Can a lawyer holding a real estate deposit release it to the seller client, or require the client to sign an indemnity agreement, when the buyer defaults?

Plain-English summary

The Board of Governors asked whether a lawyer who holds a buyer's deposit on a real estate purchase, where the buyer failed to close on time, may release the deposit to the seller client only after the client signs an agreement indemnifying the lawyer against a buyer suit for wrongful release. The lawyer had proposed three options: hold the funds to see if the buyer claims them, file an interpleader and deposit them with the court, or release them to the seller after an indemnity agreement.

The opinion applies the trust-accounting rule, Rule 5-1.1, which requires a lawyer to promptly deliver funds the client or a third person is entitled to receive, and the comment to Rule 5-1.2, which recognizes that third parties may have just claims against funds in a lawyer's custody and that a lawyer may have a legal duty to protect those claims and refuse to surrender the property to the client. The comment also states a lawyer should not unilaterally arbitrate a dispute between the client and a third party and, where appropriate, should consider depositing disputed funds in the court registry. Citing The Florida Bar v. Toothaker, the opinion notes a lawyer acting as escrow agent is a trustee of both parties with a fiduciary duty under the escrow agreement. The committee concludes that if the lawyer owes a legal duty to the buyer (such as under the escrow agreement), the lawyer may not release the funds to the client; instead the lawyer must hold them in trust until the dispute is resolved or file an interpleader or declaratory action and deposit the funds with the court (Rule 5-1.1(f), Florida Opinion 67-36). Whether a third party has a valid legal claim is a legal question outside an ethics opinion. If the lawyer owes no such duty, or the escrow agreement directs release to the client, the funds must be returned to the client promptly.

The opinion holds the indemnity-agreement option is ethically impermissible. Requiring the client to sign such an agreement puts the lawyer's own interest ahead of the lawyer's duties to the client and third party. Under Rule 4-1.7(b), a lawyer whose independent judgment may be materially limited by the lawyer's own interest may proceed only if the lawyer reasonably believes the representation will not be adversely affected and the client consents after consultation; and the comment to Rule 4-1.7 recognizes conflicts so inherent that the lawyer cannot properly ask for consent. The opinion concludes the indemnity agreement creates a personal conflict to which the lawyer should not seek client consent, and that it is unreasonable to ask the client to indemnify the lawyer if the lawyer is legally obligated to release the funds to the client (citing Rule 4-1.8(a) and New York City Opinion 1986-5).

In practice

Under the Florida rules as they stood at the time of this 2002 opinion, the controlling distinction is whether the lawyer owes a legal duty to the buyer over the deposit. The opinion holds that where such a duty exists the lawyer cannot hand the money to the client, must keep disputed funds in trust, and may use interpleader to let a court decide. Per the opinion, the lawyer cannot resolve this by shifting the risk back to the client through an indemnity agreement, because doing so elevates the lawyer's own interest over the lawyer's fiduciary duties and creates a non-consentable conflict under Rule 4-1.7(b). The opinion repeatedly notes that whether the buyer actually has a valid claim, and what the escrow agreement requires, are legal questions outside its scope.

Common questions

Q: The buyer defaulted and my seller client wants the deposit. Can I just release it?

A: Per the opinion, only if the lawyer owes no legal duty to the buyer over the funds, or the escrow agreement directs release to the client. If the buyer has a valid legal claim and the lawyer owes a duty to protect the funds, the lawyer may not release them to the client.

Q: What do I do with the deposit while the dispute is unresolved?

A: The opinion concludes the lawyer must hold the funds in trust until the dispute is resolved, and may file an interpleader or declaratory action and deposit the disputed funds in the court registry (Rule 5-1.1(f)).

Q: Can I protect myself by having the client sign an indemnity agreement before I release the funds?

A: No. The opinion holds that requiring the client to sign such an agreement is ethically impermissible because it puts the lawyer's own interest ahead of duties to the client and third party and creates a personal conflict to which the lawyer should not seek consent.

Q: Can I just decide who is right and pay that party?

