Breach of Fiduciary Duty Claim Against Lawyer Acting as Both Escrow Agent and Attorney for Counterparty Triggers Duty to Defend Notwithstanding Business Enterprise Exclusion

The Illinois Intermediate Appellate Court, applying Iowa law, has affirmed that a professional liability insurer must provide a defense for an attorney who allegedly mishandled funds that he was holding in escrow related to the plaintiff’s transaction with another company for which the attorney was vice president and legal counsel. Willey v. Minn. Lawyers Mutual Ins. Co., 2017 IL App (5th) 160452 (Ill. App. Dec. 6, 2017). In so doing, the court first determined that the claim was properly interpreted as one for a breach of duty as an escrow agent, which was within the grant of coverage for “professional services.” The court then found a business enterprise exclusion inapplicable because it required that damages arise from certain conflicts of interest that were not present.

Attorney Willey was wearing several hats in a transaction between Floyd Schlueter (Schlueter) and Idea Catalyst (Catalyst). Catalyst contracted to provide Schlueter with a letter of credit for the purchase of real estate. The contract was drafted by Willey as attorney for Catalyst, and signed by Willey as VP/Manager of Catalyst. The contract called for Catalyst’s $500,000 fee to be wired to Willey as escrow agent for the transaction. Willey was also a partner at Willey O’Brien, LC, and the firm had purchased a professional liability policy under which both Willey and the firm were insureds. After the letter of credit failed to materialize, Schlueter demanded his money back, only to find that it had been distributed to third parties contrary to his understanding of the escrow arrangement. Schlueter sued, alleging Willey breached his fiduciary duties, and specifically that Willey’s position as VP of Catalyst was a “conflict of interest” that “in and of itself created a breach of … duty.”

The policy insured against claims “result[ing] from the rendering [of] professional services,” defined as “legal or notary services provided to others, while engaged in the practice of law … including … escrow agent [services.]” The court found no merit in the insurer’s argument that, since Schlueter was not Willey’s “client,” Willey was not “engaged in the practice of law” with respect to Schlueter. The court noted that the policy’s broad language, combined with its specific inclusion of “escrow agent” placed the claim within the insuring agreement.

The court next rejected the insurer’s argument that the business enterprise exclusion applied. The exclusion barred coverage for claims “arising out of professional services rendered by an insured in connection with any business enterprise … managed … by any insured, where … damages … resulted from conflicts of interest with … any client or former client or … person claiming an interest in the same business enterprise.” The court held that, even though Schlueter had explicitly alleged a “conflict of interest,” the exclusion did not apply. Even if the financing agreement was a “business enterprise” in which both Schlueter and Catalyst “claim[ed] an interest,” Willey’s role as an escrow agent did not conflict with Schlueter’s interest in the Catalyst transaction. Under Iowa law, the court recognized that the “payee of an instrument is not incapacitated from acting as [escrow agent]” and merely becomes an agent for both parties. This created a fiduciary relationship between Willey and Schlueter free from conflicts and outside the exclusion.


Wiley Executive Summary

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