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Don’t Count on Escrow Companies Being Neutral Third Parties

Don’t Count on Escrow Companies Being Neutral Third Parties

In theory, escrow companies in Arizona are supposed to be neutral third parties who not only coordinate the escrow but also collect the buyers’ earnest deposit and then can assign that deposit in the event of a dispute based on the wording of the contract.

Buyers and sellers, when they sign the Arizona Association of Realtors’ Residential Resale Purchase Contract, even give the escrow companies that power and agree to hold the companies harmless for their decisions:

3f. Release of Earnest Money: In the event of a dispute between Buyer and Seller regarding any Earnest Money deposited with Escrow Company, Buyer and Seller authorize Escrow Company to release Earnest Money pursuant to the terms and conditions of this contract in its sole and absolute discretion. Buyer and Seller agree to hold harmless and indemnify Escrow Company against any claim, action or lawsuit of any kind, and from any loss, judgment, or expense, including costs and attorney fees, arising from or relating in any way to the release of Earnest Money.

I’m no an attorney. But the phrase “sole and absolute discretion” seems like it would give the escrow companies “sole and absolute discretion” to make a decision “pursuant to the terms and conditions of the contract.”

Yet it doesn’t seem to be anywhere near that simple for some companies, especially when it comes to bank owned homes. In that arena, it appears the desire to keep happy the lenders and asset managers who sign exclusive contracts and demand all their escrows be handled by a certain escrow company overrides the real estate contract that the buyer has signed, right or wrong.

Take, for instance, the escrow company that was one of this past Friday’s happy hour topics. Buyer has an offer accepted on a bank owned home, performs the inspections and elects to cancel per the inspection period contingencies of the AAR Purchase Contract with earnest money to return to the buyer. It doesn’t get more cut and dry than this.

And yet the escrow company won’t release the earnest deposit until the seller/asset manager signs a mutual cancellation form, even though the cancellation isn’t mutual and doesn’t have to be mutual – not when the cancellation is per the inspection contingency.

There’s no justification for the return of the earnest money to be delayed, but this escrow company has decided it’s more important to follow the asset manager’s rules than the actual wording of the contract. Neutral third party? Sure.

Take another scenario, where the manager of an escrow company already has informed the seller/asset manager that their claim on the earnest deposit has no basis and that the money will be returned to the buyer.

According to the terms of the AAR Residential Resale Real Estate Purchase Contract Section 3f, line 119-123, Escrow is to determine to whom the Earnest Money is to be released, according to the terms of the contract, and in their sole and absolute discretion.  There is no corresponding deletion or change to this on the Addendum.  Given the facts above, it is Escrow’s position that the Earnest Money should be returned to the Buyer.

Yet, three-plus weeks after the cancellation take place and this decision was rendered, the buyer still doesn’t have his earnest deposit. Why? Because the legal departments for this company have decided that this escrow company shouldn’t be making decisions.

Contrary to your assertions, [redacted] is a neutral third party in this transaction.  [redacted] can only act on mutual instructions from both a buyer and a seller.  It has no independent decision-making authority here.  [redacted] is aware of competing claims to the earnest money deposit and will not make any legal determination as to who is entitled to the money.  Nor will [redacted] make any legal determination as to contractual rights of the parties. Whether the money is to be released to your client or to the seller is a matter to be taken up with the seller, not [redacted].

Until such time as [redacted] receives mutually executed instructions by the parties or a court order directing [redacted] to undertake a particular action with regard to the transaction, the monies will remain where they are today as is required.  That is what the law requires of [redacted].

Actually, it’s not at all what the law requires of this particular company but perhaps the California-based legal department doesn’t have a broad knowledge of Arizona statute.

Why would an escrow company escalate a $1,000 earnest money dispute all the way to its corporate counsel when the contract clearly says not just that they have the authority to make a decision but also can be held harmless for that decision?

Only a cynic would believe it has anything at all to do with the contract that will send additional escrows from this asset manager and selling lender to the escrow company and the fear said contract would disappear if a decision were to be made in opposition to the sellers’ wishes, even if the sellers’ wishes have no basis in the contract.

At some point, the actions of escrow companies handling bank-owned escrows ought to be closely looked at by the Arizona Attorney General’s office; either the actions of many of these companies has no basis in the law, or the AAR Purchase Contract is written in contradiction to the Arizona law. My hunch is the latter isn’t the case.

Lacking that, maybe someone can get 3 On Your Side to take a look at this mess and see how many buyers are being disadvantaged if not outright screwed by escrow companies ignoring the contract and any hint of neutrality in favor of supporting their corporate selling masters.

One can only hope.

[Editor’s note: When I have a choice in the matter, the contracts I write almost always have Lawyers Title-Arrowhead as the escrow company of choice. Why? Because they remain a beacon of honesty even in this bank-owned world and actually abide by their role as set forth in the contract and use the terms and conditions of the contract to determine what should happen in a dispute. In short, they do their job and they do it well.

Side note to the side note … outside of a lunch I received a few years back, I haven’t received a thing to pass along the above recommendation. In fact, there are no goodies to be had from Lawyers Title aside from standard marketing fare and a yearly desk calendar. Again, it’s about the work, not the freebies.]

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