Receiver May Be Liable For Distributing Funds In Violation Of Order; Lack Of Knowledge Immaterial Because Order Was E-Filed

On May 24, 2018, Justice Kornreich of the New York County Commercial Division issued a decision in Kadosh v. Kadosh, 2018 NY Slip Op. 31005(U), describing the standard under which a court-appointed receiver could be held liable for actions taken in the course of their duties.

In the underlying action, two brothers were disputing the proper division of funds in an escrow account, which was under the control of a receiver. Because one of the brothers was in a fee dispute with his counsel (“DHC”), and had agreed that attorney fees would be paid out of his share of the escrow, the court issued an order (“August 2016 Order”) specifically directing that any release of funds could only be made upon receipt of a letter signed by both the party and DHC. But once the court decided how the funds were to be distributed, the receiver, relying solely upon an oral representation by the party, distributed his entire share of the funds to him without notice to or consent by DHC. When the receiver moved to settle his accounts and for discharge, DHC opposed.

The court first rejected the receiver’s argument that DHC lacked standing, and could recover in a lawsuit it had filed directly against its client:

The preconditions in the August 2016 Order were specifically for the benefit of DHC, as DHC was the only party that stood to lose if David got paid from the escrow without first paying his legal bills. And while the amount of DHC's damages might be mitigated based on the outcome of its litigation with David, such litigation is only necessary due to the Receiver's violation. Ergo, the time and money DHC now must spend seeking to recover from David is the direct consequence of the Receiver's violation.

The court also rejected the receiver’s defense of immunity, noting that “immunity only extends to a receiver who acts in good faith and with appropriate care and prudence” (emphasis by the court), and going on to state that:

The Receiver contends that he may not be held liable for what he characterizes as mere "errors in judgment." But that is not the accusation. Though the Receiver is not alleged to have acted in bad faith, he is alleged to have acted "with a lack of due care." He is guilty of that offense. The only basis for the Receiver to have disbursed the $2.7 million to David is the August 2016 Order. 14 The Receiver, however, claims to have never seen that order. He apparently relied on David's oral representation to justify the disbursement, even though David was represented by counsel at the time.

That was not a de minimis violation for which a receiver is ordinary exculpated. Leaving aside whether it was negligent for the Receiver to have failed to look up the August 2016 Order on NYSCEF (it was), it is inexcusable for him to have disbursed $2.7 million to David without first independently confirming that the court had permitted him to do so. A reasonable attorney could not (and should not) assume the existence or parameters of a court order merely by the say so of one of the litigants (especially in such a hotly contested case) without first reviewing a copy of the order or at least conferring with that litigant's counsel (who, as noted earlier, told the Receiver not to disburse the funds due to its fee dispute with David). According to the Receiver, he never saw a copy of the August 2016 Order prior to writing David a check for $2. 7 million.

The Receiver's conduct amounts to gross negligence because his actions evinced a reckless indifference to the rights of the other parties in this action. The Receiver, a licensed New York attorney, cannot claim that an attorney acts reasonably by taking actions pursuant to a court order which he has never seen. The Receiver was specifically informed by DHC of a fee dispute with David, but sent David the money without first inquiring (e.g., with a quick email) of DHC the status of such dispute. While the Receiver may not have had reason to know that DHC had a lien on the funds in escrow, Zapson's August 7, 2016 email proves that the Receiver was aware of a fee dispute. More importantly, without actually reviewing the August 2016 Order, which could have contained any number of preconditions, the Receiver was in no position to ascertain who might be adversely affected by his actions. The court is unaware of any authority immunizing a receiver for this sort of reckless behavior. Immunity is supposed to protect fiduciaries from good faith exercises of judgment, but not the reckless release of millions of dollars to a dishonest litigant merely on his say so.

(Internal citations and quotations omitted, emphases added.)

This decision is of interest not only as it concerns the scope of a receiver’s immunity from suit, but also as it relates to the importance of the NYSCEF system; the receiver’s explanation for his failure to comply with the August 2016 Order was that he had never seen it, which the court rejected out of hand:

He takes this position despite executing an e-filing authorization in conjunction with his appointment as Receiver, in which he, like all counsel of record in this part, agreed to accept service of orders filed on NYSCEF. See Dkt. 83. As reflected on NYSCEF, it was the Receiver himself who e-filed this authorization. In fact, the docket in this action indicates that the Receiver personally e-filed nearly 40 documents. Apparently, at some point, the Receiver stopped following the docket despite not yet having been relieved.

If a document has been e-filed, all parties are presumed to have seen it.

Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com or Schlam Stone & Dolan of counsel Niall Ó Murchadha at nomurchadha@schlamstone.com if you or a client have questions regarding an attorney's failure to perform his or her duties.