A Note From The Legal Helpdesk: Dispute Resolution- Interpleader

A Note From The Legal Helpdesk: Dispute Resolution- Interpleader

Like any profession, disputes involving real estate transactions occur frequently enough that REALTORS® should know the resolution options available to them. Over the coming weeks, the Legal Helpdesk plans to provide overviews of various dispute resolution options, such as mediation, arbitration, and interpleader. First, we will discuss interpleader.

Interpleader is an option when a dispute arises involving two or more parties who argue over property held by a disinterested third-party. As you well know, REALTORS® frequently hold or handle funds on behalf of others – whether the funds are earnest money, commission to be paid to other real estate licensees, or otherwise. When disputes over these funds arise, the holder of the funds may seem stuck in the middle. Through interpleader, the holder can deposit the funds with the court, requiring the differing claimants to resolve the issue in court. This article explains interpleader in Alabama and provides examples of when interpleader may be useful to you.

The Rule
The Alabama Rules of Civil Procedure (ARCP) are the procedural rules governing civil actions in Alabama and contain the rule on interpleader. The benefit of interpleader is that, when properly done, the party holding the funds receives a discharge of liability after depositing the disputed funds with the court. So, the REALTOR® stuck in the middle can meet his or her legal obligations, bow out of the dispute, and get back to business.

The ARCP allow one party to interplead other parties into court in two situations. See Ala. R. Civ. P. Rule 22. First, the party can deposit disputed funds and interplead other persons, who become defendants, into court when the party is or may be exposed to multiple liabilities. Here are some examples:

  • A real estate broker (Broker) holds Buyer’s earnest money in an escrow account. Buyer backs out of the contract and wants the earnest money returned but Seller refuses to sign a release. As you know, if a dispute arises over escrowed funds, Alabama law prohibits disbursing of the funds unless the parties agree in writing to the release or upon adjudication by a court of law. See Admin. Code R. 790-x-3-.03. To adjudicate in a court of law, Broker may use interpleader to deposit the funds with a court and join the Buyer and Seller as defendants, requiring the Buyer and Seller to settle their differences. See Ala. Admin. Code R. 790-x-3-.03(7). The Broker can then petition the court for dismissal, receiving a discharge of liability from the court.
  • A real estate broker (Broker) sells a house. Two real estate agents are owed commission as buyer’s agents but dispute the percentage owed to each. Broker may deposit the funds with a court and join the two buyer’s agents as defendants, requiring the two to settle their differences. Similar to above, the Broker can then petition the court for dismissal and receive a discharge of liability when proper.

The second situation occurs when the party holding the funds is already a defendant in a lawsuit and is or may be subject to liability from a party or parties not already named in the lawsuit. The Rule allows the defendant to join another party or parties as defendant(s) and deposit the disputed funds with the court. The party can then ask the court to dismiss them from the lawsuit and let the disputing parties settle the case.

The examples above in the first situation are applicable to this second situation, except that one of the disputing parties - the Buyer/Seller or one of the agents – would have sued the Broker first. Broker can then ask the court to join the other disputing party (or parties) as defendant(s), deposit the disputed funds, and seek dismissal and a discharge of liability from the court. 

Disclaimer: This article provides general information only and does not constitute legal advice. No attorney-client relationship is created by reading, viewing, opening, or other action related to this article. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Specific circumstances may change the applicable law or advice a competent individual would provide. In addition, this information is not meant to supplant or in any way replace Errors and Omissions Insurance or other insurance coverage. Mistakes may occasionally be made. Once notified, we will work diligently to correct the issue in a timely manner and mark any updated or changed articles accordingly.