What Happens When an Escrow Agent Steals the Money?

Escrow accounts are designed to protect buyers and sellers by holding funds neutrally until contractual conditions are met. But what happens when the escrow agent steals money—the very person entrusted to safeguard the money? Unfortunately, New York courts have addressed this scenario more than once, and the answer often surprises clients: someone still bears the loss, even though neither party committed the wrongdoing.

A recent Brooklyn real estate dispute, Herman v. 818 Woodward LLC (NY Sup. Ct. 2021), illustrates how courts analyze escrow theft, who ultimately bears the financial risk, and why contract language and timing matter enormously.

The General Rule: Loss Follows Ownership, Not Fault

New York follows what courts commonly refer to as the “entitlement rule.” Under this rule, when an escrow agent embezzles or misappropriates funds, the loss falls on the party who was entitled to the money at the moment it was stolen, not on the innocent counterparty. As the court explained in Herman, quoting long‑standing precedent: “When an escrow agent absconds with money he is holding in his capacity as depositary, the loss must fall upon the person as whose agent he is holding the money at the time.” This principle applies even where the result seems harsh. Courts consistently hold that the wrongdoing of a third‑party escrow agent does not automatically shift losses between buyer and seller.

The Herman Case: A $457,500 Deposit Disappears

In Herman v. 818 Woodward LLC, the buyer deposited $457,500 as a down payment under a January 10, 2020 contract for the purchase of two properties in Brooklyn and Queens. The funds were placed into the attorney escrow account, who was designated as escrowee under the contract. The transaction did not close as scheduled. Litigation followed, including claims for specific performance and breach of contract. During the pendency of the case, it was discovered that the attorney had misappropriated the escrow funds and effectively stolen the deposit. This raised a critical question: Who must absorb the loss—the buyer or the seller?

Why Timing Matters: Had the Closing Occurred?

The court emphasized that entitlement depends on whether the conditions for releasing the escrow funds had been satisfied at the time of the theft. In a typical real estate transaction:

• If the closing has not occurred, the buyer generally remains entitled to the deposit.

• If the closing has occurred, or all conditions precedent have been satisfied, entitlement may shift to the seller.

In Herman, the precise timing of the embezzlement was unclear, though evidence suggested it occurred in March 2021. The sellers argued that a closing had already taken place in April 2020 (without the buyer’s participation), meaning the seller owned the deposit when it was stolen. The buyer disputed the validity of that closing entirely. Because there were unresolved factual disputes about whether a valid closing occurred, the court denied summary judgment, holding that ownership of the escrow funds could not be determined as a matter of law at that stage.

Contract Language Can Change the Outcome

Another key takeaway from Herman is the importance of escrow language in the contract itself. The sale agreement explicitly stated that the escrowee was acting “solely as a stakeholder” and not as the agent of either party. This distinction matters because, in some contracts, escrow agents are expressly designated as the seller’s or buyer’s agent—shifting the risk of loss accordingly. New York courts have held that where the contract clearly makes the escrowee the seller’s agent, the seller may bear the loss of an escrow theft. But where, as in Herman, the escrowee is a neutral stakeholder, courts revert to the entitlement rule.

Recourse Against the Escrow Agent

Courts do note that the injured party may go after the dishonest escrow agent, not the innocent counterparty. In practice, however, that remedy may be illusory if the escrow agent is insolvent or has already dissipated the funds.

The Kossoff Sentencing: Criminal Consequences, Civil Losses

The attorney in Herman ultimately pleaded guilty to stealing more than $14.6 million from their attorney escrow accounts belonging to at least 35 individuals and companies. In May 2022, he was sentenced to 4½ to 13½ years in state prison for grand larceny and scheme to defraud. The sentencing court also entered restitution judgments in favor of victims and the Lawyers’ Fund for Client Protection, holding the attorney liable for over $14.6 million and ordering forfeiture of assets.

Practical Lessons for Buyers and Sellers

The Herman litigation offers several important lessons:

1. Escrow theft does not eliminate contractual risk. Courts will still determine who owned the money at the time of theft.

2. Contract language matters. Whether the escrowee is an agent or a neutral stakeholder can change the allocation of loss.

3. Timing is critical. Disputes over whether a closing occurred can decide who bears hundreds of thousands—or millions—of dollars in losses.

4. Criminal cases do not resolve civil liability. Even where an escrow agent goes to prison, buyers and sellers may still litigate against each other.