Unable to Deliver Marketable Title Return of Earnest Money

20 Replies

Unable to Deliver Marketable Title Return of Earnest Money

A friend of mine, Kevin, recently is in a situation which I cannot seem to understand fully, but am hoping a Real Estate Attorney can shed some light on the subject.

Kevin searched the Internet and found a property that he wanted to buy. He called up and made an appointment to meet an Agent, let's call him Bill, at the property.

Kevin went through the property and loved it. He asked Bill to submit a verbal offer to the Seller.

The Brokerage for Agent Bill is a well know Brokerage. Bill never gave Kevin an Agency Disclosure form nor spoke to Kevin about Dual Agency and any kind of Agency disclosure was never signed.

A Contract of Sale was faxed to Kevin from the Seller, let's call him Mike.

In June 2017, Kevin reviewed and signed a Contract of Sale as the Purchaser for a Property in Brooklyn, NY and put down close to $400k for the Deposit on Contract (Earnest Money). Yes, it's a large sum, but there was a previous all cash offer on the property and Kevin, while he is using a Mortgage, offered a higher Purchase Price and a higher amount for Earnest Money to be deposited on Contract.

The Check for the Earnest Money on Contract was made out to the Seller's Attorney Mike as Escrowee, so I am assuming that the Earnest Money had to be deposited into the Escrow of the Seller's Attorney.

Kevin then Applied for a Mortgage at a well known Bank.

Title was completed and an Appraisal was ordered.

Sometime around mid-June 2017, a few weeks later, the Seller's Step-Sister filed a Lien of Rescission to stop the Sale.

When the Appraisal came back, the Lien of Rescission was discovered, the Mortgage Bank added the Lien as a condition to clear for closing.

A Civil Case was filed against the Seller and the Case was suppose to take place around December 1st.

Buyer's Attorney and Seller's Attorney agreed to postpone the original closing from 45 days after signing the Contract on June 13th to December 1st day, documented in email.

The Case was then postponed to January 29th, 2018.

Along the way, the Buyer's Attorney got sick and developed ALS.

When January 29th, 2018 came, the Seller's Civil Case was again postponed to April 1st, 2018.

The Mortgage Bank issued a statement that the Mortgage Contingency was no longer valid and has expired.

Kevin then changed Attorneys. By Feb. 5th, Kevin instructed his new Attorney to Cancel the Contract and get the Deposit returned. During this time, Kevin also had seen a property he would like to buy and had put in an offer to purchase which was accepted on Feb. 5th, the day an email went out to Cancel the original Contract.

At the same time, the Mortgage Bank then closed the Application since there was no point in continuing as the Seller could not deliver Marketable Title and the Mortgage Contingency had expired.

The Seller's Attorney stopped communicating with Kevin's Attorney. Kevin's Attorney called Seller's Attorney who did pick up the phone at that time and Seller's Attorney claimed he was sick with the Flu and was not in the office to take care of the Cancellation.

Kevin's Attorney, a week ago, was tired of waiting and then sent a Demand Letter in Writing to Seller's Attorney to promptly return deposit.

Kevin went to find out more about the Seller's Attorney, specifically if he had any problems.

We searched a public Court Website and found out that the Seller's Attorney was sued by a Client that was Purchasing a Property. The Client failed to get the Mortgage commitment. This Attorney failed to communicate that fact in time to the Seller of this property. As a result, the Purchaser lost his Deposit. the Purchaser sued and won, paid by the E&O Insurance from this Attorney.

Just yesterday, Kevin, who is very frustrated, went to the Seller's Attorney's Office to talk to him and find out why the Deposit was being help up. Seller's Attorney claims that he cannot speak with Kevin and can only speak with Kevin's Attorney and the Seller, but not Kevin directly.

Seller's Attorney is suggesting that if Kevin is looking for another property, then the Earnest Money would be in jepeoardy.

Kevin then contacts the Bill the Agent and explains the situation. Bill said that the Seller understands completely and absolutely agrees to return the deposit. Bill the Agent said that he will meet the Seller Directly and ask him to write an email to all parties to confirm his consent.

However, it seems doubtful as the Seller's Attorney seems to be pulling the strings and may be thinking that his Seller can keep the Earnest Money Deposit.

Sorry about the long explanation, but that is about the relevant facts of the case as I remember it.

