Zoning, a $60,000 Deposit, and Two Demanding Attorneys
A 38-acre parcel sells at auction for $600,000. The buyer wires a 10% deposit of $60,000 to your auction company, which is named escrow agent in the purchase agreement. Closing is set for 45 days out. On day 40 the buyer's attorney sends written notice that the buyer will not close because the seller 'misrepresented the zoning,' and demands the deposit back. The next morning the seller's attorney demands the same $60,000 as liquidated damages and directs you to pay it to the seller, less your commission. Both letters cite the same contract paragraph, which is silent on how a dispute is resolved.
1. As escrow agent, who do you pay and when? Walk through the correct sequence.
Read the worked answer
You are a stakeholder, not a judge. Pay no one yet.
Both letters cite a paragraph that is silent on dispute resolution, which means the contract gives you no authority to decide who is right. The correct sequence:
- Freeze the funds. Paying the seller today exposes you to the buyer's claim; refunding the buyer exposes you to the seller's. Either way you have converted disputed money.
- Notify in writing both attorneys within a day or two: the $60,000 is held intact in escrow; no disbursement will be made without (a) a written release signed by both parties, (b) a final, non-appealable court order, or (c) an order in an interpleader. State the date after which you will act.
- Interplead if no release appears. If neither party produces a release or order within a stated window (10–15 days is typical), file an interpleader and tender the $60,000 into the court registry, asking the court to award your fees and costs from the fund. That is the mechanism that discharges your duty and ends your exposure.
- Keep the money where it belongs: in the escrow/trust account, reconciled, earning no interest unless the agreement says otherwise. Never move it to operating 'temporarily.'
- Nothing in the buyer's zoning allegation changes your role - you do not investigate the merits, and you do not opine on whether the misrepresentation claim is good.
2. The seller directs you to pay the deposit to him less your commission. May you take your commission out of the escrowed funds now?
Read the worked answer
No. Your commission is a claim against the seller under the listing agreement, not a claim against the buyer's deposit.
- Paying yourself out of escrow before the dispute resolves is a conflict of interest: you would be deciding your own entitlement with money you hold in trust. The buyer will characterize it as self-dealing, and the Board likely will agree.
- Options, in order of preference:
- Wait. Let the dispute resolve, then take commission from the seller's share under the listing contract.
- Get a release. If the seller signs a written direction and the buyer's attorney confirms no objection, disburse on that release with both documents in the file.
- Interplead the whole fund and include your commission claim so the court ranks it.
- Check the contract: a real-estate auction contract may make commission earned at the fall of the hammer, but 'earned' and 'payable out of this escrowed deposit' are different questions. Earned status gives you a claim against the seller; it does not give you authority over the buyer's money.
- If you do hold a commission claim, assert it in writing to the seller with the contract citation - do not simply net it before a court or the parties have settled the deposit's fate.