Daily Development for Tuesday, February 13, 2001

ATTORNEY/CLIENT; ESCROW FUNCTION: Washington opinion demonstrates why lawyers should not serve as escrows in matters in which they have individual clients.

Splash Design, Inc. v. Lee, 2000 WL 1772519 (Wash.App.Div. 1) (unpublished).

Splash Design ran a picture frame shop in Seattle under the inventive name of "Frame It." Meesaun Lee wanted to buy the business. She picked an attorney from the phone book. The attorney's name is reported in the case, but the editor will refer to him under the pseudonym "Green." Green represented Lee in the purchase and acted as escrowee under instructions from both buyer and seller.

Green did a lien search, but misspelled the business name as "Flame It." No liens showed up, and he disbursed the purchase price to the seller by check, less a small holdback. The next evening, Green realized that he had searched the wrong name, and did a new search. He found federal tax liens against Visible Enterprises, formerly doing business as "Frame It" at the same location. He thought the liens might attach. Without talking to either party, Green stopped payment on the check. Green then told both buyer and seller to get new lawyers.

Buyer and Seller closed again a few days later, with Lee represented by a new attorney. The parties agreed to a $10,000 holdback, to be released when the tax lien question was resolved. Lee agreed to apply for a certificate of nonattachment from the IRS. Her new attorney asked Green to release the money. Green instead prepared supplemental escrow instructions, which Splash refused to sign. Green eventually released the funds anyway, except for the $10,000. (It is not clear whether the parties, under the amended agreement, wanted Green to hold that money, or whether Lee's attorney intended the holdback to be managed some other way.)

Splash at that point sued Green and his law firm, alleging breach of fiduciary duty and violation of the consumer protection act.

Lee got a letter from the IRS a week later, saying that the liens did not attach. Splash asked for the remaining $10,000. Green's law firm refused to deliver the money because Splash had sued it.

Ultimately, the trial court ordered the money disbursed, then gave Splash damages and sanctioned the firm by awarding attorney fees at trial. Green and his firm appealed.

The appeals court affirmed, and further sanctioned defendant law firm by awarding Splash attorney fees for frivolous appeal. The court found that "reasonable minds must agree" that Green breached a fiduciary duty when he refused to turn over the $10,000 to Splash. The court also found that Green did not meet the standard of a reasonably prudent attorney when he made his "careless lien search," and that he erred again in concluding that the tax liens might attach to the property.

Finally, Green "ceased to represent both buyer and seller neutrally" as required by his status of escrowee, when he unilaterally stopped payment on the seller's check. Green argued that he was just exercising his right under the escrow instructions to "hold all matters in their existing status" in the case of a dispute. The court saw more than one problem with that argument:

"But there was not a dispute between the parties here. And Green did more than merely preserve the status quo. He actively intervened in the transaction when he returned the purchase price to the buyer, Lee, without returning the business to the seller. Nothing in the escrow documents gave Green the authority to step out of the advisory capacity created by the instructions and intervene in the transaction . . . The evidence in the record supports only one conclusion: Green's conduct breached his fiduciary duty."

Comment: In the DD for 11/23/99, the editor reported Galvanek v. Skibitcky 55 Conn. App. 254, 738 A.2d 1150 (1999), which held that a lawyer maintained escrow was void where the lawyer also represented one of the parties to the escrow because the lawyer had a duty of loyalty to his client that made it impossible for him to serve as escrow. The editor referred to the practice of a lawyer serving as an escrow for a client as "boneheaded."

Lawyers from Connecticut objected to the insult, and contended that under Connecticut practice it was necessary for them to serve as escrows because the state provided little opportunity for independent escrow agents to do business. Since that case, the Connecticut legislature has validated lawyer escrows and that statute has itself been validated in Rockwell v. Klein, 2000 WL1887846 (Conn.Super. 12/12/00).

Interestingly, in the DIRT discussion that followed, a Washington attorney opined that standard practice in Washington was that if an attorney served as an escrow, that attorney would not represent any party to the escrow individually. The DIRT discussion referred to this as the "West Coast Practice," but the editor believes it to be the best practice anywhere. The obvious exception is when such escrow practices are enforceable, ethical, and absolutely necessary because there is no other choice, and then only when the various parties have been served a hearty meal of disclosures and warnings.

The problem is, of course, that even if the escrow is legal, as it apparently was in Washington and now would be in Connecticut, for a lawyer to serve as an escrow in such matters conflates the lawyer's duties to his client (and the client's expectations of those duties) with the lawyer's responsibilities under the escrow.

Comment 2: In the instant case, Mr. Green, having got himself "into the soup," took actions that he felt were most consistent with his client's interests. For that one decision, the editor says: Good on you, Green!! He'd already made plenty of mistakes, and he continued to make them, but at least he viewed himself as still having a client whose interests he was supposed to pursue. Yes, he later took heat for that decision, but the heat was really deserved for his other mistakes. (Of course, once his own client, Lee, told Green to release the monies, then he and his firm started blundering again.)

Clients deserve loyalty. Lawyers should guarantee it. When we mess up, we should keep the client's interest paramount still. Unfortunately for Green, his loyalty to his client should have prevented him from agreeing to take on additional loyalties to others through the escrow responsibility. By then, he was in an impossible conflict from which there really was no escape once the fan started to turn.

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