Since 1982, New York State's legal profession, through its Lawyers'
Fund for Client Protection, has restored $20 million to clients and
beneficiaries of escrow transactions.
That's nearly half of all reimbursement paid out by the Lawyers'
Fund since 1982. Of the $20 million, $14 million involved escrows
in real property transactions, usually residential sales and down
payments. The remaining $6 million was lost in other escrow
arrangements, like bulk sales and escrows created in the course of
Since the Lawyers' Fund in the Empire State has a relatively high
maximum limit its awards compared to client protection funds in
other states -- $100,000 per client loss -- most escrow losses are
fully reimbursed by the Lawyers' Fund if, of course, the dishonest
(and disbarred or dead) practitioner is unable to make restitution.
There's an old and solid principle of common law that law clients
can rightfully trust on the integrity of their attorneys. That
being said, no law client is excused from exercising common sense,
or an informed judgment. In the field of escrow, clients (and
lawyers) have practical means to prevent losses and, in some cases,
to promptly detect and remedy them.
Toward those ends, the Board of Trustees of the Lawyers' Fund is
publishing a new pamphlet called, Know Your Escrow Rights.
It's a plain-English guide to the rights of consumers and law
clients, and the fiduciary obligations of escrow agents. It's
available from the Lawyers' Fund without charge.
The practical suggestions in Know Your Escrow Rights are
based upon New York laws, rules and court decisions. Observing them
will help consumers avoid disagreements in escrow transactions, and
prevent the misuse or loss of escrow money and property. For the
Lawyers' Fund, every dollar saved from loss is a dollar that will be
used to help other law clients in need of reimbursement.
What follows is the plain-English text of the consumer pamphlet,
annotated as a public service for members of the New York bar. The
preface to the consumer edition includes the important
"Because escrow agreements are legal contracts that involve
important rights and obligations, the careful consumer will consult an
attorney before entrusting money or property with an escrow agent."
- What's an escrow?
An escrow is a legal arrangement to help parties perform their
contracts and avoid disagreements. The escrow agreement has three
parties: a "depositor", an "escrow agent" and a
In the typical escrow, the depositor is required to entrust money or
property with an escrow agent. The escrow agent holds the escrow
deposit until it can be released to the beneficiary upon the
happening of some future event, or the performance of some
A common example involves the down payment in the purchase and sale
of a residence, condominium or cooperative. The contract frequently
requires that the buyer's down payment be paid to the seller's
lawyer, in escrow, or to a real estate broker, pending the title
In this escrow example, the buyer is the depositor, and the seller
is the beneficiary. The seller's lawyer or real estate broker is
the escrow agent, who undertakes to safeguard the down payment in a
special bank account until the contract has been performed, or is
canceled by the buyer and seller.(4)
If the purchase goes forward as planned, the escrow agent will
release the down payment to the seller at the title closing. If the
buyer and seller agree to cancel their contract, the escrow agent is
usually required to return the down payment to the buyer.
- What are other examples of escrows?
Other escrows include settlements in personal injury and other court
cases; agreements to distribute property in matrimonial actions;
and, in the bulk sale of business assets, escrows to insure that
taxes and business debts will be paid.
There are also consumer escrows that are regulated by special state
laws. Examples include escrow accounts for rent security deposits;
(5) real property tax escrow accounts required by
mortgage lenders;(6) deposits paid to builders
constructing new homes;(7) down payments for interests
homeowners associations and time-share projects;(8) advance fees paid to automobile brokers;(9) membership fees
paid to health clubs and licensed campgrounds;(10) and
entrance fees and deposits paid on life care community contracts.(11)
- Are written escrow agreements required?
- Not in all cases. But someone considering an escrow transaction
should insist that the escrow agreement be in writing, and be
reviewed by a lawyer. Every escrow agreement should contain
provisions which set forth:
- the names and addresses of the depositor, the escrow agent and the beneficiary;
- the amount of the escrow deposit;
- the name and address of the bank where escrow money will be deposited, and the title and number of the bank account;
- whether the escrow agent is required to use an interest-bearing account, and how the interest earned on the deposit will be distributed;
- the conditions that must occur or be performed before the escrow agent can release the escrow fund;
- time limits for the performance of these conditions;
- the names and addresses of all persons who will be paid the escrow fund; and
- the duties of the escrow agent in the event the conditions of the
escrow agreement cannot be met.(12)
It's also a good practice for the parties, or their attorneys, to require a
copy of the written agreement, and a periodic status report from the escrow
agent regarding the current balance in the escrow account, if any, and its
- Who does an escrow agent work for?
