In Alexander O&G, LLC v. Nomad Land & Energy Res., LLC, Nomad entered into a Purchase and Sale Agreement (“PSA”) with Alexander O&G, LLC (“AOG”) for the sale of oil and gas interests. No. H-16-2065, 2017 U.S. Dist. LEXIS 130415 (S.D. Tex. August 16, 2017). The PSA provided that AOG would deposit earnest money into an escrow account:
Upon execution and delivery of the Agreement, [AOG] shall tender [Nomad], in an agreed escrow agent’s account, an earnest money deposit of $100,000.00 to help ensure [AOG’s] performance hereunder, which deposit shall be non-refundable, except in the event that [Nomad] shall be unwilling or unable to perform his obligations hereunder, in which case the entirety of the earnest money deposit, and any interest or any additions thereto, shall be refunded to [AOG].
Id. AOG later informed Nomad that it was terminating the PSA, and Nomad requested that AOG’s counsel release the $100,000 deposit they held in escrow pursuant to the terms of the PSA. AOG’s counsel responded that it had returned the funds to its client, AOG, as it was the owner of those funds. Nomad then sued AOG and AOG’s counsel, and alleged that AOG’s counsel breached fiduciary duties as an escrow agent. AOG’s counsel filed a motion to dismiss the complaint.
The federal district court denied the motion to dismiss regarding the claims against the attorneys. The court first determined whether the attorneys acted as an escrow agent. The court held that to create an escrow relationship “the parties to the underlying transaction need only to deposit instruments or funds with a third party and to agree to the terms in which the third party would deliver the items deposited.” Id. “There must be a valid underlying contract to support the escrow agreement. However, in the absence of a contract, a fiduciary relationship may still exist.” Id. The court held that “[e]ven 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.” Id.
The court then held that Nomad sufficiently pled the existence of a fiduciary relationship by alleging that “the PSA between AOG and Nomad is a valid, underlying contract in which the parties agreed to clear and definite escrow terms.” Id. Further, “Nomad also alleged that the Counter-Defendants were counsel to AOG for the PSA, and therefore should have been on notice of the instructions to the escrow agent.” Id. The court concluded that “these facts create a more than plausible basis that the Counter Defendants were on notice of the explicit instructions to the escrow agent in the PSA and assumed a fiduciary duty to Nomad when they accepted the $100,000 earnest money deposited into Jones Gill’s IOLTA account” and that a fiduciary relationship existed between the attorneys and Nomad.
The court noted that in Texas an escrow agent owes the duty of loyalty, the duty to make full disclosure, and the duty to exercise a high degree of care to conserve the money and pay it only to those entitled to receive it. Id. Thereunder, the court found that Nomad alleged facts that the attorneys breached their fiduciary duty because the earnest money was returned to the wrong party and that such breach resulted in injury. The court denied the motion to dismiss.