A: No. Per the comment to Rule 5-1.2 the opinion relies on, a lawyer should not unilaterally arbitrate a dispute between the client and a third party.

Background and rules framework

The opinion interprets Rule 5-1.1 and Rule 5-1.2 (trust accounts and safekeeping of client and third-party property, formerly Rule 4-1.15, comparable to Model Rule 1.15), Rule 4-1.7(b) (conflict from the lawyer's own interest, Model Rule 1.7), and Rule 4-1.8(a) (business transactions with a client, Model Rule 1.8(a)) of the Rules Regulating The Florida Bar.

Citations and references

Rules of Professional Conduct:

• Model Rule 1.15 / Fla. Rules 5-1.1, 5-1.1(f), 5-1.2 (trust accounts; safekeeping property; interpleader)
• Model Rule 1.7 / Fla. Rule 4-1.7(b) (conflict from the lawyer's own interest)
• Model Rule 1.8 / Fla. Rule 4-1.8(a) (business transactions with a client)

Cases:

• The Florida Bar v. Toothaker, 477 So. 2d 551 (Fla. 1985), lawyer-escrow agent owes a fiduciary duty to both parties
• The Florida Bar v. Golden, 566 So. 2d 1286 (Fla. 1990); The Florida Bar v. Joy, 679 So. 2d 1165 (Fla. 1996)

Other opinions cited:

• Fla. Ethics Op. 67-36; Connecticut Ops. 00-15, 01-02; New York Op. 710; New York City Op. 1986-5; Philadelphia Op. 89-4

See also

• Florida Bar Op. 02-4: Third-Party Claims on Settlement Funds
• Florida Bar Op. 12-4: Multiple Title Insurer Trust Account Audits
• Florida Bar Op. 21-2: Venmo and PayPal for Trust Funds

Source

• Landing page: https://www.floridabar.org/etopinions/etopinion-02-6/
• Original PDF: https://www-media.floridabar.org/uploads/2017/04/FL-Bar-Ethics-Op-02-6.pdf

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

FLORIDA BAR ETHICS OPINION
OPINION 02-6
March 7, 2003
Advisory ethics opinions are not binding.
An attorney representing the seller, who is holding the deposit for a purchase agreement
that has not been closed on time by the buyer, may not remit the funds to the seller/client if the
buyer has a valid legal claim to the escrow funds and the attorney has a legal duty to protect the
funds. The attorney must continue to hold the funds in trust until the dispute is resolved or the
attorney may file an interpleader and deposit the funds into the court’s registry. It is unethical
under the facts presented for the attorney to require the client to sign an indemnity agreement
before releasing funds held by the attorney as a deposit on the purchase of the property.
RPC: 4-1.7, 4-1.7(b), 4-1.8(a), 5-1.1, 5-1.1(f), 5-1.2
Opinions: 67-36, Connecticut Bar Opinion 00-15 (2000), Connecticut Bar Opinion 01-02
(2001); New York Opinion 710 (1998); New York City Opinion 1986-5 (1986);
Philadelphia Opinion 89-4 (1989)
Cases: Craddock v. Cooper, 123 So.2d 256 (Fla. 2d DCA 1960); The Florida Bar v.
Golden, 566 So.2d 1286 (Fla. 1990) and The Florida Bar v. Joy, 679 So.2d 1165
(Fla. 1996); The Florida Bar v. Toothaker, 477 So.2d 551 (Fla. 1985); Gautreaux
v. Greenman, 719 So.2d 1261 (Fla. 3d DCA 1998); SMP, Ltd. v. Syrett, Meshad,
Resnick & Lieb, P.A., 584 So.2d 1051 (Fla. 2d DCA 1991); United American
Bank of Central Florida, Inc. v. Seligman, 599 So.2d 1014 (Fla. 5th DCA 1992)
The Florida Bar Board of Governors has requested that the Professional Ethics
Committee issue an advisory opinion regarding the ethical propriety of an attorney requiring a
client who is the seller of real property to sign an indemnity agreement before releasing funds
held by the attorney as a deposit on the purchase of the real property when the buyer is in default.
The request is based on an inquiry reviewed by the board.
The attorney is representing a seller in a real estate transaction. The buyer failed to close
by the date set in the purchase agreement. The attorney has inquired as to what to do with the
deposit monies when the buyer is in default. The client/seller has requested that the attorney
release the deposit held by the attorney under the agreement. The attorney would like to give the
client three options: 1) the attorney would hold the funds for a period of time to see whether the
buyer makes a claim on the monies; 2) the attorney would file an interpleader and deposit the
funds into the registry of the court; or 3) the attorney would release the funds to the seller after
the seller/client signs an indemnification agreement thereby shifting the risk of a buyer lawsuit
against the attorney for wrongful release of the deposit to the seller.
As an ethical matter, Rule 5-1.1 (formerly Rule 4-1.15), Rules Regulating The Florida
Bar, states in pertinent part:
(e) Notice of Receipt of Trust Funds; Delivery; Accounting. Upon
receiving funds or other property in which a client or third person has an interest,
a lawyer shall promptly notify the client or third person. Except as stated in this

