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The Legal Description > News > Must escrow holder be included in dispute over funds?

Must escrow holder be included in dispute over funds?

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Court Report
Monday, February 22, 2021

Parties to a purchase agreement that fell through disputed who was entitled to the $2.5 million held in escrow. As part of the case, the court had to determine whether the escrow holder must be joined as a necessary party for the case to continue.

The case is H5 Capital-Seattle Real Estate LLC v. Onni Capital LLC (U.S. District Court for the Western District of Washington, No. 2:20-cv-00801-RAJ).

Currently in escrow is $2.5 million, left after a deal between H5 Capital-Seattle Real Estate LLC and Onni Capital LLC. H5 Capital owns the property in Seattle. It entered into an option agreement on Aug. 19, 2019, with Onni Capital, whereby Onni had an exclusive right, for a period of time, to buy the property. Onni agreed to pay $500,000 to escrow holder First American Title Insurance Co. If Onni exercised the option, it would pay an additional $500,000 to First American as a nonrefundable deposit for the property.

Onni exercised the option on Dec. 19, 2019. At the time, it had already delivered $1 million to First American. Under the purchase agreement, Onni agreed to make another payment of an additional $1.5 million for an earnest money deposit.

Onni terminated the agreement months later, arguing that its performance under the purchase agreement became impracticable because of the COVID-19 pandemic. Onni instructed First American to return the disputed funds.

On May 27, 2020, H5 sued Onni, arguing that Onni breached the option agreement and the purchase agreement. It argued  the disputed funds are non-refundable and must be paid to H5 and asked the court to determine which party is entitled to the disputed funds.

Onni moved to dismiss for failure to join a necessary party, arguing that First American is a required and indispensable party. It argued that joining First American would destroy diversity jurisdiction and the court cannot proceed without it, therefore the court should dismiss the case.

U.S. District Judge Richard Jones denied the motion to dismiss for failure to join a necessary party, finding that First American is not a necessary party.

“First American does not claim a legally protected interest in the disputed funds,” Jones said. “Onni argues that First American, as an escrow holder under the purchase agreement, has an interest in this lawsuit. It has an interest Onni says, because First American retains actual possession of the disputed funds. This is of no moment. Rule 19(a)(1)(B) asks whether the absent party ‘claims an interest relating to the subject of the action.’ First American makes no such claim to the disputed funds that it holds in escrow. Rather, it expressly declares that it ‘has no pecuniary interest in those funds’ and that it will hold the funds only until it receives mutual written instructions from the parties. At such time, it says, it ‘will disburse the funds in accordance with those instructions.’ Given that First American claims no interest in the subject of this lawsuit, it is not a required party under Rule 19(a)(1)(B). Thus, to be considered a required party, Onni must rely on a different subsection, Rule 19(a)(1)(A), and must show that without First American the court cannot accord complete relief among the parties.”

Onni further argued no complete relief can be awarded if First American is not joined because it will have no obligation to disburse the disputed funds after the court determines who the funds belong to. H5 counters that no party is alleging wrongdoing by First American and, thus, there is no relief to be obtained against it.

“Meaningful relief is complete relief,” Jones said. “Should either party prevail, the court may indeed fashion relief that is more than partial or hollow—thus meaningful—yet short of an order directing First American to release the disputed funds. For example, the court may declare who the disputed funds belong to. That is meaningful relief between H5 and Onni, even if it does not bind First American directly. Sure, after declaratory judgment, some coordination with First American shall be required. But, for purposes of compulsory joinder, the Court may assume First American’s compliance.

“The court likewise assumes that First American will honor its commitments,” Jones continued. “Just as the tribe in Alto was bound to its Constitution, First American is bound by the option and purchase agreements. First American’s chief responsibility under those agreements is to hold and disburse funds. Further, First American has declared under penalty of perjury in this lawsuit that it claims no interest in the disputed funds and will disburse them once it receives ‘mutual written instructions from the parties.’ The court has no reason to think that First American will flout either of these promises. Once First American disburses the funds to the prevailing party, that party will have been granted complete and meaningful relief.”

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