This has been an INCREDIBLY frustrating experience for Kevin. I know this is just a public forum and I won't take any opinions as ADVICE.

Mostly I'm just venting as I can't understand how a Seller's Attorney cannot just return the deposit based on the fact that the Seller does not have Marketable Title more than 8 months into Contract AND that the Mortgage Contingency expired.

Any thoughts would be appreciated!

Originally posted by @Llewelyn A. :

Unable to Deliver Marketable Title Return of Earnest Money

A friend of mine, Kevin, recently is in a situation which I cannot seem to understand fully, but am hoping a Real Estate Attorney can shed some light on the subject.

Kevin searched the Internet and found a property that he wanted to buy. He called up and made an appointment to meet an Agent, let's call him Bill, at the property.

Kevin went through the property and loved it. He asked Bill to submit a verbal offer to the Seller.

The Brokerage for Agent Bill is a well know Brokerage. Bill never gave Kevin an Agency Disclosure form nor spoke to Kevin about Dual Agency and any kind of Agency disclosure was never signed.

A Contract of Sale was faxed to Kevin from the Seller, let's call him Mike.

In June 2017, Kevin reviewed and signed a Contract of Sale as the Purchaser for a Property in Brooklyn, NY and put down close to $400k for the Deposit on Contract (Earnest Money). Yes, it's a large sum, but there was a previous all cash offer on the property and Kevin, while he is using a Mortgage, offered a higher Purchase Price and a higher amount for Earnest Money to be deposited on Contract.

The Check for the Earnest Money on Contract was made out to the Seller's Attorney Mike as Escrowee, so I am assuming that the Earnest Money had to be deposited into the Escrow of the Seller's Attorney.

Kevin then Applied for a Mortgage at a well known Bank.

Title was completed and an Appraisal was ordered.

Sometime around mid-June 2017, a few weeks later, the Seller's Step-Sister filed a Lien of Rescission to stop the Sale.

When the Appraisal came back, the Lien of Rescission was discovered, the Mortgage Bank added the Lien as a condition to clear for closing.

A Civil Case was filed against the Seller and the Case was suppose to take place around December 1st.

Buyer's Attorney and Seller's Attorney agreed to postpone the original closing from 45 days after signing the Contract on June 13th to December 1st day, documented in email.

The Case was then postponed to January 29th, 2018.

Along the way, the Buyer's Attorney got sick and developed ALS.

When January 29th, 2018 came, the Seller's Civil Case was again postponed to April 1st, 2018.

The Mortgage Bank issued a statement that the Mortgage Contingency was no longer valid and has expired.

Kevin then changed Attorneys. By Feb. 5th, Kevin instructed his new Attorney to Cancel the Contract and get the Deposit returned. During this time, Kevin also had seen a property he would like to buy and had put in an offer to purchase which was accepted on Feb. 5th, the day an email went out to Cancel the original Contract.

At the same time, the Mortgage Bank then closed the Application since there was no point in continuing as the Seller could not deliver Marketable Title and the Mortgage Contingency had expired.

The Seller's Attorney stopped communicating with Kevin's Attorney. Kevin's Attorney called Seller's Attorney who did pick up the phone at that time and Seller's Attorney claimed he was sick with the Flu and was not in the office to take care of the Cancellation.

Kevin's Attorney, a week ago, was tired of waiting and then sent a Demand Letter in Writing to Seller's Attorney to promptly return deposit.

Kevin went to find out more about the Seller's Attorney, specifically if he had any problems.

We searched a public Court Website and found out that the Seller's Attorney was sued by a Client that was Purchasing a Property. The Client failed to get the Mortgage commitment. This Attorney failed to communicate that fact in time to the Seller of this property. As a result, the Purchaser lost his Deposit. the Purchaser sued and won, paid by the E&O Insurance from this Attorney.

Just yesterday, Kevin, who is very frustrated, went to the Seller's Attorney's Office to talk to him and find out why the Deposit was being help up. Seller's Attorney claims that he cannot speak with Kevin and can only speak with Kevin's Attorney and the Seller, but not Kevin directly.

Seller's Attorney is suggesting that if Kevin is looking for another property, then the Earnest Money would be in jepeoardy.

Kevin then contacts the Bill the Agent and explains the situation. Bill said that the Seller understands completely and absolutely agrees to return the deposit. Bill the Agent said that he will meet the Seller Directly and ask him to write an email to all parties to confirm his consent.

