From Dollars to Doughnuts

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The late, great stand-up comedian Mitch Hedberg had a routine about buying a doughnut, captured below in a very meta-fashion. 

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Mitch’s point is obvious to normal human beings (namely, those who haven’t spend three years in law school):  some transactions cry out not to be documented.

On the far other side of the spectrum are most of those occasions when a lawyer is dealing with his or her client.  Today’s Tip is devoted to matters in which clients inquire about asking a lawyer to hold funds (or documents, computer code, or other objects) in escrow in connection with a transaction.  Lawyers need to be extremely cautious about doing so for many reasons.  First off, lawyers (and clients) should recognize that there are professionals who do so, and may have better infrastructure and experience to handle these transactions.  Second, undertaking such a role has a potential to drive a wedge between lawyer and our client, such that a lawyer, who might be able to pursue remedies against a third party’s conduct in holding funds in escrow, might be limited when the lawyer’s own firm is the one that has those duties.  Lastly, of course, there’s the risk issue.  There’s a reason that other professionals change for their services; they are responsible not just for performing the task, but also for compliance with the money-laundering, know-your-client duties, and other applicable rules.  

As a matter of custom and practice, there are some transactions, such routine real estate matters, in which a law firm may be comfortable serving in this position.  In such circumstances, a firm may be willing to do so, but we would urge application of two important conditions:  (1) a firm should have an approved form of escrow agreement that seeks to mitigate the risk and conflict issues noted above; and (2) a firm should require that each transaction be approved by someone else at the firm, not associated with the particular transaction, to ensure that the firm is aware of the risks it is agreeing to undertake.