When a real estate transaction fails to close, there are a multitude of legal issues that arise for the buyer, seller, and real estate broker. Often times the buyer’s earnest money binder or “deposit” is being held by a third party escrow agent. Both the buyer and seller are making conflicting claims to the binder. Section 475.25(1)(d)1., Florida Statutes, sets for the statutory procedure that real estate professionals should follow in the event of conflicting binder claims. Remember that real estate agents and brokers are regulated by the Florida Department of Business and Professional Regulation so they must follow some specific procedures in the event of a binder dispute. These procedure are outlined generally by Florida Realtors® and include seeking an Escrow Disbursement Order, Arbitration, Mediation or Interpleader. This blog will focus on the use of Interpleader Actions for escrow binder disputes in Florida.
Interpleader Actions in Florida are governed by Florida Rule of Civil Procedure 1.240, which is a rule promulgated by Florida’s Supreme Court. The person holding the funds (escrow agent) to which two or more persons make claims (such as a buyer and seller) files suit asking the court to decide which party has a legal right to the binder. If the court finds the interpleader appropriate, the person filing the suit is dismissed from the case, the funds are deposited into the court registry, and the claimants to the funds litigate between themselves the issue of entitlement of the deposited monies. 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 him. An example of independent liability would be when the escrow agent has breached his duties under the escrow agreement or the escrow agent fails to disclose a conflict or misappropriates the funds.
After dismissal, the escrow agent is not done yet. The agent will be permitted to recover costs and attorney’s fees incurred in initiating an interpleader action. In Ellison v. Riddle, 166 So.2d 840 (Fla. 2nd DCA 1964), the appellate court defined entitlement to fees and costs as follows: “in order to be entitled to such an award the plaintiff must prove his total disinterest in the stake he holds other than that of bringing it into court so that conflicting claims thereto can be judicially determined…the plaintiff must also show he did nothing to cause the conflicting claims.” If the escrow agent delays filing the interpleader and is sued by one of the claimants, the right to attorney’s fees and costs from the interpleaded funds may be lost.
Interpleader Action is intended to protect the escrow agent holding the funds. Because that protection allows the escrow agent to recover attorney’s fees and costs from the funds it holds, the protection is to the detriment of any the buyer and seller arguing over the entitlement to the amount being held. For that reason, especially when the disputed funds are small like in residential real estate transactions, it may be in the best interest of even the legally right claimant to settle a dispute and accept a reduced amount before the interpleader action is filed.
Interpleader actions can be complex and since they are like any other lawsuit, attorney’s fees and costs can be expensive if they are aggressively litigated. An understanding of the process will only allow the litigating parties to clearly appreciate their possible level of exposure and risk.