business transaction escrow services
Attorney Escrow Services | Escrow Attorney
Escrow Attorney | Paymaster Services
What is Escrow
Escrow is a financial arrangement where a third party holds and regulates payment of the funds required for two parties involved in a given transaction. Escrow helps make transactions more secure by keeping the payment in a secure account which is only released when all of the terms of an agreement are met.
An escrow is a contractual arrangement in which a neutral third party receives and disburses money for the primary transacting parties e.g., buyer and seller. The advantage of an escrow protects both parties by keeping the payment in a secure escrow account which is only released when all of the terms of an agreement are met as overseen by the neutral escrow agent.
What is an IOLTA
Interest on Lawyers Trust Accounts (“IOLTA”) essentially are an attorney’s version of an escrow account. Primarily, funds are deposited by Clients into IOLTA accounts for unearned and/or future legal services and costs. Funds are held “in trust” within an IOLTA and are technically the Client’s funds until earned or transferred back to the Client (generally speaking). IOLTA accounts are also used to facilitate the transfer of funds between other parties and Clients.
A lawyer who receives funds that belong to a client must place those funds in a trust account separate from the lawyer's own money. Client funds are deposited in an IOLTA account when the funds cannot otherwise earn enough income for the client to be more than the cost of securing that income. Every state, along with the District of Columbia and the Virgin Islands, operates an IOLTA program. These funds, together with state and federal appropriations as well as private grants and donations, enable nonprofit legal aid providers to help low-income people with civil legal matters such as landlord/tenant issues, child custody disputes and advocacy for those with disabilities.
IOLTA’s are also a unique and innovative way to increase access to justice for individuals and families living in poverty and to improve our justice system. Without taxing the public, and at no cost to lawyers or their clients, interest from lawyer trust accounts is pooled to provide civil legal aid to the poor and support improvements to the justice system.
Bottom Line: Attorney’s IOLTA accounts are a form of escrow but are not the same as an “escrow account” as the attorney responsible for the IOLTA is not usually a neutral 3rd party as duty is to the engaged Client.
Escrow-type Services Panakos Law Provides
Escrow as non-Neutral Client Representative (Client Funds Sub-Account or “CFSA”)
In certain circumstances, Panakos Law supports its Clients by utilizing the Firm’s existing banking relationships and to facilitate effective funds transfers specifically related to a Client’s matter. In these scenarios, the Firm will work with the Client and our our business banking team to establish a Client Funds Sub-Account or CFSA within the Firm’s existing banking accounts. In essence, these accounts are directly associated with a specific Client (business or individual) but managed and overseen by The Firm. These types of accounts are usually established for a Client to receive funds.
Funds deposited into a CFSA are held by the Firm on behalf of the Client
Funds are “owned” by the Client but not deposited into a Client-controlled bank account
Funds transfers (withdrawals from the CFSA) are managed and authorized by the Firm on behalf of the Client
Interest is accrued and earned in the CFSA
Interest is reported to the IRS as Client’s interest via a 1099-INT
Funds / Transactions within the CFSA are “the Clients” but managed by the Firm
Primary example: Private Securities Offering by a Client of the Firm and the offering carries a minimum total investment amount. Funds raised by the Client are deposited to the CFSA but are not released to the Client until the minimal threshold has been met. The funds have been withdrawn from the investor’s account but the Client does not receive them immediately. This is a method to assist the Client with federal securities law compliance and the terms specific to the private offering.
Escrow as non-Neutral Agent (“Facilitation of funds”)
Funds are deposited to one of the Firm’s general client IOLTA account (as opposed to a Client-specific account). In such a scenario, the Firm is offering the use of its IOLTA account as a financial tool to facilitate a funds transfer between another party and the Firm’s Client. The Firm has an ethical duty to the client engaged and not any other party and as such these transactions are not considered to be a form of “escrow”.
