Who Keeps the Money?

I have recently had a new experience in a recent transaction.  I was representing a seller and an offer was accepted.  It was a strong offer, the buyer's agent claimed his client could pay cash if needed but may want to finance the loan.  The sellers were okay with either way, how could a person with enough cash to buy and a preapproval not qualify for a loan, right?  The proof of funds was from a house the buyer selling and it was closing in a matter of days and money in a bank account.  The buyer's house closed, but after more investigation I discovered the property was co-owned.  The buyer received well over $100,000 dollars for his share and all of it was being used as a down payment.  Okay, so we were mislead a little, but with over $130,000 as a down payment, almost half the cost of the house what could go wrong.  The escrow period continued and towards the end the buyer's agent asked for an extension.  The lender said buyer's funds needed to season before the lender would allow them to be used towards the purchase.  No problem, it is only a couple of weeks and we were guaranteed by both the loan officer and buyer's agent nothing else would get in the way of closing. So the sellers agreed to the extension.  Now the escrow is about to expire again and after waiting a couple days for an update from the buyer's agent I was told the lender questioned why someone else was making the buyer's car payments.  Well the answer was simple and we were guaranteed the buyer would clear it up in a matter of a couple of days.  A couple of days passed and the buyer did not clear up the problem.  The agent pleads for another extension of just a few days and the sellers again granted the time.  After sixty days of waiting it made sense to wait another five days.  So I sent out the forty eight hour notice to perform to protect the sellers.  And sure enough, you guessed, the buyer did not perform.  The loan was denied and the buyers agent sent a cancellation of contract on the end of the very last day of escrow.  Anticipating this, I already had a cancellation waiting to send from the sellers.  The difference between the two cancellation of contracts is that the seller wanted the ten thousand dollar deposit to go to them and the buyer thought it should returned to him.  What would you do?  We'll find out as this soap opera plays out.  By the way, after the house was on the market for only three days the sellers have a new solid offer over asking price.