipal Law § 22. After the case settled, the City claimed priority over the proceeds. The Court of Appeals held that the attorney’s charging lien had priority because the attorney’s efforts were instrumental in creating the fund, thus furthering the legislative intent of encouraging recovery and preventing arson fraud.

    Facts

    LMWT Realty Corp. owned two buildings damaged in a 1990 fire and filed a claim with First Central Insurance Company, which was disputed. The City of New York had filed certificates of lien for unpaid property taxes and charges against the properties pursuant to General Municipal Law § 22. LMWT then retained Jaroslawicz and Jaros on a contingency fee basis to sue the insurer. The City was notified of the insurance claim and served the insurer’s adjuster with certificates of special lien. The liens continued to accrue during the litigation. Just before jury selection, the insurer settled for $130,000 but refused to issue the check due to the City’s lien.

    Procedural History

    LMWT moved for an order compelling the insurer to pay the attorney’s fees and expenses, and to escrow the balance pending resolution of the dispute with the City. The City appeared and consented to jurisdiction. The Supreme Court granted the motion, directing payment of attorney’s fees, but ordered the balance to the City in partial satisfaction of its lien. The Appellate Division affirmed. The New York Court of Appeals granted further review.

    Issue(s)

    Whether an attorney’s charging lien takes priority over a municipality’s special lien on fire insurance proceeds pursuant to General Municipal Law § 22, when the attorney’s services created the fund subject to the lien.

    Holding

    Yes, because considerations of equity and the purpose of the statute are best served by according priority to the attorney’s charging lien in this situation.

    Court’s Reasoning

    The court recognized that under Judiciary Law § 475, an attorney has a charging lien that comes into existence upon commencement of the action, giving the attorney an equitable ownership interest in the client’s cause of action, not merely a claim. The court cited Matter of City of New York (United States – Coblentz), stating that a cause of action is a species of property, and the attorney acquires a vested property interest upon signing the retainer agreement. The court distinguished cases where prior claims superseded attorney’s liens, noting those cases did not involve a fund created through the attorney’s efforts. Here, the attorney’s services created the fund at issue, as the City had no right of action against the insurer. Citing Matter of Herlihy (State Tax Commn.), the court emphasized that it would be inequitable to allow the City to recover the entire fund created by the attorney’s efforts, especially since the City was aware that legal services were necessary to procure recovery from the insurers. The court reasoned that General Municipal Law § 22, intended to prevent arson fraud and ensure payment to municipal lienholders, is furthered by prioritizing attorney’s liens. Otherwise, attorneys would be unwilling to pursue claims for tax-delinquent insureds, frustrating the statute’s purpose. The court stated, “the charging lien was created by the common-law courts as a device to protect an attorney by disabling clients from receiving the fruits of recoveries without paying for the valuable services by which the recoveries were obtained.” The court also rejected the City’s suggestion that attorneys evaluate the likelihood of sufficient recovery before accepting cases, deeming it impractical. The court concluded that both the statute’s purpose and equitable considerations warranted prioritizing the attorney’s charging lien.

  • Hawthorne v. Hawthorne, 13 N.Y.2d 82 (1963): Division of Fire Insurance Proceeds for Tenants by the Entirety

    Hawthorne v. Hawthorne, 13 N.Y.2d 82 (1963)

    Proceeds from a fire insurance policy on real property owned by tenants by the entirety are considered personal property and are not subject to the inseverable quality of ownership associated with the real property itself, allowing for division of the proceeds.

    Summary

    The case concerns whether fire insurance proceeds for property owned by a husband and wife as tenants by the entirety should be divided at the request of one owner. The court held that the insurance proceeds, being personal property derived from a contract, are not subject to the same inseverable ownership as the real property. Thus, the proceeds can be divided. The court distinguished this situation from involuntary conversions like condemnation awards, where the substituted property retains the original ownership structure, because the insurance proceeds arose from a voluntary contract.

    Facts

    Plaintiff wife and defendant husband owned real property as tenants by the entirety.
    The property was insured under a standard fire insurance policy.
    The property was damaged by fire, and insurance proceeds were paid out.
    The wife sought to have the proceeds divided, while the husband argued they should be treated as held by the entirety.

    Procedural History

    The Special Term dismissed the wife’s complaint.
    The Appellate Division affirmed the dismissal.
    The wife appealed to the New York Court of Appeals.

    Issue(s)

    Whether the proceeds of a fire insurance policy insuring the interests of a husband and wife as tenants by the entirety are required to be divided at the demand of one owner, or whether they are impressed with the inseverable quality of ownership akin to the real property.

    Holding

    No, because the insurance proceeds are considered personal property derived from a contractual agreement, not an involuntary conversion of the real property itself.

    Court’s Reasoning

    The court reasoned that while the unity of person historically explained entireties in realty, it doesn’t dictate the relationship regarding insurance proceeds. Personal property cannot be held by the entirety.
    The court distinguished this case from condemnation cases where the award substitutes the real property and retains the original ownership structure. Here, the insurance proceeds stem from a personal contract, not an operation of law on the real property.
    “These proceeds have been paid pursuant to a personal contract of insurance entered into between these parties and the insurance company.”
    The court emphasized that the loss of the realty was involuntary, but the draft (insurance proceeds) was the product of a voluntary contractual act.
    The court cited Matter of Blumenthal, where a purchase-money bond and mortgage taken back by a husband and wife on the sale of real property held by them as tenants by the entirety were deemed to be held as tenants in common, not by the entirety. The court in Blumenthal stated, “Estates by entirety are peculiar to real estate. No such thing exists, except by analogy, as to personal property.”
    The court noted that applying the incidents of a tenancy by the entirety to personal property is only by analogy and that considerations of policy and common convenience support the division of the proceeds.
    The court stated: “Therefore, since it is only by analogy that the incidents of a tenancy by the entirety may apply to personal property (Matter of Albrecht, 136 N. Y. 91, supra), considerations of policy and common convenience reinforce the applicability of the reasoning of the Blumenthal case.”
    Therefore, the complaint stated a valid cause of action for the compulsory division of the insurance proceeds.