Use of the Firm’s IOLTA account specific to a Client’s transaction (as opposed to the Client’s account)
The Firm can both accept and distribute funds on behalf of the Client as per the Client’s direction
Funds deposit to the Firm’s general client trust account (IOLTA) and “credited” as the Client’s funds
Funds held in escrow do not earn interest (technically interest is accrued but is directly deposited with the State Bar by the bank)
The Firm is not neutral and acts in the best interest of Client
Funds are transferred/released as per Client directives
Inbound Example: A Client sells their business and in consideration of a fully executed Asset Purchase Agreement the buyer deposits funds into the Firm’s IOLTA account (instead of directly into the Client’s bank account). The funds are then transferred out of the IOLTA as per the instructions of the Client.
Outbound Example: A Client is buying a business and instead of the Client wiring the seller the funds directly, the Client deposits funds within the Firm’s IOLTA and upon authorization of the Client the funds are released by the Firm on behalf of the Client.
Escrow as a Neutral 3rd Party (“Paymaster”)
Paymasters do not have to be attorneys. However, attorneys often serve in the role of a Paymaster because they are able to use Attorney’s Trust Accounts (IOLTA accounts and used for short term escrow transactions). These are monitored by the California State Bar and provide an additional measure of security for handling large sums of money.
As a licensed attorney, the Paymaster is subject to large penalties and serious licensing consequences if any funds are misappropriated. More importantly, the Paymaster has a specific duty to maintain a neutral 3rd party relationship with the parties by not providing legal services for any of the clients in the transaction as such representation would be considered to be a conflict of interest.
As licensed professionals and officers of the court, attorneys are held to higher standards, thereby making them a legitimate alternative to licensed “escrow agents” and online services that are not structured to escrow larger transactions.
Key elements of Panakos Paymaster services include but are not limited to:
The Firm as Paymaster has a limited duty to act as a neutral “transferrer of funds”
An Escrow Attorney is not an attorney for either party
A specific IOLTA account is established to support the Firm’s necessity to act as a neutral 3rd party
Neither party in the transaction is formally represented by the Firm as relates to the structure of the transaction, nor the enforcement of the terms of the transaction
A disclosure is made to both parties confirming the Firm is acting as a neutral and does not “represent” either of the parties
The Firm must adhere to strict anti-money laundering laws set forth by the Financial Action Task Force (FATF)
IRS Form W-9 must be completed by all parties in the transaction
All such transactions must be compliant with federal authorities including the U.S. Treasury Department and the Department of Homeland Security
A comprehensive and detailed “intake” process is followed whereby the Firm collects information to confirm the parties are authorized to participate in the transaction
Fees as Paymaster include a small initial administrative fee and a tiered gross transaction fee
Primary Example: Two parties working with their own counsel have agreed to a large transaction involving the purchase of 2 million widgets for $8M. The terms of the agreement state that a neutral 3rd party (defined by “escrow”) will be used to facilitate the transfer of funds. In such a case, Panakos Law will act as a neutral Paymaster and facilitate the transfer of $8M between the parties as per the terms of the transaction (whereby both parties agree to the release of the funds).
If you are an existing Client of the Firm OR the Firm will be providing counsel as relates to the terms and enforcement of the financial transaction, the Firm ethically cannot provide Paymaster services.
A typical Paymaster arrangement occurs as follows:
Buyer and Seller agree to contractual terms – Either the Buyer or Seller contacts an escrow/paymaster attorney. Both parties agree to the terms of the legally drafted escrow agreement (without counsel by the Paymaster). Buyer is provided the Paymaster’s specific IOLTA banking information. Seller gives the Paymaster its banking information.
Buyer Funds the Paymaster Account – The Buyer submits a payment by wire transfer to the Paymaster IOLTA account. The attorney verifies the payment. Both the Buyer and Seller are notified that funds have been secured in the Paymaster account.
Terms of the Agreement are followed by the Parties - Funds are held by the Paymaster as per the terms of the agreement as the Buyer and Seller verify or inspect as defined.
Buyer and Seller approve the release of funds from the Paymaster – The Buyer and Seller sign an agreement allowing for the release of the specified funds (or portion thereof as per terms of the agreement).
Paymaster releases funds – Paymaster releases funds from the Trust Account to the beneficiary as per agreement.
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