How to manage a dispute over releasing held funds
Every settlement agent, closing attorney, and escrow professional eventually faces the same wall: funds are sitting in a trust account, both parties believe they are entitled to them, and neither will sign a release. The transaction has either collapsed or stalled, the phone calls are getting harder, and you are holding money that belongs to someone — you just cannot yet determine who. What you do in that moment, how you document it, how you communicate, and when you escalate determines whether you navigate the situation cleanly or get pulled into litigation yourself. This article walks through the full arc of a release dispute — what triggers it, how the standoff is properly managed, what the escalation ladder looks like, and how drafting discipline prevents most of it before it starts.
Why release disputes happen
A release dispute typically surfaces because the buyer and seller cannot agree on the release of funds or the fulfillment of certain contract terms — essentially, a disagreement over whether the conditions required to close the transaction have been satisfied. That definition is clean on paper and messy in practice. The underlying fact pattern is almost always one of a handful of recurring scenarios.
The most common is the failed transaction where both parties feel they acted properly. Escrow deposit disputes arise when the buyer and seller in a real estate transaction do not close on their contract, and cannot agree on the division of the deposit paid by the buyer into escrow. Generally, the seller can keep the earnest money deposit if it is shown that the buyer violated the terms of the contract. However, the situation may not be that clear, leading to both the buyer and seller feeling they are entitled to the earnest money deposit.
The second scenario involves conditions that are genuinely ambiguous. A repair credit was promised but not fully memorialized. An inspection contingency was waived in one document and referenced in another. A financing deadline passed while the lender was still processing. In these cases, neither party is necessarily acting in bad faith — they are simply reading the same contract differently, and both readings are defensible.
The third scenario is bad faith, full stop. One party knows the conditions were met and is stalling, hoping the other side will capitulate rather than pursue formal dispute resolution. Neither party is allowed to hold the earnest money deposit in bad faith. California Civil Code section 1057.3 states that any party that refuses to sign off a release of funds held in escrow can be liable for up to $1,000 and attorney’s fees. Similar statutes exist in other states, though the mechanism and penalties vary. As the professional holding the funds, distinguishing between a genuine legal disagreement and deliberate obstruction shapes how quickly you move toward formal resolution.
The settlement agent’s structural position
Before getting into procedure, it is worth being precise about what the settlement agent’s role actually is during a release dispute, because misunderstanding it is how professionals get themselves into trouble.
Escrow holders are neutral. They simply agree to hold funds and may only release the money if they feel legally allowed and will not be exposed to risk. That neutrality is not optional — it is the foundation of the agent’s legal protection and professional standing. An escrow agent is not a judge and is not allowed to adjudicate fights between parties over how funds should be disbursed. Even if an escrow agent is 100% sure that one party is in the right, they are not allowed to disburse funds without the joint authorization of the parties.
This creates the core tension of the release dispute. The funds cannot move without mutual authorization, but the parties will not give it. An escrow dispute typically means the process comes to a screeching halt because the escrow agent won’t release any funds until the dispute is resolved. That freeze is not a failure of process — it is the process working correctly. The agent’s job is not to pick a winner. The agent’s job is to hold the funds safely, document every communication, and move the parties toward a resolution mechanism that is authorized under the contract.
The holder of these funds has a fiduciary responsibility to maintain the money in a separate escrow account and only disburse it according to the terms of the purchase agreement or by mutual consent of both parties. That fiduciary duty runs to both sides simultaneously. Because they are a neutral third party with a fiduciary duty to both buyer and seller, escrow agents can clarify the terms of the agreement, explain the status of funds, and help both parties understand their options. Clarifying is permitted. Advocating is not.
Examples of an escrow agent’s breach of duty may include failing to disburse funds according to the instructions of the parties, failing to timely close the escrow, or failing to properly document and record the transaction. Which is why, when competing instructions arrive, the agent must document each one, acknowledge receipt of each one, and decline to act on either until the dispute is resolved through a proper channel.
The first response: go back to the contract
When dealing with an escrow deposit dispute, one must first look to the language of the purchase agreement contract regarding dispute resolution. The language of the contract will almost always control. This sounds obvious, but in the heat of a standoff — with both principals calling you and their agents pressuring you — it is easy to lose sight of the fact that the resolution pathway was already agreed upon before the dispute began.
Most importantly, when addressing how a dispute is resolved and who resolves it, everything always starts with the answer to this question: who is holding the funds? That answer determines which regulatory framework applies, which procedures must be followed, and what your obligations are on timeline.
The type of resolution will depend on who is holding the earnest money deposit in escrow. If the escrow agent is a title company, lawyer, or someone other than a real estate broker, the dispute is handled as a civil matter initially. If the holder is a licensed real estate broker in a state like Florida, there are specific regulatory pathways — including submitting the matter to the state real estate commission — that apply before the civil route opens up.