However, it seems doubtful as the Seller's Attorney seems to be pulling the strings and may be thinking that his Seller can keep the Earnest Money Deposit.

Sorry about the long explanation, but that is about the relevant facts of the case as I remember it.

This has been an INCREDIBLY frustrating experience for Kevin. I know this is just a public forum and I won't take any opinions as ADVICE.

Mostly I'm just venting as I can't understand how a Seller's Attorney cannot just return the deposit based on the fact that the Seller does not have Marketable Title more than 8 months into Contract AND that the Mortgage Contingency expired.

Any thoughts would be appreciated!

The seller's attorney probably doesn't have the money. Kevin should have his attorney ask the court to force the attorney to show a bank account that still contains the earnest money, then have it placed in the registry of the court (Court Bank account) for safe keeping until the case is settled/complete. There is more to this story than meets the eye.

That is an unusually high deposit. In Brooklyn it’s usually 10% of the contract price. It seems to me that it’s time for litigation. It will take time (a couple of years) but eventually he will get his money back. Your transactional attorney may not be able to handle the litigation piece so I’d ask him for a referral. I know a few, so PM me if you want me to send you their contact info. I wouldn’t start looking for something else unless you don’t need that money to purchase something as unfortunately this is going to be a long ride. 

@Mike S.

@Morris Cohen

Mike S. Thank you for suggesting that Kevin take that approach. I'll keep that in mind should he start litigation next week if the Seller's Attorney still refuses to return the deposit. Asking to show the Bank Account may cause him to think twice in consideration that it was explained to me that if an Attorney in NY is undergoing an Audit towards his Escrow Account, he cannot practice until the Audit is over. That was one strategy to force the Attorney to give back the deposit. He has a robust business, it seems.

Morris: Yes, the deposit is normally 10%. In this case, the deposit was increased to $400k which would have been the down payment to the Seller anyway. So it wasn't a big deal and Kevin has been in at least several other purchases in his lifetime where there were no issues in consideration of the multiple Attorney representations and the Escrow accounts... it all seems very safe until you get an Attorney that sees things in a vastly different light than what you believe is the situation.

Any thoughts on if the Seller's Attorney having any grounds to keep the deposit despite the Seller not being able to deliver Marketable Title 9 months after the signing on the contract and it will be more in consideration that the Seller's Sister continues to delay the closing?

just as an aside I personally would never send that kind of EM to a small closing attorney or any attorney for that matter .. I would only put that amount with one of the big 5 national title and escrow companies..

for those that have blind faith in small closing attornies remember they are just people and its not a rarity that they screw up and steal peoples money.. it happens.. and its one thing to have 5 or 10k at risk but 400k  Large NO WAY NO how from my point of view.

Maybe things are different in your state.. but a simple cancellation signed by the seller directing the attorney to return the EM and signed by the buyer should be all that's needed..

again attorney is ill etc etc.. very troubling way to do business.

@Llewelyn A. It seems like Sellers Attorney is trading space for time and there there has to be a reason for it. It looks like litigation is on the horizon and that's unfortunate, but you know it, Kevin knows it, and most importantly the Seller's Attorney knows it. A Hail Marry option could be to go along with what the Seller's Attorney wants to get an opportunity to settle without litigation. 

Maybe its the Marine in me but what Sun Tzu wrote in Ch 6 kind of applies here:

"tactics are like unto water; for water in its natural course runs away from high places and hastens downwards. So in war, the way is to avoid what is strong and to strike at what is weak."

The lawyer knows he can stall for time, wait for you to make a mistake ect, he is the strength. At least Bill is a little less adversarial so work with him. Empathize with Bill and the seller's position and suggest that if you can't get back the funds you at least want to help the seller's case in court, work out some sort of deal, talk about a master lease option, basically anything that does not involve the idea of litigation. 

Suggest a belly to belly meeting with the Seller, Bill, and Kevin to talk. There he'll have an opportunity to get the seller to sign a cancellation right there (which Kevin may conveniently have on him) and send it over to the attorneys. If seller doesn't want to meet, cancel's ect you'll know its game on and can file in the courts right away. 

@Jay Hinrichs

@Vitaliy Volpov

@Bill F.

Jay, thanks for the asides.

The original Attorney probably started suffering from Dementia as well as ALS. It's just a VERY unfortunate circumstance but she practiced RE Law for over 30 plus years. Kevin and I had used her personally for 10 years. There was never a problem until now.

