Earnest Money Disputes Holdbacks

1. Earnest Money Disputes& Holdbacks Kelly Rickenbach, Esq. Claims Counsel Region C Stewart Title Guaranty Company

2. What this course covers Overview of Earnest Money Deposits, common disputes and procedures to observe when you find yourself in the middle of a dispute Overview of Holdbacks, including review of Withholding Escrow Instructions and guidelines to consider when you are requested to hold funds in escrow Review of guidelines to consider when you are requested to hold funds in escrow

3. Earnest Money Defined Any deposit or payment of a part of the purchase price for the property, made in the form of cash, check, promissory note, or other things of value for the purpose of binding the purchaser to the agreement and identified in the agreement as an earnest money deposit. Wash. Rev. Code Ann. � 64.04.005(4). It does not include other deposits or credits made by the buyer. Wash. Rev. Code Ann. � 64.04.005(4). It does not include other deposits or credits made by the buyer.

4. What it doesn�t include Any other deposits or payments made by the purchaser, advances, etc. The monies held for earnest money deposit must be specified as such.

5. Boomerang Function

6. Following the money Earnest Money usually follows the transaction from day one all the way through to closing. Buyer writes a check ? gives to Real Estate Agent ? gives to Escrow Company. When Seller accepts offer ? check is deposited. ? Escrow Company places check into separate trust account. ? At closing, money comes back to the buyer as a credit against the costs or down payment. If limited situations, it can be returned to buyer at close of escrow. (more often than not, checks made out to Escrow Company directly and not the seller). (If over $10,000.00, interest bearing account � buyer fills out W-9). (more often than not, checks made out to Escrow Company directly and not the seller). (If over $10,000.00, interest bearing account � buyer fills out W-9).

7. Common Misconceptions Sellers assume that if the deal falls through, the Buyer�s Earnest Money Deposit is automatically forfeited. On the other hand, Buyers tend to assume that if the deal doesn�t close, they will automatically get the Earnest Money Deposit back.

8. NEITHER IS TRUE!!!

9. The majority of sales transactions will close and the Earnest Money funds are properly applied to buyer�s down payment and/or closing costs, however, there are exceptions to the rule. When deals don�t end up closing � parties are upset and sometimes both want the money.

10. Reasons Earnest Money might be refunded Buyer cannot secure financing (usually there is a financing contingency enabling the buyer to a refund of the Earnest Money if he can�t get a loan.) Inspection contingency � the inspection reveals material matters that were undisclosed and/or unknown to the Buyer. Party�s misrepresentation of material facts

11. Notice of Termination In situations where the Buyer cannot obtain financing, he can sign a Notice of Termination (NWMLS Form 901) and provide it to the seller. Provided it is within the financing contingency time frame, the Earnest Money can be refunded to the Buyer. Keep in mind, Washington courts have held that in certain cases, even if the Buyer doesn�t sign a Notice of Termination, he is entitled to his Earnest Money if he cannot get financing. In an ideal situation, both parties will sign a rescission agreement directing disbursement of the Earnest Monies. In an ideal situation, both parties will sign a rescission agreement directing disbursement of the Earnest Monies.

12. Thatcher v. Salvo WA State case where the court held that if the buyers acted in good faith to obtain loan approval, even if buyers don�t have an approval on the date the P&S Agreement expires, the P & S Agreement merely expires, and the buyers have not breached anything, then both seller�s and buyer�s duties under the P&S Agreement are discharged. The buyer has a right to a refund of its earnest money. The only way a seller may be entitled to the buyer�s earnest money in this situation is if the buyer fails without legal excuse to complete the P&S Agreement. A buyer�s mere failure to notify the seller that he/she cannot obtain financing does not qualify as �without legal excuse.� 128 Wn.App. 579, 116 P.3d 1019 (2005),128 Wn.App. 579, 116 P.3d 1019 (2005),

13. What can you do when the deal doesn�t close and the parties inquire about Earnest Money?

14. Tips to make your job & life easier Don�t release the funds to either party if there is a known dispute and you have not received non-conflicting mutual instructions.

15. Ask for more information. Often times there will be a Notice of Termination, or a letter from the lender indicating the Buyer does not qualify for financing.

