Are There Alternatives to a Broker’s Trust Account for Escrow Payments?

I am considering the purchase of a large yacht through a broker, and I have a few questions about the escrow process. I understand that most transactions in California call for the buyer’s funds to be held and disbursed through the broker’s trust account. I read, however, that a broker in Dana Point disappeared in 2009 with $2 million in trust account funds unaccounted for. I know that California brokers must post a $15,000 bond to maintain their license, but this is little comfort, since most yacht purchase transactions will involve trust account deposits that are considerably greater than the bond amount. Are there any alternatives to the broker trust account? Can I use a real estate escrow company?

Our reader is referring to the disappearance of broker Ed Fitzgerald, former president of Dana Island Yachts in Dana Point (see “Boaters Seek Answers About Disappearance of Broker — and Funds,” The Log, Dec. 21, 2009). Fitzgerald was accused of stealing buyers’ deposits, vessel purchase funds and prepaid slip rental payments in trust when he disappeared in 2009.

The Fitzgerald incident was particularly troublesome because, on the surface, the brokerage did not stand out as a “problem child.” Yacht brokers in California are licensed, regulated and periodically inspected by the California Department of Boating and Waterways. Broker-age trust accounts are reviewed as a part of this process, and Dana Island Yachts had no history of problems, violations or significant complaints with any part of its brokerage business. Fitzgerald was also a member of the California Yacht Brokers Association and was subject to the CYBA’s rigorous Code of Ethics.

Nonetheless, with all of these safeguards in place, a lot of people lost a lot of money in this incident. If the allegations against him are true (and that has not yet been proven), it was a case of a “bad apple” upsetting the system for everyone else. And, to make matters worse, our reader correctly notes that the $15,000 surety bond that California licensed brokers are required to maintain is wholly inadequate under all but the most trivial of transactions.

There are several alternatives to the escrow of funds in a yacht broker’s trust account. But before discussing those alternatives, we should acknowledge that whenever funds are deposited in a third-party trust, it may be possible for a “bad apple” to break that trust. Whether a real estate escrow is used, or an attorney’s trust account or some other form of trust arrangement is used, it may be possible for someone to cut himself or herself a check and disappear with funds that were held in trust. With that in mind, let’s look at some of the alternatives.

The most obvious alternative to a yacht broker trust account would be the use of a real estate escrow service. Unfortunately, those organizations are extremely reluctant to accept funds from a transaction that is not within their core business of real estate.

The various contracts and documents in a real estate transaction are fairly uniform. Escrow officers have a very good understanding of the flow of the transaction and of the format and purpose of each of the documents in the transaction. This allows them to follow the escrow instructions for the distribution of funds and the recording of documents without hiring a lawyer every time a new type of transaction comes through the door.

Conversely, the flow of the transaction and the format and purpose of each of the documents in a yachting transaction will differ considerably from a real estate transaction, and in fact there may be many transactional variations within the yachting world itself. All escrow services have a legal obligation to both sides of the transaction to follow the escrow instructions precisely, and their fee would be prohibitively high if they were compelled to hire an attorney whenever they see a new form of purchase agreement. As such, I am not aware of any California-licensed escrow agency that will agree to escrow funds for a yachting transaction.

Another logical alternative to a yacht broker trust account would be to hire an experienced maritime attorney to oversee the transaction and hold the funds in trust. However, an attorney who represents one party cannot be a “neutral” escrow without obtaining a conflict of interest waiver from all parties — in which case, he or she can no longer effectively represent either party separately. And, of course, the fees charged by an attorney who serves as a neutral escrow may be significant, especially in light of the fact that the attorney may not be available to offer independent legal advice to either party.

In view of the foregoing discussion, and considering that we always face some level of risk whenever we ask a third party to hold funds in trust, the most logical course is still to trust the yacht broker to hold the transaction funds. A broker who has been in business for many years and is a respected member of the yachting community is unlikely to abscond with client funds, regardless of whether we can point to one or two rare cases where this has actually occurred.

One final alternative for a buyer is to pay the balance of the purchase price directly to the seller via wire transfer. In that case, the broker would be holding the deposit funds in trust, but the payment of the bulk of the purchase price would bypass the broker entirely. Most brokers have no problem with such an arrangement, though it will require several modifications to the purchase contract to reflect the revised path for the distribution of funds.

In the end, however, every transaction is different — and the safest approach is to contact an experienced maritime attorney for advice concerning your particular transaction.