Escrow Funds: If You Aren’t Careful, Your Funds May Become Part Of A Bankruptcy Estate

Quinlan v. AFI Services, LLC (In re AFI Services, LLC), 486 B.R. 827 (Bankr. S.D. Tex. 2013) -

The debtor (AFIS) entered into a joint venture agreement with a third party (Quinlan) to acquire an apartment complex pursuant to a purchase agreement between the debtor and the seller. Under the JV agreement, the debtor was supposed to form a new single purpose entity to acquire the property on behalf of the joint venture, and in return Quinlan deposited $1 million with the title company, as contemplated by a proposed amendment to the purchase agreement that would extend the closing deadline of April 30, 2012 for an additional 60 days. Although Quinlan wired the money, the amendment was not signed, the deal fell through, and the debtor filed bankruptcy. Not surprisingly, Quinlan wanted his money back.

The joint venture agreement was signed on April 27, 2012, and contemplated that the amendment extending the closing deadline would be signed contemporaneously. However, on that same day the seller advised that it still expected the sale to close on April 30, and the amendment was not signed. The following events occurred on April 30:

10:25 a.m.: Quinlan wired $1 million to the title company "on behalf of AFIS" with "no further qualifications, limitations, restrictions, or reservations." 1:22 p.m.: Seller's attorney sent an email message to the title company with a copy to the debtor's corporate attorney asking the title company to "please cause this additional earnest money to be wired back to the sender as soon as possible." In reciting these facts, the court noted that the purchase agreement and escrow instructions did not provide for email notice, and consequently the title company "did not receive proper notice of this instruction." The title company did not return the money to Quinlan. 8:34 p.m.: The debtor filed bankruptcy. On June 7, the title company asked the debtor's corporate counsel for instructions regarding the $1 million. In response, the debtor's bankruptcy attorney requested that the funds be wired to his firm's IOLTA trust account, which the title company did. The funds were then deposited with the bankruptcy court.

On July 11, Quinlan filed an adversary proceeding in the bankruptcy court requesting a declaratory judgment that the bankruptcy estate had no interest and he was the sole owner of the $1 million. On October 5, he filed a motion for partial summary judgment, and on October 26, the trustee filed a counter motion arguing...