16. Ask if the parties have entered into a Rescission Agreement � or if they are willing to sign a Rescission Agreement.

17. Rescission Agreements When appropriate & how to use them

18. If there is any question or dispute regarding the Earnest Money, see if the parties are willing to sign a Rescission Agreement. This is often the best option for all parties involved. Having a clear, written direction as to where the funds should be directed will help to avoid any confusion and further liability on behalf of the Escrow Agent. Moreover, it serves as good documentation for the file and can help if you have questions later on down the road. Keep in mind that Rescission Agreement does not preserve the parties� contractual rights and obligations. A rescission restores the parties to the position they were in before they entered into their Agreement. Keep in mind that Rescission Agreement does not preserve the parties� contractual rights and obligations. A rescission restores the parties to the position they were in before they entered into their Agreement.

19. Hypothetical Question #1 Buyer and Seller enter into Purchase and Sale Agreement & Buyer deposits Earnest Money with Escrow. Buyer, however, cannot get financing. Seller then gets another offer and enters into a Second Purchase and Sale Agreement. Escrow is still holding Earnest Money from the first signed Purchase and Sale Agreement because there has been no demand for return of the Earnest Money and no Rescission Agreement.

20. What should you, the Escrow Agent, do with the new funds for the second deal? And what should you do with the funds that are still remaining from the first Purchase and Sale Agreement?

21. Resolve the issue of the funds with the first proposed buyer before handling the second buyer�s transaction. Advise the seller that the second deal cannot close until the Seller and proposed Buyer #1 enter into an agreement or direct Escrow as to how the disburse the Earnest Money. The easiest solution is to get a signed Rescission Agreement from the first deal.

22. Hypothetical Question #2 Billy signs a Purchase and Sale Agreement for a home purchase in Bellevue. The property is advertised For Sale By Owner so no agents are involved. Billy gives the seller $5,000 in Earnest Money. Pursuant to the signed P&S A, he has 28 days to secure his loan financing. Billy can�t get financing and delivers a Notice of Cancellation to the Seller, along with a loan denial letter from the mortgage broker. The seller is upset, and Billy gets a letter from the seller�s attorney demanding the $5,000 earnest money. Billy asks you, the escrow agent, what to do? 

23. Suggestions? Billy clearly thinks he is entitled to the Earnest Money. However, the Seller�s attorney also seems to think that the Seller is entitled to the money. Review the letter provided by the attorney to see whether there is some explanation as to why Billy should have to forfeit the Earnest Money if he was unable to get financing. In any event, you have received conflicting instructions � best not to release the funds until clear direction and understanding from both parties. What can you say to lessen the argument: The point is that is always makes sense to reach an agreement. Failure to agree ties the money up for awhile, could possibly lead to further legal action and inconvenience, and it just becomes a frustrating mess for both sides -- more so than you realize at the time. What can you say to lessen the argument: The point is that is always makes sense to reach an agreement. Failure to agree ties the money up for awhile, could possibly lead to further legal action and inconvenience, and it just becomes a frustrating mess for both sides -- more so than you realize at the time.

24. Other Suggestions? You could respond to Billy and the Seller�s attorney indicating that you will need non-conflicting, mutual written instructions signed by both parties in order to release the Earnest Money. Ask if they would be willing to provide a signed Rescission Agreement. But remember - don�t cross the line and give Billy legal advice. 

25. When working with difficult parties� Keep in mind that the point is always to make the parties understand it will be easier to reach an agreement. The failure to come to an agreement (forcing Interpleader) ties up the money, and can lead to further legal action and inconvenience, which becomes another frustrating mess for both sides � more so then they probably realize at the time. Most of time, the parties need not result need not result to court action, which can cost more money than the actual Earnest Money about being held. Additionally, the funds will be tied up for a while in the Court Registry, making it difficult for the seller/buyer to make another purchase. Most of time, the parties need not result need not result to court action, which can cost more money than the actual Earnest Money about being held. Additionally, the funds will be tied up for a while in the Court Registry, making it difficult for the seller/buyer to make another purchase.

