Real estate agents have often heard the term “interpleader” and scratched their heads in confusion. It’s no surprise; it is a legal term that many attorneys never run into. But any time there is a transaction in which funds are being held in escrow, there is a possibility of an interpleader action. The purpose of this blog is to demystify that term and to give some guidance on how an interpleader action may impact your transaction.
What is the Role of an Escrow Agent?
It’s pretty straightforward. The parties appoint the escrow agent to hold a specific fund of money until they instruct the agent on what to do with it. Once they receive instructions on what to do with the money, they disburse it according to the parties’ directions. That being said, an escrow agent isn’t a judge, and isn’t allowed to adjudicate fights between parties over how funds should be disbursed. Even if an escrow agent is 100% sure that one party is in the right, they are not allowed to disburse funds without the joint authorization of the parties. What happens if the parties can’t agree on how funds should Be disbursed? Interpleader!
What is an Interpleader?
An interpleader is a lawsuit that is filed by an escrow agent when the parties cannot agree on the disposition of funds. As a matter of practice, most escrow agents will not initiate an interpleader action when they discover that parties have a dispute. They will wait a reasonable period of time for the parties to try to work the issue out between themselves. What amount of time is “reasonable” differs from agent to agent and situation to situation. But typically at least 60 days.
To file an interpleader action, the escrow agent must hire an attorney. That attorney must name as parties anyone who has a claim to the escrowed funds; this typically means the buyer(s) and the seller(s). While listing brokerages may have a contractual right to a portion of any deposit that that a seller recovers from a breaching buyer, they are not typically made a party to an interpleader suit because they are not a party to the escrow agreement (their right to payment from the seller springs from a separate listing agreement). After all of the parties are brought into the suit, the escrow agent asks the court for permission to deposit the escrowed funds into the court’s bank account so that the parties are able to fight over entitlement.
How Does an Interpleader Action Impact My Transaction?
It doesn’t directly impact a transaction. When an escrow agent has decided to interplead funds, the deal has typically been dead for months. From a practical standpoint, though, it is useful to understand the interpleader process, and the associated cost. The escrow agent will incur attorney fees and court costs from prosecuting an action, and is usually allowed to recover those amounts from the escrowed fund before depositing the rest with the court. The amount is usually in the three-to-five-thousand-dollar range, although much higher amounts are possible if any party fights the interpleader action. Regardless, buyers and sellers should be aware that if they cannot ultimately agree on how escrowed funds can be divided, the total “bucket” of cash for them to fight over will be reduced if the matter proceeds to the interpleader stage. That is a valuable insight for an agent to provide to a client, especially when the amount of deposits is smaller.
If you have questions about an interpleader action, always contact a qualified real estate attorney for a consultation.