A person who serves as an escrow agent is a fiduciary, with duties
to all parties who have an interest in the escrow property.(13) The
most important duty is to safeguard the escrow property.(14) If it's
money, it must be deposited in a special bank account that's
separate from the escrow agent's personal and business accounts.(15)
An escrow agent should provide the parties with a receipt for the
escrow property, a copy of the escrow agreement and keep complete
and accurate records.(16) Depositors and
beneficiaries have a right to a full accounting of the escrow
agent's management of the escrow property.(17)
An escrow agent has the legal duty to comply strictly with the terms
and conditions of the escrow agreement.(18) Escrow property cannot be
delivered to anyone, except in accordance with the provisions of the
An escrow agent who releases escrow property in violation of an
escrow agreement is subject to money damages in a civil court action
brought by any party who has suffered economic loss because of the
agent's breach of duty.(20)
- Are escrow agents paid for their services?
Escrow agents can serve with or without compensation. If an escrow
agent expects to be paid for administering an escrow account or
property, the matter of fees and reimbursement of expenses should be
clearly set forth in the escrow agreement.
- Can escrow agents assert liens against escrow property?
No. An escrow agent can have no claim or lien on the escrow deposit
for services rendered,(21) unless the escrow
agreement provides otherwise.(22) The escrow agent is
simply a custodian of the escrow property,(23) which must
be paid out as the escrow agreement provides.(24)
- Are interest-bearing accounts required for escrow deposits?
Not in all cases,(25) but escrow agreements
interest-bearing accounts when escrow funds can generate significant
interest for one or more of the parties. For small and short-term
escrow deposits, lawyers are permitted by state law to use so-called
"IOLA" bank accounts".(26) Interest
earned on these IOLA accounts is pooled and used to finance civil
legal services for the poor.(27)
If you arrange for an interest-bearing bank account, the escrow
agent and bank may require a Social Security or Federal Tax
Identification number for federal and state income tax purposes.
- Can escrow agents keep bank interest?
No. All interest that's earned on an escrow deposit should be paid
out in accordance with the escrow agreement, or to the party whose
money generated the interest. It would be a conflict of interest
for an escrow agent, as a fiduciary,(28) to
require that bank interest be treated as compensation for services
- If an escrow deposit is stolen, who bears the loss?
Unless an escrow agreement provides otherwise, the loss generally
falls on the party who owned the escrow property at the time of its
theft.(30) In the case of a stolen down
payment, that's usually the
buyer, who may be asked by the seller to replace the down payment
before title closes. Of course, an injured party will have the
right to seek money damages from the dishonest escrow agent.(31)
Are there danger signals to watch for?
Yes, and consumers can protect themselves against losses. A deposit
of money with an escrow agent should be made by certified check, for
example, and not with cash. The check should be promptly deposited
in a special bank account identified in the escrow agreement. The
depositor should review the endorsement on the check to make sure
that the escrow agent has made the proper bank deposit. The
beneficiary of an escrow agreement should be wary if an escrow agent
delays in releasing escrow property. And a bounced check from an
escrow agent is a signal that escrow money might have been misused.
In these situations, the careful consumer will promptly consult a
- What's the Lawyers' Fund for Client Protection?
The New York Lawyers' Fund is a state agency that the legal
profession finances to protect law clients from dishonest conduct in
the practice of law.(32)
The Lawyers' Fund is administered by a court-appointed Board of
Trustees composed of lawyers and nonlawyers.(33) The Trustees are
permitted to reimburse law clients when a lawyer in New York State
misuses or steals client money and property in the practice of law.(34)
The maximum limit on awards is currently $100,000 per client loss.(35)
To qualify, the loss must occur in the practice of law, and in an
Reimbursement procedures are simple and cost-free. In addition,
lawyers who help clients seek reimbursement cannot charge legal fees
for this professional service.(37)
Losses reimbursed by the Lawyers' Fund include the theft of down
payments and other escrows in real property transactions, estate and
trust assets, personal injury settlements and money embezzled from
clients in investment transactions. The Lawyer's Fund cannot settle
fee disputes, or compensate for a lawyer's malpractice or neglect.(38)
A law client seeking reimbursement must also file a written
complaint with the appropriate Attorney Grievance (Disciplinary)
Committee in the locality where the lawyer practices, and cooperate
fully with the Committee's investigation of the complaint.(39) Awards
from the fund are generally made after a lawyer's disbarment, and
where it appears that the lawyer is unable to make restitution.
Application forms, information and other help is available from the
offices of New York Lawyers' Fund in Albany. Telephone (518)
434-1935 or, in New York State, 1-800-442-FUND (3863).