26. INTERPLEADER When all else fails�you may have to interplead the funds.

27. Interpleader solves the dilemma of both the buyer and the seller demanding the earnest money. Under license law, you must return the money to �the person entitled to it� within 30 days after either the buyer or seller demands it. However, prior to interpleading the funds, as a last resort, send a letter to the parties involved, advising of the expense, delay, etc. caused by Interpleader. The following is a sample letter:However, prior to interpleading the funds, as a last resort, send a letter to the parties involved, advising of the expense, delay, etc. caused by Interpleader. The following is a sample letter:

28. As a first step, I usually recommend that the Escrow Agent (who has exhausted all other steps and has informed me that Interpleader is really the last option) send a letter to all parties and their agents, indicating that it plans to Interplead the funds unless it receives non-conflicting, written mutual instructions from both parties indicating the direction of the funds.

29. Sample Pre-Interpleader Action Letter Dear Buyer & Seller: Stewart Title has been holding ______ (amount here) in Earnest Money for the above referenced Escrow since _______ (Date of Deposit). This letter will serve as written notice to each and all of you that Stewart Title intends to interplead these funds pursuant to Revised Code of Washington (RCW) �� 4.08.160.170 and Superior Court Civil Rule 22 on _______ (Date you plan to file) if we have not received a signed Rescission Agreement directing disbursement of the funds, or other sufficient mutual written instruction as to what the parties have agreed to with respect to the _______ Earnest Money.

30. Letter cont�d� It is our understanding the transaction for the referenced property has been cancelled. Stewart Title has received specific demand from both the Buyer and the Seller to disburse the Earnest Money. Based on the conflicting requests, prior to release of the Earnest Money, Stewart Title required that the parties enter into a signed Rescission Agreement directing disbursement of the funds, or provide other written instruction regarding direction of the Earnest Money. To date, Stewart Title has not receive a Rescission Agreement or other signed instruction.

31. Letter cont�d� Stewart Title has no choice but to Interplead these funds into the Registry of the Court. If you believe we have misunderstood any of the facts, or you have additional information that you wish us to consider prior to filing an Interpleader Complaint, please contact me immediately. Stewart Title�s decision to interplead funds rather than face multiple claims and potential liability is without prejudice to or waiver of any defenses Stewart Title may have in this matter and all such defenses are hereby preserved. Signed � Escrow Agent

32. This takes you out of the role of JUDGE AND JURY If you are wrong, you may have to pay twice!If you are wrong, you may have to pay twice!

33. LEGAL AUTHORITY FOR INTERPLEADER NWMLS Form 21 Specifically Paragraph B

34. Paragraph B Provides: � b) Earnest Money: The parties instruct the Closing Agent to � (2) commence an interpleader action in the Superior Court for the county in which the Property is located within 30 days of a party�s demand for the Earnest Money (and deduct up to $250.00 of the costs thereof) unless the parties agree otherwise in writing.

35. Language also found in the Standard Escrow Instructions Paragraph 6 of the Standard Escrow Instructions also gives the authority of the Escrow Agent to Interplead the funds: �Escrowee has absolute right to file suit in interpleader and obtain order from the court requiring parties to interplead��

36. What exactly happens in Interpleader? The disputed funds are deposited into the court�s treasury. The parties are left to fight about who gets what. You are done with the trouble and can wipe your hands clean (minus the filing fees and such).

37. What if litigation has been filed by one of the parties? Contact your Legal Claims Department, or local Attorney Your attorney will file a Stipulation & Order to Interplead Funds Preferred because generally less expensive. Requires attorney to represent and obtain Court Order allowing for deposit of disputed funds.

38. Koncicky v. Sekac Seller and buyer entered into Earnest Money agreement for purchase and sale of property. The transaction was facilitated by a real estate agent acting for the seller. Buyers paid earnest money which the agent received and held. Earnest money agreement provided that if a dispute arose, the prevailing parties would recover costs and reasonable attorney fees.

39. Agent brought interpleader complaint against buyers seeking adjudication of who was entitled to earnest money. Agent challenged a judgment that awarded the buyers their reasonable attorney fees and costs. The court affirmed, finding that the agent actively asserted a claim to the earnest money and that she did not disclaim any interest in the earnest money. Therefore, she wasn�t protected from award of fees.

