WHEN QUIET TITLE ACTIONS INVOLVE ESTATES

There can be situations even after a title search that the true ownership of property is unclear. In one actual situation, a property record search showed that the deed of the property from the 1940s showed ownership by one party, yet through the 1960s through the 2000s, there are records of mortgages on the property and satisfaction of mortgages under various names other than the names on the deed, yet no new deed recorded.

Moreover, the person occupying the home is a grandson of the last named persons who had a mortgage on the property. Now that grandson wants to probate the deceased grandparents’ estates in the hopes to pay off tax liens that are against the grandparents as owners of the property. The situation becomes even murkier because the grandson’s mother is still alive and incapacitated.

Given all this, what is necessary to resolve this title issue?  One option is to commence a quiet title action to have the court decide and order who has title to the property. One title insurance company said it would not provide insurance without such an order and assurance from the court.

Quiet Title

Quiet Title actions usually provide that any person who claims an interest in real property can make a claim to compel the determination of the ownership of that property. The defendants can make a claim adverse to that of the plaintiff. Competing claims can be based on public records or other evidence. In other words, if someone has some direct or circumstantial evidence sufficient to make a claim of ownership of the property, that person can file a claim in court with notice to any other party that may have a similar claim to the property with the court determining ownership.

Sometimes it is virtually impossible to notify or to join all potential defendants. For example, in the above situation, the grandson, if he ever was able to become the personal representative of his last to die grandparent’s estate, filed a claim, the court could likely order a publication in a newspaper of the claim since it would be unlikely that the owners of the property in 1940 are locatable or are still alive, or their heirs are locatable.

With this, after all are joined or notified to satisfy the court, the Judge would review the evidence and make a determination. Even after the quiet title decision, there could be issues pertaining to the distribution of the property among the heirs, and outstanding claims against the property such as the tax liens in the situation described above.

A list of other reason for a quiet title action can include the following:

Adverse possession claims;

Fraudulent conveyance claims;

Title registration, clerical errors and unrecorded claims;

Tax issues regarding back taxes;

Boundary disputes;

Survey errors; and

Competing claims among heirs and lien holders.

There can be many challenges to Quiet Title actions, even after a final court decree. In any event, if someone wants to inherit property that they think they are entitled to receive, and there is no clear ownership of the property, and there is the chance that no one would buy the property without title insurance if the heir wants to profit from the property, then a Quiet Title action may become necessary to attempt to resolve the issue.

Feel free to contact me to discuss more or to share your insights here in the comment section. If we are not Linked In, feel free to Linked In with me. Damien Bosco, Esq., Bosco Law Firm, LLC, dbosco@boscolawfirm.com, 1350 Avenue of the Americas, 2d Floor, New York, New York 10019. www.boscolawfirm.com

WHAT HAPPENS IN PROBATE WHEN THERE ARE UNKNOWN HEIRS?

During an estate proceeding, the petitioner for probate (probate is an estate proceeding when there is a will) or the petitioner for administration (when there is not a will) will have to supply to the court the names of the heirs of the decedent. So if Grandma dies and Grandpa died before her, then all her children are listed and if one her kids died with kids, then the grandchildren may have to be listed also.

Sometimes the courts will require the petitioner to provide a family tree affidavit. This would be an affidavit submitted by someone not related to the decedent like a neighbor who knows the family. Problems occur when there is not any known relatives or knowledge of the relatives in incomplete.

For example, and this happens frequently today when people are living to an older age, let’s say someone dies at 95 years old. Most of the siblings could have already died and possibly even some of the children. Further, the person could have been single, or with no children, or the spouse predeceased with no children, no aunts or uncles living, no siblings living, so the nearest relatives are first cousins that cannot be found.

If the petitioner alleges that any of the heirs of the decedent or others required to be cited are unknown or that the names and addresses of some persons who are or may be heirs are unknown,  in most jurisdictions, the petitioner must submit an affidavit showing that he or she has used due diligence in endeavoring to ascertain the identity, names and addresses of all such persons.

