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Demystifying Interpleader Actions in Real Estate

Nicki and Karen » July 8, 2024

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Real estate transactions aren’t always straightforward. In simple transactions, two parties will sign a contract that allows the closing process to begin and the property to be sold. The buyer often pays an earnest money deposit to show the seller that they’re serious about completing the transaction.

There are times, however, when disputes arise. For example, the lender may be unable to complete the underwriting process, which would put the sale in jeopardy and likely require the buyer to back out. In this situation, there may be a dispute over who gets to keep the earnest money deposit. If the seller and buyer don’t come to an agreement, an interpleader action California may need to be taken.

Interpleader actions are lawsuits that escrow agents can file when the parties involved in the real estate transaction don’t agree on how the funds should be disbursed. It may be necessary to ensure the issue is resolved promptly. This guide explores “What is an interpleader action in real estate?”.

home for sale sign

What Is an Interpleader Action?

An interpleader is a type of lawsuit that an escrow agent can file when the parties in a real estate transaction don’t agree on who receives the funds if the sale doesn’t go through. While escrow agents have this power, they don’t wield it immediately. First, they’ll wait for a reasonable amount of time to give the parties more opportunities to resolve the issue. The period is often 60-90 days.

Before an escrow agent can file an interpleader action real estate, they’ll need to hire an attorney. This individual must identify the various parties that might have a claim to the funds. In most situations, the parties will be the buyer and seller. Once the lawsuit is filed, the escrow agent will usually ask the judge to deposit the funds directly into the court’s bank account.

There are many advantages associated with using interpleader actions, which include everything from protecting the escrow payment and limiting legal expenses to mitigating uncertainties. These actions are taken to resolve disputes and make sure that additional claims aren’t filed by one or both of the parties.

When Is an Interpleader Action Necessary in Real Estate?

An interpleader action is necessary for real estate transactions if the ownership rights are disputed or multiple parties make claims for the earnest money deposit. This action allows the stakeholder to make sure all claimants are involved in the same case. Otherwise, separate actions could be taken, which might complicate matters and put the stakeholder at risk.

Let’s say that the stakeholder is holding $500,000 on behalf of two parties. If party A and party B make separate ownership claims for the money, the escrow agent could be sued by A and B in multiple actions. In this scenario, the escrow agent incurs double liability, which means that they could technically be liable for $1 million. When an interpleader is filed, the two parties are brought into the same action.

You can avoid these issues by clarifying legal ownership and making sure that every party understands who will get the money during a financial transaction. If both parties sign a document that contains all the relevant details, there will be no need for an interpleader action.

Key Elements of Interpleader Actions

An interpleader action involves stakeholders, claimants, and the court. There are two steps involved with an interpleader action, the first of which is filing the complaint and transferring the money or documents to the court. Once each party is served, they can respond by making a claim for the funds.

The court’s role in resolving disputes involves determining whether the interpleader action requirements have been met. If they find that there are multiple claimants and that only one fund is at issue, the interpleading party will receive an Order for Discharge. When this happens, the court can decide if the interpleader party needs to pay attorney fees.

The case will then continue, during which the court will assess the situation and try to determine which claimant should receive the money. The claimant who doesn’t receive ownership of the funds may be tasked with paying attorney fees for all parties.

Keys in door of newly purchased home

Process of Filing an Interpleader Action

If you’d like to initiate an interpleader action in California, you must first identify the jurisdiction you’re in. If you’re initiating the litigation, you’ll be the plaintiff, which is the stakeholder. In certain jurisdictions, the plaintiff could be called the plaintiff-in-interpleader.

Once you inform the court of your dilemma and deposit the disputed funds, you’ll be discharged from liability, which means that you no longer need to spend money or time attempting to resolve this issue between the other parties. For an interpleader action to go forward, you must adhere to the following requirements:

  • The money that’s deposited to the court must be claimed by all claimants
  • The stakeholder can’t have a claim on the money
  • All claims need to be dependent on the same source
  • The stakeholder can’t have independent liability to one of the claimants

While the most common example of an interpleader action occurs when an escrow agent attempts to resolve the issue between the buyer and seller, it can also take place as part of an insurance policy. If multiple parties make a claim on a specific policy, the insurance company can choose to file an interpleader action if they don’t want to be involved in the dispute.

Legal Considerations and Requirements

When you’re exploring an interpleader action, make sure you comply with California state laws. For the most part, these laws adhere to the federal regulations governing interpleader real estate actions. For example, the plaintiff will need to deny liability in part or in whole to the claimants. In California, the stakeholder has the ability to seek reimbursement for their costs and at least some of the attorney fees.

Benefits of Using Interpleader Actions in Real Estate

Interpleader actions can be highly beneficial to claimants and stakeholders alike. In most cases, escrow hasn’t closed, which means that the agent will need to contend with multiple parties who can’t come to an agreement. These parties may make allegations that you haven’t performed your duties.

You can avoid these issues altogether by depositing the escrow funds into the court’s account, which will allow you to be discharged from any further liability. You’ll be effectively mitigating your legal risks as well as your litigation expenses.

The claimants also benefit from this action. It allows a decision to be made for everyone in the transaction. Otherwise, each party may need to make a separate claim against the escrow agent or fund holder. The issue with separate claims is that the legal expenses could be higher. The timeline for resolving the issue could also be extended when needing to deal with multiple claims.

Keep in mind that an escrow agent isn’t required to wait a long time before they file an interpleader action. California’s Department of Business Oversight is tasked with maintaining reporting requirements under Title 10 of the California Code of Regulations. They perform annual audits, during which they must review escrow liability. When making this type of audit, the department can identify if the escrow account properly disbursed the money according to the court’s instructions.

An interpleader action also allows the claimants who are disputing with one another to make their arguments in court. You’ll be able to argue your rights to the money as well as any other claims that you might have against the other party.

As mentioned previously, the court can decide to do away with some of the attorney fees and costs that the escrow agent may be tasked with paying. However, the interpleading party needs to request that the court pay for the attorney fees from the money that has been deposited into the court’s account. The court can also choose to reduce the fees that they ask for. The escrow client’s law firm can agree to solely obtain fees from the court-awarded compensation.

There are numerous reasons why you should consider interpleader actions. When disputes occur in a real estate transaction, they can bring everything to a halt and cause all parties to spend a considerable amount of time and money on litigation. An interpleading action streamlines this process by allowing multiple claimants to be brought into the same case.

Conclusion

Interpleader actions are rare but useful. Escrow agents can use these actions to reduce their legal liability and make sure that the parties involved in the transaction have their cases heard in court. When you’re involved in a complex real estate dispute, it’s highly recommended that you seek legal advice. Without experienced legal representation by your side, a dispute may not be resolved in your favor.

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