Escrow and Holdback Claims After Selling a Business: What Happens to the Money
Last updated: November 2026. Reviewed by Pavel Kolmogorov, California business litigation attorney (State Bar No. 321018).
When a buyer makes an indemnity escrow claim before the release date, the escrow holder follows its instructions. If they say to hold a claimed amount, the money stays put until both sides agree or a court or arbitrator decides. In California a suit on the written agreement generally may be filed within four years, unless the agreement clearly and reasonably shortens that time. (Code Civ. Proc., § 337, subd. (a).) Kolmogorov Law, P.C., a business litigation firm in Irvine, represents sellers and buyers in these disputes.
Call (909) 235-6116 or contact us online to discuss a frozen escrow, a holdback, or an indemnity claim after a sale.
What happens when an indemnity escrow claim arrives
A seller has waited for the release date to collect the last part of the price. Shortly before that date, the buyer delivers a claim notice. It alleges breached representations and names an amount close to the whole fund.
Two documents now control. The purchase agreement says what the buyer may claim and how. The escrow agreement says what the holder does with the money while the claim is open.
An escrow holder does not judge the claim. The California Supreme Court has said that, absent clear evidence of fraud, an escrow holder's obligations are limited to compliance with the parties' instructions. If the instructions say to hold any amount covered by a claim notice, the holder will hold it.
A holdback is different in one respect. No neutral party has the money. The buyer simply has not paid it, and the seller's remedy is a claim against the buyer for the unpaid price.
Was the claim notice valid?
Timing first. A notice delivered on the last day is as good as one delivered a year earlier, if the agreement measures the deadline by delivery and the notice meets its terms.
Then content. The agreement may require the notice to describe the claim in reasonable detail, identify the representation involved, and state the amount or a good faith estimate. A one-line notice may not satisfy that standard. Clear and explicit contract language governs. (Civ. Code, § 1638.)
Then the kind of claim. A claim based on a lawsuit by a third party against the business follows the tender and defense rules on our page about indemnification clauses. A direct claim, where the buyer says the business was not as represented, is in substance a claim for breach of the agreement.
If the buyer's notice is really about closing-date accounting, see our page on working capital adjustment disputes.
Survival periods and the time to sue
A purchase agreement may say the representations survive closing for a stated period. Whether that period is also the deadline to sue depends on the wording.
A federal appeals court applying California law considered a clause saying the representations would survive the closing for one year. It held the clause did not clearly shorten the time to file suit. The clause could mean only that a breach had to arise within the year, leaving the ordinary limitations period for the lawsuit. (Western Filter Corp. v. Argan, Inc. (9th Cir. 2008) 540 F.3d 947, 952-954.)
A California Court of Appeal later reached a different result on different language. An asset purchase agreement barred any indemnification claim made more than 24 months after the closing date. The court held that the indemnification article covered direct claims between the parties, enforced the 24-month limit, and declined to construe it strictly against the party relying on it. (Zalkind v. Ceradyne, Inc. (2011) 194 Cal.App.4th 1010, 1018, 1027, 1029-1030.)
The lesson is to read three provisions together: the survival clause, the claims deadline in the indemnity article, and any clause making indemnification the exclusive remedy. Our page on the statute of limitations for breach of contract covers the default periods.
Baskets, caps, and fraud
If the indemnity article sets a threshold the losses must exceed (a basket) or a ceiling on total recovery (a cap), test the claimed amount against both. Our page on purchase agreement disputes explains those limits.
Fraud is treated differently. A contract cannot exempt a party from responsibility for its own fraud. (Civ. Code, § 1668.) A buyer that can prove the seller knew a representation was false may pursue a fraud claim beyond the cap.
How a frozen escrow gets resolved
If the escrow agreement gives the seller a period to object in writing, use it. Check whether the agreement treats silence as consent to pay the buyer.
After an objection, the money generally moves in one of three ways. The parties sign joint written instructions. A court or arbitrator issues a final order, in the forum the purchase agreement names. Or the holder, facing two demands, deposits the fund with the court. California lets a person facing competing claims that may give rise to double liability bring an action requiring the claimants to litigate between themselves, and deposit an amount it admits is payable with the clerk. (Code Civ. Proc., § 386, subds. (b), (c).) Our page on interpleader explains that procedure.
A seller who prevails may recover more than the fund. Where the amount was certain and due on a particular day, interest runs from that day. (Civ. Code, § 3287, subd. (a).) Our page on prejudgment interest explains the rule.
The seller's next steps
Send the written objection within the period the escrow agreement sets, and state your grounds.
Ask for release of everything the notice does not cover. Whether the unclaimed balance is due on the release date depends on the escrow terms.
Compare the claimed amount with the basket and the cap, and compare the alleged breach with the disclosure schedules.
The buyer's side: making a claim that holds
Give notice as soon as you know of the claim, not on the last day. Follow the delivery terms exactly and include the detail the agreement asks for, with the documents behind your estimate.
Claim what you can support, and keep the support with the notice.
If you hold the money yourself under a holdback, check whether the agreement gives you a right to set off. Withholding an amount that is due can itself be a breach if your claim fails.
What to bring to the first meeting
- The purchase agreement, disclosure schedules, and escrow agreement.
- The claim notice, any objection, and proof of when each was delivered.
- The documents the buyer cites for its losses.
- Correspondence with the escrow holder.
- A timeline from closing to the release date.
Frequently asked questions
Part of my sale price is in escrow and the buyer filed a claim the day before release. What happens now?
The escrow holder follows its instructions, and if they say to hold any amount covered by a claim notice, it keeps that amount. A notice on the last day is timely if it meets the agreement's delivery and content terms. Send a written objection within the period the escrow agreement sets. If the dispute is not settled, a California court or arbitrator decides who receives the money.
The buyer of my business is holding back the final payment and says it has indemnity claims. Can it just keep the money?
Only if its claim is valid and timely and the agreement's payment and setoff terms let it withhold. With a holdback, the buyer owes you the money and must justify nonpayment under the contract. If its claim fails, the withholding can be a breach, and under California law a sum certain carries interest from the day it was due.
What is an indemnity escrow?
It is part of the purchase price deposited with a neutral holder at closing to secure the seller's indemnity obligations. The escrow agreement says when the holder releases it and what happens if the buyer makes a claim first. In California the holder's duties are generally limited to following the parties' instructions, so it will not decide a contested claim itself.
How long can a buyer make claims against the escrow?
Until the date the agreement sets for claims against the escrow. In California, whether a survival period for the representations also limits the time to file a lawsuit depends on the wording. Courts applying California law have enforced a clear contractual deadline for indemnification claims and have refused to read an ambiguous survival clause as a limitations period.
Can a buyer recover more than the escrow amount?
It depends on the cap. An agreement may limit indemnity recovery to the escrow for ordinary breaches of representations. California law does not allow a contract to exempt a party from its own fraud, so a buyer that proves fraud may seek damages beyond the fund.
Talk to a California breach of contract attorney
If an escrow or holdback from the sale of your company is tied up in a claim, or you need to make one, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is located in Irvine, California. Related reading: our breach of contract practice page and our page on purchase agreement disputes.
This page provides general information about California law and is not legal advice. Outcomes depend on the purchase agreement, the escrow terms, and the court or arbitrator.