Compliance with this due diligence requirement is not intended to burden the estate with costly or overly time-consuming searches. Absent special circumstances, the affidavit will be deemed to satisfy the requirement of due diligence if it indicates the results obtained from among the following:

  1. examination of decedent’s personal effects, including address books;

(2) inquiry of decedent’s relatives, neighbors, friends, former business associates and employers, the post office and financial institutions;

(3) correspondence to the last known address of any missing heirs;

(4) correspondence or telephone calls to, or internet search for, persons of same or similar name in the area where the person being sought lived; and

(5) examination of the records of the Motor Vehicle Bureau and Board of Elections of the state or county of the last-known address of the person whose whereabouts is unknown.

In some probate proceedings, the court may accept, in lieu of the above, an affidavit by decedent setting forth the efforts that he or she made to ascertain relatives.

If after doing due diligence heirs still cannot be located, then in most jurisdiction a publication in a newspaper could be necessary to find heirs. Afterward, if no one comes forward or there are still unknown heirs, a court may appoint someone to represent the unknown heirs. And even if someone comes forward, the court may require a kinship proceeding to prove they are the heirs.

It can be complicated, time consuming and costly.  One way to prevent such a situation is to have the person list for an estate planning attorney the known heirs and their addresses when drawing a will and other estate planning documents.

For further discussion, feel free to contact me, Damien Bosco, Esq. at (212) 201-1908 or at dbosco@boscolegal.com. If we are not connected on LinkedIn and you have a profile on it, feel free to connect with me.

INSURANCE FORMS NOT END ALL REGARDING BENEFICIARY DISPUTES

An interesting case regarding a dispute of insurance proceeds in the Eleventh Circuit, US Court of Appeals, came down this past July. (Prudential Insurance v. Kopp). The case involved a dispute about who was entitled to death benefits under a decedent’s life insurance policy. Specifically, the question was whether a written request to change the beneficiary of the policy that the insurance company never processed is valid. The insurance company stated that since it never processed the paperwork, the initial beneficiary remains the beneficiary. However, the court held that strict compliance to an insurer’s internal regulations about changing beneficiaries is not always necessary. The court sent the case back to the district court to review the facts behind the matter to determine who should get the insurance proceeds.

In this case, the question was whether a written request to change the beneficiary of the policy to the wife of the decedent, submitted to the insurance company and signed by the decedent and one of his sons was sufficient to show that the wife was the beneficiary notwithstanding the fact that the insurance company did not process the request. The district court denied the request of the wife. The wife argued that the district court applied too strict a standard of compliance and that, as an equitable matter, she is entitled to receive the death benefits from her husband’s life insurance policy. The district court ruled against the wife.

Specifically, the form that the decedent and one of his sons submitted to change the beneficiary to the wife was to change the owner of the policy from a trust to the decedent, and the beneficiary to his wife. However, the insurance form stated that each trustee was to sign unless the trust itself or state law provides otherwise. In this case, the second trustee, the other son, never signed the form even after the insurance company sent notice it did not process the request because of that reason.

The appeals court disagreed with the district court with regard to the standard that it used to deny the wife’s claim. Applying, Georgia law, the court stated that when a insurance company stands indifferently to the parties, strict compliance with the insurer’s regulations are not required, and the court is permitted to use its equitable powers to determine which claimant should receive the benefits. The court reasoned that an insurer’s regulations are made solely for its benefit and protection. So if the insurer is not an interested party, the court may award the funds on equitable principles. The court held that the insurer’s regulations merely serve as an indication of the possible intent of the insured or other party authorized to request a change in the beneficiary.

Finally, the court held that a change in beneficiary request is effective where it is clear that the requesting party has a right to make a change, intends to change it, and takes reasonable step to bring about the change.

