Sellers and their lawyer refused to release escrow money when a demand was made.
The attorney is acting as an escrow agent. He or she cannot release the money unless both parties agree to the release. If the sellers refuse to release the money, then the attorney must hold the money until the dispute is resolved - or he or she may deposit the funds into court once a court action is initiated.
You should speak to your real estate attorney about what your options are.
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I doubt NY law allows real estate actions to be brought in Small Claims court.
Check your purchase contract, which should provide a dispute resolution provision for this type of situation. You'll need to adhere to the terms of the contract you signed.
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Real Estate Attorney
Small Claims Court in New York City for example has monetary jurisdiction up to $5,000 however before you jump the gun you should be confident that you are right and entitled to the return of the escrow money because if you have a weak case and go it alone without proper legal representation you not only risk losing but your damages could compound themselves in a counter-claim.
You probably can't sue the escrow agent unless he misused the money or lost it. Check the escrow provisions of your contract
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The contract of sale usually contains a clause insulating the escrow gent from being named in an action to recover the down payment. Generally if a dispute arises the escrow agent will have the option to deposit to money with the court and be done. So unless as mr chertock says the escrow agent acted improperly he or she cannot be sued.
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You should review your contract with your lawyer. Assuming your interpretation is right that you are entitled to a refund, you could sue for a refund in small claims court. The escrow agent, in this case, apparently the seller's attorney, is a necessary party to that lawsuit.
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Small Claims Court is not likely your best option. If you are simply suing the Seller for money and the sum is less than $5,000, you can attempt to bring the action in Small Claims BUT if the money is being held in escrow and you are seeking the Court's determination as to whom is rightfully entitled to the money in escrow, the action likely sounds in equity and law and should not, properly, be brought in Small Claims Court.
In the past, I have named the Seller and the attorney, nominally, (e.g. "John Smith, Esq., as Escrow Agent") to get jurisdiction over the attorney, so that the Court can direct the attorney where to dispose of the money.
The determining factor, for me, would be how much money is in dispute, what the money is being held for and what the nature of your claim is.