40. HOLDBACKS

41. What is an Escrow Holdback? Any contractual condition wherein the funds are withheld by the Closing Agent to ensure a specific event occurs. Examples: Completion of construction items, necessary repairs to the residence, or payment of a judgment or other lien.

42. In Construction Situations Specific to construction situations, an Escrow Holdback is an of money withheld by the Lender during the progress of construction of a house to ensure that construction is satisfactory and completed at every state. A typical holdback amount is 10% of the total cost of the building project.

43. Sample Holdback Agreement Buyer and seller desire to amend the Purchase and Sale Agreement as set forth below and establish an Escrow Holdback account with Escrow Holder upon and subject to the terms and conditions set forth below: AGREEMENT NOW, THEREFORE, in consideration of the foregoing recitals, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Buyer and Seller hereby agree as follows:

44. Sample Holdback Agreement cont. 1. Escrow Holdback Account. a. Buyer and Seller hereby establish an escrow holdback account with Escrow Holder (�Holdback Account�) pursuant to which Escrow Holder shall hold a sum equal to the _________ from the proceeds of the Purchase Price (�Holdback Amount�) and not disburse said amount to any party until Escrow Holder is authorized to do so as provided herein.

45. Sample Holdback Language Cont�d� Escrow Holder shall invest the Holdback Amount in an interest bearing account with a responsible federally-insured institutional lender approved by Buyer and Seller and interest shall accrue for the account of the party to whom the Holdback Amount (or such portions thereof) is disbursed pursuant to the instructions set forth herein. Seller shall be responsible for the payment of all charges and fees imposed by Escrow Holder in connection with its duties hereunder.

46. Sample Holdback Agreement cont�d� b. Escrow Holder shall hold the Holdback Amount until the Disbursement Date of ___________, at which time Escrow Holder shall deliver to Buyer and/or Seller (as applicable) the Holdback Amount (or such portion thereof as set forth in the Final Resolution), plus all interest accrued thereon for the benefit of such party. The Disbursement Date shall be the earlier of (i) the date that Buyer delivers to Escrow Holder evidence that the (description of dispute, construction, etc. � basically reason for the holdback) has reached Final Resolution, or by (Date here). If the Disbursement Date occurs pursuant to subparagraph (ii) or (iii) above, then Escrow Holder shall deliver to Buyer the entire Holdback Amount plus all interest accrued thereon, without further instruction.

47. WITHHOLDING ESCROW INSTRUCTIONS

48. Any Withholding Escrow Instructions (WEI) pertaining to a specific resolution of�a matter prior to closing of the sale transaction must be disclosed to both�parties. The terms of the WEI must be mutually agreed upon and signed in writing by both parties. Requirements

49. Additional Requirements The WEI must contain an anticipated completion date of the subject�post-closing�matter, AND, a defined date in which escrow agrees to hold funds until. The WEI must also contain a specific instruction providing for a definitive action to be taken by the Escrow Holder, in the event that the parties have not provided any notice to the Escrowee of accomplishing the task at hand.

50. If appropriate - Include language in the initially prepared instructions confirming that the buyer must provide written approval of�the post-closing action, prior to funds being release from the file. This extra step avoids you being placed in the situation of the seller demanding you comply with the written terms of the release instructions when he notified escrow of the completion of repairs, and the buyer demanding that funds remain on hold in escrow until such time as�the required repair work has been completed�to his satisfaction. 

51. Helpful hint Its best practice to draft all instructions in a manner that will allow for or required the Escrow to release ALL funds at one time. Avoid the trap of being required to release 20% of the funds for one repair, 20% for another, etc.

52. Situations Warranting WEI�s

53. Outstanding Judgment Lien In a situation where payment of a lien that is disputed by the seller, will cause the lien to remain unpaid and encumbering the property past closing date, WEI�s are appropriate.

54. Construction/Closing Repairs In a situation where the post-closing repairs are scheduled for completion within the 45 days following close of escrow. Escrow agrees to hold funds for 60 days following close of escrow to account for any delay.

55. Without specific language In that same situation, funds being held for 45 days to accommodate post-closing repairs � and no correspondence being received by escrow during the 45 days from any party - escrow is thereby allowed to release�all the funds on hold�to the purchaser on the 46th day following close of escrow.� 

56. ANY QUESTIONS???