Escrow Agreement Clause
(Identifying and Managing Bankruptcy Risk)

Summary

This template is a clause that may be used in drafting an escrow agreement to address the treatment of escrowed funds in the event a party files for bankruptcy. This template includes practical guidance and drafting notes. Whether property being held in escrow when a case is filed under the Bankruptcy Code constitutes property of the bankruptcy estate is a mixed question of state and federal law. Factors considered by various courts include whether the debtor entity initiated or agreed to the creation of the escrow, whether the debtor entity exercises any degree of control over the escrow, the source of the funds that have funded the escrow, the beneficiary of the escrow, and finally, the purpose of the escrow. After determining the nature of an estate's interest in an escrow, courts consider whether the escrow constitutes property of the estate. Whether the res of an escrow includes property of the estate is a key issue for practitioners, as property of the estate is subject to the jurisdiction of the bankruptcy court and subject to the automatic stay. For more information on escrow agreements in bankruptcy, see Escrow Agreements: The Bankruptcy Effect.