Once you have confirmed your regulatory position, you go to the dispute resolution clause. In most standard residential contracts, that clause prescribes a sequence: a window for the parties to resolve it themselves, then mandatory mediation, then arbitration or litigation if mediation fails. Clause 16 of the standard FAR/BAR residential sale contract, for example, directs disputing parties to use mediation to resolve conflicts that cannot be resolved after 10 days of negotiations. Other contracts use similar sequences with slightly different timeframes. The point is that the contract itself is the first playbook, and you should be citing it explicitly in every written communication you send to the disputing parties.
Managing the standoff: documentation and communication
While the parties work through the prescribed dispute resolution steps — or while you are waiting for them to — your job as the holder is to manage the period of uncertainty without creating new liability.
The single most important practice during a standoff is written communication for everything. Not calls followed by an email summarizing the call — actual written correspondence at every decision point. Document all communications about the dispute, and consider whether the matter should be brought before the court for determination. Inadequate documentation creates problems when disputes arise. Document everything in writing, including deposit confirmations, disbursement authorizations, and client acknowledgments.
When a competing written demand arrives — meaning one party instructs you to release funds in their favor — you acknowledge receipt of it in writing and inform both parties that you have received competing instructions and cannot disburse without mutual authorization or a resolution through the agreed dispute process. This acknowledgment is not simply good practice. In states with specific statutory frameworks, failure to follow prescribed procedures after receiving conflicting demands can expose the holding agent to fines or license risk.
The second practice is clear communication about what the parties must do next. In many cases, escrow agents can play a key role in helping to resolve disputes before they escalate. Because they are a neutral third party with a fiduciary duty to both buyer and seller, escrow agents can clarify the terms of the agreement, explain the status of funds, and help both parties understand their options. This can often de-escalate tension and encourage productive discussions that lead to a resolution. In some instances, simply confirming what was agreed upon in writing and reviewing supporting documents can resolve confusion and move the transaction forward.
This is the de-escalation window — and it is real. A meaningful portion of release disputes resolve at this stage, not because anyone capitulated, but because a clear, factual recitation of the contract terms and the current status of each condition removed the ambiguity that was driving the standoff. Emotions run high in failed transactions. The settlement agent who can stay methodical, cite the document, and give both sides a clear picture of where things stand often becomes the gravity that pulls the dispute toward resolution without formal process.
The escalation ladder: mediation, arbitration, and interpleader
When direct negotiation fails, the escalation path follows the contract’s dispute resolution clause. Each step up the ladder carries higher cost, longer timelines, and diminishing flexibility.
Mediation
In mediation, a neutral third party who is familiar with escrow disputes guides negotiations between the parties in pursuit of a settlement. When this process succeeds, both parties have a stake in the decision and might be able to move forward even if they did not get everything they wanted. However, the buyer and seller must approve the result, so if consensus cannot be reached, the parties are back where they started.
Mediation is nonbinding, which is both its strength and its limitation. It preserves the parties’ ability to reach a creative resolution — a split of the deposit, a credit applied against an amended closing price, a mutually agreed extension — that a court cannot impose. Many of these disputes go through a mediation process as part of the small claims process if the deposit in dispute is less than $5,000. On larger deposits, the stakes justify formal commercial mediation with an experienced neutral. During mediation, the holding agent typically remains on standby — funds stay put, the parties negotiate, and if an agreement is reached, it gets documented in writing and the agent disburses accordingly.
Arbitration
Non-binding arbitration — where conflicts go before an arbitrator resembling court proceedings — is usually better suited to escrow disputes because issues can be resolved more quickly and inexpensively. Sometimes, the transaction contract will call for non-binding arbitration, which means that a party can reject the decision and go to court, but an adverse result might convince someone that litigation likely wouldn’t work.
Should the parties agree to binding arbitration, the ruling given by the arbitrator must be honored by each side. This gives the buyer and seller a definitive decision without having to engage in litigation, but the party that disagrees with the outcome has no recourse. Binding arbitration is the preferred endpoint for most commercial real estate disputes — it produces finality without the delay and cost of a full trial, and the holding agent can release funds promptly once the award is issued.
Interpleader
When all negotiated resolution fails, the holding agent has a nuclear option that also happens to be a protective one: the interpleader action. An interpleader is a legal action that allows a neutral third party, often holding money or property, to ask the court to determine who among multiple claimants is entitled to it. It protects the stakeholder from multiple liabilities or lawsuits over the same property or funds. Once filed, the stakeholder deposits the disputed asset with the court and is typically released from further involvement.
Interpleader prevents the stakeholder from being obliged to determine at his or her peril which claimant has the better claim. That is precisely the exposure the holding agent faces during a genuine standoff: releasing to either party risks being sued by the other. Interpleader solves that problem by removing the agent from the equation entirely.
