Escrow dispute? Legal fees can reduce the deposit
An interpleader action asks a court to resolve competing claims to escrow funds, but the associated fees and costs can leave buyers and sellers with less to recover.
ORLANDO, Fla. — What’s an escrow holder do if the buyer and seller disagree over who gets the money being held? If the escrow holder files an interpleader action and asks a court to take over, the fees and costs associated with doing so could seriously deplete the amount of funds they’re fighting over.
As every Realtor® knows, an entity holding a buyer’s escrow deposit – whether it’s a real estate broker, a title company, an attorney or someone else – must ultimately release the money if a transaction fails. However, for better or worse, that release doesn’t always go smoothly. Often there are conflicting demands, and sometimes the escrow holder can’t determine whether both parties can agree on a method for releasing the deposit. A broker may ask for an Escrow Disbursement Order from the Florida Real Estate Commission (FREC). That remedy, however, is not generally available to non-brokers.
In cases like this, the escrow holder might decide to turn the dispute over to a civil court in what’s called an “interpleader action.” An interpleader action is a lawsuit. The Florida Rule of Civil Procedure 1.240 sets forth the basic concept. Multiple defendants may have claims against the plaintiff for property the plaintiff doesn’t claim themselves. The interpleader allows the plaintiff to essentially file suit and give up the property to the court so the defendants can adjudicate their claims. In the case of a real estate transaction, if the court accepts an interpleader action, the plaintiff escrow holder may then deposit the escrowed property – usually the earnest money deposit – with the court and be dismissed from the suit.
The interpleader action then essentially forces the seller and buyer to litigate their case with the court, and the court then decides who is entitled to the deposit.
An interpleader action has a built-in disadvantage though: The escrow holder incurs attorney’s fees and costs in filing the suit. To recoup the fees and costs, however, an escrow holder’s attorney usually files a claim with the court to recover those fees, and the court will often do so.
Paragraph 13 of the FR/Bar and ASIS contracts, and paragraph 17 of the CRSP, take this a step further. If a Closing Agent or Escrow Agent are in doubt about disbursement of funds they hold, and they resort to an interpleader, those paragraphs explicitly entitle the agent to recover reasonable costs and attorney’s fees.
Since the interpleader moneys are the only reliable source of funds before the court, the court will generally use those funds to reimburse the escrow agent. Should the court grant a request for reimbursement using the escrow funds, it’s important to understand that the total amount of the deposit available to the parties could be reduced – sometimes significantly. If the deposit amount is only a few thousand dollars, it would not be unusual for the majority to be eaten up by the reimbursement of the escrow agent’s expenses.
All three contracts obligate the parties to attempt to work out their disputes informally before resorting to litigation. Because of the potentially high cost of an interpleader, it’s in the best interests of all parties to try to resolve deposit disputes before they get to that point.
Richard Swank is an Associate General Counsel for Florida Realtors
Note: Information deemed accurate on date of publication
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