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Legal Matters
Best of the Legal Hotline - Resolving Earnest Money Disputes
by Debbi
Conrad
Listing brokers can find themselves in the middle of heated disputes over the
disbursement of earnest money when deals fall through. Here are a few examples of earnest money cases from the Legal Hotline:
General Rules
| Q. A listing broker had a full-price offer on a small cottage with $500 down and a home sale contingency. The buyer never
listed his home and backed out of the deal. The seller thinks that she is entitled to the earnest money. Is she correct? |
| A. While it is natural to want to help the side that "deserves" it, the
disbursement of earnest money from a real estate trust account is controlled by rules in Wis. Admin. Code § RL 18.09(1) & (2). §
18.09(1) lists the circumstances under which a broker may safely disburse. § 18.09(2) requires notice be given
before disbursement is made if the matter is in dispute. The rules are fairly mechanical and do not give the broker the right to decide who deserves to receive the funds. The
listing broker should remain neutral and not take sides, thus avoiding liability for improper disbursements.
The rules are reflected in the provisions of the DRL-approved offer to purchase
forms. Pursuant to lines 247-271 of the WB-11 residential offer, for example, the
listing broker is to do nothing with the earnest money for 60 days after the
scheduled closing date unless the parties reach a written agreement for the
disbursement of the earnest money. The listing broker may write a
memorandum or letter to the buyer and seller and their respective attorneys, if
any, pointing out these provisions and explaining that this is how the earnest
money disbursement must be handled. It is then up to the parties to
work out their differences by negotiation or by going to small claims court.
After the 60 days has past, the listing broker may choose to initiate a small
claims action or seek an impartial attorney's written opinion as to who should
receive the earnest money. The listing broker may deduct up to $250 from the
earnest money for the legal fees involved in either of these alternatives. The
listing broker, however, may also continue to do nothing and allow the parties to find a way to resolve the earnest money dispute.
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Parties Go to Small Claims Court
| Q. A buyer failed to remove the sale of the buyer's property contingency and did not close by the closing date. The seller
believes that he deserves the earnest money because the buyer did not perform. Is he correct? |
| A. The seller may authorize or deny a return of the earnest money to the buyer in the WB-45 Cancellation Agreement and Mutual
Release (CAMR). If the seller will not release the earnest money, the buyer may take his claim for the earnest money to the
small claims court, where the appropriate standard generally should be whether the buyer acted in good faith and with due
diligence in performing the contract. If he did, he generally should be entitled to the return of his earnest money.
Per Wis. Stat. § 799.01, the small claims court has jurisdiction over all earnest money disputes involving an offer to
purchase a 1- to 4-unit residential property, as well as any suit for a money judgment of $5,000 or less. If the buyer sues
the seller and names the broker as a party, the small claims court can resolve the dispute between the buyer and the
seller, and indicate which party the listing broker should pay. Wis. Admin. Code § RL 18.09 allows the broker to disburse
the earnest money as directed by the order of the court. It is important, however, that the listing broker be named in the
action so as to be subject to the jurisdiction of the court and thus legally obligated to comply with the court's
directive.
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Attorney Opinion
| Q. The buyer paid $10,000 earnest money when she offered to purchase a riverfront property. The MLS data sheet said that there
were 475 ft. of river frontage, but it turns out there are only 421 ft. of frontage. The buyer has backed out. The sellers
say they are not giving her the earnest money back because she backed out and because it is up to the buyer to verify any
acreage, square footage, etc. per the offer to purchase. The listing broker would like to get an attorney's opinion
directing the earnest money disbursement. |
| A. The offer to purchase and Wis. Admin. Code § RL 18.09 provide for disbursement of the earnest money based upon the advice
of an attorney not representing any party to the contract. Prior to making such a disbursement, the listing broker must
send all parties 30 days prior written notice by certified mail.
The disbursement cannot be made until 60 days have passed after the scheduled closing date, but the listing broker may
obtain the attorney's opinion and send out the 30-day certified mail letters prior to the end of the 60 days. It is good
practice to include a copy of the attorney's opinion in the letters to the parties. If the 30 days pass and neither seller
nor buyer start a small claims action, the listing broker will be authorized to disburse per the attorney's opinion. Such a
disbursement, however, does not determine the rights of the parties with respect to the earnest money - either party may
still initiate legal action to determine entitlement to the earnest money.
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| Q. An offer did not close and parties can't agree over the earnest money. The listing broker waited the 60 days and obtained
attorney's opinion on disbursement. However, the buyer will not give the broker an address for sending the 30-day
certified mail notice of the broker's intent to distribute funds. The buyer did pick up a copy of broker's letter, but
would not sign acknowledging receipt of a copy. How should broker proceed? |
| A. § RL 18.09(2) states that where the broker has knowledge that either party disagrees with the proposed disbursement, the
broker must attempt to notify all parties in writing of the broker's intent to disburse prior to making the disbursement.
