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Earnest money deposit on real estate sale not included in bankruptcy estate

The bankruptcy court properly rejected the Chapter 7 trustee's "turnover" request for a good faith deposit on a proposed real estate purchase that had been assigned to the debtor because the debtor did not possess either a legal or an equitable property interest in the deposit at the time it filed for bankruptcy. The debtor was assigned an agreement to purchase property (the Agreement) from the assignor's negotiations with the Commonwealth of Kentucky Transportation Cabinet (the Cabinet). The debtor filed for Chapter 7 relief two days before the expiration of the Agreement's closing period, and the Agreement was then deemed rejected under § 365(d)(1). The trustee later sought turnover of the good-faith purchase deposit under § 542. The court upheld the district court's affirmance of the bankruptcy court's dismissal because "'fundamental to the concept of "Turnover" is that the asset to be turned over must be property of the debtor's bankruptcy estate.'" When the debtor filed its voluntary Chapter 7 petition, it had "no 'present right' to possess the deposit, and thus, no legal or equitable interest in it. A bankruptcy estate is comprised of 'all legal or equitable interests of the debtor in property as of the commencement of the case.'" At the time the petition was filed, the debtor only had an interest "in the Agreement, not the deposit." The deposit, "as a stand-alone interest, was beyond the reach of rejection." Not only did the debtor lack a "contractual interest" in the deposit, the trustee could not prevail on his turnover request based on an "equitable interest" at the time the bankruptcy was filed. The court rejected the trustee's argument that the good faith deposit was subject to § 542 turnover because it was held in escrow, concluding that it was not held in escrow. The Agreement provided for the "delivery of the funds to the grantee - the Cabinet - as opposed to a third party[;]" therefore, under Kentucky law, the deposit was not held in escrow. The trustee's claim that the transaction for the sale of land between the debtor and the Cabinet was a "contract for deed" also failed "because both the Agreement and the parties' actions unambiguously show that the debtor never acquired an immediate right to use or possess the land prior to filing for Chapter 7 relief." Affirmed.


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