Risk Management Blog

This week we introduce guest blogger and attorney Shelley Gould from the Law Offices of David B. Bloom. She delves into what an interpleader action is and how escrow officers can utilize this tool and why. Today’s post is the first of two parts; part 2 will be posted in next week’s blog. Please share your thoughts below.

Interpleader clauses can be found in the general provisions of standard escrow instructions for the sale of a business and the purchase of real estate. It is an under- utilized remedy because of a lack of understanding of what it is and how interpleader actions can be used by escrow companies for their own legal protection.

Interpleader is defined as an equitable remedy now governed by statute, whereby a holder of money such as an escrow deposits funds or property with the Court. The purpose is to avoid liability to double or multiple claimants or potential claimants to the same funds or property,  and/or to otherwise allow the Court to determine the conflicting parties’ respective claims to the monies or property. The governing statute for an interpleader action is California Code of Civil Procedure §386 et seq.

The elements of an interpleader action are set forth in Code of Civil Procedure §386; which provides that:

1) The party bringing or the interpleader may be any person, firm, corporation, association or other entity against whom double or multiple claims are made or may be made, by two or more persons which are such that may give rise to double or multiple liability.

2) The claims or assertion of titles need not have a common origin nor be identical but must be adverse to and independent of one another.

3) Or the claims are un-liquidated and no liability on the part of the party bringing the action has arisen. Collusion, bad faith or inequitable conduct by the interpleading party which create the controversy may be a defense to an interpleader action. The claims to the fund may be potential and not even asserted, but cannot be wholly speculative.

4) The party bringing the action has no interest in the money or property claimed, or no interest in a portion of the money or property, and alleges that all or such portion is demanded by the other parties to the action. [Escrow’s cancellation fee may be claimed as part of the interplead funds]

5) The party bringing the action may deny liability in whole or in part to any or all of the claimants.

Resort to an interpleader action can arise other than in the escrow context which is outside the scope of this article. However, the most typical circumstance for an escrow officer which may lead to an interpleader is when a “dispute” arises between buyer and seller and one party informs Escrow in writing to cancel, but parties do not sign mutual cancellation instructions. A common scenario is: Buyer states that Seller misrepresented the yearly income generated by the business and makes demand to cancel. Seller doesn’t want to cancel and refuses to sign cancellation instructions.

Another common circumstance is when conflicting demands are made on Escrow. A typical example is: Buyer decides he doesn’t want to go through with a real estate purchase and makes demand on Escrow

to cancel and return his deposit. Seller doesn’t want to cancel and wants to retain Buyer’s deposit pursuant to a liquidated damages provision. Seller’s attorney demands that deposit be turned over to him.

Finally an interpleader action may result when Escrow risks liability to each of the parties. This may arise when the parties to escrow are arguing but can’t resolve their differences and blame Escrow for not closing. For example, Buyer tells Escrow to cancel, but he only will pay 1/2 of the escrow’s fees. Seller refuses to pay his half of the fees incurred, and doesn’t want Escrow to release Buyer’s deposit.

Click below to read part II

Disclaimer:
The information in this blog is provided for general informational purposes only and is not intended to be legal advice. The law changes frequently and varies from jurisdiction to jurisdiction. Being general in nature, the information provided may not apply to any specific factual and/or legal set of circumstances. No attorney-client relationship is formed nor should any such relationship be implied. Nothing on this blog is intended to substitute for the advice of an attorney, especially an attorney licensed in your jurisdiction. If you require legal advice, please consult with a competent attorney licensed to practice in your jurisdiction.