What can a North Carolina lawyer holding escrowed closing funds do when the buyer and seller dispute whether the money should be released?

Plain-English summary

A lawyer who represented only the buyer closed a residential sale and agreed to hold $2,000 of the price in escrow until the seller completed certain repairs, when the money would be released to the seller; the escrow was not put in writing. The seller made some repairs and demanded the money, while the buyer called them shoddy and incomplete and told the lawyer not to release it. The committee addressed what the lawyer-escrow agent could do.

The opinion held that, like a lawyer serving as trustee under a deed of trust, the responsibilities and limitations of a lawyer acting as escrow agent arise primarily from the fiduciary relationship as escrow agent, not from any client-lawyer relationship (RPC 82; Rule 1.15-1(b)(3)). The fiduciary relationship demands impartiality to both the obligor and obligee, so the lawyer-escrow agent may not advocate for either party in a dispute over the funds and must carry out the escrow terms, releasing the funds on the agreed contingency or condition. If the lawyer cannot determine whether the contingency has occurred or the condition has been performed, because the terms are too vague or the parties have a factual dispute, the lawyer may not release the funds until both parties consent or a court orders release (RPC 66). Here, the lawyer had to be impartial and could not release the funds to either side until they agreed or a court directed it, and could not be the buyer's advocate while serving as escrow agent even though the buyer was formerly his client. The lawyer could, however, resign as escrow agent, turn the funds over to a third party, and then represent one party in the dispute; former service as escrow agent does not disqualify the lawyer from advocacy (cf. RPC 82), but because of the prior representation of the buyer at closing, the lawyer could only take the buyer's side (Rule 1.7).

Currency note

This opinion was issued in 1998, before North Carolina's adoption of the 2003 revisions to the Rules of Professional Conduct, and it cites the safekeeping and conflict rules under the numbering then in effect (Rule 1.15-1(b)(3), Rule 1.7), relying on RPC 82 and RPC 66. Later guidance appears in 99 Formal Ethics Opinion 8. Treat this page as historical context, not current guidance. Verify against current rules before relying on any specific requirement mentioned here.

Common questions

Q: Whose interests does a North Carolina lawyer serving as escrow agent owe duties to?

A: The opinion held the lawyer-escrow agent owes a fiduciary duty of impartiality to both the obligor and the obligee, arising from the escrow role rather than a client-lawyer relationship (RPC 82; Rule 1.15-1(b)(3)).

Q: Can the escrow-agent lawyer release the funds when the parties dispute the repairs?

A: No. The opinion held that if the lawyer cannot determine the release condition was met, he may not release the funds to either side until both parties consent or a court orders release (RPC 66).

Q: Can the lawyer take the buyer's side even though he holds the escrow?

A: Not while serving as escrow agent. The opinion held the lawyer must remain impartial and may not advocate for the buyer (his former client) until he resigns the escrow role.

Q: Can the lawyer resign and then represent the buyer?

A: Yes. The opinion held the lawyer may resign, turn the funds over to a third party, and then advocate for one party; because of the prior representation, he could only represent the buyer (Rule 1.7).

Background and rules framework

The opinion applied North Carolina Rule 1.15-1 (safekeeping of property, including the escrow-agent provision in 1.15-1(b)(3)) and Rule 1.7 (conflicts of interest), the analogues to Model Rules 1.15 and 1.7, to a lawyer holding escrowed closing funds. It relied on RPC 82 (lawyer as trustee under a deed of trust) and RPC 66 (release of escrowed funds only on consent or court order).

Citations and references

Rules of Professional Conduct:

• MR 1.15 (safekeeping property) / NC Rule 1.15-1(b)(3)
• MR 1.7 (conflicts of interest) / NC Rule 1.7

Other opinions cited:

• NC RPC 82: former service as trustee under a deed of trust does not disqualify a lawyer from a partisan role
• NC RPC 66: an escrow agent may not release disputed funds absent consent or a court order

See also

• NC State Bar Op. 99 FEO 8: Escrow Agreement With a Future-Conflict Waiver
• NY State Bar Op. 1127: Settlement Funds in the Attorney Trust Account

Source

• Landing page: https://www.ncbar.gov/for-lawyers/ethics-and-governing-rules/ethics-opinions/opinions/98-formal-ethics-opinion-11/

Original opinion text

Reproduced from the official source for research purposes. The linked source is authoritative.

Editor's Note: See 99 Formal Ethics Opinion 8 for additional guidance.

Inquiry #1:

Attorney A closed the sale of residential property by Seller to Buyer. Before closing, Attorney A notified Seller that he represented only the interests of Buyer. At the time of closing, it became apparent that there were certain repairs that still needed to be done to the house. Seller and Buyer agreed to place $2,000 of the purchase price in escrow until the repairs were completed by Seller at which time the money would be released to Seller. Attorney A agreed to act as escrow agent. The escrow agreement was not memorialized in writing. Seller made some repairs to the house and has demanded that Attorney A release the money to him. Buyer contends that the repairs were shoddy and incomplete and has instructed Attorney A not to release the money. What can Attorney A do?

Opinion #1:

Like the role of a lawyer serving as a trustee under a deed of trust, the responsibilities of and limitations on a lawyer acting as an escrow agent arise primarily from the lawyer's fiduciary relationship in serving as an escrow agent as opposed to any client-lawyer relationship. See, e.g., RPC 82 and Rule 1.15-1(b)(3) of the Revised Rules of Professional Conduct. The fiduciary relationship demands that the escrow agent be impartial to both the obligor and the obligee under the escrow agreement. Therefore, the lawyer/escrow agent may not act as an advocate for either party against the other in any dispute regarding the release of the escrowed funds. The lawyer must carry out the terms of the escrow agreement with regard to the release the escrowed funds upon the happening of the agreed contingency or the performance of the agreed condition. If the lawyer/escrow agent cannot determine whether the contingency has occurred or there has been performance—either because the terms of the escrow agreement are too vague or the parties have a factual dispute—he may not release the funds until both parties consent or there is a court order directing that the funds be released. RPC 66.

In the present situation, Attorney A must be impartial in carrying out the terms of the escrow agreement. If he is unable to determine that the condition for release of the funds has been met, he may not release the funds to either Buyer or Seller until they have reached an agreement between themselves or until there is a court order instructing Attorney A to release the funds to one party or the other. As long as he serves as escrow agent, Attorney A must be impartial and he may not be an advocate for Buyer even though Buyer was formerly his client.

Inquiry #2:

May Attorney A resign as escrow agent, turn the funds over to a third party, and represent Buyer in his dispute with Seller over the release of the escrowed funds?

Opinion #2:

Yes. Former service as an escrow agent does not disqualify a lawyer from assuming the role of advocate for one party in a dispute over escrowed funds. Cf. RPC 82 (former service as trustee under deed of trust does not disqualify a lawyer from assuming partisan role in foreclosure proceeding). Of course, in the present inquiry, because of his prior representation of Buyer at closing, Attorney A may only assume the role of advocate for Buyer. See Rule 1.7.