Skip Navigation

 
The Florida Bar
www.floridabar.org
PROFESSIONAL ETHICS OF THE FLORIDA BAR

OPINION 02-6
March 7, 2003

An attorney representing the seller, who is holding the deposit for a purchase agreement that has not been closed on time by the buyer, may not remit the funds to the seller/client if the buyer has a valid legal claim to the escrow funds and the attorney has a legal duty to protect the funds. The attorney must continue to hold the funds in trust until the dispute is resolved or the attorney may file an interpleader and deposit the funds into the court’s registry. It is unethical under the facts presented for the attorney to require the client to sign an indemnity agreement before releasing funds held by the attorney as a deposit on the purchase of the property.

RPC: 4-1.7, 4-1.7(b), 4-1.8(a), 5-1.1, 5-1.1(f), 5-1.2
Opinions: 67-36, Connecticut Bar Opinion 00-15 (2000), Connecticut Bar Opinion 01-02 (2001); New York Opinion 710 (1998); New York City Opinion 1986-5 (1986); Philadelphia Opinion 89-4 (1989)
Cases: Craddock v. Cooper, 123 So.2d 256 (Fla. 2d DCA 1960); The Florida Bar v. Golden, 566 So.2d 1286 (Fla. 1990) and The Florida Bar v. Joy, 679 So.2d 1165 (Fla. 1996); The Florida Bar v. Toothaker, 477 So.2d 551 (Fla. 1985); Gautreaux v. Greenman, 719 So.2d 1261 (Fla. 3d DCA 1998); SMP, Ltd. v. Syrett, Meshad, Resnick & Lieb, P.A., 584 So.2d 1051 (Fla. 2d DCA 1991); United American Bank of Central Florida, Inc. v. Seligman, 599 So.2d 1014 (Fla. 5th DCA 1992)

The Florida Bar Board of Governors has requested that the Professional Ethics Committee issue an advisory opinion regarding the ethical propriety of an attorney requiring a client who is the seller of real property to sign an indemnity agreement before releasing funds held by the attorney as a deposit on the purchase of the real property when the buyer is in default. The request is based on an inquiry reviewed by the board.

The attorney is representing a seller in a real estate transaction. The buyer failed to close by the date set in the purchase agreement. The attorney has inquired as to what to do with the deposit monies when the buyer is in default. The client/seller has requested that the attorney release the deposit held by the attorney under the agreement. The attorney would like to give the client three options: 1) the attorney would hold the funds for a period of time to see whether the buyer makes a claim on the monies; 2) the attorney would file an interpleader and deposit the funds into the registry of the court; or 3) the attorney would release the funds to the seller after the seller/client signs an indemnification agreement thereby shifting the risk of a buyer lawsuit against the attorney for wrongful release of the deposit to the seller.

As an ethical matter, Rule 5-1.1 (formerly Rule 4-1.15), Rules Regulating The Florida Bar, states in pertinent part:

(e) Notice of Receipt of Trust Funds; Delivery; Accounting. Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by the client or third person, shall promptly render a full accounting regarding such property.
[Emphasis added.]

Generally, an attorney’s first duty is to the client. However, in certain circumstances, such as when an attorney is also acting as an escrow agent, the attorney may also have a duty to third parties. An escrow agent is a trustee of both parties who is charged with the performance of an express trust as set forth in the trust agreement. In other words, an escrow agent has a duty to perform in accordance with the express terms of the escrow agreement. See, The Florida Bar v. Toothaker, 477 So.2d 551 (Fla. 1985) (attorney acted as escrow agent and therefore had fiduciary relationship to both buyer and seller). The Comment to 5-1.2, (formerly Rule 4-1.15) of the Rules Regulating The Florida Bar, offers guidance regarding escrow funds held by an attorney. The Comment, in pertinent part, provides:

Third parties, such as a client's creditors, may have just claims against funds or other property in a lawyer's custody. A lawyer may have a duty under applicable law to protect such third party claims against wrongful interference by the client and, accordingly, may refuse to surrender the property to the client. However, a lawyer should not unilaterally assume to arbitrate a dispute between the client and the third party and where appropriate the lawyer should consider the possibility of depositing the property or funds in dispute into the registry of the applicable court so that the matter may be adjudicated.
The obligations of a lawyer under this rule are independent of those arising from activity other than rendering legal services. For example, a lawyer who serves as an escrow agent is governed by the applicable law relating to fiduciaries even though the lawyer does not render legal services in the transaction.

As the Comment suggests, an attorney's ethical obligation to act will be based upon his or her legal obligations to the parties, including any potential legal obligations as an escrow agent. See, The Florida Bar v. Golden, 566 So.2d 1286 (Fla. 1990) and The Florida Bar v. Joy, 679 So.2d 1165 (Fla. 1996).

