Wrongful Release of Earnest Money to Buyer by Title Company

Question: My husband is a USAF jet pilot. We were stationed at Luke AFB for three years, but we were recently transferred to Eglin AFB in Florida. We temporarily are living in base housing, but we wanted to buy a home as soon as possible after the sale of our Glendale home. When we moved to Florida our Glendale home was in escrow for $528,000 with a $40,000 earnest money deposit. All contingencies have now been fulfilled, including financing. The buyer (an LLC investor) now refuses to close escrow because a short term rental buyer just bought the home next to our Glendale home. The title company immediately released the $40,000 earnest money to the buyer. Without the $40,000 earnest money, we can’t start looking for homes in Florida. Does the title company have any liability to us for wrongfully releasing the $40,000 earnest money to the buyer?

Answer: Probably not. First, most LLCs that buy a home are “single asset” LLCs, i.e., the only asset is or will be the home. Although the principals of the LLC have personal liability if they commit fraud, the burden of proof for fraud is “clear and convincing evidence,” which is difficult to prove. Second, a short-term rental next door could be a bona fide reason for the buyer not to close escrow. Third, under the standard AAR purchase contract, the seller and buyer agree that the title company has “sole and absolute discretion” to release the earnest money.

Note: Years ago title companies rarely released the earnest money to the buyer or seller without a court order, even if “black and white” as to who was entitled to the earnest money. The title companies’ argument was “why should we have to pay the earnest money twice if a court later rules that we made the wrong decision?” After the Realtor industry agreed with the title industry to add the “sole and absolute discretion” language to the standard AAR purchase contract, title companies became much more liberal in releasing earnest money.

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