When two parties enter into a contract for the purchase and sale of real property, the buyer typically provides an initial deposit, commonly referred to as an Earnest Money Deposit (“Deposit). Unfortunately, when the real estate transaction fails to close (for various reasons), there is oftentimes a dispute over who is entitled to the Deposit. If the buyer and seller cannot agree on who should receive the Deposit, then what happens?
This article will generally explain what an escrow agent will do when there is a dispute over the Deposit and what it means to file an interpleader action.
What is an Earnest Money deposit?
When purchasing residential real property in California, the parties enter into a written purchase and sale agreement. Regardless of the form agreement used, the purchase and sale agreement generally provides for the buyer to provide an initial earnest money deposit into escrow. The amount of the deposit will vary and is generally held by an escrow holder, otherwise known as a stakeholder. The escrow agent will then hold the deposit for the parties until the closing occurs for the purchase of the property.
If the buyer refuses to move forward with the purchase, a dispute may arise over who is entitled to the Deposit. If the parties cannot resolve the dispute themselves and decide where the money should be returned, the escrow agent may have to file an interpleader action requesting a court determination as to entitlement of the funds on Deposit.
What is an interpleader action and how does it work?
When a dispute arises between the buyer and seller over who is entitled to the Deposit, the escrow agent has a couple options. The escrow agent may hold the Deposit and allow the buyer and seller time to amicably decide who is entitled to the Deposit. If the buyer and seller cannot amicably resolve their dispute, then the escrow agent will typically file what is known as an “interpleader action.”
Interpleader actions are governed by California Code of Civil Procedure section 386.6 Interpleader actions also are usually referenced in the General Provisions of the Escrow instructions and in the contract of the parties.
Simply stated, the escrow agent may file a lawsuit asking the court to allow the holder of the Deposit to make a decision about which party is entitled to the funds and deposit the money making up the Deposit into the court registry. The Escrow will usually name both the buyer and the seller in that lawsuit, or anyone else claiming an interest in the funds. Provided the escrow agent does not have any other liability to the buyer or seller, the Escrow on most occasions will make a motion for a discharge of liability, and the Court generally allows the escrow agent out of the lawsuit.
The buyer and seller will remain in the lawsuit and generally make cross complaints against each other, each explaining why they are entitled to the Deposit. From that point, the buyer and seller will litigate the issue of who is entitled to said funds. The buyer and seller may each have grounds for why they believe they are entitled to the Deposit.
Recovery of the escrow agent’s attorneys’ fees and costs
Since the escrow agent is generally an uninterested third party to a Deposit dispute, the purchase and sale agreement usually allows the escrow agent to recover its attorneys’ fees and costs relating to the interpleader action. The escrow agent’s attorneys’ fees and costs are typically deduced from the Deposit and the remainder of the Deposit will remain in the court’s registry until the Court makes a determination about entitlement to the funds.
In the General Provisions of the Escrow Instructions and California Code of Civil Procedure section 386.6, the escrow agent is entitled to recover its reasonable attorneys’ fees and costs from the Deposit.
Real estate purchase transactions fail for many reasons, especially during these tough economic times. While those complexities are generally seen between the buyer and the seller, it is important for escrow agents to understand their rights and responsibilities and obtain guidance on how best to handle Deposit disputes and interpleader actions. Please feel free to reach out to our Firm to discuss your options.