Escrow and Trust Catastrophes – How to Get Back Escrow or Trust Funds in the Event of a Meltdown

What happens when the company holding your escrow implodes, and the principals fail to act to return your escrow? 

What happens if the sole principal of your escrow company dies or is incapacitated, and left no succession plan to refund or account for your escrow?

What happens if these events occur with a transfer of trust funds?

These and similar events are escrow and trust catastrophes. They can make one feel in limbo with no clear way back, and pressing time constraints on closings, lien priorities, and construction. This article provides a quick primer on some options available for quick relief. In brief, Florida law empowers a court to enter a preliminary injunction to freeze escrowed/trust funds in their current account, and transfer them back to their origin or the Court Registry. Florida law also empowers a court to enter a constructive trust to freeze an account holding escrowed/trust funds, and transfer them back to their origin or the Court Registry. We urge you to seek legal counsel in employing these methods. If you have any questions about escrow disputes or trust disputes, escrow and trust emergencies and catastrophes, please contact Bernhard Law Firm at www.bernhardlawfirm.com, 786-871-3349, abernhard@bernhardlawfirm.com. [KEEP READING BELOW]

A. Florida law empowers the Court to enter a preliminary injunction to freeze escrowed/trust funds in the recipient account, and transfer them back to their origin or the Court Registry.

Well-established Florida law empowers the Court to enter an ex parte preliminary injunction to freeze a bank account improperly holding escrowed/trust funds, and order that the escrowed/trust funds be returned to the originator or placed into the Court Registry, so as to maintain the status quo and avoid dissipation.  The case law is ample. Gyptec, S.A. v. Hakim-Daccach, 299 So. 3d 481, 484–85 (Fla. 3d DCA 2020) (affirming injunction directing company to transfer money back to escrow account and enjoining further transfers out of account pending final determination of ownership interest); TJ Mgmt. Group, L.L.C. v. Zidon, 990 So. 2d 623, 625 (Fla. 3d DCA 2008) (affirming preliminary injunction freezing bank account and requiring deposit of funds into court registryafter receiving funds from attorney trust account that had to be returned); Klem v. Espejo-Norton, 983 So. 2d 1235, 1237 (Fla. 3d DCA 2008) (affirming constructive trust on estate assets, as court had quasi in rem authority over estate assets placed in respondent’s brokerage account).

For further supporting case law, see also Montalvo v. Attorneys’ Title Ins. Fund, 967 So. 2d 369, 369 (Fla. 3d DCA 2007) (Mem) (affirming preliminary injunction for lack of abuse of discretion); Ga. Banking Co. v. GMC Lending & Mortg. Servs. Corp., 923 So. 2d 1224, 1225 (Fla. 3d DCA 2006) (reinstating ex parte preliminary injunction preventing transfer of funds out of account, where bank showed trust funds that defendant refused to turn over); Riverland and Indian Sun L.C. v. L.J. Melody & Co., 879 So. 2d 1271, 1271 (Fla. 3d DCA 2004) (affirming preliminary injunction freezing account in a constructive trust after broker realized real estate transaction was not closing as contractually agreed, omitting wire transfer from proceeds due to broker); Blecher v. Dreyfus Brokerage Servs., Inc., 770 So. 2d 1276, 1277 (Fla. 3d DCA 2000) (affirming preliminary injunction freezing an account holding money of stock proceeds that brokerage placed in account inadvertently); Vargas v. Vargas, 771 So. 2d 594, 596 (Fla. 3d DCA 2000) (affirming preliminary injunction where plaintiff showed ownership in money in bank accounts, and lifting injunction would expose those assets to dissipation or conversion by a third party over who plaintiffs have no control); Castillo v. Vlaminck de Castillo, 701 So. 2d 1198, 1199 (Fla. 3d DCA 1997) (affirming preliminary injunction freezing account given potential for misuse of funds by family member); Escudero v. Hasbun, 689 So. 2d 1144, 1146 (Fla. 3d DCA 1997) (affirming preliminary injunction precluding removal or disbursement of funds in bank account containing proceeds belonging to petitioner, and improperly still in respondent’s account); Credo LLC v. Speyside Invs. Corp., 259 So. 3d 893, 901 (Fla. 3d DCA 2018) (affirming order granting preliminary injunction requiring funds to be deposited into court registry); Ames v. Ames, 204 So. 3d 132, 133–34 (Fla. 4th DCA 2016) (affirming ex parte preliminary injunction freezing accounts between family members, were potentially being improperly dissipated); Gruder v. Gruder, 433 So. 2d 23, 24 (Fla. 4th DCA 1983) (holding beneficiary of trust entitled to preliminary injunction to prevent removal of assets, where unable to get reliable accounting of whereabouts or disposition of assets); but see Am. Univ. of Caribbean v. Tien, 26 So. 3d 56, 59 (Fla. 3d DCA 2010) (holding no injunction necessary as funds were under control of a federal court-appointed receiver and no basis to pierce the corporate veil).

