How to Handle an Earnest Money Dispute When Both Parties Are Threatening to Sue
Both parties are threatening to sue, the earnest money is frozen, and you're caught in the middle holding funds you cannot safely release to either side. This is the moment where documentation matters more than opinions.
When buyer and seller both claim the deposit, the escrow holder needs a documented authority to release it. The office's role is to administer the escrow, not decide which party deserves the money.
Read the actual agreement
Collect the purchase agreement, escrow instructions, amendments, cancellation notices and demands. Identify contingency language, notice provisions, release procedures and any dispute-resolution clause.
A missed closing date or a loan denial does not, by itself, establish forfeiture or an automatic refund. Entitlement depends on the terms, notices, facts and law. Refer contested contract interpretations to the parties' counsel.
Obtain clear written positions
Ask each party to identify the amount claimed and the basis for the demand. Log receipt dates and objections. Use the actual contract for response periods; there is no universal waiting period that permits release after silence.
Before acting on an apparent agreement, confirm the signers' authority and the payment instructions through the office's established process.
Consider a negotiated release or mediation
The parties may agree on a return, payment or split. Obtain the required executed direction specifying the recipients and amounts. A signed form still needs to be considered with the rest of the file, including any withdrawn consent or conflicting order.
If the agreement calls for mediation, the parties and counsel can arrange it. Mediation can lead to a settlement; the mediator does not ordinarily impose a binding outcome. The office should not promise that it can compel participation or that mediation will be cheaper in every case.
Ask counsel about interpleader
California Code of Civil Procedure § 386 permits interpleader where conflicting claims create potential multiple liability. Counsel can determine whether the statutory procedure fits, arrange any deposit and seek the appropriate court relief.
Interpleader does not transfer liability to the court. Discharge depends on the proceedings and relief granted, and it is not automatic protection from every claim about prior conduct. Do not describe filing as a guaranteed exit from the dispute.
Maintain the funds and the record
Track the disputed balance, notices, governing documents and next review date. A prolonged hold still needs management attention and a legally supported resolution path. Obtain advice on any relevant reporting or unclaimed-property issue.
Before a release, retain the authority, amount, recipient, verification evidence and named reviewer. If material information changes, return the decision to review.
Liability and insurance
Whether a release or hold creates liability is fact-specific. A complete record helps explain the decision but does not establish that exposure is minimal. E&O coverage depends on the policy and claim. Consult counsel and the carrier as required rather than assuming a signed release or internal exception ensures coverage.
Sources
One page in the file before money moves.
Your office decides. Veto records what was reviewed, what stayed open, and who reviewed it.