The use of escrow agreements and escrow agents is common. They are used in relationship to purchase-sale or real estate contracts. They are also used in relationship to certain settlement agreements. The escrow agent may be a third-party, such as a title company or financial institution, or it may be a law firm representing a party in the transaction or case.
An escrow agent owes a fiduciary duty to the parties to the escrow transaction or agreement. Carter Development of Massachusetts, LLC v. Howard, 44 Fla. L. Weekly D2833a (Fla. 1st DCA 2019). “Any limitation on the use of money placed in an escrow pursuant to an agreement is governed solely by the terms of that agreement.” Id.
While an escrow agent owes a fiduciary duty to a party to the escrow agreement, how escrowed monies will be disbursed are governed by that agreement.
In Carter Development of Massachusetts, parties entered into an agreement associated with the investment in a real estate project. An investor was depositing $650,000 into the developer’s law firm’s trust account where the money was held by the law firm pursuant to the terms of an escrow agreement between the developer and the law firm. Subsequently, the developer and law firm entered into an escrow agreement governing the disbursement of the escrowed proceeds.
The investment or project failed and the investor wanted money back arguing that the money should not have been disbursed to the developer. However the money, or most of it, was gone as the law firm disbursed the money pursuant to the escrow agreement with the developer. The investor sued the law firm for, among other claims, breach of fiduciary duty by the escrow agent. However, the investor was NOT a party to the escrow agreement. This meant that the law firm, as the escrow agent, owed no duty to the investor – there was no fiduciary duty owed to the investor.
The moral is that if the investor wanted control as to the disbursement of the escrowed proceeds, it should have made itself a party to the escrow agreement and negotiated those terms. The investor’s current deal did not give the investor that right as it was not a party to the escrow agreement between the law firm and the developer.
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