Many purchase/sale transactions require payments into escrow.  Sometimes counsel for one of the parties acts as escrow agent to keep the fees down. Providing such a service has its risks.

In Alexander O&G, LLC v. Nomad Land and Energy Resources, LLC, decided August 16, 2017 by the United States District Court for the Southern District of Texas, Houston Division, Nomad signed a PSA with Alexander for the sale of oil and gas interests in Pecos County, Texas.  The PSA said that Alexander would deposit $100,000 in an agreed escrow agent’s account and that the deposit would be non-refundable except if Nomad was unwilling or unable to perform, in which case the amount would be refunded to Alexander.  An escrow agreement, which was never signed, designated Alexander’s counsel (Jones Gill LLP) as the escrow agent.

On July 22, 2016, Alexander told Nomad that it was terminating the PSA.  On July 27, Nomad asked Jones Gill to send Nomad the $100,000.  Jones Gill declined saying that the escrow agreement had not been executed and that it had returned the amount to Alexander, the owner of the funds.  

Nomad sued Jones Gill on four causes of action: (i) breach of fiduciary duty, (ii) breach of contract, (iii) money had and received, and (iv) promissory estoppel.

With respect to a fiduciary duty, the court declined to dismiss Nomad’s breach of fiduciary duty claim saying that “even where no formal escrow agreement exists, a party that receives money accompanied by specific instructions on how to apply the money has the duties of an escrow agent;” that Nomad had shown specific instructions in the PSA, and that Jones Gill was on notice of those instructions because it was Alexander’s legal counsel.  

As to the breach of contract claim, the court found that the following facts create a plausible basis that a valid contract existed whereby Jones Gill agreed to serve as an escrow agent for Alexander and Nomad, and that such a contract could be implied even if not in writing:  The PSA contained a specific provision for Alexander to deposit the earnest money, the money would go to Nomad unless Nomad was unwilling or unable to close, the unexecuted escrow agreement listed Jones Gill as escrow agent, Alexander had deposited the sum into the Jones Gill account, and Jones Gill had acknowledged receiving the funds.

On the other counts, the court found that Nomad’s money had and received claim satisfies the Rule 12(b)(6) standard and that “a factfinder could plausibly see that PSA was partially performed by depositing and receiving the escrow amount and that these actions unequivocally refer to the alleged escrow agreement” and had no other purpose than to fulfill the PSA.

What lessons do we take away?  First, if you are both counsel to one of the parties and escrow agent you can potentially be put in a most awkward position and should think carefully about what could go wrong.  Second, whether you are the purchaser or the seller, take the time to make sure each and every document that is supposed to be executed is actually executed.