When a real estate sale fails to close, buyers and sellers sometimes disagree as to who is at fault. While real estate contracts invariably contain provisions governing disposition of the earnest money that are designed to protect the escrowee, it is crucial for the escrowee, caught in the middle of conflicting claims to the earnest money, to proceed carefully.  Otherwise, the escrowee may find itself with an inadequate award for its attorney’s fees and costs.

A battle for the earnest money (along with all of the other relief each allegedly aggrieved party seeks) naturally ensues.  The escrowee is commonly and properly named as a necessary party in the litigation in its capacity as the stakeholder. As soon as the escrowee learns it has been named in the litigation, its sole goal is to achieve the quickest and least costly exit possible.

Upon conflicting claims to the escrow funds, escrow provisions of the contract routinely entitle the escrowee to file an interpleader action, enabling it to be dismissed from the case upon its deposit of the earnest money with the Clerk of the Court.  By doing so, the escrowee leaves the other parties to fight amongst themselves without its further involvement.  These terms entitle the escrowee to charge reasonable attorney’s fees and costs arising from the interpleader action against the earnest money. However, interpleader entails a cumbersome and antiquated procedure in Illinois established by common law rather than the interpleader statute.  See Kovitz Shifrin Nesbit, P.C. v. Rossiello, 392 Ill.App.3d 1059 (1st Dist. 2009) (analyzing the four-step process for interpleader).  Unfortunately, in the absence of a resolution, the court may not fully appreciate the extent of work necessitated by the four-step process when it comes time to adjudicate the reasonableness of the escrowee’s attorney’s fees and costs.

The following tips will help an escrowee’s attorney to achieve the best possible result in the form of an early exit without the sting of significant unreimbursed fees and costs:

  1. Obviously, read the escrow terms carefully.  The escrow provisions commonly found in one county somewhat differ from those found in another.  The slightest deviation from the terms may result in a regrettable technical challenge to the escrowee’s right to attorney fees.  Some of these contracts contain conditions precedent to the filing of an interpleader action.  Some of these provisions do not perfectly jibe with the sequence of events required by interpleader procedure, so care is warranted.
  2. If conditions precedent are satisfied, immediately file the interpleader as a counterclaim.  While it may seem counterintuitive, filing the formal interpleader will pave the way to a resolution.  This is because the escrowee’s bargaining power to achieve an agreed dismissal comes from the prospect of its attorney’s fees eroding the earnest money.
  3. Check the court docket for dueling lawsuits.  Sometimes one party may neglect to include the escrowee as a party (especially pro se litigants). Check the court docket to determine whether or not there are separate actions filed by the buyer and seller.  If there are separate lawsuits, the escrowee should take steps to obtain a dismissal order binding on both actions.
  4. Convince the other parties to promptly consolidate dueling actions.  Remind the other parties in writing that a motion to consolidate filed by the escrowee’s attorney will erode the earnest money.  This usually works, but if not, the letter/e-mail provides a good exhibit to attach to a fee petition, if that becomes necessary.
  5. Aggressively pursue an agreed discharge and dismissal.  Once the interpleader is filed, escrowee’s counsel should zealously pressure all parties to agree to an order of discharge and dismissal without the formalities otherwise required by Illinois interpleader jurisprudence.  Each and every correspondence to other parties’ counsel should stress that an agreed discharge of the escrowee is in every party’s best interest in light of the attorney’s fees terms of the escrow provision.  Any time another party hinders such a resolution, the escrowee’s attorney should telegraph the next cumbersome expensive step she will have to take pursuant to interpleader law and remind them that the fees will mount. Likewise, each time the escrowee’s counsel appears before the court, she should stress that she hopes to achieve a quick resolution to avoid the multi-step formalities of interpleader.  By repeating and highlighting this goal in every correspondence and court appearance, if no resolution is reached, the escrowee’s subsequent fee petition will contain strong exhibits and will be more easily justified and appreciated by the court.
  6. Prepare a detailed agreed dismissal order consistent with interpleader law.  The agreed dismissal order should resemble an order that would otherwise be achieved by following the “four-step” interpleader procedure.  In addition to dismissing the escrowee with prejudice, the order should contain a provision establishing where the funds will be deposited (whether it is a party’s or the clerk’s trust account) pending final determination of the merits of the litigation.  It should also contain a finding that the escrowee’s duties are terminated and that the escrowee is discharged from any further claim that the other parties may make against it related to the escrow funds.