Civil Law Hypo - Dazzle Me With Things I've Forgotten!

Factual Questions
1

This was given to me as a hypo, and although I had some ideas, civil law is not my forte - I can barely spell “Contracts,” after all.

Mighty Big Enterprises, Inc, employed John Que as its CEO. As a benefit it wished to pay to John as partial compensation for his services as CEO, Mighty Big deposited $200,000 into a bank account to be used as a construction deposit to assist John in building his personal residence. The account was opened with the $200,000 deposit in MBE, Inc.'s name, with the understanding between MBE and John that the money was to be used as a deposit to finance the construction of the home.

This happened in 1997. Construction of the home began.

In 1998, a series of disputes arose between MBE and John, with lawsuits filed on each side. MBE’s lawsuit sought, among other things, the return of the $200,000. As these disputes were being litigated, construction of the home continued.

In 1999, unbeknownst to John, and considerably before the home was completed, the bank independently returned the $200,000 to MBE.

In 2000, John settled his various disputes with MBE, and entered into a settlement agreement. The agreement was drafted by MBE, and it provided that all the claims between the parties would be dismissed. It did not list all the claims; it simply averred that all claims between the two would be dismissed. Obviously, it made no mention of the $200,000 in deposit funds.

The home was finally constructed in 2001. At that time, John discovered that the money he was relying on was no longer on deposit at the bank, and that it had been returned to MBE.

Can John recover the $200,000 from MBE?

2

No

John :wally

3

Good lord! I don’t have the effrontery to think I could dazzle you with anything short of the Dallas cheerleaders, but might I ask some questions?

  1. When you say “The account was opened with the $200,000 deposit in MBE, Inc.'s name,” do you mean that the account was in MBE’s name, and therefore never in John Cue’s control or possession? It is not clear to me why a suit would demand the ‘return’ of such funds. You can’t ‘return’ what the other party already has [though I can imagine a mistaken claim in the drafting of the suit]. Was the money in escrow or something similar?

1a) From later events, it appears that the money never left the control of MBE. If it was under joint access, it is predictable that either party might empty the account (as one spouse might empty a joint account to keep the other spouse from doing so). The other party would, I presume, be notified, or at least have the ability to confirm the balance at will.

  1. You say the bank “independently” returned the funds. Those this mean it was not at the request of MBE? (e.g. the bank decided to close the account for some reason) If MBE withdrew the funds, either they had the authority to do so, or the bank made an error, and John Cue would have cause to recover from the bank. I presume you would have told us if MBE received the funds through (e.g.) a false representation of their authority to withdraw.

  2. To a layman like myself, it seems that any ambiguities in a contract would be construed against the drafter. MBE’s formal claim against John Cue was clearly dismissed by the agreement, but if he was never in control/possession of the funds, that claim was moot anyway. Dismissing a moot claim doesn’t ‘return’ funds to John that John never actually had possession of.

3a) However, ff MBE and John had joint access, John might be up a creek for assuming for two years that the contested funds were available to him, whenthey had been removed a year before he signed the agreement. It might be argued (though not incontestably) that a prudent man would have checked the status of major claims before signing away his rights, or that the failure to do so indicated an intent to sign that claim away. Again, it becomes important for me to know exactly what the banking arrangements were. Who controlled the money?

I’m sorry if these issues aren’t germane, or if a qualified person would immediately understand what you meant. Feel free to disregard my questions if they’re silly.

4

I don’t see how, assuming that the dismissals were with prejudice. The issue of the return of the $200,000 was part of the litigation, and that litigation was terminated by that dismissal. In my state (and I suspect most places), the issue cannot be relitigated. It’s res judicata.

I haven’t completely ruled out a few long shot arguments (fraud, mistake), but if this were a real world question, I’d be asking to read the settlement agreement and whatever documents set up the bank account, and seeking more information about how the account was closed. There’s nothing in the hypo itself that comes anywhere near to establishing those arguments, though. I’d also look into a claim against the bank, but again, nothing in the hypo itself makes me think that would be viable.

5

I realize that this is part of the hypothetical. But how the heck did that happen. Obviously there was other stuff going on, but this was apparently a major subject of the litigation.

Random is right. If the right to the money was the subject of the litigation, and the cases were dismissed, it is probably res judicata. I am assuming that the dismissals were with prejudice. If not, this was a serious error by MBE’s counsel.