Written notice must be sent by certified mail to the parties' last known addresses and the disbursement may not occur until
30 days after date on which the notice is sent.
If the listing broker has a last known address for the buyer, the certified mail notice could be sent there. Without the
certified mailing, the listing broker would be outside of the safe harbor provided by the rule. To ensure maximum
protection against liability, the listing broker may wish to consider initiating an
interpleader action in small claims court (earnest money handed over to the court) or simply doing nothing and leaving the resolution of this matter to the
parties.
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Interpleader
Q. Both the buyer and the seller want to keep earnest money and it has been more than 60 days since the scheduled closing
date. Can they just go to court to resolve this or must the parties get a third-party attorney involved to settle the
dispute? |
| A. Either party may initiate a small claims court lawsuit concerning the earnest money at any time. If they do, hopefully they
will also name the listing broker as a defendant. Then the broker will be subject to the court's jurisdiction and its
decision regarding the earnest money. The broker also can ask to pay the earnest money into the court and be out of the
dispute.
If the parties do not bring legal action, the listing broker may initiate a small claims action called an interpleader
action (Wis. Stat. § 803.07) and deduct up to $250 from the earnest money to pay for legal fees. An interpleader action is
a lawsuit brought by the custodian of money or property when he or she is not certain who is rightfully entitled to the
funds or property. In the earnest money situation, it is brought by the listing broker who is not authorized to decide who
is legally entitled to the earnest money. The interpleader action names the
competing parties and forces them to litigate their respective claims. This should
be coupled with the payment of the earnest money into the court and a request
for the dismissal of the broker.
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When is an Inspection a Test?
by Rick Staff
Recently, there have been a variety of questions relating to home inspectors performing tests during a home inspection. As noted at lines 97 to 110 of the WB-11, a seller only agrees to allow those inspections and tests which are reasonably necessary to satisfy contingencies in the offer. Furthermore, a home inspector is limited to the inspection and testing authority granted in the offer. It happens from time to time that a home inspector performs or asks to perform a test or inspection which causes the parties and the brokers to question whether the test or inspection is authorized under the contract.
An "inspection" is defined as an observation of the property which does not include testing of the property. A "test" is defined as the taking of samples of materials such as soils, water, air or building materials from the property and the laboratory or other analysis of these materials. The inclusion of the home inspection contingency authorizes inspection of the entire property including follow-up inspections as required to verify the status of questionable areas identified in the original inspection. Absent a testing contingency, no testing is allowed (except for carbon monoxide and gas leaks).
The difficulty in certain transactions arises when a home inspector proposes to investigate areas such as LBP or moisture content. These investigations may be inspections or tests depending on the methodology used. For example, an XRF machine will determine if there is LBP in a property. This is an inspection, because there is no sample taken, only a reading of lead levels. On the other hand, taking paint or dust samples and having them analyzed in a lab would be a test and would require testing authorization. (Note: The WRA Addendum S authorizes inspection and testing.)
Moisture level investigations will ordinarily be an inspection. Like an XRF machine, a moisture meter takes an electronic reading of the level of moisture that may be present. No sample is taken and therefore the use of the moisture meter is authorized under the WB-11's inspection contingency.
REALTORSŪ must always work with a buyer to ensure that the offer includes proper authorization for all the tests which need to be performed. Fortunately, separate authorization for a home inspector to use a moisture meter is not required.
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Legal Action Update
by Debbi Conrad
The WRA Legal Action Committee recently conferred to consider the following two matters.
Broker Listing Protection Commission
A REALTORŪ-member had a WB-3 Vacant Land Listing Contract (mandatory use date April 7, 1995) on a parcel of land that was ultimately purchased by a government agency after the listing had expired. The
REALTORŪ claimed her commission based upon listing protection. She reports that she discussed the property, including price, zoning and improvements, during a 20-minute conversation with a government representative. The
REALTORŪ sued the seller for her $100,000 commission. The circuit court, to the amazement of the broker and her attorney, found in favor of the seller.
Discussion
The REALTORŪ is appealing to the Wisconsin Court of Appeals because she and her attorneys believe that the 20-minute conversation was sufficient to meet the listing contract standards for "negotiation." The broker's attorney believes that the trial court judge was influenced by old case law discussing the definition of negotiation instead of limiting himself to the definition stated in the listing contract. In other words, the judge did not apply the correct test to the facts in evidence. The broker and her attorney have requested that the WRA file an amicus brief with the Wisconsin Court of Appeals explaining that the DRL included a definition of negotiation in its approved listing contracts because the case law definition was too narrow, and that the judge should confine his evaluation to the contract definition.
This case addresses an issue that potentially could have a significant and widespread impact for the real estate brokers and the WRA membership as a whole. Clarifying the proper test for determining whether negotiation has occurred is critical for the proper interpretation of the DRL-approved listing contracts in listing protection commission cases.
