Broker Entitled to Forfeited Earnest Money

Read the full decision: Bank of New York Mellon, N.A. v. Re/Max Realty One

Maine’s highest court has examined whether a brokerage could retain half of a forfeited deposit from potential buyer even when brokerage had received a full commission from a later transaction.

Bank of New York Mellon, N.A. (“Bank”) listed a property it owned for sale with real estate brokerage Re/Max One (“Brokerage”).  The listing agreement contained a forfeiture clause which provided that “[i]f any earnest money is forfeited by a Buyer, it shall be distributed one half to the Seller, and one half to the Agency.  In no event shall the Agency portion exceed the agreed upon commission [contained in the listing agreement].”

The Brokerage located an interested buyer who entered into a purchase agreement and made a 10% downpayment, which the Brokerage held in escrow.    The purchase agreement stated that if the buyer defaulted, he/she would forfeit the deposit.  In addition, the agreement also stated that the parties must mediate any disputes over forfeited earnest money.

The buyer defaulted on the purchase agreement.  Both the buyer and the Bank requested the escrowed funds and so the Brokerage, as required by the state rules, refused to release the money until it either received a court order or a written agreement between the Bank and the buyer allowing for the release of the funds.

In the interim, the Brokerage located another buyer for the property and this buyer successfully purchased the property at the full listing price.  The Brokerage received its full commission from the sale.  Later that year, the initial buyer and the Brokerage held a mediation over the disputed forfeited earnest money.  The parties reached an agreement, and they sent the agreement to the Brokerage for the release of the earnest money as specified in the agreement.  The Brokerage released the full amount specified in the agreement to the initial buyer but retained half of the amount designated to the Bank, pursuant to the listing agreement’s forfeiture clause. 

The Bank filed a lawsuit against the Brokerage, seeking the amount of escrow retained by the Brokerage.  The Brokerage filed a counterclaim, asserting that the listing agreement gave it a right to indemnification and attorney fees.  The trial court entered judgment in favor of the Bank, and the Brokerage appealed.

The Supreme Judicial Court of Maine reversed the ruling favor of the Bank and sent the case back to the trial court to enter judgment in favor of the Brokerage as well as to determine whether the Brokerage was entitled to its attorney fees.  The court determined that the listing agreement was clear in its language that the Brokerage was entitled to receive half of all forfeited earnest money, up to the limit of a full commission.  Therefore, the court ruled that the Brokerage had a contractual right to receive half of the forfeited earnest money.

The Bank argued that the Brokerage was not entitled to retain the escrowed funds because it wasn’t forfeited earnest money, as the buyer and the Bank had reached a settlement regarding the distribution of the funds.  The court rejected this argument, finding that the escrowed funds were still forfeited earnest money and the settlement hadn’t changed this fact.

Next, the court considered the Bank’s argument that the Brokerage had already received a full commission and therefore was not entitled to any additional recovery.  The court found that this argument unpersuasive also, as the Brokerage’s right to recover forfeited earnest money was separate from its right to receive a commission.  Thus, the court reversed the lower court and awarded the Brokerage the remainder of the escrowed funds. 

Finally, the court considered whether the Brokerage was entitled to attorney fees.  Because this would fact-finding, the court sent the case back to the trial court for further proceedings.

Bank of New York Mellon, N.A. v. Re/Max Realty One,  91 A.3d 1059 (Me. 2014).