Real estate malpractice claims are plaguing Kentucky lawyers. We continue to experience an increasing number of claims in that practice area. Improper disbursement of sale proceeds is proving especially costly. As we wrote in our Fall 2001 newsletter it is essential to understand the difference between escrow agent and client trust account management. An escrow agent is a neutral party with fiduciary obligations to all involved in the escrow arrangement. A lawyer holding the proceeds of a real estate transaction in a client trust account represents the client and has third party responsibilities for others with a claim on the proceeds. Kentucky Rule of Professional Conduct 1.15 Safekeeping Property provides:
“Upon receiving funds or other property in which a client or third person has an interest, a lawyer shall promptly notify the client or third person. Except as stated in this rule or otherwise permitted by law or by agreement with the client, a lawyer shall promptly deliver to the client or third person any funds or other property that the client or third person is entitled to receive and, upon request by the client or third person, shall promptly render a full accounting regarding such property.”
Under no circumstances disburse the proceeds of a real estate transaction until the title search is updated, the transaction documents recorded, and all checks providing funds for disbursement have cleared. Tell clients up front that they will not receive funds until these things have occurred and never make exceptions. Finally, no lawyer should ever deliver such funds to a third party (real estate broker, mortgage broker) for ultimate distribution.
Real Estate Malpractice Errors