New Legislation Concerning Escrow Agreements

August 1, 2000 Advisory

You may be familiar with the common practice of an attorney entering
into agreements with parties to a closing whereby the attorney holds a
portion of the closing proceeds in escrow pending resolution of some
issue such as a needed repair. Typically, upon completion of the repair
or expiration of the time allowed therefor, the escrowed portion is
distributed to the party entitled to the funds under the agreement. The
validity of this common, convenient practice of using attorneys as
escrow agents to facilitate closings, which often prevents delays and
the need for inconvenient extensions of closing dates, had been brought
into question by a recent court decision that concerned an attorney's
representation of one of the parties. Recent legislation, however,
allows the continued, logically convenient practice of parties relying
upon an attorney in the transaction to hold and disburse funds and other
items in accordance with agreed terms.
In Galvanek v. Skibitcky, 55 Conn. App. 254 (October 12, 1999), the
Connecticut Appellate Court held that an attorney representing one party
to a transaction cannot act as an escrow agent with respect to funds
withheld as part of the transaction. The plaintiff and the defendant in
this case entered into a sales contract in 1987 in which the plaintiff
agreed to convey his condominium unit to the defendant. An addendum to
the contract provided that the seller would place $7,500.00 in escrow
with the sellers attorney to be used for a 1985 repair assessment by the
condominium association. The assessment was later cancelled by the
association. On appeal of the seller's action to determine what should be
done with the escrowed funds, the Appellate Court affirmed that the
funds should be disbursed to the plaintiff/seller on the ground that the
funds were not properly held in escrow, citing an earlier case for the
proposition that [i]n Connecticut, where, pursuant to an agreement,
money is left in the hands of the attorney or agent of one of the
parties, the money is not delivered in escrow.
The net effect of the ruling in Galvanek is that funds withheld from the
proceeds of the sale of real estate and held by an attorney representing
one of the parties to the transaction are deemed to be not held in
escrow, even though the expressed interest of both parties and their
attorneys is that an escrow fund be created. The decision called into
question the very common practice of real estate attorneys in
Connecticut acting as escrow agents both before and after a closing.
Public Act 00-74, An Act Concerning Escrow Arrangements, effective as of
May 16, 2000, overrides the decision in Galvanek. This new legislation
specifies that escrow agreements in existence on or after its effective
date are not unenforceable solely because a party's attorney, law firm,
or agent is the escrow holder. Escrow agreements are defined in the act
as written or oral agreements under which money, documents, instruments
or other property is delivered to an escrow holder to be held for
delivery or disbursement upon the occurrence of a specified event or
condition. This legislation allows the continued performance by
attorneys of the escrow holder function that so often provides a crucial
mechanism for allowing parties to close a transaction on time and with
their rights and interests protected.