The hottest topic on the Legal Hotline the past few weeks has been related to escrow disputes over the disbursement of escrow funds. Specifically, the most common fact pattern includes a cancelled closing because one party is in breach of the contract and the other party is still taking the position that the contract should be enforced. The party in breach is requesting a return of earnest moneys.

Anneliese Fierstos
Illinois REALTORS® Legal Hotline Attorney

The Illinois Real Estate License Act at 225 ILCS 454/20-20(a)(17) and rules under the License Act at Section 1450.750(h) govern the release of earnest money in a dispute situation.

• First, look to the contract language. Some contracts contain language governing distribution in the event of a dispute. If so, the contract should allow for good service (i.e., by personal service or certified mail), giving notice of the proposed distribution and a reasonable period of time (at least 14 days) during which the parties may respond with any objections. If no objections are received within the time given, the money may be released as proposed. The contract must contain specific provisions in order to use this method of distribution in an escrow money dispute. If either party objects in writing within the time period, then the escrow agent must follow the procedures outlined below.
• The broker holding the earnest money must not release disputed earnest money until all parties have signed a document agreeing to its distribution, or if the contract contains the procedure outlined above and that procedure was followed.
• Generally, the listing and selling brokers are not parties to the sales contract and therefore, their signatures would not be sufficient to release funds. Only the buyers’ and sellers’ signatures (or signatures of their attorneys or other legally authorized agents) can be used to release escrow moneys.
• Another method of release involves filing a lawsuit. If a party files, the broker might deposit the escrowed funds into the court. If the broker files, it is called an interpleader action, and if the contract allows for it, the broker may be reimbursed for fees and expenses from the escrowed money in bringing that action.

Some other relevant escrow questions are:

What is the disbursement process if a title company is used to hold the escrow moneys?

Title companies are not governed by the Real Estate License Act or the rules and therefore, the disbursement process outlined above would not apply. Title companies that hold escrow are required to follow the provisions of the Illinois Title Insurance Act (225 ILCS 155 et. seq.)  If there is a dispute over the disbursement funds that are being held by a title company, parties should consult attorneys for assistance on pursuing disbursement to a particular party.

How long does a brokerage holding escrow have to deposit earnest moneys?

Under Section 1450.750(d) of the Rules under the License Act the deposit into the brokerage’s escrow account must be made no later than the next business day following the “transaction.” Section 1450.100 of the rules defines transaction as “once an agreement has been reached and accepted real estate contract is signed, or a lease agreed to, by the parties or after the receipt of the escrow money per the terms of the contract.”

In situations where an agreement is reached (and the agreement is in a final form as agreed to by the parties), but the escrow money has not been received, it must be deposited by the next business day following receipt. If earnest money is received into another office location and all escrow moneys are held at the principal office or location, the Rules say that the money must be transmitted to the principal location by the next business day following receipt of the moneys, and then deposited by the next business day following receipt by the principal location. (See Section 1450.750(k)).

Other factors to consider if your brokerage is considering holding escrow moneys:

• Escrow funds include earnest moneys and security deposits
• Earnest moneys can be in many forms including personal checks, cashier’s checks, money orders, cash, and even legally recognized cryptocurrencies.
• Escrow accounts shall be non-interest bearing (unless otherwise required by law or language of the contract)
• Escrow funds cannot be combined with brokerage operating account or a personal account and must be in an FDIC institution.
• Accurate record keeping is crucial with respect to escrow account maintenance and must be consistent with Section 1450.755 of the Rules under the License Act.