In an apparent case of first impression, the Massachusetts Appeals Court has ruled that a building contractor who misuses his customers' escrowed funds incurs not only civil liability for breach of contract and the like, but also criminal liability for "fiduciary embezzlement" (M.G.L. c. 266, § 57). In Commonwealth v. DeGennaro, 84 Mass. App. Ct. 420, decided October 21, 2013, the defendant contractor executed purchase and sale agreements with a series of customers that required the customers to pay deposits, and required the contractor to hold those deposits in escrow. The defendant contractor acted as his own escrow agent. However, instead of placing the escrowed deposits into a separate, interest-bearing bank account, the defendant deposited them into his general business operating accounts. Worse, the defendant then used the money--before it had been earned--to pay himself and to pay various business expenses. The defendant never built the houses he was hired to build, and he never returned the escrowed deposits to his customers.
After a jury trial, the contractor (and his bookkeeper) were found guilty of "fiduciary embezzlement" (among other crimes) and sentenced to up to six years in prison followed by ten years of probation, and ordered to provide restitution to their victims. On appeal, both defendants argued that, at most, they were civilly liable for breach of contract, but that they did not commit any crime, because the purchase and sale agreements did not create a formal fiduciary relationship, such as that of the executor of a will or trustee of a legal trust. The Appeals Court disagreed, and interpreted the "fiduciary embezzlement statute"--apparently for the first time--as applying to anyone who holds funds in escrow under a purchase and sale agreement, including building contractors who act as their own escrow agents.
The lessons of DeGennaro cannot be clearer for anyone in the business of buying and selling homes: escrowed funds should be handled with the utmost care. They should be kept in a separate bank account, and should never be used to pay other expenses (including paying yourself) until they are earned. The best practice may be to use a professional third-party escrow agent. As the defendant in DeGennaro learned, failure to properly maintain escrowed funds can lead not only to civil liability and therefore cost you money, but it can also lead to criminal liability, and cost you your freedom.