To be really honest, after seeing her suffer and completely break down physically, it puts into perspective that money isn't everything. I keep thinking about Steve Jobs and how much would he have given to be able to cure his Pancreatic Cancer as he was a multi-billionaire.

The good thing is that we will survive and learn from this lesson. It's a large tuition to pay, but we won't suffer in a way where we would have gladly given all the money in the world to change things.

Vitaliy: Thanks again for your PM and we will consider it when the time comes to start litigation.

Bill F: I'm not 100% sure the Seller's Attorney will be able to keep the money tied up for long. We'll re-strategize along the way.

If we can get a Audit performed on the Seller's Attorney's Escrow, we are pretty sure his practice will be shutdown.

We already know he's incompetent due to a case he lost last year..... which is quite coincidental considering he was sued about a week or so after Kevin got into Contract. This Attorney lost that law suit which was for incompetence representing a Buyer.

One of the things we want to accomplish is to allow information to be disseminated in to the public records so that anyone who chooses to use that Attorney has the ability to conduct a public search before they retain him.

Without these cases, he record looks incredibly good as a practicing Attorney for over 2 decades and no disciplinary action against him.

We want to proceed not just to get Kevin's money back, but also to hopefully allow others to have that ability to find information to make a wise choice on selecting an Attorney. 

The Seller's Agent has already arranged to meet with the Seller. Seller already verbally indicated that he consents to return deposit. We will know soon if the Seller is willing to have it in writing.

Kevin should absolutely, unequivocally file a complaint with the Kings County Bar Association. If the attorney is procrastinating with no underlying malicious intent, that will definitely prod some action.  If there is something illegal or unethical happening, it will be looked into. 

@Llewelyn A.

Are you Kevin?  You start saying “we” midway through the thread

@Chris Purcell

Nope... Kevin is not the person's name, but it's not me either. HOWEVER, he's a friend as well as a Partner in an Investment and I want to help as much as I can.

So when I say "We", it's due to our Partnership.

@Eileen Murray

I think this Attorney is going to claim Breach of Contract.

Although the Seller to this day cannot deliver Marketable Title 8 months after the Contract Signing due to ongoing litigation with his step sister, Kevin is seeking to buy another property because of the Interest Rate spike.

He originally locked in 8 months ago at 3.875% 30 year fixed, 1.2 Million Loan. Today..... it looks like it's around 4.25% or higher.

The Bank closed the original loan due to the uncertainty of the length of the application. So it looks like he has 2 causes to cancel contract, 1) Seller cannot deliver Marketable Title and 2) Bank rejected the Application due to length of time.

While he can't actually buy anything because his deposit is locked up, he needs to see what is available so he can make a decision on if he should stay in this prolonged Contract or cancel it and go on to another property.

So he wants to submit a non-binding offer to purchase but cannot go into contract because he has no money for a down payment until the previous down payment is returned.

HOWEVER, it seems as if the original Seller's Attorney wants to use this to claim Breach of Contract?!

Does that even make sense?!

The buyer looking at or making an offer in another property is irrelevant.
The Only relevant facts are:

—Is he still in contract? It doesn’t seem like there was a contract past 91/28..
—If no longer in contract due to seller’s inability to deliver clear title on time, he gets his EM back....period.
—-If he is Still in contract, he needs to wait for current closing date, aside from the Possible mtg contingency out.

@Llewelyn A. It doesn't make sense, unless perhaps the consequences of stalling for time with Kevin's EMD are less that something else.

Something is going on with the $400k where it can't/won't be delivered, Seller's Attorney gave Kevin just enough rope to hang himself when they spoke at the office or however he found out that Kevin was looking at other properties. Now its a situation where both buyer and seller may have breached contract. Off to Court you go to to answer the questions that @Wayne Brooks brought up: when was the contract "canceled" and if it wasn't "canceled" by Feb 5th did Kevin breach contract? 

More importantly Court=Time

Getting the accounts audited or at least asking for confirmation of the funds step 1. However, maybe the seller knows what the Attorney is up to and he wants $400k, but maybe he doesn't, none of us can read minds. Going around the attorney to the seller through the agent to see if he'll play ball with you forces his hand.

@Bill F.

@Wayne Brooks

There was NO correspondence between any of the parties which would indicate an extension of the Contract past 1/28.

The demand for EM was after this date.

