As a third party that facilitates the distribution of money from a buyer to a seller, what should I do if there is a dispute?

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As a third party that facilitates the distribution of money from a buyer to a seller, what should I do if there is a dispute?

Business Model: Buyer hires Seller to complete a task. Buyer pays me and his funds are placed into an escrow account. Seller completes the task. Buyer is then asked to release the funds to Seller and fund are released. Question: If the Buyer is not happy with the work performed what should I do? Do I release the funds to the Seller anyway? Return the funds to the Buyer? Do nothing, and allow the funds to remain in the escrow account until both parties have come to a mutual agreement or legal has intervened? Or something else? What types of systems, contracts or other should I have in place?

Asked on July 13, 2010 under Business Law, Colorado

Answers:

SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 11 years ago | Contributor

This is dangerous terrritory; before doing anything consult with an attorney and let an attorney answer your questions, help set up the structure, but first, let you know if you can effectively do this. Some shortfalls:

1) If you're going to hold money for another, you will be taking a fiduciary position or relationship in regards to one or both parties; that provides additional obligations for you that you need to understand fully.

2) If you're hired by one person for this (e.g. you're retained by the buyer), how do you contractual obligations to your client conflict with any fiduciary obligations?

3) Are there any regulatory or reporting hurdles  that you need to be aware of, as someone holding money for another?

As a general matter, funds held in an escrow capacity cannot be released until either (a) all conditions of the escrow have been met and/or (b) the two parties agree; that means that usually, when there is a dispute, the funds have to be held until there is an adjudication or settlement.

At a minimum, you will want to set this up as a separate LLC or corporation, and one that  you will otherwise maintain minimum assets in (to avoid exposure); you will also need the appropriate "fiduciary" insurance, which can be expensive.

You need an attorney to really research this for you, to make sure you cover all grounds.


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