If John came to me, I would say:

  1. Your case does not look promising.

  2. Give me every document that you have that concerns this case. I need to read the Pleadings from all lawsuits, any motions that were filed, any court orders that were generated, all dismissals, correspondence between counsel, all settlement documents, and all documents involving the bank. Depending on the circumstances, John’s best case might be against the bank.

  3. This is gonna be some expensive litigation. I’ll need at least a $5,000 retainer before I file anything for him, if John is an existing client who has a record of paying. If I don’t know him very well, I’m going to get $7,500 or $10,000. This case will probably involve some protracted litigation and a few appeals, if I can even file it.

6

There’s not nearly eough information in your hypothetical to give a conclusive answer. It’s really all going to relate to how the 200,000 was initially presented (and then withdrawn). There has to be some agreement detailing the status of the 200,000 account, if there is not, and this is is all some good ol’ boy board-CEO “understanding”, Bob is going to have a difficult time making the case that the money is his.

Failing some explicit written statement of the contractual status if the $ 200,000 account, and the fact that the account stayed entirely under MBE’s control, the reasonable man determination is likely to be that this was not an open handed gift, but an ongoing good faith gesture subject to the whims of MBE’s board.

The part that’s a bit confusing to me in your scenario is this:

Why would they sue for the the return of funds that were (apparently) completely under their control? Did the initial lawsuit for the return of these funds spell out the specific nature of the “agreement” involving this gift_construction deposit_joining bonus they felt had been breached?

7

Here are my thoughts on this thing.

Who has title to the $200K?

I’d say that when MBE agreed to provide the deposit account to assist in the home construction, title - at least equitable title - to the $200K passed from MBE to John. And MBE knew this, which is why they sought “return” of the $200K.

If that is true, then John’s equitable ownership of the money is not affected by the settlement.

Right?

Yes, except that, so far as John knew, he had the money at the point the cases were dismissed. So my question is - and I have no idea on the answer - does a “release of all claims” discharge UNKNOWN claims, or not?

8

IANAL, but does it matter if John has the agreement detailing what use will be made of the $200K in writing?

Also, does it matter what taxes have been paid on the money, and by whom?

And of course, what am I letting myself in for posting on a legal question when I have never even visited a law school?

Regards,
Shodan

9

One could suppose that this account was a quasi-escrow account, from which John could withdraw funds for building costs as needed. Since he never withdrew any funds, the bank could have concluded, probably incorrectly, that it was inactive and John never assumed control of its assets, so when MBE asked for the return of funds or cancellation forthwith, it was done.

10

I think that’s exactly right.

11

Not commenting as a lawyer, but as a contractor. Four years to build a house? That’s a helluva big house.

Large projects such as dwellings aren’t handled with one or two payments. For that type of undertaking, I tie completion of definable progress points with affirmation via municipal inspection to progress payments.

Example: Excavation, foundation, and all formed concrete work below grade, together with drainage system. Due upon completion $25K. Framing rough, dried in. Due upon completion $30K. Electrical and plumbing rough. Due upon completion $25K. And so forth.

As such, were I building the Cue residence, that $200K would have been drawn down over the course of time, and the most MBE would get is what hasn’t already been disbursed to me, which I’ve used to pay subcontractors, satisfy material suppliers, and compensate myself as the supervising GC.

12

Go after MBE in trust, and go after John’s lawyer for negligence.

John will assert that he had an equitable interest in those particular funds on deposit. Since a simple bank deposit is a loan to the bank, BME will assert that John did not have a trust claim against any particular funds, and instead only had a general claim against BME equal to the amount of the deposit, which had been settled.

When MBE raises the release, crack it with non est factum, mistake, uncertainty or fraud, on the basis that John did not know that the money on deposit was not in his name, that he thought that the settlement would let him keep the money, that the settlement contract did not sufficiently set out who should have the money, and that BME had an obligation to disclose the return of the funds.

If the court does not buy into one of the above and decides that the release sticks, then it is all the easier to nail John’s lawyer’s E&O.

If the release does not stick, then John might find himself having to deal with re-litigation of the entire settlement rather than this one aspect of it should BME argue that the term was not severable, so he should look at the overall deal before he goes after the $200K.

13

If John Que paid so little attention to his assets that he didn’t even know that the bank had given that money back to MBE, Inc., I’m not surprised that disputes arose between him and MBE. I’d bet that these disputes were at least partially about MBE deciding that he was incompetent as a CEO, and they attempted to fire him.