I also think we have to keep in mind that damage to the Seller is not due to the Buyer's actions but from the Seller's Civil Case.

HOWEVER, there is significant damage to the Buyer, for instance, increased mortgage interest rates, cost for application fee, Title Search, Attorney retainer, etc. which are caused by the Seller's inability to deliver marketable title.

As far as if Kevin is still in Contract, the date that was last communicated by the Seller's Attorney was 12/1/2017 where the Civil Trial was to occur but then was postponed to 1/29.

Kevin verbally corresponded to John the Sellers Agent and said that if the 1/29 date is further postponed, we would cancel.

Additionally, the Mortgage Bank Canceled the application due to uncertainty. 

I think Wayne is correct when he suggests "The Buyer looking at or making an offer in another property is irrelevant."

If you think about it, if I go into contract to buy a property, regardless, why can I not buy a second property at the same time that the 1st Contract is still in effect? Kevin doesn't need the EM for the 2nd Property. He would just like to have the EM back before proceeding.

If you can only buy one property at a time having to wait for the Closing of that property, which could take years in some cases, many of us investors would fail to scale up our real estate portfolio!

I am 100% sure that there are precedence that have occurred where a demand for EM to be returned where the Buyer still gets in to Contract and that was not a breach. I'm sure that there are a few big Players here on BP that has done that before, especially those that buy a LOT of inventory for their portfolios. 

I really don't see why making an offer on a second property, regardless if Kevin is in Contract with another, constitute a breach in contract. Is that really relevant?

However, as Bill indicated, we'll see if the Seller consents to release the funds. I cannot imagine that he would not.

What would be curious would be if Seller does not release funds, then Kevin may stay in the Contract. I am assuming that if Seller does not Consent, then the Contract is still valid and forces Kevin to purchase the property under Contract.

If that's the case, then Kevin's Attorney can re-negotiate a date where both parties can agree to Cancel if Marketable Title is not delivered AND that EM be moved to a new Escrow, such as a big and reputable Title Company as @Jay Hinrichs suggested.

@Llewelyn A.   not sure what he heart burn is here.. if buyer and seller agree to cancel EM should be returned within a day or two.. if lawyers are messing it up.. that is a huge problem.. and again name brand title and escrow companies simply would not work this way..

@Jay Hinrichs

I am not familiar with how this works.

If the Buyer wants to Cancel and demands EM back, I assume the Contract is not cancelled unless the EM is given back?

If the EM is not given back, then technically the Contract is still in Effect? Forcing the Buyer to continue?

Is that what technically happens?

The reality is that Kevin would like to buy the Property and not necessarily get out of Contract. However, if the EM was returned, then he has the option of buying a new Property.

However, the Property currently in Contract is a great deal! Kevin wants to buy it. BUT the uncertainty of the Title and when it can be delivered is the problem.

Cancelling the Contract and getting EM back allows Kevin to search for another property. But if the Seller actually clears Title, then Kevin would be happy to go into a new contract for the same property..... but ask the Seller to choose a different Sellers Attorney!

The problem we are having is that the Mortgage Contingency has expired and the Application has been closed.

That basically gives the Seller the ability to get out of the Contract.

During the time we have been waiting for Seller to clear title, the Value of the property actually appreciated at least $50k to $100k.

Kevin does not want to get out because it's not a good deal... and probably the best deal he can get... it's ONLY because of marketable title and when it can be cleared. The uncertainty of that is the problem.

The Seller is more likely to be able to sell the property at a higher price if he were to cancel and clear his title, selling to a different buyer.

Well in that case he can just sit there with his dough in escrow and wait it out..

you will need to check the nuances of NY contract law on this.. cant really tell you myself..

but if they do cancel and EM is returned then yes your out of contract and no one is obligated to either party.

NOW one out of the box thought is..

you split the baby down the middle.

come back and say HEY this is taking forever .. why don't I leave 50k in escrow  while you work it all out and just realase the 350k so I can at least put it in a money market account..

Or take an option of the property.. give them 10 to 20k non refundable option and then wait it out.

just thinking out loud as I have my coffee.... 6:48 in the morn here LOL

The contract is Dead, the closing came and went with no extension. The owner Certainly can not enforce it. Some contracts do allow the seller an additional 10-14 days to cure any title issues, keeping the buyer in contract.

Also, we don’t know What the contract and extensions say about this.

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