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RICHMOND COUNTY BAR ASSOCIATION
COMMITTEE ON PROFESSIONAL ETHICS
OPINION # 7
March 1992
The Committee is in receipt of an inquiry from an attorney who has had a real estate dealing with a seller's
attorney whom he has reason to believe filed for personal bankruptcy. His specific questions are:
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1. Is an attorney obligated to inform a party, whose money he or she shall retain in escrow,
of the filing of that attorney s personal bankruptcy, and of the possible effects that
such bankruptcy proceedings may have upon the release of such funds.
2. In such an event, is the attorney obligated to inform his or her client of the filing of a personal bankruptcy petition, and of the possible effects which a bankruptcy proceeding may have upon the retention or release of escrow monies?
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When a lawyer serves as an escrow agent his obligations are
the same as those of a trustee. (Farago v Burke, 262
NY 229, 233; see also, Herman v Dixon, 71 Misc 2d 1057,
1059, 338 NYS 2d 139, 142). The lawyer/escrow agent must meet
the same fiduciary and professional standards that are mandated
for lawyers as well as for trustees with respect to the preservation,
safekeeping, and use of the property (Farago v Burke,
supra). Of course, there is no prohibition against one of the
lawyers to a real estate transaction acting as escrow agent
for both sides with full disclosure and consent (N.Y.S. Op.
# 575, 532). The other party does not become the client of the
attorney holding the escrow, but a fiduciary relationship exists
nonetheless.
As a fiduciary, the attorney/escrow agent may be charged with
the duty to disclose where disclosure is required to prevent
a loss to a party to the escrow (Bardach v. Chain Bakers
Inc., 265 A.D. 24; aff’d 290 N.Y. 813; 55 NY Jur. 2d, Escrows,
Sec. 24: see also, Director Door Corp. V Marchese & Sallah,P.C.,
127 AD2d 735, 311 NYS2d 930 (2d Dept.)).
Thus, one must conclude that if the personal bankruptcy of the attorney/escrow agent will, or may have, a negative effect on the purpose for which it was created i.e. the release to the seller at the time of closing, that fact ought to be disclosed. The effect, if any, depends on how the federal bankruptcy laws treat the escrow deposit vis—a-vis the lawyer/debtor's estate.
Though this committee cannot answer questions of law, it appears
that property in which the debtor does not hold an equitable
interest as of the filing of the case is probably not part of
the bankruptcy estate (11 U.S.C. § 541(d); In Re Portjeff
Development Corp., Bkrtcy. E.D.N.Y. 1991, 128 B.R. 38; see
also, 8A C.J.S., Bankruptcy, § 116). Notwithstanding such status,
there exists a substantial liklihood that resolution of this
issue may be tied up in the Bankruptcy Court for an extended
period of time, and that creditors may vigorously attempt to
get the escrow fund adjudicated to be part of the attorney/debtor
s estate. Such litigation may effectively put this release of
these funds when needed in jeopardy, and such risks ought to
be disclosed by the attorney/escrow agent to both parties to
the escrow, due to the fiduciary relationship heretofore described.
Concerning question number 2, the attorney is probably under a greater duty to his or her client, for he or she is not only acting as a trustee, as indicated above, but also acting in a capacity as attorney, for which there is a greater fiduciary duty.
For these reasons, it is the Committee s opinion that both questions are answered in the affirmative.
Pursuant to Article VI, Section 19 of the R.C.B.A. By-Laws, please be advised that the statements contained herein express the opinion of the committee alone, and have not been passed upon by the Association.
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Wayne M. Ozzi
Chairman, Professional
Ethics Committee |
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