Legal Question in Real Estate Law in California


We had a house in escrow back in April. This was a short sale and the tenant had mortgage with 2 different lenders. The seller's agent openend an escrow after getting an approval from the first lender. When we were close to closing an escrow, we came to know from our lender that we were working with that there was no approval from second lender. Also, the second lender asked for some money and mentioned they would not sign. We were not willing to pay that money and we backed out by cancelling the contract. The seller did not sign and cancel the contract yet. Since then, our deposit money is with the escrow company. Now, the seller is saying to split 50% of those money with them. Is it legal for seller to ask that? Also, what can we do to get our full refund? We already spent money in inspection and appraisal which we already lost. On top of that, they are not giving our deposit back. Is it ok for listing agent to open an escrow even without getting an approval from the second lender? Please let me know. I would really like to have some advise over here to move forward.

Thank you!

Asked on 9/09/10, 11:27 am

1 Answer from Attorneys

David Gibbs The Gibbs Law Firm, APC

This is not an uncommon situation - frustrating - but not uncommon. The law is such that without a cancellation from both buyer and seller, agreeing as to how funds are to be disbursed, the escrow company can do nothing but hold the money in trust. Unless you can reach agreement with the Sellers as to the disposition of the money, it will unfortunately remain in trust until a Court orders the escrow company to release it. Can the Sellers balk and refuse to refund your money? Maybe, maybe not, but it is irrelevant whether they are right or wrong. Right or wrong, the only way you will get your money back is by agreement with them, or by suing them and having a judge order the money be refunded to you, or to the Seller, or split. Without a voluntary agreement, you have no choice but to file suit, and obtain a judgment instructing the escrow company as to how to handle the deposit. Read your contract carefully, as you may have agreed to binding arbitration, or another form of ADR, which might speed things up, but be prepared that you will have to retain a litigation attorney, and spend significant money to resolve this. The Sellers know that you will be forced to do so, and are probably hoping that you'll settle for 50% of your earnest money to avoid having to file suit and retain counsel.

Can the listing agent open escrow without approval from the second lender? The listing agent only sent the money and contract to escrow - he did not open the escrow. When you signed the Purchase Agreement (assuming it was a California Association of Realtors Residential Purchase Agreement and Joint Escrow Instructions - RPA-CA), you and the Seller mutually instructed the escrow company to open escrow. Further, I assume you signed additional escrow instructions, so the agent may not have done anything wrong. Contracts are very frequently formed for the sale of a residential property, and escrows opened without the short-sale being approved by one or both lendes. You will want to have a good real estate attorney review the contract to determine if there was any improper act on the part of the agent(s).

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Answered on 9/14/10, 12:00 pm

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