Outcome
The committee authorized up to $3,000 for the legal services and expenses necessary to file an amicus brief with the Court of Appeals clarifying the test for negotiation in listing protection disputes.
Use of Extraterritorial Plat Approval Power to Zone: The Woods v. City of Madison
The Woods submitted a preliminary plat to the City of Madison for approval under its extraterritorial plat approval jurisdiction. The proposed 11-lot subdivision lies within the Town of Burke and provides for a mixture of agricultural, commercial and agri-business lots. The city rejected the plat based upon a Madison subdivision ordinance that considers proposed use. The city found that the plat promotes some commercial uses in an area that is predominately agricultural and that this commercial development is incompatible with the surrounding agricultural land use pattern.
The Woods relied upon the Gordie Boucher case, a 1993 published Court of Appeals decision which held that the City of Madison could not use its extraterritorial plat approval jurisdiction to regulate land uses and thus, in effect, engage in zoning. The Gordie Boucher case was a WRA Legal Action case and is the standing precedent.
The Court of Appeals, however, concluded that it decided that case in error and that the decision should be overturned. Because the court cannot reverse itself, it asked the Wisconsin Supreme Court to take jurisdiction directly from the trial court. The Supreme Court agreed. On June 24, 2002, the WRA Legal Action Committee authorized $10,000 to file an amicus curiae brief on behalf of the WRA. That brief has been filed at a cost of $8,534.55. The issue before the committee was whether additional funds should be authorized for oral argument before the Wisconsin Supreme Court.
Discussion
Gordie Boucher is the precedent for the principle that zoning decisions must be made using the zoning process, not the plat approval process. Cities may not attempt to "go in the back door" and use their extraterritorial plat approval powers to exert zoning control. The zoning procedures require notice to land owners, hearings, and a joint zoning commission including representatives from the town board. If Gordie Boucher is overruled and cities are permitted to unilaterally enact zoning through the extraterritorial plat approval process, the towns and their citizens effectively lose the right for any input into zoning decisions controlling lands within their boundaries.
It is important for the WRA to participate in oral argument before the Wisconsin Supreme Court to emphasize the due process rights being lost when cities are allowed to bypass the statutory procedures for extraterritorial zoning. The attorney for the Woods will argue for the approval of his clients' plat, and his arguments may or may not support the validity of the Gordie Boucher decision.
This case addresses an issue that potentially could have a significant and widespread impact for real estate developers, builders, brokers and the WRA membership as a whole. The power of cities to make decisions regarding the use and development of lands in adjoining townships should be limited to the procedures stated in the Wisconsin Statutes. The Wisconsin Builders Association will likely share this cost with the WRA.
Outcome
The committee authorized up to $10,000 for oral argument before the Wisconsin Supreme Court in The Woods v. City of Madison case, but only if the Wisconsin Supreme Court grants the WRA time for oral argument and if the Wisconsin Builders Association agrees to split the costs.
Unfortunately, the Supreme Court has denied the WRA's motion for 15 minutes of oral argument time. The case will be heard on Tuesday, Oct. 8, 2002 at 9:45 a.m. We will have to hope that the Woods' attorney strongly supports the Gordie Boucher precedent and that the court takes into account the arguments presented in the WRA amicus brief.
For more information about the WRA Legal Action Program, go to www.wra.org/legal/legal_action_program.asp
or contact the WRA Legal Department.
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REB Update
by Rick Staff
The REB met in Madison on Sept. 26, 2002. The REB members elected Dick Kollmansberger of Waukesha as the Chair, replacing Jim Imhoff of Madison. The WRA staff would like to extend its thanks to Jim Imhoff for six years of tireless service as chair. Jim successfully balanced the DRL's consumer protection role with the need to provide a regulatory environment which did not unnecessarily interfere with professional real estate practice. As we say good-bye to Jim, we welcome Dick, whose past work in numerous leadership roles at the WRA, including the presidency in 1996, were marked by strong leadership and an excellent "common sense" perspective when dealing with industry issues.
The REB voted to support revised administrative rules addressing broker supervision and agency disclosure. The rules provide more flexibility to brokers seeking to develop a company-agent supervision framework for the various business models found throughout the state. The old headquarter-branch office paradigm has been dropped and the rules allow brokers to supervise using any model which provides adequate review of contracts, availability to answer practice questions and the other elements of supervision. Agency disclosure will be revised slightly by recognizing that those parties (usually buyers) who the agent first meets at the first showing will not have to have an agency disclosure thrown in front of them on the threshold. If the showing develops into a level of significant negotiation the agency disclosure will then need to be given. These rules will now go to the Secretary and the Rules Clearinghouse for further review. After the rules are approved by the Secretary, they will be posted on the WRA Web site, and covered in more detail in future issues of the Wisconsin
REALTORŪ. Look for a Legal Update describing the changes - likely in November or December.
The DRL will offer electronic license renewal this year. Look for more information in the next Wisconsin
REALTORŪ.
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