Ethics Corner: Ethics for Lawyers Acting as Escrow Agents
Dear Ethics Committee:
Last year, I was asked to serve as escrow agent for the proceeds of a business sale that were to be divided and dispersed to both my client and his former business associate under the terms of a settlement agreement. Although there was no escrow agreement, I stepped in to act as escrow agent as a favor to my client.
Things went smoothly at first, but now my client has directed me not to release any more funds from the escrow account to his former business associate. Instead, he has asked me to release the entire balance to his own personal account to be used as a set-off for a debt that the former associate had failed to pay.
In the meantime, the former business associate has demanded payment of his claimed share of the escrowed funds while threatening to sue both my client and my firm. I am torn between abiding by my client’s directive and dispersing the funds as contemplated in the settlement agreement. Can I do either without violating an ethics rule?
Ethics Committee Response:
Summary: Because an escrow agent owes identical fiduciary duties to both (or all) parties who have an interest in the escrowed funds; and because you are now confronted with a dispute between the parties regarding the appropriate disposition of the funds; you cannot take either of the courses of action you have asked about. Rather, as escrow agent you should (1) determine whether the disposition of any portion of the funds is agreeable to both parties, in which case this partial distribution should be made expeditiously, NHRPC 1.15(g); and (2) retain custody of the disputed portion of the funds until the dispute is resolved – by mediation or litigation, if not between the parties themselves. A lawyer/escrow agent should not seek to arbitrate the dispute personally.
Discussion: The governing rule in this situation is Rule 1.15 of the New Hampshire Rules of Professional Conduct, Safekeeping Property. The Rule recognizes that third parties may have lawful claims against funds in the lawyer’s custody and that fiduciary obligations like those in an escrow situation are independent of the attorney-client relationship. In particular, Rule 1.15(e) requires a lawyer who has received funds in which a client or third person has an interest to promptly deliver to the client or third person any funds to which they are entitled (except as otherwise permitted by law, agreement or the ethics rules). In the event of a dispute over the funds, however, Rule 1.15(f) provides the following:
“When in the course of representation a lawyer is in possession of property in which two or more persons (one of whom may be the lawyer) claim interests, the property shall be kept separate by the lawyer until the dispute is resolved. The lawyer shall promptly distribute all portions of the property as to which the interests are not in dispute.”
Your fiduciary obligations as escrow agent prevent you from following your client’s instructions to turn all remaining escrow funds over to his personal account. To the contrary, Rule 1.15(f) requires you to keep the funds separate until the dispute is resolved. According to American Bar Association guidance, “when the third party claim is not frivolous under applicable law, the lawyer must refuse to surrender the property to the client until the claims are resolved.” 2004 ABA Model Code Comment, Rule 1.15, Comment . See also Douglas’ Case, 147 NH 538, 543 (2002) (disputed portion of property held by lawyer must be kept separate). Thus, releasing the remaining funds to your client as a set-off for unrelated claims could constitute a violation of Rule 1.15.
Keep in mind that your obligations to your client during the course of the representation do not cease, even if you are unable to release the escrow funds to him. For example, Rule 1.4(a)(5) requires you to consult with the client about any relevant limitation on your conduct when you know that the client expects assistance not permitted under the Rules or other law. Here, advising your client on the potential implications to his own interests, as well as to your firm, and suggesting means such as arbitration for resolving the dispute over the escrowed funds may prevent further litigation.
You may also need to resort to filing an interpleader or other action to have a court resolve the dispute if the parties are unable to do so. Your status as counsel representing one of the party’s interests would prevent you from unilaterally resolving the dispute. See Paul Bruzga advs. Betty Denison, PCC Docket No. 07-068 (March 5, 2010) (“by making the disbursement, the Respondent substituted his judgment for that of a court”).
Finally, the attorney should advise his or her client, before undertaking the role of escrow agent, that circumstances may arise (such as those discussed in this hypothetical) in which the fiduciary duties of an escrow agent will prevent the attorney from acting solely on the client’s behalf should unforeseen disputes arise between the client and other parties to an escrow agreement.
In most cases, it will be advisable to have a written escrow agreement signed by all parties that addresses the escrow agent’s and parties’ obligations. Such an agreement should help to eliminate confusion on the part of the client or the other parties regarding an escrow agent’s obligations in the event of a dispute over release of funds.
This commentary by the NHBA Ethics Committee provides general guidance on the NH Rules of Professional Conduct. New Hampshire lawyers may contact the Committee for confidential and informal guidance on their own prospective conduct or to suggest topics for Ethics Corner commentaries by emailing Robin E. Knippers. Upon receipt, a quorum of the committee then would have an opportunity to review your inquiry during a regularly scheduled meeting and respond to you by telephone or email.