Interpleader: What Is It And Why Is It An Effective Remedy In An Escrow Holder’s Arsenal? – Part IIUCC, Corporate
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 second and final part of the article.
BENEFITS OF FILING AN INTERPLEADER ACTION
There are multiple benefits to instituting an interpleader action. Many times escrow hasn’t closed and the Escrow holder is faced with parties in dispute and occasionally an allegation is made that the Escrow holder hasn’t performed his/her duties. Escrow can deposit the escrow funds into Court and obtain a discharge and release from further liability in connection with the escrow account and the parties. The purpose is to give Escrow protection and limit litigation expenses.
Once an interpleader action is filed, any claims the parties believe they have as to Escrow, cannot be pled as a cross complaint and must be brought as a separate action. Conner v. Bank of Bakersfield (1920) 183 Cal.199, 203
Escrow owes no duty to resolve a dispute between buyer, seller and broker as to the ownership of the deposited money in lieu of filing an interpleader action. Interpleader prevents the stakeholder [Escrow] from being obliged to determine at his/her peril which claimant has the better claim. Lee v. West Coast Life Insurance, (2012) 688 F 3d. 1004, 1009. Moreover, Escrow does not need to wait an indefinite time before filing an interpleader action. Security Trust & Savings Bank v. Carlsen, (1928) 205 Cal. 309, 316.
California’s Department of Business Oversight has reporting requirements for annual audits which under Title 10 of California Code of Regulations, Regulation 1741.5(7)(C)(i) states that part of the audit procedure shall include a review of the schedule of escrow liability as of the last audit for dormant files and verify that “funds in dormant files that no longer are on the schedule of escrow liability were properly disbursed according to signed instructions or according to the instructions of a court of competent jurisdiction, were interpleaded to a court of competent jurisdiction, or were escheated to the State of California.”
The interpleader action provides the disputing claimants with a forum to obtain a court determination of their respective rights to the fund and other claims that they may have against each other.
In some situations, the Escrow holder can petition for instructions in the interpleader litigation if further monies are received from third parties or an immediate request for guidance is warranted. This can become an issue, for example, when the Board of Equalization releases money being held that was paid by Seller before escrow opened.
Finally from a financial viewpoint, the interpleading party [Escrow] can request the Court to award its reasonable attorney’s fees and costs which may be paid from the amount in dispute which has been deposited into Court. Code of Civil Procedure §386.6. The Court has discretion to lower the fees requested but some law firms may agree as part of their ongoing representation of its escrow client to look only to the court awarded compensation for its fees.
The interpleader action is initiated by a verified complaint or cross-complaint. There are two distinct stages of an interpleader action. The first stage is the filing of the complaint and the depositing of the money and/or documents into Court. After the parties have been served, a claimant can answer and set forth his claim of ownership to the fund and any claims he may have against the other adverse claimants disclaim his interest in the fund or allow his default to be entered. Then the Court determines whether the requirements of the statutory interpleader action have been met – a single fund at issue and adverse claimants to the fund. Once the requirements are met, the interpleading party can obtain an Order for Discharge and dismissal from the litigation.
The Order for Discharge is typically obtained by filing a motion. In the Motion for Discharge, request is made to pay the attorney’s fees that have been incurred and court costs from the monies on deposit. The amount of attorney’s fees is left to the discretion of the Court. At the same time, request is made to pay any cancellation fee due Escrow. If the motion is granted, the Order must specify the name of the party to be paid, the address where the check is to be mailed and the amount of each payment. Disbursement is made by the County Auditor on receipt of a certified copy of the court order.
The case continues with the claimants but without Escrow which is the second stage. During this stage, the Court will then determine the issue of ownership between the remaining claimants. The Court may also determine which claimant will be charged with the costs and attorney fees that were incurred by the discharged party.
It should be pointed out that as a matter of jurisdiction, interpleader actions of small escrow deposits of $5,000.00 can only be filed as a limited matter in the superior court and legally may not be brought as a small claims action. Code of Civil Procedure §§86 (a)(2), 116.220(a)(5)
Despite this, there may be instances where Escrow is erroneously named as a party and if there is no objection or the Court allows it, the matter will be decided in a small claims action.
In summary, escrow officers should look to the interpleader remedy when parties to the escrow cannot resolve their own differences. By Shelley M. Gould, Esq., LAW OFFICES OF DAVID B. BLOOM, APC
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.