14

If it was a deposit account in MBE’s name, then the bank would not have informed John. John’s lawyer should have reviewed the documentation concerning the account rather than simply assume that the account was in John’s name, and upon learning that it was MBE’s account, should have addressed the issue in the settlement. Sounds like neither John nor his counsel were bright bulbs (on the assumption that John was not so dumb as to handle the entire matter on his own).

15

IANAL, or in any way trained as one, which is probably why this question looks trivial to me. Is there any sort of binding contract, in writing and signed by both parties, that says anything about the $200,000 house bonus? If yes, then whatever that contract says determines whether Mr. Que gets the money. If no, then Mr. Que is screwed, and was a fool to rely on getting that money without seeing anything in writing. Why would it be any more complicated than that?

16

I think it woud depend on the language in the release. A “release of all claims” can mean:

  1. A release of all claims existing at the time (“everything we’ve been fighting about”);

  2. A release of all claims existing at the time PLUS a release of all claims that would have existed if we had bothered to bring them (“everything we knew about that could have given rise to a claim”); or

  3. A release of all claims, known or unknown, now existing or hereafter arising, etc. etc. (“every possible claim”).

For obvious reasons, most releases are of the third variety. But a release is a contract like any other contract, and is itself subject to litigation. So I would want to know: First, had John made a formal claim for the 200K before signing the release, putting his entitlement to it at issue? (I do not believe MBE’s claim is sufficient to raise this issue for John; to the contrary, the fact that they included in their suit their right to recover funds in a bank account in their own name indicates they knew there was some question as to their right to control the funds.) (And by “formal claim” I don’t mean an actual suit; but did he raise it with them as a possible issue, such that both parties would reasonably believe a “release of all claims” includes this claim?) Second, should John reasonably have known prior to signing the release that the money had been returned to MBE? If not, he has a strong arguement that he had no claim until he discovered the money was gone, and any release signed prior to that time obviously could not include a claim he didn’t know about. This implicates the #2 type of release, and leads to questions about when he discovered the money had been given back, and when he should have discovered the money was given back.

As with any other contract, a release that is ambiguous will be strictly construed against the drafter and will be construed to effect the intent of the party, insofar as it can be determined. But in my jurisdiction, the answer to the question “does a ‘release of all claims’ include claims not known/not ripe at the time of signing?” is NO. So wording is key, and – as always, your jurisdictional mileage may vary.

But I respectfully disagree with RANDOM that MBE’s allegation that it owns the money (which is a claim against John) necessarily implicates a claim by John. John may have had reason not to put a claim on the money, such as (a) he didn’t think the ‘settlement of all claims’ included the money claim (stupid and, as an argument, probably DOA, but nevertheless common) or (b) he thought it wasn’t at issue anymore at all (if, for example, he thought the money had already been spent on his house). But MBE’s having put the ownership at issue does not necessarily translate to “John made a contrary claim.” So in addition to the settlement papers (release, etc.) and the complaint, I would want to see what John said in his answer.

17

I should clarify that in my jurisdiction “the answer to the question “does a ‘release of all claims’ include claims not known/not ripe at the time of signing?” is NO” so long as the “now known or hereafter arising” language is not included. Which is why we always, always, always include it.

And even though releases are construed against the drafter, I prefer to be the party drafting them. That way I know the releasing party is releasing every possibly claim, known or unknown, real or hypothetical, whatever.

18

Another contractor chiming in.

If this happened to me, I don’t know who would foot the bill and I wouldn’t care. The property would belong to me.

Well, me and my bank.

See? “some body” owns this property and the fastest way to get paid is to place a mechanics lien on the address.

Some one would step foreward and pay the bill or the bank will. Either way I get my money.

19

If any one assumes that the property owner did all the work himself, there is no way an owner/builder can pull the necessary permits without having a plumber and an electrician sign off on his drawings.

That just aint gonna happen.

20

Although I didn’t craft the hypo, I think I’m safe in saying ‘no’ here – as far as John knew, the $200K was his to use, and that was simply never questioned in any way, shape, manner, or form prior to his discovery in 2001 that the money was gone.

That’s where I’m going to shrug my shoulders, and ask you what kinds of indicia we might rely on to see if a reasonable man in his position would have known the money was transferred back to MBE. I have no idea.

  • Rick