What does this all mean

This case is interesting because most people believe that insurance forms and the details of the forms are a matter of law, rather than an insurance company’s internal regulations. This means that there may be flexibility when someone claims to be a beneficiary even if the forms are not fully completed. The laws vary in each state, but this case shows that the policy holder’s intent is key. Unfortunately, the flip side is that there can be more reason for litigation.

For further discussion feel free to contact me at DBosco@boscolegal.com, or connect with me on LinkedIn if were are not already connected.

STAGES OF A CIVIL LAWSUIT

Many people may be generally aware of what occurs in a civil lawsuit. However, many people do not know the details of what procedurally occurs in one. This article covers the basic stages of a civil lawsuit.
A civil lawsuit is generally a case for money damages or equitable relief (e.g. what is fair) as appose to a criminal lawsuit wherein the government through a prosecutor brings charges against someone or some entity for criminal misconduct.
Each state and the federal government have their own rules and procedures for a civil lawsuit, and may have different names for each of its proceedings. Your legal counsel should be familiar with your state’s procedure or federal civil procedure. Depending on what type of claim you have, or may have against you, you may find yourself in state or federal court.
In any event, procedurally, the stages of a civil law suit generally occur within following the categories:
1. Pleadings
2. Discovery
3. Motions
4. Pre-trial
5. Trial
6. Post Trial
Pleadings
Pleadings include:
a complaint wherein the plaintiff bringing the claim must set forth the facts supporting the claims and state the causes of action;
an answer wherein defendant must admit, deny or deny knowledge of any alleged facts in the complaint
affirmative defenses, wherein the defendant provides defenses to the complaint;
counterclaims wherein the defendant brings an action against the plaintiff;
and a reply to counterclaims, similar to an answer.

Discovery
After the pleadings, the lawsuit enters the discovery stage. Usually discovery entails:
Depositions, wherein the parties can depose (interview) under oath the other party prior to trial;
Interrogatories, wherein each party can ask written questions of the other party prior to trial
Document Demands, wherein each party can request relevant documents from the other party; and
Subpoenas, wherein each party may serve a subpoena on a third party for documents, to answer written question or to be interviewed under oath.
Motions
There are many different types of motions that can occur in a civil lawsuit. Some of the more common ones are a:
motion to dismiss the case outright before answering the complaint;
motion for summary judgment for the court to make its decision when there is no dispute in facts and no need to proceed to trial,
motion to compel usually when a party is not providing documentary evidence or required information;
motion to strike usually when a party is violating an order;
motion to renew or reargue a previous motion; and
various pre-trial and post trial motions.

Pre-Trial
After the discovery stage, the parties must prepare for trial. This task is very time consuming as each party must develop its case and defenses so it is well prepared for the trial. This includes developing opening and closing statements, direct and cross examinations and jury instructions as well as preparing the witnesses.
Trial
Most people are familiar with the trial procedure. However, usually a civil trial is not a dramatic as a criminal trial mostly seen on television. The trial is usually on specific facts supporting a money damage claim or equitable STAGES OF A CIVIL LAWSUIT
Many people may be generally aware of what occurs in a civil lawsuit. However, many people do not know the details of what procedurally occurs in one. This article covers the basic stages of a civil lawsuit.
A civil lawsuit is generally a case for money damages or equitable relief (e.g. what is fair) as appose to a criminal lawsuit wherein the government through a prosecutor brings charges against someone or some entity for criminal misconduct.
Each state and the federal government have their own rules and procedures for a civil lawsuit, and may have different names for each of its proceedings. Your legal counsel should be familiar with your state’s procedure or federal civil procedure. Depending on what type of claim you have, or may have against you, you may find yourself in state or federal court.
In any event, procedurally, the stages of a civil law suit generally occur within following the categories:
1. Pleadings
2. Discovery
3. Motions
4. Pre-trial
5. Trial
6. Post Trial
Pleadings
Pleadings include:
a complaint wherein the plaintiff bringing the claim must set forth the facts supporting the claims and state the causes of action;
an answer wherein defendant must admit, deny or deny knowledge of any alleged facts in the complaint
affirmative defenses, wherein the defendant provides defenses to the complaint;
counterclaims wherein the defendant brings an action against the plaintiff;
and a reply to counterclaims, similar to an answer.

