Opinion #106. Law Firm Acting as "Escrow Agent" to Assist Both Parties in Purchase and Sale of Business
Issued by the Professional Ethics Commission
Date Issued: May 25, 1990
A law firm is requested by a self‑proclaimed “business broker” to serve as an “escrow agent” to “assist both parties” in the purchase and sale of a business. The business broker advertises in its brochure that one of the services it provides is to arrange for such an escrow agent to prepare the closing documents. With obvious concern for the strictures of Rule 3 of the Code of Professional Responsibility, the law firm proposes to send a letter to both buyer and seller in which the firm, inter alia, declares that it does not “represent” either party to the transaction and that its role will be limited to the drafting of the necessary legal documents to complete the sale. The law firm also would request that the parties sign a form acknowledging that they have been advised of the limited role of the law firm and of their right to secure other counsel.
The central question presented to this Commission is whether the law firm’s services as “escrow agent” under the circumstances described above would violate the Code of Professional Responsibility.
Rule 3.4(c) forbids a lawyer from undertaking or continuing multiple representation if the exercise of his or her independent professional judgment in behalf of a client will be, or is likely to be, adversely affected by his or her representation of another client, or if it would be likely to involve the lawyer in representing different interests, “except to the extent permitted by Rule 3.4 (d).” The latter rule permits multiple representation in otherwise prohibited circumstances only if it is “obvious” that the attorney can adequately represent the interests of each party and if each party consents to the representation “after full disclosure of the possible effect of such representation on the exercise of the lawyer’s independent professional judgment on behalf of each.”
The law firm in this case proposes to undertake representation of multiple clients under an arrangement that far transcends the customary understanding of the phrase “escrow agent.” Typically, an escrow agent serves simply to hold legal documents and/or pecuniary consideration in anticipation of closing a transaction, according to clearly specified instructions. See, e.g., Eddy v. Pinder, 131 Me. 139, 159 A.727 (1932). When an attorney acts in this traditional limited manner, he or she is not called upon to exercise “independent professional judgment” in behalf of either party, and thus such services do not contravene Rule 3.4(c).
In the present case, however, as expressly stated in the business broker’s brochure, the “escrow agent” is described as representing both the buyer and the seller . . . “seeing to it that closing documents are prepared according to the instructions and agreements of the buyer and seller.” The “escrow agent” is further billed as a “specialist” and “an experienced practitioner (or firm) who is familiar with the legalities of transferring ownership of small businesses; one who will insure that proper legal steps are taken.”
Although the Commission considers the central issue presented in this case to be the scope of employment allowable under Rule 3.4, we must also comment briefly on the ethical problems created by the business broker’s choice of the terms “escrow agent” and “specialist” to describe the law firm’s functions and qualifications. Given the customary understanding of the phrase “escrow agent,” its usage here coupled with the other representations in the brochure is potentially misleading to the consumer. Rule 3.9 prohibits a lawyer from knowingly using, assisting or participating in the use of a public communication which contains “a false, fraudulent, misleading, or deceptive statement or claim.” Moreover, the brochure’s statement that the lawyer or law firm, albeit qua “escrow agent,” is a “specialist” directly contravenes the express prohibitions of Rule 3.9(b)(4) and Rule 3.8.
The underlying defect, however, in the proposed services by the law firm arises from the fundamental nature of the duties it is called upon to perform. The law firm is called upon in this case affirmatively to advise the respective parties concerning what documents they will need for closing, and to prepare the legal documents. To fulfill these legal services, the law firm must exercise independent professional judgment in behalf of both buyer and seller.
In today’s increasingly complex legal and regulatory environment, the interests of the buyer and seller of a business frequently diverge, and substantial negotiation and compromise are often necessary in the course of consummating a transaction. A few common examples serve to illustrate the point. In a business transaction, the purchase price must be allocated among real estate, personal property, good will and other categories, and the allocation carries with it differing tax consequences for the respective parties. The nature and terms of security interests and mortgages likewise bear different implications for the buyer and the seller. Compliance with the Uniform Commercial Code Bulk Transfers Act, T.11 M.R.S.A. §6‑101 et seq., is likely to be of greater concern to the buyer than the seller.
Rule 3.4(d) permits representation in circumstances otherwise violative of Rule 3.4(c), but only when two conditions are met. First, it must be “obvious” that the attorney can adequately represent the interests of each party within the context of the multiple representation. Second, each party must consent to the representation after full disclosure. In a probable attempt to fulfill the disclosure and consent requirements, the law firm here proposes to send the clients a lengthy letter detailing the purportedly limited scope of this involvement and to obtain the written acknowledgment of the parties to the law firm’s role. We need not consider in detail whether the firm’s prophylactic letter would satisfy the requirements of the rule, however, because in our view it is not at all “obvious” that the attorney can adequately represent the interests of each party to this transaction.
Indeed, the law firm’s proposed letter to the clients only serves to highlight further the irreconcilable conflicts inherent in representing the competing interests presented by these facts. Much of the letter constitutes repeated warnings to the parties, jointly and severally, that various issues exist which the attorney knows to pose legal land mines waiting to explode with serious adverse consequences to buyer, seller, or both. The attorney concludes by noting that “[b]ased upon information given to me and my general knowledge, I recognize that there are areas of significant legal complications and concerns.” The firm strongly advises that the parties obtain independent counsel.
According to the Reporter’s Notes to Maine Bar Rule 3.4(d):
The first condition of Rule 3.4(d) requires more than a judgment by the lawyer that he can perform adequately. It must be obvious that he can do so; and if his capability requires substantial explanation the condition cannot be met.
