Escrow Deposits and Sale Proceeds in Interpleader

Earnest money disputes

When a home sale falls through, the buyer may demand the deposit back and the seller may claim it as damages. The person holding it, whether a broker, title or escrow company, or lawyer, is usually bound by the purchase contract and escrow instructions, and often will not release the funds without both parties’ written agreement or a court order.

An example of a state rule: Florida brokers

Florida’s real estate licensing statute is specific. If a licensee “in good faith, entertains doubt” about who is entitled to escrowed property, or “if conflicting demands have been made,” the licensee “shall promptly notify the commission” and promptly do one of the following:¹

1. ask the commission for an escrow disbursement order;
2. with all parties’ consent, submit the matter to arbitration;
3. “by interpleader or otherwise, seek adjudication of the matter by a court”; or
4. with the written consent of all parties, submit it to mediation, which must be completed within 90 days after the last demand.

A licensee who promptly uses one of these procedures and follows the result is protected from an administrative complaint for failing to account for or deliver the property.¹ Other states regulate brokers and escrow agents differently, so check the rules for the state where the property is located.

Surplus after a foreclosure or tax sale

When property is sold to pay a debt and brings in more than the debt, the surplus can draw competing claims from the former owner, junior lienholders, and others. State law sets the order of priority, and courts commonly hold the money until claims are resolved.

The Supreme Court has addressed government retention of surplus. In Tyler v. Hennepin County, a county sold a condominium for $40,000 to collect about $15,000 in unpaid taxes, interest, and penalties, and kept the $25,000 excess. The Court held that the owner plausibly alleged a taking and that the county “could not use the toehold of the tax debt to confiscate more property than was due.”² Surplus procedures differ by state, so check the current law where the property is located.

The government can be the stakeholder. In a Texas complaint, the United States alleged that it forfeited a convicted defendant’s real property as substitute assets toward a $1.5 million forfeiture money judgment, after no one but the lienholder and the taxing authority filed a claim. The property sold for $8.5 million. After the mortgage, closing costs and the money judgment were paid, about $5.78 million remained, held by the title company. Before the sale closed, the government learned of a pending probate dispute over an estate that may have had an interest in the property. It interpleaded the excess under 28 U.S.C. § 1335 and Rule 22, naming the defendant and four other potential claimants.³ complaint (PDF)

Practical points

• Read the purchase contract and escrow agreement for dispute, deadline, and attorney’s fees terms. These can affect who pays the cost of an interpleader.
• Respond to any demand or notice from the escrow holder in writing and on time.
• If you are named in an escrow interpleader, see named in an interpleader and discharge, fees, and interest.

Footnotes

1. Fla. Stat. § 475.25(1)(d)1. Florida Legislature. ↩ ↩²

2. Tyler v. Hennepin County, 598 U.S. 631 (2023). Cornell LII. ↩

3. Complaint for Interpleader and Injunctive Relief ¶¶ 5–10, United States v. Balagia, No. 4:22-cv-01048 (E.D. Tex. filed Dec. 15, 2022), ECF No. 1. Allegations only. ↩