PERILS OF BEING AN ESCROW AGENT: WHERE DISPUTES ARISE

In many ventures, from real estate to filmmaking finance, there may be the need for the services of an escrow agent (e.g., a bank, an attorney, title insurance company, or an escrow company) who acts as the holder of funds for eventual payment from one party to another party. In some cases, disputes arise among the parties and escrow agent. This article reviews some of the situations when disputes occurs.

The risk of being caught up in a dispute can cause some potential escrow agents to decline the offer to act as an escrow agent because of the risk of being involved in a dispute or accused of wrongdoing. Other entities make a business of being an escrow agent, earning fees and living with the risks involved.

Sometimes the escrow agent is caught in the middle of a dispute between the contracting parties, who join the escrow agent in litigation or accuse the escrow agent of wrongdoing even if there is no wrongdoing on the part of the escrow agent.

An escrow agent has a fiduciary duty to transfer property (usually cash) from one party to another. Part of this duty is to examine documents to make sure that the seller and buyer ( or the investor and startup, or investor and filmmaker, etc.) follow the terms of the sale or investment, and to serve both the buyer and seller in the transaction.

The scope of the fiduciary duty is defined by the scope of its contractual duties under an escrow agreement. If the escrow agent acts in accordance with its obligations under the escrow agreement, it has not breached its fiduciary duty.

Disputes may occur when parties to an escrow agreement attempt to impose upon the escrow agent an obligation in addition to its limited duties under the express terms of its contract. Also, dispute occurs when a contractual provision is incomplete, unclear or ambiguous. If it is complete, clear and unambiguous, courts must enforce it according to the plain meaning of its terms.

Sometimes an escrow agreement may require the agent to ratify a condition precedent, i.e., to make sure the one party or another did what they said they were going to do before releasing the monies. Disputes occur because one party may accuse the agent of not making sure that pre-conditions are met before releasing money or refusing to release monies when met. Additionally, disputes occur when there is the issue of whether the escrow agent has a duty to validate the actions of parties (i.e., make sure the parties really did what they said they did). All this must be set forth in the agreement.

Another potential roadblock is when the escrow agreement requires the approval of one of the parties to release funds but never receive the approval even after all conditions are met. Or possibly the parties will not provide a release of liability to the escrow agent. If the party does not give approval or the escrow agent doe not get releases, then the funds could be in “limbo.” The escrow agent may be caught in the middle, or may even have to file a lawsuit to resolve the issue.

Parties sometimes act in extremes to get their way, and the escrow agent in caught in the middle of it all. Looking at the big picture, one can only hope that in business dealings (including those involving escrow agreements) the actions of the parties involved are not so extreme as to exceed the bounds of a civilized community, which some deal makers seem to forget.