Discovery
After the pleadings, the lawsuit enters the discovery stage. Usually discovery entails:
Depositions, wherein the parties can depose (interview) under oath the other party prior to trial;
Interrogatories, wherein each party can ask written questions of the other party prior to trial
Document Demands, wherein each party can request relevant documents from the other party; and
Subpoenas, wherein each party may serve a subpoena on a third party for documents, to answer written question or to be interviewed under oath.
Motions
There are many different types of motions that can occur in a civil lawsuit. Some of the more common ones are a:
motion to dismiss the case outright before answering the complaint;
motion for summary judgment for the court to make its decision when there is no dispute in facts and no need to proceed to trial,
motion to compel usually when a party is not providing documentary evidence or required information;
motion to strike usually when a party is violating an order;
motion to renew or reargue a previous motion; and
various pre-trial and post trial motions.

Pre-Trial
After the discovery stage, the parties must prepare for trial. This task is very time consuming as each party must develop its case and defenses so it is well prepared for the trial. This includes developing opening and closing statements, direct and cross examinations and jury instructions as well as preparing the witnesses.
Trial
Most people are familiar with the trial procedure. However, usually a civil trial is not a dramatic as a criminal trial mostly seen on television. The trial is usually on specific facts supporting a money damage claim or equitable relief. The trial could be a jury trial, or a non-jury trial. If it is a jury trial, the parties must pick the jury prior to trial.
Post-Trial
If the trial was a “bench trial,” wherein the Judge heard the case and not the Jury, the Judge may request each party to submit a post-trial memoranda or brief setting forth its case so the Judge can review the positions of each party prior to making a decision. After the Judge provides a decision, or a jury provides its findings, the losing party may attempt to vacate the decision or want to appeal the decision.
In conclusion, the stages of a civil lawsuit can involve cumbersome tasks. Depending on the parties involved in the action, many lawsuits can become extremely expensive and take years to complete. So, if you ever thought, “I am going to sue them,” or heard someone say “I am going to sue you,” think twice before getting involved in a lawsuit. Attempting settlement may save you money and time, and most importantly, peace of mind.
Feel free to contact me for further discussion at dbosco@boscolegal.com; or feel free to connect with me on LinkedIn. . The trial could be a jury trial, or a non-jury trial. If it is a jury trial, the parties must pick the jury prior to trial.
Post-Trial
If the trial was a “bench trial,” wherein the Judge heard the case and not the Jury, the Judge may request each party to submit a post-trial memoranda or brief setting forth its case so the Judge can review the positions of each party prior to making a decision. After the Judge provides a decision, or a jury provides its findings, the losing party may attempt to vacate the decision or want to appeal the decision.
In conclusion, the stages of a civil lawsuit can involve cumbersome tasks. Depending on the parties involved in the action, many lawsuits can become extremely expensive and take years to complete. So, if you ever thought, “I am going to sue them,” or heard someone say “I am going to sue you,” think twice before getting involved in a lawsuit. Attempting settlement may save you money and time, and most importantly, peace of mind.
Feel free to contact me for further discussion at dbosco@boscolegal.com; or feel free to connect with me on LinkedIn.

FRAUD AND THE INVESTMENT ADVISER (HOW YOU CAN GET INTO TROUBLE)

A recent opinion in an SEC administrative proceeding (SEC v. J.S. Oliver Capital Management, LP & Mausner, June 2016) highlights how an investment adviser can get in trouble through acts of its own. The commission held, among other holdings, that the registered investment adviser and its principal in question violated antifraud provisions by “cherry picking,” profitable transactions for favored accounts, by failing to disclose uses of soft dollars to their client, and by engaging in compliance and record keeping violations.

