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Handling Disputes: Use of Interpleader

A real estate broker's obligations of handling deposits are governed by statutes and regulations, as well as the common law of agency and contracts. This legal update is addressed to the resolution of conflicting claims to deposits.

1. Authorization, Duty of Care and Accounting. As a licensee and an agent of limited authority, a real estate licensee should have explicit authorization for handling deposits and a clear understanding of the purpose thereof. By license law regulation (19 NYCRR Section 175.1 - "commingling money of principal") deposits are to be made in a separate, special bank account and may not be commingled with monies of the real estate broker. Accrued interest, if any, shall not be retained by or for the benefit of the broker, except to the extent it is applied to, and deducted from, earned commission, with the consent of all parties. Moreover, by further regulation (19 NYCRR Section 175.2 - "Rendering account for client"), a real estate broker shall, within a reasonable time, render an account to his client and remit to him any monies collected for his client and unexpended for his account. Together, and in combination with other legal requirements, the license law regulations address the need for proper record keeping regarding a separate escrow account.

2. Statutory Requirements Regarding Escrow Accounts. There is no generic requirement that parties to a real estate transaction (whether buyer and seller or tenant and landlord) utilize deposits. Where they do so, however, there are specific requirements which pertain.

a. Residential Purchase and Sale Contracts. In the case of down payments for the purchase and sale of residential real estate, under Section 778-a of the General Business Law, a contract which requires a down payment be held in escrow shall identify the escrow agent and the bank in which the down payment shall be deposited during the term of the escrow. The escrow agent can utilize a general escrow account, provided that the escrow agent's books of accounting and banking records shall accurately show the allocation to each owner of funds that are deposited in the escrow agent's special bank account and all transactions related to the receipt and disbursement of escrow funds. Moreover, unless the real estate contract provides otherwise, the escrow agent shall not be required to maintain a deposit in an interest bearing bank account.

b. Rental Deposits for Property Containing Six or More Units. With respect to rental deposits, Section 7-103(2-a) of the General Obligations Law provides that where money is deposited regarding rental property containing six or more family dwelling units, the deposits shall be in an interest bearing account in a banking organization within the state which shall earn interest at a rate which shall be the prevailing rate earned by other such deposits made with banking organizations in such area. It should be noted that while the person making the deposit in an interest bearing account is entitled to receive an administrative fee of 1% per annum in lieu of all other administrative and custodial expenses (General Obligations Law, Section 7-103[2]), this administrative fee is not permitted on purchase contract deposits.

3. Treat Deposit(s) as "Trust Funds".

a. Timely Deposits. In handling deposits pursuant to appropriate authorization, the real estate licensee should treat the funds as trust funds in accordance with the agreements under which the funds are provided. Deposits "shall be made as promptly as practicable" (19 NYCRR Section 175.1) in accordance with the agreement under which the deposit is provided. Where the parties have prescribed when the deposit is to be made, e.g. "upon acceptance for purchase offer", the broker should make the deposit in accordance with such agreement. In the absence of specified timing for making the deposit, the regulations test of "as soon as practicable" should be followed and the deposit made in the ordinary course of business.

b. Timely Notification Regarding Deposit(s). Once a deposit has been properly received and placed in an escrow account, its disposition is to be in accordance with the agreement of the parties. It should be noted that the Department of State is insistent that the broker's client must be advised if the party obligated to make deposits does not do so in a timely fashion. While the broker is not the guarantor that a contracting party will fulfill his/her obligations under written agreements, it is the responsibility of the licensee to keep his/her client apprised of the progress of fulfilling the contractual relationship.

c. "Ownership" of Deposits. Until a purchase offer is accepted, deposits tendered remain the property of the buyer making the offer. Unless the listing broker has been specifically authorized to accept deposits on behalf of an owner, the listing broker's custody of the intended deposit has no binding effect on the prospective seller. A listing broker's authority to bind a seller in a real estate transaction is required to be in writing (General Obligations Law, Section 5-1111).