The procedural mechanics: the escrow agent may file a lawsuit asking the court to allow the holder of the deposit to make a decision about which party is entitled to the funds and deposit the money into the court registry. The escrow will usually name both the buyer and the seller in that lawsuit, or anyone else claiming an interest in the funds. Provided the escrow agent does not have any other liability to the buyer or seller, the agent on most occasions will make a motion for a discharge of liability, and the court generally allows the escrow agent out of the lawsuit. The buyer and seller will remain in the lawsuit and generally make cross complaints against each other, each explaining why they are entitled to the deposit.
This protection is not free. The escrow agent will incur attorney fees and court costs from prosecuting an action, and is usually allowed to recover those amounts from the escrowed fund before depositing the rest with the court. The amount is usually in the three-to-five-thousand-dollar range, although much higher amounts are possible if any party fights the interpleader action. Buyers and sellers should be aware that if they cannot ultimately agree on how escrowed funds can be divided, the total “bucket” of cash available to them will be reduced if the matter proceeds to the interpleader stage.
That reduction is worth communicating clearly to both parties during the standoff. It is often the single most effective lever for pushing parties toward mediation: the mutual recognition that protracted disagreement will cost them both, drawn directly from the very funds they are fighting over.
As a matter of practice, most escrow agents will not initiate an interpleader action when they discover that parties have a dispute. They will wait a reasonable period of time for the parties to try to work the issue out between themselves. What amount of time is “reasonable” differs from agent to agent and situation to situation, but typically at least 60 days. That window should not be passive. The holding agent should be driving the dispute resolution process — sending written updates, facilitating the submission of required documentation, and making clear that interpleader is on the table after the cure period expires.
Scenario: partially disputed funds
Not every release dispute is all-or-nothing. One of the more nuanced situations the settlement agent faces is when some portion of the held amount is clearly owed to one party, while another portion is genuinely contested.
When disputes arise about distribution percentages, the attorney holding funds in escrow should continue holding the disputed portion until resolution. The undisputed portion — if any — can potentially be distributed. This is an important distinction. If $80,000 of a $100,000 held amount is cleanly documented as belonging to the seller, and the $20,000 dispute centers entirely on whether a repair credit was properly earned, there may be a path to releasing the undisputed $80,000 while keeping the $20,000 in trust pending resolution.
The risk is in characterizing something as undisputed when it is not. Both parties must agree — in writing — on the portion characterized as undisputed and on the release of that portion. Releasing anything over one party’s objection recreates the exact exposure that the neutrality posture is designed to prevent. When in doubt, hold everything, escalate the dispute process, and get clear written authorization before disbursing even a dollar.
In some legal disputes, the parties may reach a settlement agreement before the court renders a final judgment. A holding mechanism is ideal for holding the settlement amount until all conditions of the agreement are met. This includes ensuring that all necessary documents are signed, releases are obtained, and any other specific requirements are fulfilled. The escrow company oversees the process, ensuring that all parties adhere to the terms of the settlement agreement.
Scenario: earnout and holdback disputes in commercial transactions
The release dispute takes on different dimensions in commercial and M&A transactions, where holdback structures are deliberately built into the deal. Here the held funds represent something other than simple earnest money — they are a performance-linked instrument, and the dispute is not about whether the deal closed but whether the post-closing conditions were met.
Consider a $6 million earnout holdback on a business acquisition: the seller claims the production targets were hit; the buyer claims they were missed due to circumstances within the seller’s control. The dispute centers on whether production targets were missed or whether external disruptions excuse the shortfall. The holding agent in that scenario — typically a trust company or escrow agent under the purchase agreement — has to manage competing expert opinions, financial audit records, and contract language that was negotiated months before the dispute arose.
The release conditions in these structures are more intricate, but the fundamental principle is the same: Most M&A lawyers focus on the deal terms — but the real battles happen in the escrow dispute section. Ensuring the agreement includes clear definitions of material breaches and time limits for claims is what determines whether the resolution process is manageable or a litigation war. When those definitions are loose, the holding agent is left interpreting ambiguous contractual standards under pressure from both sides — not a position anyone should be operating from without immediate legal counsel.
In these disputes, the agent should refer the parties to the dispute resolution mechanism specified in the purchase agreement without delay. Commercial agreements frequently specify independent accountant determinations, expert panels, or expedited arbitration procedures precisely because the parties anticipated that earnout calculations would be contested. Using those mechanisms promptly, rather than trying to broker a direct resolution across sophisticated commercial adversaries, is the appropriate professional posture.
The closing attorney’s specific obligations
For attorneys performing the settlement agent function — as is required in attorney-closing states like Georgia, South Carolina, Massachusetts, and others — the release dispute carries an additional layer of professional responsibility.