Cherry picking is a practice in which securities professionals allocate profitable trades to a preferred account (like there own) and less profitable or unprofitable trades to a non-preferred account (like a customer’s). In that way, an investment adviser can increase the performance of favored accounts, or at least make it more likely that they will out perform other accounts.

One form of cherry picking involves an adviser’s allocation of block trades. When an adviser executives a block trade at multiple prices, it may allocate the highest-price sales to favored accounts and the lowest-price sales to disfavored accounts. An Adviser can also cherry pick by allocating profitable trades entirely to favored accounts.

This is what happened in this case even after the brokerage firm where trades occurred informed and warned that investment adviser that the record of trades show bias trade allocation. Moreover, in the hearing, an expert witness confirmed this statistically undeniable fact. Even though there was in place an order management system, the principal went into the accounts and made manual allocations, despite written policy to allocate trades fair and equitable.

The commission found that the investment adviser had scientor when allocating trades. Scientor is a mental state embracing intent to deceive, manipulate or defraud, and includes recklessness defined as conduct that is an extreme departure from the standards of ordinary care.

The investment adviser and the principal were also liable for using soft dollars to pay expenses to benefit them without disclosing these uses to clients. Soft dollar practices are arrangements under which products or services other than execution of securities transactions are obtained by an adviser from or through a broker in exchange for the direction by the adviser of client brokerage transactions to the broker. The Exchange Act creates a limited safe harbor that applies to certain payments of research and brokerage expenses.

The liable use of soft dollars in this case included making payments to a former spouse and to a residence club for a timeshare. Even without these egregious acts, the commission held that the investment adviser did not abide by its duty to disclose soft dollar arrangements to its clients, or to disclose potential conflicts of interests accurately and completely.

The commission also held that the investment adviser violated compliance and record keeping requirements and the principal aided, abetted and caused these violations. For one, the investment adviser did not adhere to its own written policy. Also, the commission found that there was a failure to maintain trade blotters and a failure to comply with document retention obligations.

The moral of the story

No matter how hard your personal life gets complicated and how you want to live at a high standard of living, or how hard you want to please certain clients over other clients, violating anti-fraud provisions or even poor record keeping can lead to a finding of liability (and to large damages and to the removal from the industry).

For further discussion please feel free to contact me at dbosco@boscolegal.com; or feel free to connect with me on LinkedIn, if we are not already.

BE CAREFUL WHEN DRAFTING ASSET PURCHASE AGREEMENTS: EMPLOYMENT CONTRACTS NOT AUTOMATICALLY ASSIGNABLE

If you are the purchaser of the assets of an existing business, you have to be careful to list all the assets you are actually purchasing in the asset purchase agreement. In one case, a court held that the asset purchase agreement in question did not include employment contracts of top employees. Consequently, a top employee decided to open his own company in direct competition with the purchaser even though his contract with the selling company had a noncompete clause.

The court held that since the asset purchase agreement did not list employment contracts as assets, there was no legal transfer (or assignment) of the contract. The court also addressed the issue of whether the transfer of the employment contract with a noncompete clause without an employee’s consent would be valid against public policy.

In the case, Hedgeye Risk Management, LLC v. Paul Heldeman, et al, (District Court, District of Columbia, 2016), the issue in part was whether the defendent/employee breached a noncompete covenant in a contract he had after the selling employer sold assets to plaintiff/new company. The court held that there was no breach of contract because the asset purchase agreement did not list employment contracts as assets for transfer. Therefore, the plaintiff/acquiring company had no claim for breach of contract.

Plaintiff attempted to claim that the intent of the asset purchase agreement was to include all employment contracts. However, the court held that the terms of the contract itself determine the rights and liabilities unless the language is ambiguous. In this case, the court held that the language of the asset purchase agreement was not ambiguous, did not include employment contracts and was not subject to interpretation of a party’s intent. Moreover, it questioned whether this was the intent in this particular case.

