Lawrence v. Commonwealth of Kentucky Transportation Cabinet (In re Shelbyville Rd Shoppes, LLC)

Summarized by J. Debbeler , Bricker Graydon LLP
11 years 1 month ago

Citation:

15a0002p.06

Tag(s):

Ruling:

The Sixth Circuit held that the Chapter 7 trustee could not compel the turnover under Section 542 of a "good faith" deposit made by the debtor/purchaser pre-petition as part of a real estate purchase contract as the debtor had no present right to possess the deposit as of the petition date and no legal or equitable interest in the deposit as of that date.

Procedural context:

Chapter 7 trustee filed a turnover action to recover a $962,574.65 deposit made by a prospective purchaser in a $4.812 million dollar real estate contract with the Commonwealth of Kentucky as the seller. The purchaser assigned the purchase contract to the debtor. Two days before the expiration of the extension to close the transaction the petition was filed by the debtor. The bankruptcy court denied the trustee's motion for summary judgment on the turnover count and dismissed the turnover count. The trustee appealed to the district court and it affirmed the bankruptcy court and held that the debtor had no right to possess or use the deposit prior to the filing of the petition and that the deposit was not held in escrow. The Sixth Circuit affirmed the district court.

Facts:

The deposit was made payable to the "Ky. State Treasurer" and the purchase contract provided that the deposit would be forfeited to the seller (Commonwealth of Ky.) as liquidated damages if the purchaser failed to consummate the transaction. There were several extensions of the closing of the purchase contract and the petition was filed two days before the last extension expired. The Sixth Circuit stated that neither party was in default on the date of the petition and the debtor could not have demanded repayment of the deposit on that date. The deposit served as security for the seller to guard against the purchaser's default (the real estate was tied up for over three years). The rejection of the purchase agreement under Section 365(d)(1) by the trustee did not compel the seller to refund the deposit. The purchase contract had no provisions which would allow the debtor to recover the deposit. There was no escrow agreement or escrow provisions.

Judge(s):

Guy, Rogers, Donald- Circuit Judges

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