In 2009 the Kentucky Supreme Court substantially revised the Kentucky Rules of Professional Conduct.
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The Dangers of Serving As an Escrow Agent

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By Retired Judge Stan Billingsley

Editor’s Note: This article is one of a series that LawReader.com has agreed to provide for Lawyers Mutual’s newsletter as a bar service. LawReader.com provides Internet legal research service specializing in Kentucky law. For more about LawReader go to www.LawReader.com.

The Kentucky Court of Appeals sent a strong message of warning to members of the Kentucky Bar about the risk of entering into escrow agreements when representing one party in an adversarial matter in Baker v. Coombs.

In this divorce case the husband, Collins, was represented by attorney Coombs. As part of the property settlement the husband agreed to pay substantial amounts to his wife, Baker. “As security for these payments, Baker was given liens on all of Collins’s stock holdings in a number of closely-held corporations. The agreement provided that Collins was to ‘execute all necessary documents to effectuate these liens’ and that ‘[t]he Certificates shall be held by … Coombs, Attorney.’ ” “In effect, Combs pledged himself as a de facto escrow agent on behalf of Baker as to the certificates – despite his representation of Collins. He thereby created or acquiesced in the appearance that a fiduciary duty might have arisen.” Collins did not deliver the stock certificates to Coombs. He died on September 30, 1999. Baker learned after Collin’s death that one of the corporations had been sold and that the others were not in his estate.

Baker sued Coombs alleging that he failed in his fiduciary obligation to her by not obtaining and holding Collins’s stock certificates. This allowed Collins’s businesses to be sold without taking action to assure that Baker was paid what was owed her. The trial court found that Coombs had no affirmative duty “to force or compel Collins to provide him with the certificates – or in the alternative – to advise Baker that he could not obtain them.” “…Coombs signed the Agreement only in his capacity as Collins’s counsel and not as a party to the Agreement itself. Thus, only Collins and his estate should bear liability for the financial consequences of Collins’s failure to perform under the contract."

The Court of Appeals agreed with the trial court’s findings that Coombs had no affirmative duty to obtain the stock certificates or inform Baker that he did not have them. In its opinion the Court stressed the conflict of interest implications of a lawyer agreeing to act on the behalf of an opposing party in an adversarial representation as follows:

“Our predecessor court has held that ‘[t]here can be no escrow without conditional delivery of the instrument to a third person as depositary.’ …. [B]ecause Coombs never took possession of Collins’s stock certificates, his arguable duty to Baker never arose. …. If he had been provided with those certificates, we agree that he would have been obligated to Baker for having voluntarily agreed to assume the fiduciary duties attendant to holding the certificates.

There is no doubt that Coombs became embroiled in a situation in which there was a potential for him to become conflicted with his own client. We have held that ‘one may be an agent of both parties to an escrow if there is nothing inconsistent or antagonistic between his acts for the one and the other. ….However, questions of divided loyalty may foreseeably develop under the factual situation of this case.The property Settlement Agreement was generated by adversarial litigation …. Kentucky’s Rules of Professional Conduct emphasize that “[l]oyalty is an essential element in the lawyer’s relationship to a client.” …. This case presents a clear caveat for attorneys to weigh SCR 3.130, Rule 1.7 before embarking upon a similarly perilous course of representation.”

Claims against lawyers serving in the dual capacity of lawyer and escrow agent usually involve the accusation that the lawyer favored his client over the opposing party in the transaction by not acting in the required neutral role of an escrow agent. If the client was disfavored, the client will allege a conflict of interest that will be hard to defend. Good risk management is to avoid in adversarial representations the tension created by serving as lawyer and escrow agent – stay in your capacity of lawyer.

 


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