Upon the seller's acceptance of a purchase offer contract, the property right to any deposits is governed by the contractual agreement of the parties. Unless the purchaser has made a written irrovocable offer (General Obligations Law Section 5-1109), the prospective purchaser can revoke the offer, prior to the seller's acceptance and reclaim any tendered deposit.
It must be emphasized that the buyer and seller are free to make whatever arrangements they desire with respect to the rights to any deposits prior to closing. The listing broker's rights to claim a deposit are derivative of the seller's right thereto and further dependent upon the listing agreement between the seller and the listing broker.

4. Determination of Competing Claims to Deposits. Purchase contracts are frequently conditioned upon fulfillment or waiver of various contingencies. The Secretary of State, in the publication "Real Estate Broker's License Law" recognizes that there are situations where it is not possible or appropriate for a broker to make an evaluation as to the entitlement of the buyer or seller to a deposit. The Secretary of State has likewise indicated that brokers must act responsibly where there is no bona fide question regarding entitlement to a deposit. Thus, where the situation is clear, such as when a buyer gives timely notice that a mortgage contingency cannot be fulfilled, the buyer is entitled to the return of his deposit. Similarly, where the buyer refuses to go forward, without any claim of justification, under most purchase contracts the seller would be entitled to the deposit. The seller's rights are then subject to the rights, if any, of the listing broker, under the applicable listing agreement.

a. Continuing Use of Escrow Account. In the event of a genuine issue as to entitlement to a deposit, the broker should continue to hold the deposit in escrow while advising the parties that it will be released upon a determination by a forum of competent jurisdiction (such as trial court or arbitration decision) or by mutual agreement (preferably with releases) of those involved. In cases of competing claims to the deposit which depend on the adjudication of disputed questions of law and fact, the broker can utilize "interpleader" proceedings. The following discussion is how to handle an interpleader matter.

b. "Interpleader" Litigation. An interpleader is a legal device whereby a stakeholder (the broker holding the deposit) who may be exposed to multiple liability as a result of adverse claims, may commence a lawsuit involving the claimants, effectively requiring those parties to adjudicate their claims and discharge the broker from further responsibility with respect to the deposit. New York has an array of courts of "limited jurisdiction", which means inter alia that they have a dollar limit to their jurisdiction.

c. Commencement of Interpleader Action in an Appropriate Court. It is suggested that the REALTOR's personal counsel or local board counsel be consulted with regard to the appropriate court in pursuit of an interpleader action, as both dollar limitations and practical factors (such as service of process and venue) are involved.

d. Motion for Exoneration. Once the pleadings have been served upon the defendants (the competing claimants for the deposit) and their (twenty day) time to answer has elapsed, the broker as stakeholder can file a motion for exoneration and payment of the costs and fees of the action.

It should be emphasized that upon the service of the interpleader complaint on the parties, they have the opportunity to serve a "answer", which may or may not assert counterclaims with regard to the plaintiff stakeholder. If counterclaims are asserted, plaintiff will need to file a reply thereto. It is recommended that a lawyer be consulted in doing so.

Following the receipt of the defendants answers (or expiration of their time to answer), the next step would be to file a motion for exoneration and requesting payment of the expenses of the action.

e. Sample Forms. The following papers provide sample forms for utilization in an interpleader action. A few practice pointers are noted:

(1) the broker does not extract his costs before the money is paid to the Court. Rather, upon the motion for exoneration, the Court determines whether to grant the motion and to approve payment into court. If the Court grants the motion permitting payment to the Court, the Court will direct disposition of the deposit. The listing broker must comply with the Court's direction as to the deposits and is not entitled to subtract his costs, unless the Court authorizes him to do so.

(2) the request for payment of "plaintiff's expenses, costs and disbursements to be paid out of the money paid into Court" does not mean that the plaintiff broker will be awarded his costs by the Court. The broker's request is for payment of his/her litigation expenses, irrespective of the entitlement to the deposit. The Court has discretion to impose terms relating to the payment of expenses, costs and disbursements as may be just. The Court can permit the plaintiff's costs to be charged against the subject matter of the action (i.e. deposit).

