When parties dispute escrowed funds and the escrow agreement has no release or dispute clause, may the lawyer-escrow agent just return the funds to the lawyer's own client?
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This page answers the general question as of 1998. Ezel answers yours: whether it's allowed on your facts, under the current New York Rules of Professional Conduct, with citations.
Plain-English summary
A lawyer had held funds in escrow for years under a written agreement from a real estate deal in which the lawyer represented the sellers. The escrow secured the purchasers against loss from a possible municipal assessment on a sidewalk violation. A municipal representative had recently advised there was no possibility of an assessment, but the purchasers still refused to let the lawyer return the funds to the sellers. The escrow agreement neither authorized release once it was clear no assessment would issue nor provided a dispute-resolution procedure. The lawyer asked whether the funds could be returned to the sellers on furnishing the purchasers' attorney an affidavit of the investigation and findings.
The committee answered the question in the negative. It explained that an escrow agent owes contractual and fiduciary duties to all parties that can be discharged only per the escrow agreement's terms or with all parties' informed consent, and that the agent's obligations derive principally from the substantive law of contracts and agency, which is beyond the committee's jurisdiction. Where the agreement is silent on dispute resolution, it would be inappropriate for the lawyer to assume the power to resolve the dispute by releasing the funds, because the stipulated contingency for release had not occurred; the committee cited Brooklyn Op. 1993-1 for the point that an attorney escrowee may not disburse based on his or her own notions of fairness.
The committee added that the lawyer may resign as escrow agent, but that DR 9-102's mandate to protect property entrusted to the lawyer's custody requires the lawyer to keep the funds intact and start a process to resolve the dispute, for example by commencing a stakeholder's (interpleader) action and depositing the funds with the court. The committee observed that the situation underscored the importance of a carefully drafted escrow agreement that provides for possible disputes, and that lawyers should avoid making such arrangements casually in the press of a closing.
Currency note
This opinion was issued in 1998, under New York's former Code of Professional Responsibility, which New York replaced with the Rules of Professional Conduct in 2009. 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: Can a lawyer-escrow agent return disputed funds to the lawyer's own client?
A: The opinion concluded no. Absent authorization by all parties, the lawyer may release escrowed funds only as the escrow agreement provides; here the contingency for release had not occurred.
Q: Can the lawyer just resign as escrow agent and hand the funds over?
A: The opinion said the lawyer may resign, but DR 9-102 requires the lawyer to preserve the funds intact and initiate a resolution process, not simply release them.
Q: What process can the lawyer use to resolve the standoff?
A: The opinion pointed to commencing a stakeholder's action and depositing the funds with the court (interpleader), unless the parties agree to another arrangement.
Background and rules framework
The opinion interpreted DR 9-102 of New York's former Code of Professional Responsibility, which governs the safekeeping of funds and property of others held by a lawyer, while noting that the escrow agent's core duties arise from the substantive law of contracts and agency. The Model Rule analogue is Rule 1.15 (safekeeping property; handling of disputed funds). New York replaced the Code with the Rules of Professional Conduct in 2009; the DR number cited here is historical.
Citations and references
Rules of Professional Conduct:
- MR 1.15 (safekeeping property; disputed funds)
- NY DR 9-102
Other opinions cited:
- Brooklyn Op. 1993-1 (1993): an attorney escrowee may not disburse disputed funds on his or her own notions of fairness
- N.Y. City 1986-5 (1986): the importance of a carefully drafted escrow agreement
- N.Y. State 575 (1986); N.Y. State 532 (1981): a lawyer's Code duties as escrow agent
See also
- NY State Bar Op. 717: Paying medical liens from settlement funds
- NY State Bar Op. 737: Writing an escrow check against uncleared funds
Source
- Landing page: https://nysba.org/opinion-710/
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