Escrow Agent Cannot Unilaterally Release Funds

Written by Posted On Wednesday, 25 February 2015 11:02

Question: I am a real estate agent and need some advice. A couple of years ago, I represented a buyer who went to settlement. However, certain repairs which the seller had agreed to do were not completed by the settlement date, so $7,500 was held in escrow by the title attorney. I sent several faxes and e-mails to seller's broker (the listing agent) requesting that the repairs either be promptly completed or that the escrow funds be released to the buyer. I finally received a message that "according to information received by the listing office, the seller had passed away." I relayed this information by letter to the settlement company. I received no answer. Recently, the purchaser located the seller's address and telephone number and discovered that the seller is alive and doing well. In this case the listing office appeared to have misrepresented the truth. Where should we go from here?

Answer: This is, indeed, a bizarre situation. Without casting any blame on anyone at this point in time, I suggest that you advise the title attorney that you have located the seller, and demand that the attorney follow up on this. While technically, it may be considered unethical for you to contact the seller directly, since you were the selling agent, there is nothing to stop the attorney from making the call.

In fact, I suspect that the attorney did not focus on the escrow issue when settlement took place. Traditionally, escrow agents will have the buyer and the seller enter into an escrow agreement, and include a time limit as to when the escrowed funds should be released. If the work is not completed within an agreed upon period of time, the escrow will be released directly to the buyer -- without demand from the buyer or objection from the seller.

If there is no such time limit, the escrow agent is prohibited by law to release the funds just because one party has so requested. An escrow agent has a fiduciary duty to the parties to the transaction. There are only two ways in which the funds can be disbursed: by written release signed by both parties, authorizing how the funds are to be distributed, or by a order issued by a Judge. The latter obviously requires that a lawsuit be filed, and this is time consuming and potentially expensive for everyone. Many escrow agreements will include a provision that the prevailing party in such litigation will be awarded such legal fees and court costs as determined by the Judge. Such a provision is designed to expedite an out of court settlement.

You should also contact the listing agent and his/her manager, in writing, to advise them that the seller has been located. You should request that they immediately contact the seller in order to resolve this matter.

You have suggested that the listing agent may have misrepresented the facts, but I would not rush so fast to judgment. What did they gain by withholding vital information from you as to the whereabouts of the Seller? Unless there was some unwritten agreement between the seller and the agent that these funds would ultimately be released to the broker -- which in my opinion would be illegal -- the moneys would be returned to the seller if the work was completed, or released to the buyer.

I am also surprised that despite the long period of time since the escrow was created, the title attorney took no action to resolve the matter. There is a process in law called an Interpleader Action. The attorney would file a lawsuit against both the buyer and the seller, put the funds into the Court registry, and basically ask the Court to release the attorney from the escrow obligation and resolve the dispute.

It clearly is a mystery, but now that you have located the Seller, I believe the matter will be quickly resolved.

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Benny L Kass

Author of the weekly Housing Counsel column with The Washington Post for nearly 30 years, Benny Kass is the senior partner with the Washington, DC law firm of KASS LEGAL GROUP, PLLC and a specialist in such real estate legal areas as commercial and residential financing, closings, foreclosures and workouts.

Mr. Kass is a Charter Member of the College of Community Association Attorneys, and has written extensively about community association issues. In addition, he is a life member of the National Conference of Commissioners on Uniform State Laws. In this capacity, he has been involved in the development of almost all of the Commission’s real estate laws, including the Uniform Common Interest Ownership Act which has been adopted in many states.

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