Cf. Opinion No. 12 of this Commission.
For the law firm in this case to advise which closing documents to prepare, and the precise terms of those documents, it must favor the interests of one party over those of the other with respect to each critical issue regarding which their interests diverge. It is certainly not “obvious” that such can be done without compromising the interests of the parties. For these reasons, the Commission concludes that the law firm’s services as “escrow agent” under the circumstances described herein would violate Rule 3.4(c) and (d).
THE ESCROW AGENT
As a service to buyers and sellers, your office can arrange for an escrow attorney, agent or company to prepare closing documents. This service is designed to assist both parties in the transaction. Many people have questions regarding the use of escrow. Here are a few of the most common ones.
What is an escrow agent?
He/she is an experienced practitioner (or firm) who is familiar with the legalities of transferring ownership of small businesses; one who will insure that proper legal steps are taken.
Whom does the escrow agent represent?
The agent acts on behalf of the buyer and seller, seeing to it that closing documents are prepared according to the instruction and agreements of the buyer and seller.
What is the cost of the escrow services?
Your ________ will be pleased to advise you of the cost of these services in your local community. Since the escrow agent is a specialist in this area, he/she is usually able to offer the buyer and seller a much more competitive price than a non‑specialist could.
Who pays for the escrow services?
Normally the buyer and seller share the cost of the escrow agent.
What documents are prepared?
Each transaction may have special arrangements requiring specific documents. In general, however, there are two basic types of transactions: the cash purchase and the installment sale.
In a cash purchase the escrow agent normally prepares the following documents:
1.) The Closing Statement — This shows the sale price and the disbursement of all funds, i.e., to the seller, the broker, and any other creditors, such as banks or governmental authorities.
2.) Bulk Sales Notification — A letter to the business creditors of the current owner, notifying them of a pending sale and the date, so that they may submit their claim for any outstanding balance owed.
3.) Bulk Sale Affidavit — An affidavit by the seller in which he/she swears under penalty of law that there are no creditors or outstanding debts of the business to be sold.
4.) Property Schedule — An exact and accurate list of all furniture, fixtures, equipment and other property being sold.
5.) Agreement Bill of Sale — This contract reflects a check of public records to see that no vendor, supplier, taxing authority, or other entity has filed a claim against the business, its owners, or its equipment or fixtures. This is necessary to demonstrate that the seller has clear title to the assets to be sold.
In an installment sale, in addition to items 1 through 5 above, the escrow specialist also may prepare the following documents in which the seller finances a portion of the purchase price by taking a note from the buyer:
6.) Promissory Note — A legal instrument whereby the buyer promises to pay the seller the balance of the sale price. It may include the following:
The total owed;
The interest rate;
The payment schedule;
Late charge (if any);
Provisions for default (non‑payment);
Seller’s remedies for default;
Right of offset; and
The buyer’s signature.
7.) Security Agreement — A document which lists equipment, furniture, fixtures and other property of the debtor/buyer in which the seller is granted a security interest/ownership right. This secures the promissory note to the extent of the debt due. This agreement is signed by the buyer and seller.
8.) UCC (Uniform Commercial Code) Financing Statement Form — There are two such forms; one is filed with county records, the other is filed with the Secretary of State or appropriate authority. This filing puts the world on notice that the seller has a security interest in applicable property sold to the buyer.
What other document might the escrow agent prepare?
Some transactions involve the buyer’s applying for an operating license or permit or require that monies be held in escrow. In these transactions, the escrow agent would prepare:
1.) License Transfer Application Documents — to enable the seller’s license(s) or permit(s) to be transferred to the buyer.
2.) Escrow Agreement — When funds are to be held in escrow until a specific condition is met (e.g., approval for a license), an agreement is prepared which specifically sets out what must be done, and under what condition the proceeds may be released and to whom.
Other documents such as lease assignments, subleasing agreements, corporate resolutions, stock pledge agreements, may also be requested of the escrow specialist.
Do I need an attorney?
While the escrow specialist will provide many of the legal documents necessary to close the sale of a business, some buyers or sellers choose to have their own attorney either prepare or review the documents.
_____ encourages you to consult your attorney to review these documents if you feel more secure by doing so.
What About the Earnest Money?
A certified check tendered as earnest money may be made payable to an independent escrow company or agent. It will be held until all contingencies are removed and all conditions of the contract are met. It is then credited as part of the purchase price payable at closing. If the conditions are not met, this check should be returned to the buyer. Since this money is “earnest money,” it is interpreted by all involved as evidence of the buyer’s sincerity in completing the transaction. If all conditions are met by the seller, and the buyer does not complete the sale, the earnest money may be forfeited, depending on the terms of the purchase and sale agreement.
Do I have to use an escrow specialist?
No; the choice is yours. Our experience has shown, however, that the use of the escrow specialist is an effective and economical way to complete the transaction.
If you still have more questions, please feel free to ask your_____ or your personal attorney.
 The business broker’s brochure is reproduced in full at the end of this Opinion.
 Curiously, the law firm in its letter would disavow representation of either party, and the written consent would affirm merely that the parties have not relied upon any “legal advice” from the firm nor in fact “received any.” For reasons explained supra, the law firm in fact represents both parties in a professional capacity. To comply with Rule 3.4(d), if otherwise allowed, the mandatory consent would have to take precisely the opposite form, i.e., expressly to acknowledge multiple representation and “the possible effect of such representation on the exercise of the lawyers’ independent professional judgment on behalf of each.” Of course, nothing stated herein would prevent the broker from retaining its own counsel, conducting the negotiations, and instructing the attorney in document preparation.