When a builder will not cure punch-list items, can the closing attorney holding the construction escrow disburse the funds to the purchaser alone after notice and a waiting period?

Plain-English summary

A closing attorney held $1,000 in escrow from a residential construction closing, to be disbursed to the builder once the builder corrected a list of items. The builder never made the corrections despite repeated requests, and the purchaser asked the attorney to disburse the escrowed funds and accrued interest to the purchaser in exchange for an indemnification. After three years had passed and following ninety days' notice to both parties, the attorney wanted to transfer the funds to the purchaser and assume any civil liability, and asked whether doing so would be ethical.

The opinion answered no. Funds received by a lawyer acting as escrow agent must be maintained under the trust-accounting provisions of Rules 10.1 and 10.2, and the lawyer stands in a fiduciary relationship with all parties to the escrow, obligated to treat each as a client as to the funds held. Disbursement is governed first by the terms of the escrow agreement, which should tell the lawyer which party is entitled to payment and when (Rule 10.2(E)). Where, as here, unforeseen circumstances arise for which the agreement made no provision, disposition must be agreed upon by the parties or made the subject of a legally binding order before the lawyer releases the funds. The lawyer may not, acting with only one party, decide to disburse the funds to that party without the consent of the other interested party.

Currency note

This opinion was issued in 1989, before the North Carolina State Bar's adoption of the 2003 revisions to the Rules of Professional Conduct. The trust-accounting provisions it applies (Rules 10.1 and 10.2, including 10.2(E)) have since been renumbered and revised (the corresponding Model Rule is 1.15). Subsequent rule amendments or later opinions may have changed the analysis. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific rule, deadline, or requirement mentioned here.

Common questions

Q: Could the attorney disburse the escrow to the purchaser after the builder failed to perform?

A: No. The opinion concluded that the lawyer-escrow agent could not disburse the funds to one party acting with that party alone, even after notice and a waiting period.

Q: To whom does a lawyer-escrow agent owe duties?

A: The opinion concluded the lawyer stands in a fiduciary relationship with all parties to the escrow and must treat each as a client with respect to the funds held in trust.

Q: What was required to release the disputed escrow?

A: The opinion concluded that, absent a controlling provision in the escrow agreement, the parties had to agree or a legally binding order had to issue before the lawyer could release the funds.

Background and rules framework

The opinion applied North Carolina Rules 10.1 and 10.2, the trust-accounting provisions, including Rule 10.2(E) on disbursing entrusted funds (corresponding to Model Rule 1.15). It treated a lawyer holding escrowed funds as a fiduciary to every party to the escrow, so the escrow agreement, and failing that the parties' agreement or a court order, controlled disbursement.

Citations and references

Rules of Professional Conduct:

• North Carolina Rules 10.1 and 10.2 (trust accounting), including Rule 10.2(E) (disbursing entrusted funds)
• MR 1.15 (safekeeping property)

See also

• NC Ethics Op. RPC 127: conditional delivery of settlement proceeds
• NC Ethics Op. RPC 125: disbursement of settlement proceeds
• NC Ethics Op. RPC 149: unclaimed client funds

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/rpc-66/

Original opinion text

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

Inquiry:

Purchaser entered into a residential construction contract on March 27, 1985 with builder. When the transaction was closed on July 25, 1986, $1000 was placed in escrow with the closing attorney to be held until a list of items was corrected and then disbursed to the builder.

The builder has failed to correct the items although many requests have been made by the purchaser. From time to time the attorney has urged the builder to resolve the problems with the purchaser but no action has been taken.

The attorney has maintained an escrow account earning interest in the name of the purchaser and the purchaser has now requested that the attorney disburse the escrow account and interest to the purchaser in exchange for an indemnification from the purchaser to the attorney.

After the passage of three years' time on July 25, 1989, and after ninety (90) days' notice to both parties, the attorney would like to transfer the escrow account to the purchaser and assume any civil liability, provided the transfer can be made without violating any ethical standard.

Can the attorney ethically disburse the escrowed funds to the purchaser under such circumstances?

Opinion:

No. Funds received by a lawyer acting as an escrow agent must be maintained in accordance with the trust accounting provisions of Rules 10.1 and 10.2 of the Rules of Professional Conduct. A lawyer/escrow agent stands in a fiduciary relationship with all parties to the escrow and is obligated to treat each as a client with respect to the funds held in trust. Disbursement of escrowed funds is governed in the first instance by the terms of the escrow agreement which should inform the lawyer as to which "client" is entitled to receive payment and when and in what amounts such payment ought to be made. Rule 10.2 (E). If unforeseen circumstances arise for which no provision was made in the escrow agreement, such as those described in the inquiry, the disposition of the escrowed funds must be agreed upon by the parties or made the subject of a legally binding order prior to the lawyer's release of the escrowed funds. The lawyer may not, in concert with only one of the parties to the escrow agreement, determine that the funds will be disbursed to that party without the consent of the other interested party.