The court stated that an assignment of an employment contract would not be automatic when a company purchases another company’s assets. Moreover, the court stated that contracts with noncompete clauses are suspect in that an employee may have a right to negate the transfer of the employment contract when there are such covenants because of public policy reasons. The court referred to other cases where it was held that a non-compete clause is personal in nature and is not assignable without an employee’s consent. An employer’s successor in interest does not inherent the contract.

In other words, courts have held that an employee may have a right not to approve the assignment of the employment contract to a successor in interest when there is a noncompete clause. The court held there is good reason for the rule in that covenants not to compete should be construed narrowly because they are a constraint on an employee’s right to earn a livelihood. The employee may not be wiling to suffer restraint on his or her employment for the benefit of the new employer.

The court distinguished an asset purchase agreement from a merger. It stated that, among other points, because the original company did not merge into the purchasing company, the purchaser company did not become a party to the employment contract.

What to take from this
When reviewing or drafting asset purchase agreement be sure to include all assets, list them, including employment contracts if the purchaser want to keep them. Moreover, due diligence is necessary on all the employment contract. Whether a contract with a non-compete clause is transferrable could be a public policy issue, negating the transfer, without an employee’s consent.  Feel free to contact me for further discussion at dbosco@boscolegal.com

ATTEMPTING TO BYPASS AN SEC ADMINISTRATIVE PROCEEDING IS AN APPARENT NO GO (HOW THE PROCEEDING DIFFERS FROM FEDERAL DISTRICT COURT)

Congress authorized the Securities and Exchange Commission (“SEC” or “Commission”) to bring civil actions to enforce violations of the Securities Exchange Act of 1934 (the “Exchange Act”), and the regulations promulgated thereunder. The Commission is empowered to bring such actions in either federal district court or in an administrative proceeding before the Commission. An SEC administrative enforcement action culminates in a final order of the Commission, which in turn is reviewable exclusively by the appropriate federal court of appeals.
In one recent court case, a respondent in a SEC proceeding attempted to bring a “sister action,” in federal court at the same time. The respondent was actually attempting to challenge the constitutionality of the administrative proceeding. (Hill v. SEC, et al, Eleventh Circuit, 2016). The issue was whether the respondent in an SEC administrative enforcement action could bypass the Securities Exchange Act of 1934 by filing a collateral lawsuit in federal district court challenging the administrative proceeding on constitutional grounds.
The appeals court held that the district court lacked jurisdiction over the respondents’ collateral attacks. The court found that it was fairly discernible from the review scheme provided in the statute that Congress intend the respondent’s claims to be resolved first in the administrative forum, not the district court, and the if necessary, on appeal to the appropriate federal court of appeals. The court reasoned that the Commission could rule that the appellant/respondent did not violate securities laws, in which case the constitutional question would become moot.
The court discerned that the general intent of Congress was to channel all objections to a final Commission order, inducing challenges to the constitutionality of the SEC’s administrative law judge or the administrative proceeding itself, into the administrative forum and to preclude parallel federal district court litigation. The court found that the respondents’ constitutional challenges were not outside the type of claims that Congress intended to be reviewed within the statutory scheme.
Interestedly, the court never addressed the challenge of whether an SEC administrative proceeding is constitutional, by only that any objections to the proceeding itself, including constitutional objections, are to be brought within the proceeding. Whether the SEC proceedings are constitutional appears to be a decision for another day.
SEC proceedings do differ from proceedings in Federal Court, mostly involving discovery issues as more fully described below.
How SEC Administrative Proceeding differ from proceedings in federal court