(3) the award of the listing brokers litigation expenses from the deposit would mean that the winning claimant thereto would not get back the entire deposit, unless the Court made a "further award".

(4) the winning claimant could apply to the Court for an award of "discretionary allowance" which could effectively recompense the winner for his litigation costs and any expenses paid to the listing broker, who had been relieved of responsibility as a stakeholder. It should be noted that it is unusual in the American system for such allowances to be granted, however, unless there is a demonstration of frivolous conduct by a defendant in litigation.

NYSAR strongly recommends that prior to filing an interpleader action, the REALTOR's own counsel be consulted for specific advice in handling particular situations.

STATE OF NEW YORK
SUPREME COURT COUNTY OF
_____________________________________________________________________________
LISTING BROKER,

Plaintiff,

-against- NOTICE OF
MOTION
"SELLER" and "BUYER",

Defendants.

______________________________________________________________________________

TO: "SELLER" and "BUYER"

Upon the annexed affidavit(s) of Listing Broker [and Listing Broker's attorney], sworn to __________________, 
20 ___ and upon the pleadings herein, the plaintiff with move this Court at the ________________ County Courthouse, ________________ Street, _________________, New York, on ___________________, 20 ___ at _____ a.m. for an Order pursuant to CPLR 1006(f), permitting the plaintiff to pay into this Court (or to deliver to this Court or to a person designated by the Court) the amount in dispute in this action, namely the sum of $ ___________, and discharging plaintiff from liability to any party to this action, and directing the payment to plaintiff of his expenses, including reasonable attorney's fees, costs and disbursements of this action, and charging the same against the amount in dispute, and for such other and further relief as the Court deems proper, including the cost of this motion.
Pursuant to CPLR 2214(b), answering affidavits, if any, are required to be served at least seven (7) days before the return date of this motion.

Dated: __________________________, New York
__________________________, 20 ___

______________________________
Attorney for Plaintiff
[or Listing Broker Appearing Pro Se] (if not incorporated)

Address:

Telephone Number:

TO: ___________________________________
Attorney for Defendant [or seller]
Address:

___________________________________
Attorney for Defendant [or Buyer]
Address:

STATE OF NEW YORK
SUPREME COURT COUNTY OF
______________________________________________________________________________

LISTING BROKER,

Plaintiff,

-against- AFFIDAVIT
"SELLER" and "BUYER",

Defendants.
______________________________________________________________________________

STATE OF NEW YORK )
) ss.:
COUNTY OF )

