By: Lance T. Denha, Esq.
In a typical real estate transaction, an escrow account is opened shortly after a purchase contract is signed by the buyer and seller. The contract spells out the terms of the transaction, including the price and to whom funds are to be disbursed. The escrow agent, who is usually an attorney or officer of a title insurance company, accepts money into the escrow account from the buyer and the buyer’s lender, then disburses the funds according to the purchase contract.
In addition to distributing funds to the seller, the escrow account is used to ensure that all material contractual items associated with the transaction, including loan fees, title insurance and deed transfer fees, are paid. The escrow is said to close when all terms of the agreement are carried out and all funds are disbursed. An escrow agent in a real estate transaction is responsible for following all of the escrow instructions compiled by the buyer and seller, as well as the handling of documents and payments associated with the loan. The agent’s responsibilities include ensuring that all relevant payments are made to and from the escrow account, and that necessary documents are received on time.
It should be noted the duties owed by an escrow agent are both to buyer and seller. These duties include the duty of loyalty, the duty to make full disclosure, and the duty to exercise a high degree of care to conserve the money placed in escrow and pay it only to those parties entitled to receive the funds.
In some situations, one of the parties may default on their obligation under the transaction. If this occurs then the non-defaulting party typically has its rights and remedies, including even the right to terminate the contract all together. The money that was placed into escrow becomes idle because the escrow agent is usually instructed not to release or refund any of the money until the dispute between the parties is settled, unless otherwise spelled out in the purchase contract. The escrow agent, in order to prevent the risk of multiple lawsuits against him, can file for what is called an interpleader action.
An interpleader action should be entered into when the escrow agent has no interest in the money that is the subject matter of the dispute and there is no independent liability asserted against it. An interpleader action requires the intermediary to place the money into the court’s custody. The intermediary or escrow agent is then dismissed as a party to the interpleader action and the defending parties must litigate and argue for their rights to the money among themselves.
A typical escrow agent will have no vested interest in the earnest money deposit they hold during a transaction or sale and will have no involvement in the creation of the conflict that is the subject matter of the lawsuit. Therefore, an escrow agent is entitled to recover the costs and attorneys fees incurred in filing the interpleader action. The court will then decide what happens to the escrow money and documents. The service and assistance of a knowledgeable attorney is a valuable tool to utilize during this process.