Under the rules regulating trust accounts, the attorney must determine whether the attorney has a legal duty to the purchaser, such as under the escrow agreement. If the attorney does have a legal duty to the purchaser, the attorney may not release the funds to the client. An indemnification agreement signed by the client does not abrogate the attorney’s responsibilities to third parties under the Rules of Professional Conduct. Rather, the attorney should hold the funds in trust until the dispute can be resolved. If the dispute cannot be resolved, the attorney could file an interpleader or declaratory judgment action in a court of competent jurisdiction and deposit the disputed funds in the registry of the court. Rule 5-1.1(f) and Florida Opinion 67-36. Whether a third party has a valid legal claim against the trust funds is a legal question that cannot be answered in an ethics opinion. Rule 2, Florida Bar Procedures for Ruling on Questions of Ethics. See generally, United American Bank of Central Florida, Inc. v. Seligman, 599 So.2d 1014 (Fla. 5th DCA 1992); SMP, Ltd. v. Syrett, Meshad, Resnick & Lieb, P.A., 584 So.2d 1051 (Fla. 2d DCA 1991); Craddock v. Cooper, 123 So.2d 256 (Fla. 2d DCA 1960) and Gautreaux v. Greenman, 719 So.2d 1261 (Fla. 3d DCA 1998).

On the other hand, if the attorney does not have a legal duty to the third party, or if the attorney’s legal duty under the escrow agreement is to release the funds to the client, then the funds must be returned to the client/seller as soon as possible pursuant to Rule 5-1.1.

The third option, that of requiring the seller/client to sign the indemnification agreement, thereby shifting the risk of a buyer lawsuit against the attorney for wrongful release of the deposit to the seller, is ethically impermissible. If there is a question under the escrow agreement as to whether the funds should be released, then the attorney must continue to hold the money in trust until either the dispute is resolved by the parties or a court has made a determination pursuant to an interpleader or declaratory action. If the escrow agreement is clear as to whom the money should be disbursed, then the attorney, as escrow agent, must disburse the funds accordingly. See, Connecticut Bar Opinion 00-15 (2000), Connecticut Bar Opinion 01-02 (2001), New York Opinion 710 (1998) and Philadelphia Opinion 89-4 (1989). To require that the seller/client sign an indemnification agreement before the attorney will disburse the funds is putting the attorney’s own interests ahead of his or her duties to the client and third party as an attorney and escrow agent. Rule 4-1.7(b) is the governing ethical standard. This rule provides in pertinent part:

(b) Duty to Avoid Limitation on Independent Professional Judgment. A
lawyer shall not represent a client if the lawyer's exercise of independent professional judgment in the representation of that client may be materially limited by the lawyer's responsibilities to another client or to a third person or by the lawyer's own interest, unless:
(1) the lawyer reasonably believes the representation will not be adversely affected; and
(2) the client consents after consultation [emphasis added].

Under Rule 4-1.7(b), an attorney may represent a client when the attorney's exercise of independent professional judgment in the representation of that client may be materially limited by the attorney's own interests only if two conditions are satisfied. First, the attorney must reasonably believe that the representation of the client will not be adversely affected. Second, the attorney's client must consent to the representation after consultation with the attorney regarding the relevant facts. As the Comment to Rule 4-1.7 points out, there are conflicts which are so inherent that it would be improper to request a client's consent:

A client may consent to representation notwithstanding a conflict. However,
as indicated in paragraph (a)(1) with respect to representation directly
adverse to a client and paragraph (b)(1) with respect to material limitations
on representation of a client, when a disinterested lawyer would conclude that
the client should not agree to the representation under the circumstances, the
lawyer involved cannot properly ask for such agreement or provide
representation on the basis of the client's consent.

The indemnification agreement creates a personal conflict of interest for the attorney to which the attorney should not seek client consent. See New York City Opinion 1986-5 (1986). Additionally, it is unreasonable to request that the client consent to indemnifying the attorney if the attorney is legally obligated to release the funds to the client. See Rule 4-1.8(a).

In summary, the committee is of the opinion that an attorney representing the seller, who is holding the deposit for a purchase agreement that has not been closed on time by the buyer, may not remit the funds to the seller/client if the buyer has a valid legal claim to the escrow funds and the attorney has a legal duty to protect the funds. Rule 5-1.1(f). Rather, the attorney must continue to hold the funds in trust until the dispute is resolved or the attorney may file an interpleader and deposit the funds into the court’s registry. What the attorney’s legal obligations pursuant to a particular escrow agreement is a legal/factual question, beyond the scope of an ethics opinion. Finally, under the facts presented, it is unethical for the attorney to require the client to sign an indemnity agreement before releasing funds held by the attorney as a deposit on the purchase of the property.

[Revised: 08-24-2011]