A closing lawyer must also comply with the conditions placed upon the delivery of the deed by the seller absent fraud. The ethical obligations that apply to the attorney in this role are more demanding than those that apply to a title company or commercial escrow agent. The attorney’s fiduciary duties, professional conduct rules, and trust accounting obligations all bear on how the standoff is managed.
In situations where funds were received in trust from a client, the attorney is obliged to disburse those funds at a time which is consistent with the client’s instructions. Moreover, it is fair to say that any lawyer receiving client funds with the present knowledge that he or she does not intend to comply with the instructions for the handling of those funds would violate applicable conduct rules by engaging in conduct involving dishonesty, fraud, deceit, or misrepresentation.
Under applicable trust accounting rules, funds deposited in a trust account are funds received by the attorney as a fiduciary, which must be held and disbursed only for the benefit of those entitled to them, in accordance with appropriate instructions. In a dispute, “appropriate instructions” means mutual authorization or a court order. Anything less, and the attorney is disbursing at their own professional risk.
Improper handling of disputed funds creates risk. Hold disputed funds in trust until resolution through agreement, court order, or interpleader. That principle is not negotiable, regardless of how confident the attorney may be about which party has the stronger claim. The closing attorney is not the adjudicator — and acting like one, by releasing funds based on their own assessment of who is right, is the fastest route to a bar complaint and a malpractice claim in the same transaction.
What good conditions language prevents
The cleanest way to manage a release dispute is to have drafted the release conditions with enough specificity that the dispute never becomes a standoff in the first place. This is the prevention side of the equation, and it belongs in the same conversation precisely because most release disputes trace back to documentation that was adequate for the deal but inadequate for a disagreement.
Vague completion language — “repairs shall be completed to buyer’s satisfaction” — is a dispute engine. “Satisfaction” is not a verifiable standard; it is an invitation for subjective disagreement. The same problem appears in contingency language that specifies a timeframe but not a notification procedure, or condition language that references an external standard without specifying who measures it or when.
Taking steps to ensure there is a clear and detailed purchase agreement, including any contingencies, timelines, and details about who is responsible for certain costs, is the best preventive approach. The more specific and detailed the contract — and the more transparent the parties are during negotiations — the less room there is for misinterpretation and disputes.
A well-drafted escrow agreement protects against disputes and compliance problems. Every escrow arrangement should document these key elements: clear identification of parties, precise release conditions, the distribution formula, interest allocation, fee arrangements, and default provisions for when parties cannot agree.
The default provision is the piece most often omitted. If the parties cannot agree, what happens next? Who initiates mediation, and within what timeframe? What is the cure period before interpleader becomes available? Is there a split-the-funds fallback for disputes under a threshold amount? Answering these questions in the agreement — before anyone is in dispute — removes the ambiguity that makes standoffs intractable.
When you close the deal and set the release conditions clearly, you also reduce the friction that comes after. Shaka’s onchain payment routing becomes especially relevant here: once the conditions are met and both parties have authorized disbursement, the funds move instantly and directly to each designated wallet — no delay, no wire reconciliation, no check-clearing lag. The clarity of “conditions met, disbursement executed, done” is only possible if the conditions themselves were clear at the outset. The professional who drafts precisely at the front end is the one who disburses cleanly at the back end.
Holding the line when pressure mounts
The last thing worth addressing is the human dimension of a release dispute, because no amount of procedural knowledge protects you if you buckle under the pressure that these situations generate.
Both parties, their agents, and sometimes their attorneys will pressure the holding agent to move. The seller’s agent will imply that you are acting improperly by withholding funds that clearly belong to their client. The buyer’s attorney will threaten action if you release a single dollar without written authorization. Both sides will be simultaneously certain they are right, and both will treat your neutrality as an obstacle rather than the professional standard it is.
Your position is straightforward: you will hold the funds, you will follow the dispute resolution process set out in the contract, and you will disburse when you have the proper written authorization — from mutual agreement, from a mediated settlement, from an arbitration award, or from a court order. That is not rigidity. That is the job.
Not knowing the answer to who is entitled to the funds, the escrow agent holding them is placed in an uncomfortable position when facing demands for the funds by both parties. Releasing the funds to any party exposes the escrow agent to a lawsuit by the other party. Staying neutral and following the prescribed process is not just the ethical obligation — it is the professional self-protection. The agent who releases under pressure, outside proper authorization, does not close the dispute. They become a party to it.
The settlement agent, closing attorney, or broker who navigates a release dispute well does so not by finding the fastest exit, but by holding the process steady — keeping funds safe, communications documented, escalation timely, and their own exposure minimal — until the parties find their way to a resolution that both can live with. That discipline, practiced consistently across every disputed file, is what separates professionals who manage these situations from those who are managed by them.
