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Escrow Liability – Instructions on Disbursement

Type Matter:  Escrow Company Liability – Instructions on Disbursement
Issue:  Can an Escrow company be found liable to a Buyer’s Broker if they take Escrow instructions from a Seller and disburse the commission as directed by the listing Broker?
Answer:  No
Facts:  Can an Escrow company be found liable to a Buyer’s Broker if they take Escrow instructions from a Seller and disburse the commission as directed by the listing Broker?  The Escrow Company ignored oral and verbal instructions from the Buyer and Buyer’s Broker to pay commission and/or hold commission.  The Seller provided Escrow with an irrevocable instruction to pay commission to the listing Broker.  The Purchase Agreement had language that the Buyer’s Broker was a third party beneficiary, but it was ambiguous.  The Buyer’s Broker repeatedly tried to get Escrow to issue an instruction to pay 50% of the commission to the Buyer’s Broker or hold 100% of the commissions.  The Buyer’s Broker asserted that there were conflicting commission instructions, so Escrow could not disburse the commission.  Escrow despite repeated badgering steadfastly followed the Seller’s instruction to pay all the commission to the listing Broker.  Escrow ultimately disbursed 100% of the commission to the listing Broker.

Prior to the Buyer’s Broker filing its lawsuit in Superior Court, the listing Broker offered the Buyer’s Broker 2.5% of a 7.5% commission.  The 7.5% commission was in connection with a sales price of $6.5 million ($487,500).

Results:  Counsel for Escrow was able to convince the Court that Escrow can solely take instructions on commission from the party paying the commission who is the Seller.  The issue of conflicting instructions was resolved in Escrow’s favor as the commission was never the property of the Buyer, as shown by the fact that the Seller paid the commission not the Buyer.  The Court was also convinced that what the listing Broker did was not issue an instruction to Escrow, but instead just advised Escrow on the distribution of the commission funds after the Seller instructed Escrow.

Lesson:  The facts in a case cannot be ignored so instead of paying hundreds of thousands of dollars in legal fees and facing an express indemnity action by an escrow company a Buyer’s Broker should either take what it can get before ever having to file suit.  If legal action is taken it should be a Board of Realtors complaint between the Brokers only; as this is much more efficient in terms of time expended, legal fees and costs.

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