SEC administrative actions differ from cases brought in federal district court in several respects. The administrative action begins when the Commission serves the respondent with an Order Instituting Proceedings (“OIP”). The Commission then presides over the action, but it typically delegates review to an Administrative Law Judge (“ALJ”). Unlike an action brought in federal court, in a proceeding before the Commission the Federal Rules of Civil Procedure and Evidence do not apply, and the respondent does not enjoy the right to a jury trial. Instead, the SEC’s Rules of Practice govern administrative proceedings. Among other differences, the Rules of Practice provide for more limited discovery. For example, the Rules of Practice allow the taking of depositions at the Commission’s discretion, only upon a finding that the prospective witnesses will be unavailable to testify at the hearing. The Rules of Practice also do not provide for routine document production, instead requiring parties to request that the ALJ issue subpoenas. Administrative actions proceed relatively quickly along fixed timelines set by the rules.
When the Commission delegates review to an ALJ, the ALJ holds an evidentiary hearing and then renders an initial decision with factual findings and conclusions of law. Either party may appeal the initial decision to the Commission. The Commission’s review authority is broad. It may affirm, reverse, modify, set aside or remand for further proceedings, in whole or in part, an initial decision by a hearing officer and may make any findings or conclusions that in its judgment are proper and on the basis of the record. Conversely, if there is no appeal to the Commission, and the Commission declines to exercise its right to review on its own, the ALJ’s initial decision becomes the final decision of the Commission for all purposes.
Regardless of whether the initial decision is appealed, the administrative process culminates in a final order of the Commission. The process of obtaining judicial review begins with the filing of a petition in the court of appeals that triggers the court’s jurisdiction. Upon the filing of the record in the court of appeals, the court’s jurisdiction becomes exclusive. Although other provisions of the Exchange Act provide limited district court jurisdiction over some types of securities related claims, the Act contains no express authorization for district court review of a final Commission order.
Feel free to connect with me on LinkedIn if not already connected; or contact me for additional discussion at dbosco@boscolegal.com. Open to networking, referrals and new opportunities.

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.

WHAT EXACTLY IS A FIDUCIARY ANYWAY? INVESTMENT ADVISER REQUIREMENTS

Registered investment advisers, either registered with the Securities and Exchange Commission or with a State, are “fiduciaries” to their advisory clients. With the recent talk about fiduciary requirements being extended to agents or financial professionals offering advise on retirement plans, what exactly does being a fiduciary mean in the context of a registered investment adviser? It means that there is a fundamental obligation to act in the best interests of clients and to provide investment advice in a client’s best interests. Registered investment advisers owe their clients a duty of undivided loyalty and utmost good faith.

Having a fiduciary duty is a higher burden than requiring only suitability of an investment where the investment professional offering services would only have to determine whether the investment is suitable for a client, not whether the product being offered to the client is in the client’s best interest.

Registered investment advisers are not to engage in any activity in conflict with the interest of any client, and are to take steps reasonably necessary to fulfill their obligations. They must employ reasonable care to avoid misleading clients and must provide full and fair disclosure of all material facts to their clients and prospective clients.

Generally, facts are “material” if a reasonable investor would consider them to be important. Investment advisers must eliminate, or at least disclose, all conflicts of interest that might incline them — consciously or unconsciously — to render advice that is not disinterested. If they do not avoid a conflict of interest that could impact the impartiality of their advice, they must make full and frank disclosure of the conflict. Additionally, an adviser cannot use a client’s assets for their own benefit or for the benefit of other clients, without the client’s consent.

Departing from this fiduciary standard may constitute “fraud” upon the clients under Section 206 of the Advisers Act, which says in part that fraud is,

(1) to employ any device, scheme, or artifice to defraud any client or prospective client;
(2) to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client;
(3) acting as principal for his own account, knowingly to sell any security to or purchase any security from a client, or acting as broker for a person other than such client, knowingly to effect any sale or purchase of any security for the account of such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction. The prohibitions of this paragraph shall not apply to any transaction with a customer of a broker or dealer if such broker or dealer is not acting as an investment adviser in relation to such transaction; or
(4) to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative. The Commission shall, for the purposes of this paragraph (4) by rules and regulations define, and prescribe means reasonably designed to prevent, such acts, practices, and courses of business as are fraudulent, deceptive, or manipulative.

Although the role of being a fiduciary may be a burden, there is the flip side that a client knows that the adviser is acting in the client’s best interest, causing less doubt of the motive of the registered investment adviser in offering advise to the client.