Commercial Division Blog

Current Developments in the Commercial Divisions of the
New York State Courts
Posted: November 23, 2017

If a Debtor Controls Funds Escrowed to Pay Specific Creditors, Those Funds Are Subject to Other Creditors’ Claims

On November 15, 2017, the Second Department issued a decision in Freedman v. Hason, 2017 NY Slip Op. 07977, holding that even if a debtor escrows funds to pay specific creditors, those funds are subject to the claims of other creditors if the debtor retains control of the funds, explaining:

Hason’s contention that the proceeds of a sale of real property to a bona fide purchaser for value are free of any claims by creditors of the recipient of the proceeds is without merit. Rather, when a plaintiff cannot follow the land because it was sold to a bona fide purchaser for value, the plaintiff may follow the money to assert a claim against the proceeds of the sale. Where a debtor places funds in escrow for the payment of specific creditors, as long as those funds remain subject to the debtor’s present or future control, those funds are subject to claims brought by other creditors who know about the escrow funds.

Here, the funds held in escrow were not transferred to anyone at the time of the sale. More than a year later, in February 2016, Hason agreed to transfer the funds to Freedman, demonstrating that Hason retained control over the funds. The judgment held by Uzi and assigned to Chicago Title was a superior claim to the contract right of Freedman to those funds. Accordingly, Hason’s renewed motion to direct the release of the escrow funds to Freeman was properly denied.

(Internal citations and quotations omitted).

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