Le'go My Escrow! Dealing with Competing Claims for Escrowed Funds

Terry Jessop & Bitner Newsletter

Issue 36, October 2016

In Utah, escrow officers can assume the role of agent for both the buyer and seller of real estate. This creates an inherent conflict of interest because the escrow officer owes duties to both parties. Usually, the buyer and seller work together toward the same goal of closing the sale. But when things go wrong the buyer and seller become adversarial and the escrow officer ends up in the middle trying to serve two masters. For example, a sale falls through and the buyer demands the return of the earnest money. The seller believes the earnest money is non-refundable and also demands the funds. The contract seems to justify both demands, depending on how it is interpreted. What is an escrow officer to do?

He-Said, She-Said

Escrows are driven by written instructions. As with all real estate law, we start with the general rule that if it isn't in writing it isn't enforceable. Hence, if the parties want an escrow officer to do something, they must issue written instructions telling her what to do and when to do it. There is no magic to the form of the document. It can appear as detailed instructions, a letter, or an email. The important thing is that they are written down and delivered to the escrow officer, otherwise the instructions are not binding.

An escrow officer's hands are tied when she receives conflicting instructions. Using the example above, it is not up to the escrow officer to act as judge and jury to decide whose interpretation of the contract is correct. The buyer and seller must agree with respect to who gets the funds, or the escrow officer cannot disburse them.

Duty of Care

The reason for neutrality is that escrow officers have fiduciary duties to the parties they serve, and they are held to a high standard of care as they perform those duties. In fact, in some circumstances, escrow officers have been held to have fiduciary duties to persons or entities who are not even parties to the transaction. (See Orlando Millenia LC v. United Title Services of Utah, Inc., 2015 UT 55, 355 P.3d 965.) An escrow officer who shows favoritism to one party may be liable for the breach of his fiduciary duties to the other, and he may expose his employer to liability as well.

When in Doubt, Interplead

When it is impossible for the escrow officer to comply with competing instructions, the escrow officer (or, more commonly, the title company which employs the officer) interpleads the funds with the court. This means the title company files a lawsuit naming both the buyer and seller as defendants and pays the money into an account held by the court. The title company then withdraws from the case and the buyer and seller duke it out over who should get the money. If the amount is small it will quickly be eaten up with attorney's fees and costs, and there will be nothing left to disburse to either party.

Dealing with escrow disputes can be tricky. If you have questions about your escrowed funds, give us a call. We can help.

© Terry Jessop & Bitner October 2016