For a preliminary injunction, Florida Rule of Civil Procedure 1.610(a) provides that the injunction can be granted without written or oral notice to the adverse party if: (i) it appears from the specific facts shown by affidavit or verified pleading that immediate and irreparable injury, loss, or damage will result to the movant before the adverse party can be heard in opposition; and (ii) the movant’s attorney certifies in writing any efforts that have been made to give notice and the reasons why notice should not be required. Fla. R. Civ. P. 1.610(a)(1). Moreover, personal service is not required to establish quasi in rem jurisdiction over the assets. TJ v. Zidon at 625 (affirming preliminary injunction to freeze assets).

Additionally, Florida case law provides that a party must show: (1) a likelihood of irreparable harm and the unavailability of an adequate remedy at law; (2) a substantial likelihood of success on the merits; (3) that the threatened injury to the petitioner outweighs any possible harm to the respondent; and (4) that issuance of the injunction would not disserve the public interest. Ga. Banking at 1225; see also Ames v. Ames, 204 So. 3d 132, 133–34 (Fla. 4th DCA 2016) (affirming ex parte preliminary injunction freezing accounts between family members, that were potentially being improperly dissipated, as the trust res was sufficiently specific, identifiable property or could be clearly traced in assets of the defendant).

Further, Rule 1.610(a)(2) provides that no evidence other than the affidavit or verified pleading shall be used to support the application for temporary injunction, unless the adverse party appears at the hearing or has received reasonable notice of the hearing. Fla. R. Civ. P. 1.610(a)(2). When the Court grants the injunction, it must: (i) be endorsed with the date and hour of entry; (ii) filed forthwith in the Clerk’s office; and (iii) define the injury, state findings by the Court why the injury may be irreparable, and give the reasons why the order was granted without notice if notice was not given. Fla. R. Civ. P. 1.610(a)(2).

Lastly, Florida Rule of Civil Procedure 1.610(b) provides that a bond must be given in an amount the Court deems proper, conditioned for the payment of costs and damages sustained by the adverse party if wrongfully enjoined. Fla. R. Civ. P. 1.610(b). In setting an injunction bond, the purpose of the injunction bond is solely to provide sufficient funds to cover the adverse party’s costs and damages if the injunction is wrongfully issued. Vargas v. Vargas, 771 So. 2d 594, 596 (Fla. 3d DCA 2000) (affirming preliminary injunction to freeze accounts where funds were traced).

Thus, seeking an emergency preliminary injunction is a strong tool to safeguard escrow or trust funds in crisis. A second and sometimes concurrent option is to request the imposition of a constructive trust.

B. Florida law empowers the Court to enter a constructive trust to freeze an account improperly holding escrowed/trust funds, and transfer them back to their origin or the Court Registry.

Under Florida law, constructive trust will be imposed where a party through questionable means gains something for himself which in equity and good conscience he should not be permitted to hold. SupraStewart Title Guar. Co. v. Title Dynamics, Inc., 2005WL8159430 at *4 (M.D. Fla. June 15, 2005) (citing Saporta v. Saporta, 766 So. 2d 379, 381–82 (Fla. 3d DCA 2000)). A constructive trust will be imposed even when property is not acquired by fraud, if it will prevent unjust enrichment. Id.

A plaintiff must allege the following elements to state a claim for imposition of a constructive trust: (1) an express or implied promise; (2) transfer of property and reliance thereon; (3) a confidential relationship; and (4) unjust enrichment. Id. (citing Saporta at 381). The res must be specific, identifiable property or traceable to the plaintiff’s assets. Id. Under the constructive trust doctrine, a rightful owner of misappropriated trust property can reach the property, even from subsequent holders. Id. Thus, a person seeking to salvage, protect, or recover escrowed/trust funds in crisis may consider seeking a constructive trust in emergency motion, either by itself or in tandem with a request for preliminary injunction.

In sum, Florida law empowers the Court to enter a preliminary injunction to freeze improperly held escrowed/trust funds in the holder’s account, and transfer them back to the originator or the Court Registry. Florida law also empowers the Court to enter a constructive trust to freeze an account improperly holding escrowed/trust funds, and transfer them back to the originator or the Court Registry. We urge you to seek legal counsel in employing these methods. If you have any questions about escrow disputes or trust disputes, escrow and trust emergencies and catastrophes, please contact Bernhard Law Firm at www.bernhardlawfirm.com, 786-871-3349, abernhard@bernhardlawfirm.com.

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