contract-law new-york-state agency escrow
What is the liability of an escrow agent who failed to do his job?
<p>This question is a followup to <a href="https://law.stackexchange.com/questions/58441/what-rights-and-remedies-does-the-buyer-have-under-the-following-circumstances-o/58463#58463">this question</a> regarding a failed. building purchase.</p>
<p>The seller's attorney had agreed to be the escrow agent for the transaction. That is, he was supposed to receive the purchase price, X from the buyer, an amount Y-X from the seller, use the two amounts to pay off the mortgage Y, and then transfer the building from the seller to the buyer &quot;free and clear.&quot;</p>
<p>The attorney received only X from the buyer, and used it to pay the mortgage &quot;down,&quot; but not &quot;off.&quot; This was because the seller didn't put up the difference as implied by the contract. The buyer wants &quot;out&quot; and the return of his X, but it is now in the hands of the mortgagee. The escrow agent was supposed to receive both amounts, X from the buyer and Y-X from the seller, before paying &quot;off&quot; the mortgage and transferring the property to the buyer. In that event, he could have returned X to the buyer when he did not receive Y-X from the seller, but now he can't do that.</p>
<p>What, if anything, is the liability of the attorney? Is he responsible for the difference Y-X? Does he have to return X to the seller out of his own pocket?</p>
<p>(The venue is New York state.)</p>

<p>The liability of an escrow agent is normally limited contractually to the bare minimum allowed by law, this generally limits the liability of the escrow agent to compliance with court orders and to refraining from willful or reckless conduct made in bad faith.</p>
<p>Also, usually a seller's attorney is not allowed to serve as a true third-party escrow agent, because this would impose a conflict of interest on the attorney in the transaction, with the seller's attorney owing fiduciary duties to both the seller and the buyer in the same transaction.</p>
<p>Most likely, in this situation, the seller's attorney would be construed not as a third-party escrow officer, but as a disclosed agent of the seller who is immune from liability. The buyer would have a claim against the seller (e.g. for breach of warranty of title and breach of contract), but in all likelihood not against the seller's attorney. Of course, this is cold comfort if the seller isn't good for the amount owed, for example, because the seller was an insolvent entity.</p>
<p>In a similar situation where an attorney for one party was charged with distributing settlement funds held in the attorneys' trust account for third-parties in Colorado, a malpractice or breach of fiduciary duty claim against the attorney was not allowed, although a breach of contract claim to address the problem was permitted. (I'll find a citation if I can, I am working from memory.)</p>
<p>The attorney might be subject to disciplinary action before a professional ethics board for entering into a role that involved a conflict of interest or for improperly disbursing trust funds, but this would not benefit the buyer economically.</p>
<p>The buyer could probably not pursue a professional malpractice action against the attorney since the buyer does not have an attorney-client relationship with the attorney.</p>
<p>On the other hand, if the attorney simply absconded with the funds for the attorneys' personal benefit, in addition to an ethical violation, there would be grounds for a criminal prosecution and restitution and there would likely be a claim in a tort not specific to the escrow agent relationship for conversion or civil theft against the attorney.</p>
<p>But, since the attorney appears to have acted in good faith to implement a contract on behalf of the attorneys' client in a manner probably not contemplated by the contract, about which the contract was probably ambiguous, in a manner that provided economic benefit to the buyer even though not the full amount sought, it is unlikely that there would be any remedy against the attorney.</p>
<p>It also isn't inconceivable that the buyer could obtain recision of the entire transaction including the payment to the mortgage company, although that would be difficult.</p>
<p>The buyer, if represented by counsel, might have a claims for malpractice against buyer's attorney or realtor, for failing to properly advise buyer of the risks of entering into the transaction as it was structured.</p>
<p>There are multiple theories upon which this litigation could proceed and the details of state law and the language of the relevant contracts, as well as the economic realities, would matter.</p>
