Good faith dispute over deposits
When escrow fails to close, a buyer’s good faith deposit toward the payment of the purchase price of a one-to-four unit residential property is returned within 30 days after the person entitled to the funds demands them. If disputed by the other party, the issue becomes who has the right to receive the funds deposited in escrow. [Calif. Civil Code §1057.3]
A seller or buyer who wrongfully refuses to release the buyer’s good faith escrow deposit is liable for a money penalty of three times the amount wrongfully withheld, called treble damages. Treble damages need to be greater than $100 but less than $1,000, plus attorney’s fees. [CC §1057.3]
Usually the dispute arises on the seller’s claim they are entitled to the deposit under a forfeiture-of-deposit provision in the purchase agreement. However, the seller is not entitled to any of the buyer’s funds unless the seller has suffered out-of-pocket money losses due to a breach by the buyer.
Unless escrow receives mutual instructions to disburse the funds held in escrow when escrow fails to close, the escrow company deposits the funds with the court. This relieves escrow of any further responsibility to account for the funds, called an interpleader. Thus, escrow can close out its trust account on this escrow file. [Calif. Code of Civil Procedure §386; Security Trust & Savings Bank v. Carlsen (1928) 205 C 309]
Release of deposited funds is not required if a legitimate good faith dispute exists between the buyer and the seller over entitlement to the funds. [CC §1057.3(f)(2)]
Neither the buyer nor seller will be entitled to any penalty or statutory attorney’s fees on resolution of a good faith dispute.
The good faith standard for an individual’s refusal to release escrowed funds requires a reasonable belief by the individual of their right to the funds. [CC §1057.3(c)]
