"By the complaint commencing this adversary proceeding the chapter 7 trustee seeks judgment pursuant to 11 U.S.C. ' 542 directing the defendant escrow agent and the defendant bank in which escrowed funds are deposited to turn over to the trustee as property of the estate monies in an escrow account.

The defendant escrow agent and defendant bank have filed answers indicating they do not claim an interest in th escrowed funds.

The defendant Federal Trade Commission (FTC) has moved to dismiss this adversary proceeding for lack of jurisdiction over the subject matter (the escrowed funds) and for failure to state a claim on which relief can be granted. . . .

The FTC contends subject matter jurisdiction is lacking because the funds in escrow are not property of the estate. According to counsel for the FTC the debtor has only a contingent right to the escrow fund, as does the FTC, and it is only this contingent right of the debtor and not the fund, that is property of the estate.

. . . .

Upon the commencement of this bankruptcy case all of the legal and equitable interests of Safety Plus, Inc. in property became property of the estate. 11 U.S.C. ' 541(a)(1). In its brief the Commission concedes that the determination of the nature and extent of the debtor's interest in property is governed by state law. . . . Under Kentucky law title to funds escrowed in connection with litigation remains in the depositor until the litigation is concluded adversely to the depositor. Mobile Companies, Inc. v. American States Ins., 823 S.W.2d 934 (Ky. App. 1981). Consequently, in this case when bankruptcy intervened title to the escrowed funds was in the debtor and thus the funds became property of the estate.

The FTC relies on 11 U.S.C. ' 541(d) which provides that property in which the debtor holds only legal title and not an equitable interest becomes property of the estate only to the extent of the debtor's legal title in such property, but not to the extent of any equitable interest in such property that the debtor does not hold. As indicated by legislative history, 11 U.S.C. ' 541(d) was enacted to protect secondary mortgage market transactions, and has no application to the facts of this case, especially in view of the fact that under Kentucky law legal title to the entire amount of the funds placed in escrow remained in the debtor.

The FTC argues that the debtor retained no equitable interest in the funds. However, the agreed order pursuant to which the funds were escrowed provided that the debtor is not estopped from seeking an ultimate dissolution of the escrow account and distribution back to the debtor. Consequently, the debtor retained an equitable interest in as well as legal title to the funds. When bankruptcy intervened the debtor’s equitable interest in the funds was equivalent to the equitable interest of the FTC therein and legal title to the funds was in the debtor as well.

The FTC cites several cases in support of its contention that the escrowed funds are not property of the estate. None of the cases appear to be apposite.

The funds held in escrow in In re All Chemical Isotope Enrichment, Inc., 127 B.R. 829 (Bankr. E.D. Tenn. 1991), were not deposited by the debtor; whereas, in this case the funds were deposited in their entirety by Safety Plus, Inc.

The source of the funds is a factor to be considered in determining whether escrowed monies are property of the estate. In re World Communications, Inc., 72 B.R. 498 (D. Utah 1987).

In Matter of Newcomb, 744 F.2d 621 (8th Cir. 1984), the conditions of the escrow had been met and all legal and equitable interests in the funds in escrow had passed to the United States before bankruptcy intervened. In the case before this court the litigation was unresolved when bankruptcy intervened.

In re Palm Beach Heights Development & Sales Corp., 52 B.R. 181 (Bankr. S.D. Fla. 1985), involved the disposition of statutory trust funds, as distinguished from monies held in escrow. The case of In re Cedar Rapids Meats, Inc., 121 B.R. 562 (Bankr. N.D. Iowa 1990), similarly involves the disposition of funds held in a statutory trust. See also Selby v. Ford Motor Co., 590 F.2d 642 (6th Cir. 1979).

In the present case the ex parte temporary restraining order obtained by the FTC, based on allegations that the debtor was engaging in false advertising amounting to unfair or deceptive practices in commerce, had effectively terminated the business of the debtor. . . .

. . . .

[T]itle 11 U.S.C. ' 507 provides clear congressional direction with respect to the distribution of monies of the estate. Claims for unpaid commissions are accorded third priority; claims for refunds of consumer deposits are awarded sixth priority. . . . Consequently, it appears to this court that the objective of consumer redress will be better served by distribution of the escrowed funds through the bankruptcy case. . . .

Dated: Feb. 1, 1994.

By the court -

Joe Lee, Chief Judge

Copies to:

Robert J. Brown

J. James Rogan

Thomas A. Cohn

Kevin M. McGuire

Robert L. Treadway