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rule or otherwise permitted by law or by agreement with the client, a lawyer shall
promptly deliver to the client or third person any funds or other property that the
client or third person is entitled to receive and, upon request by the client or third
person, shall promptly render a full accounting regarding such property.
[Emphasis added.]
Generally, an attorney’s first duty is to the client. However, in certain circumstances,
such as when an attorney is also acting as an escrow agent, the attorney may also have a duty to
third parties. An escrow agent is a trustee of both parties who is charged with the performance
of an express trust as set forth in the trust agreement. In other words, an escrow agent has a duty
to perform in accordance with the express terms of the escrow agreement. See, The Florida Bar
v. Toothaker, 477 So.2d 551 (Fla. 1985) (attorney acted as escrow agent and therefore had
fiduciary relationship to both buyer and seller). The Comment to 5-1.2, (formerly Rule 4-1.15)
of the Rules Regulating The Florida Bar, offers guidance regarding escrow funds held by an
attorney. The Comment, in pertinent part, provides:
Third parties, such as a client’s creditors, may have just claims against funds or
other property in a lawyer’s custody. A lawyer may have a duty under applicable
law to protect such third party claims against wrongful interference by the client
and, accordingly, may refuse to surrender the property to the client. However, a
lawyer should not unilaterally assume to arbitrate a dispute between the client and
the third party and where appropriate the lawyer should consider the possibility of
depositing the property or funds in dispute into the registry of the applicable court
so that the matter may be adjudicated.
The obligations of a lawyer under this rule are independent of those arising from
activity other than rendering legal services. For example, a lawyer who serves as
an escrow agent is governed by the applicable law relating to fiduciaries even
though the lawyer does not render legal services in the transaction.
As the Comment suggests, an attorney’s ethical obligation to act will be based upon his
or her legal obligations to the parties, including any potential legal obligations as an escrow
agent. See, The Florida Bar v. Golden, 566 So.2d 1286 (Fla. 1990) and The Florida Bar v. Joy,
679 So.2d 1165 (Fla. 1996).
Under the rules regulating trust accounts, the attorney must determine whether the
attorney has a legal duty to the purchaser, such as under the escrow agreement. If the attorney
does have a legal duty to the purchaser, the attorney may not release the funds to the client. An
indemnification agreement signed by the client does not abrogate the attorney’s responsibilities
to third parties under the Rules of Professional Conduct. Rather, the attorney should hold the
funds in trust until the dispute can be resolved. If the dispute cannot be resolved, the attorney
could file an interpleader or declaratory judgment action in a court of competent jurisdiction and
deposit the disputed funds in the registry of the court. Rule 5-1.1(f) and Florida Opinion 67-36.
Whether a third party has a valid legal claim against the trust funds is a legal question that cannot
be answered in an ethics opinion. Rule 2, Florida Bar Procedures for Ruling on Questions of
Ethics. See generally, United American Bank of Central Florida, Inc. v. Seligman, 599 So.2d
1014 (Fla. 5th DCA 1992); SMP, Ltd. v. Syrett, Meshad, Resnick & Lieb, P.A., 584 So.2d 1051

