The editor sent an earlier version of this to some readers, but wishes to retract it. He changed his mind and disagrees more strongly with the case than before.

Daily Development for Wednesday, November 3, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri

VENDOR/PURCHASER; SELLER’S REMEDIES; EARNEST MONEY; GARNISHMENT: Earnest money that is pledged to pay costs of closing cannot be garnished by seller’s creditor.

General RAC, Inc. v. Coldwell Banker Residential Real Estate, Inc., 876 So. 2d 606 (Fla. App. 2004)

Sellers listed their homestead property for sale and agreed to pay a 6% commission to broker. The buyers paid a $10,000 earnest money payment and broker held the funds. The listing agreement provided that in the event the buyer failed to close, the broker got half the earnest money as a commission. The court does not expressly say what happened if the buyer did close, but it can be inferred that the agreement provided that the commission came out of the earnest money.

A creditor of sellers attempted to garnish the earnest money in the hands of the broker. The trial court denied garnishment and the creditor appealed.

The broker pointed to a Florida case that had provided that earnest money proceeds that are payable to a broker as a commission are not property of the seller and therefore are not subject to garnishment.

The creditor pointed to a subsequent statute providing that monies that will pass to the debtor conditioned only on the passage of time are subject to garnishment even before they pass. The creditor argued that under the terms of the listing agreement, at best the broker was entitled only to one half the earnest money in the event of buyer’s default.

The court ruled that the statute did not apply here because more than the passage of time was required for the sellers to get the money. Therefore, the money could not at the time of the attempted garnishment be treated as the property of the debtor.

But the court set forth a more fundamental obstacle for the creditor in this particular case - the property was homestead property. The proceeds of the sale retained their character as homestead, and the costs of generating the proceeds also were protected as homestead. The court noted that the balance of the proceeds in the hands of the seller following closing might lost their character as homestead if the seller did not reinvest in a home.

The court also made a statement which could be construed as a third reason for denying relief to the creditor: “[I]n real estate transactions the buyers’ deposit is part of the proceeds from which, at time of closing, deductions are made for seller’s expenses, including a broker’s commission, if any.”

Comment 1: It makes sense to protect proceeds of a homestead as homestead, and of course if the earnest money were treated differently because of a possible claim by the broker, the broker would still have a right to be paid by the seller and this would reduce the proceeds. So the homestead analysis makes perfect sense.

Comment 2: Outside of the homestead context, however, it would appear that there is no good reason to deny the creditor advance access to those funds that are not pledged to the broker. To the extent the court can be viewed as denying garnishment simply because the earnest money dollars may be the monies that ultimately go to the broker, although the broker has no direct claim on them, the editor thinks the court’s reasoning faulty. Here, apparently, the broker was not entitled to the escrow funds per se except that the broker got half of the funds in the event of a default by the buyer.

Comment 3: Let’s take the situation one step further (again outside of homestead). If the creditor had a lien on the property, that lien would have to be paid from the proceeds in order for there to be a sale, and thus would have a claim prior to those costs payable if the sale went through. What difference is there here? Doesn’t the earnest money represent the debtor’s property simply in another form? Why should the fact that they are earmarked for the cost of sale make any difference at all?

Maybe if the broker holds the earnest money and the money indeed has been pledged to the broker at a time when the broker is not aware of the creditor, the broker’s claim is a valid one. Aside from that, unless there’s a homestead, “earmarked” funds ought to be reachable, and this would include funds in the hands of an independent escrow unless there is a formal security interest created in those funds in favor of the broker.

Does this suggest that brokers may want to provide in listing agreements that they apply funds in escrow directly to closing expenses, including their commission, first, with any surplus paid to seller? Why not? Further, it shouldn’t matter whether the money is held by the broker or by an escrow agent. If a specific pledge of those funds has been made, then the monies will not pass to the seller and the creditor should be attempting to garnish the other funds that are not part of the cost of producing the proceeds.

Readers are encouraged to respond to or criticize this posting.

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