Escrow Agreements: The Bankruptcy Effect

Summary

This practice note discusses the treatment of escrow agreements in bankruptcy cases. What happens if one party to an escrow agreement files for bankruptcy relief or is the subject of an involuntary case? The overlay of a bankruptcy case on an existing escrow agreement raises three key legal questions. First, is the property subject to the escrow agreement in question property of the bankruptcy estate pursuant to Section 541(a)(1) of the Bankruptcy Code? Second, is the escrow agreement an executory contract that the trustee may assume or reject under Section 365(a) of the Bankruptcy Code? Third, was the transfer of property into the escrow a voidable transaction?