LISTING BROKER, being duly sworn, deposes and says:
1. I am the plaintiff in this action (or I am an officer of the plaintiff corporation, to wit, its __________________).
2. I make this affidavit in support of plaintiff's motion for an order pursuant to CPLR 1006(f) permitting the plaintiff to pay into this Court (or to deliver to this Court or to a person designated by the Court) the amount in dispute in this action and discharging plaintiff from liability to any party to this action, and directing the payment to plaintiff of his expenses, including reasonable attorneys' fees, costs and disbursements of this action, and charging the same against the amount in dispute.
3. At all times the mentioned in the complaint, plaintiff was a real estate broker duly licensed under Article 12-A of the Real Property Law of the State of New York.
4. On or about ______________________ , 20__, plaintiff listed defendant Seller's property known as __________________________________________ in the City of_________________, County of __________________ and State of New York pursuant to a listing agreement with the said Seller.
5. On or about _________________, 20__, defendant Buyer tendered a purchaser offer for defendant Seller's property together with a deposit in the amount of $ ______ to plaintiff, which deposit is currently being held by plaintiff as the listing broker pursuant to paragraph ___ of the listing agreement and paragraph ___ of the purchase offer.
6. A dispute has arisen between defendant Seller and defendant Buyer regarding their conflicting claims of entitlement to the said deposit. Each of the defendants has demanded that the plaintiff (a) turn over the deposit to them, and (b) refuse to turn over the deposit to the other defendant.
7. Plaintiff is unable to ascertain without hazard to himself, which of the defendants is in fact entitled to the deposit.
8. Plaintiff may be exposed to liability as a result of the adverse claims of the defendants and desires to avoid any possibility of being found liable to either party for the said deposit.
9. Plaintiff is ready and willing, and hereby offers to pay into Court the amount of the said deposit, or to pay the deposit to whomever the Court shall direct.
10. The above entitled action was commenced against defendant Seller by service of the summons and complaint upon him on __________________, 20__ and against the defendant Buyer by service of the summons and complaint upon him on ____________,20__. The time for all parties to plead has expired.
11. A copy of the complaint in this action is attached hereto as Exhibit "A".
12. Attached hereto as Exhibit "B" is the answer of defendant Seller dated _________________, 20__.
13. Attached hereto as Exhibit "C" is the answer of defendant Buyer dated _________________, 20__.
14. Plaintiff has also submitted in support of this motion the affidavit of his attorney ____________________, dated ______________, 20__. As the affidavit of plaintiff's attorney indicates, the plaintiff has and will incur substantial expenses in connection with this action. It is submitted that the Court should, in its discretion, award to plaintiff the costs, including reasonable attorneys' fees, of this action (including the cost of this motion) as set forth in said affidavit of ________________, Esg., pursuant to CPLR 1006(f).
15. No previous application has been made for the relief or order sought herein.
WHEREFORE, it is respectfully requested that an Order be granted permitting the plaintiff to pay into Court, or deliver to a person designated by the Court, the amount in dispute; discharging the plaintiff from liability in whole to any party to this action; and directing payment to the plaintiff of his expenses, including reasonable attorneys' fees, costs and disbursements of this action and charging the same against the amount in dispute, and for such other and further relief as to the Court seems just and proper, including the costs of the motion.

__________________________
Listing Broker

Sworn to before me this__ day of ___________, 20__.

_________________________
Notary Public

STATE OF NEW YORK
SUPREME COURT COUNTY OF
_____________________________________________________________________________
LISTING BROKER,

Plaintiff,

-against- COMPLAINT

"SELLER" and "BUYER",

Defendants.

______________________________________________________________________________

Plaintiff alleges:

1. At all times hereinafter mentioned, plaintiff was a real estate broker duly licensed under Article 12-A of the Real Property Law of the State of New York.
2. Plaintiff listed defendant Seller's property known as ____________________
in the City of ____________________, County of _________________ and State of New York pursuant to a listing agreement with said Seller.
3. On or about _________________, 20 ____, defendant Buyer tendered a purchase offer fro defendant Seller's property together with a deposit in the amount of $ ________________, which deposit was to be held by plaintiff Listing Broker pursuant to paragraph ___ of said listing agreement and paragraph ___ of said purchase offer.
4. A dispute has arisen between defendant Seller and defendant Buyer regarding their conflicting claims of entitlement to said deposit. Each of the defendants has demanded that the plaintiff (a) turn over the deposit to them and (b) refuse to turn over the deposit to the other defendant.
5. Plaintiff is unable to ascertain, without hazard to himself, which of the defendants is in fact entitled to the deposit.
6. Plaintiff is ready and willing to pay the deposit to whomever the Court shall direct.
7. This action is not brought in collusion with either of the defendants.
WHEREOF, plaintiff demands judgement that:
(a) Each of the defendants be restrained by injunction from commencing or prosecuting any claim or proceeding against the plaintiff in relation to the above claim.
(b) The rights to the deposit be determined by the Court.
(c) Plaintiff be authorized and permitted to pay the deposit money into Court.
(d) Upon payment by plaintiff of the deposit money into Court, plaintiff be discharged from all liability to the defendants regarding the deposit related to the purchase offer for the premises named above.
(e) Plaintiff's expenses, costs and disbursements be paid out of the money paid into Court.
(f) Plaintiff have such other relief as the Court deems proper.

Dated:

______________________________
Attorney for Plaintiff

Address

Telephone Number

 

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