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Conflicting demands for earnest money deposit? Do all you can to stay neutral

It has happened to you before. For one of numerous reasons, a party breaches and a transaction does not close. You notify the parties and forward cancellation documents. In response, the buyer and the seller make conflicting demands to release the earnest money deposit from the escrow account.

After you request that both the buyer and the seller agree to an escrow instruction to disburse in one way or another, they will not do so. Worse, both sides intensify their demands with calls to management and threats of litigation.

Worse yet, it is clear from the parties’ escrow instructions and emails which party breached and which party is entitled to the funds. You believe that making the choice to release the funds and close your file will end the discourteous emails and calls.

While there is a good probability that you are right, your choice may result in subsequent legal action against your escrow company.

As an escrow agent and company, your role is to remain a neutral third party. Choosing one side over conflicting demands can remove that neutrality. This choice may result in liability to the escrow company.

For example, in an unpublished opinion in Nevada, the Nevada Supreme Court held that “[i]f an escrow agent is uncertain about his or her duties as to disbursing the escrow money, he or she should seek guidance from the district court through an interpleader action.” See Horner v. Semenza, 2013 WL 3257963 at 3. Ignoring this clear directive may result in a breach of an escrow agent’s duties by failing to seek the court’s guidance. See Wood v. Chi. Title Agency of Las Vegas, Inc., 109 Nev. 70, 73, 847 P. 2d 740 (1993). These duties include the requirement of scrupulous honesty, skill and diligence.

In other words, if the parties cannot agree, then you should be extremely cautious in choosing sides.

Instead, it is best to allow a court to choose via a lawsuit to interplead the funds. The role for an escrow company in such litigation is simple: file a lawsuit, serve the parties and deposit the disputed funds with the court. It is then up to the parties and judge to determine who is entitled to the funds.

Alternatively, most parties’ purchase and sale agreements contain a mediation or arbitration clause between the parties. If the parties voluntary agree to mediate or are bound to arbitrate, these forums often result in an agreement for disbursement between the parties and a resolution to the dispute.

Another option is to allow the parties themselves to take the issue to court as part of the parties’ disputes in the failed transaction. If the deal fell through, there may be reason beyond the earnest money why one party will sue the other. As part of the suit, your escrow company can agree to follow any court order that determines the ownership and payment of the earnest money proceeds. Doing so keeps your company out of court and resolves the issue.

While it may be difficult to remain neutral to a buyer and a seller in an earnest money dispute, doing so is the right decision. And with the above alternatives and a healthy amount of communication, you can uphold your escrow duties while keeping your clients for the next transaction.

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This blog contains general information only, not intended to be relied upon as, nor a substitute for, specific professional advice. We accept no responsibility for loss occasioned to any purpose acting on or refraining from action as a result of any material on this blog.

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