Many transactions never close. A seller cannot deliver, financing falls through, or a document never arrives. When that happens, every party wants to know one thing: what happens to the money in the attorney trust account? The answer should already be in the signed agreement.
The usual rule: back to where it came from
A well written paymaster or escrow agreement says that if the release condition is not met by a stated deadline, the funds go back to the account they came from, less any agreed fees and bank charges. Returning funds only to the original sending account also protects against fraud, because no one can redirect the refund by email.
Deadlines matter
Without a deadline, money can sit in trust for months while the parties argue about whether the deal is "still alive." The agreement should state a clear holding period, and whether it can be extended, and by whom. Any extension should be in writing.
When the parties disagree
Sometimes one side says the condition was met and the other says it was not. An attorney holding funds in trust cannot simply pick a side when both have a claim to the money. Typical agreements allow the attorney to:
- hold the disputed amount until all claiming parties sign joint written instructions; or
- ask a court to decide, by depositing the funds with the court in an interpleader action under California Code of Civil Procedure section 386.
Undisputed amounts can usually still be paid as agreed.
Fees when a deal fails
Agreements often provide that some fee is earned for the work done even if the deal does not close, for example for verification and document review. This should be stated clearly before any money is received, along with who bears bank charges for returning funds.
What the attorney will not do
The attorney will not pay funds to a new account that was never verified, will not release money because one party sends an urgent email, and will not keep funds that belong to someone else. Trust money remains the property of the people entitled to it, and the attorney must account for every dollar under Rule 1.15 of the California Rules of Professional Conduct.
Planning ahead
Before you sign, read the return of funds clause, the deadline and the dispute clause. If they are unclear, ask for changes. See also ten questions to ask a paymaster attorney.