Coopersmith and Coopersmith

In light of recent instability among financial institutions, companies of all sizes are evaluating how cash balances are maintained. This is especially relevant for lawyers engaged in real estate transactions who are holding escrow deposits.

This client alert will highlight the responsibility of attorneys acting as an escrow agent in real estate transactions.

The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the United States government that protects bank depositors against the loss of deposits if a member bank fails. FDIC insurance covers deposits up to $250,000 per depositor, per ownership category (e.g., retirement accounts, revocable trust accounts), per FDIC-insured bank.

However, there have been questions as to what happens to an attorney escrow account should a banking institution become insolvent. Funds deposited by a fiduciary, such as an escrow agent, on behalf of another person or entity are insured as the deposits of the beneficiary and not the fiduciary. Therefore, a law firm may have an account balance in excess of the FDIC insurance limit and have each client’s deposit separately insured, provided each client’s balance is less than $250,000. However, if the client has other funds of the same ownership category deposited in the same banking institution, those funds will be added together to determine the insurance limit.

In a typical real estate transaction, 10% of the purchase price is held in escrow, so deposits for most transactions of $2,500,000 or less are likely to be fully insured. Sellers and other owners of funds held in escrow over their coverage limit may wish to deposit the funds across multiple institutions.

There has been one case where an attorney was sued for malpractice when the depository bank failed. Ultimately the attorney was not found to be liable for the uninsured loss because he didn’t know the bank would fail.

In 2005, a transaction involving two cooperative apartments at 50 Central Park West and deposits at a New York branch of the Connecticut Bank of Commerce (CBC) of $1.45 million and $1.28 million, well over the limit insured by the FDIC, resulted in a lawsuit. Bazinet v. Kluge, 14 A.D.3d 324 (2005). Before the transactions could be concluded, and unbeknownst to any of the parties, CBC closed and the FDIC was named as receiver. The buyer sued for return of his down payment, and the attorney was unable to fully recover the funds from the closed bank. The buyer then filed cross claims against the attorney for legal malpractice for not depositing the escrowed funds in a manner which would have been covered by FDIC insurance or taking other steps to ensure protection of those funds. On appeal, the court ultimately found that the attorney was not liable for the losses because he did not know the bank would fail.

To better protect our clients, our firm offers an option on escrow accounts at different institutions where they may choose to split deposits over the insured limit.

To learn more of our thoughts and impact on Co-Ops and Condos in the Cooperator CLICK HERE.

The foregoing is not intended to be comprehensive nor constitute legal advice. If you would like to discuss your specific circumstances or would like more information, feel free to contact us at (212) 625-8505.

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