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(Fla. 2d DCA 1991); Craddock v. Cooper, 123 So.2d 256 (Fla. 2d DCA 1960) and Gautreaux v.
Greenman, 719 So.2d 1261 (Fla. 3d DCA 1998).
On the other hand, if the attorney does not have a legal duty to the third party, or if the
attorney’s legal duty under the escrow agreement is to release the funds to the client, then the
funds must be returned to the client/seller as soon as possible pursuant to Rule 5-1.1.
The third option, that of requiring the seller/client to sign the indemnification agreement,
thereby shifting the risk of a buyer lawsuit against the attorney for wrongful release of the
deposit to the seller, is ethically impermissible. If there is a question under the escrow agreement
as to whether the funds should be released, then the attorney must continue to hold the money in
trust until either the dispute is resolved by the parties or a court has made a determination
pursuant to an interpleader or declaratory action. If the escrow agreement is clear as to whom
the money should be disbursed, then the attorney, as escrow agent, must disburse the funds
accordingly. See, Connecticut Bar Opinion 00-15 (2000), Connecticut Bar Opinion 01-02
(2001), New York Opinion 710 (1998) and Philadelphia Opinion 89-4 (1989). To require that
the seller/client sign an indemnification agreement before the attorney will disburse the funds is
putting the attorney’s own interests ahead of his or her duties to the client and third party as an
attorney and escrow agent. Rule 4-1.7(b) is the governing ethical standard. This rule provides in
pertinent part:
(b) Duty to Avoid Limitation on Independent Professional Judgment. A
lawyer shall not represent a client if the lawyer’s exercise of independent
professional judgment in the representation of that client may be materially
limited by the lawyer’s responsibilities to another client or to a third person or by
the lawyer’s own interest, unless:
(1) the lawyer reasonably believes the representation will not be adversely
affected; and
(2) the client consents after consultation [emphasis added].
Under Rule 4-1.7(b), an attorney may represent a client when the attorney’s exercise of
independent professional judgment in the representation of that client may be materially limited
by the attorney’s own interests only if two conditions are satisfied. First, the attorney must
reasonably believe that the representation of the client will not be adversely affected. Second,
the attorney’s client must consent to the representation after consultation with the attorney
regarding the relevant facts. As the Comment to Rule 4-1.7 points out, there are conflicts which
are so inherent that it would be improper to request a client’s consent:
A client may consent to representation notwithstanding a conflict. However,
as indicated in paragraph (a)(1) with respect to representation directly adverse to a
client and paragraph (b)(1) with respect to material limitations on representation
of a client, when a disinterested lawyer would conclude that the client should not
agree to the representation under the circumstances, the lawyer involved cannot
properly ask for such agreement or provide representation on the basis of the
client’s consent.

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The indemnification agreement creates a personal conflict of interest for the attorney to
which the attorney should not seek client consent. See New York City Opinion 1986-5 (1986).
Additionally, it is unreasonable to request that the client consent to indemnifying the attorney if
the attorney is legally obligated to release the funds to the client. See Rule 4-1.8(a).
In summary, the committee is of the opinion that an attorney representing the seller, who
is holding the deposit for a purchase agreement that has not been closed on time by the buyer,
may not remit the funds to the seller/client if the buyer has a valid legal claim to the escrow
funds and the attorney has a legal duty to protect the funds. Rule 5-1.1(f). Rather, the attorney
must continue to hold the funds in trust until the dispute is resolved or the attorney may file an
interpleader and deposit the funds into the court’s registry. What the attorney’s legal obligations
pursuant to a particular escrow agreement is a legal/factual question, beyond the scope of an
ethics opinion. Finally, under the facts presented, it is unethical for the attorney to require the
client to sign an indemnity agreement before releasing funds held by the attorney as a deposit on
the purchase of the property.