William E. Johnson and Tyra Gilliam

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
RALEIGH DIVISION
IN RE:
WILLIAM E. JOHNSON
REBECCA C. JOHNSON
DEBTORS
CASE NO.
05-01845-5-ATS
ORDER REGARDING MOTION TO ALLOW ESTATE TO RETAIN DEPOSIT
The matter before the court is the chapter 7 trustee’s motion to
allow the bankruptcy estate to retain an earnest money deposit. A
hearing took place in Raleigh, North Carolina on October 25, 2005.
William E. Johnson and Rebecca C. Johnson filed a petition for
relief under chapter 7 of the Bankruptcy Code on May 5, 2005, and
Joseph N. Callaway, II was appointed trustee. Among the estate’s
assets is a piece of property described as Lot 14 in Landmark
Subdivision, Johnston County, North Carolina. Stock Building Supply
holds a first deed of trust on the property with an approximate balance
on the petition date of $38,718.79. Stock filed a motion for relief
from the automatic stay to foreclose on the property, and Stock and the
trustee reached an agreement to allow the trustee an opportunity to
sell the property.
Prior to the filing of the petition, Tyra Gilliam expressed an
interest in purchasing the property. Postpetition, the trustee
approached Ms. Gilliam and reached an agreement to sell the property
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for $40,000, with a $4,000 deposit to be held in escrow. The trustee’s
agreement with Stock provided that of the $40,000 proceeds, Stock would
receive $36,000 and the estate would retain $4,000. The agreement
further provided that the trustee would have 90 days to sell the
property, after which the stay would lift. The agreement between Stock
and the trustee was memorialized in a consent order entered on August
12, 2005, and an order allowing the sale to Ms. Gilliam was also
entered on August 12, 2005.
The trustee provided the trustee’s deed and other necessary
information to Ms. Gilliam’s closing attorney, but the sale failed to
close. The trustee now seeks an order allowing it to retain the $4,000
earnest money deposit for the benefit of the estate, contending that
the estate has been damaged by Ms. Gilliam’s breach of contract in the
amount of $4,000. Stock contends that it is entitled to 90 percent of
the escrowed funds by virtue of its agreement with the trustee, while
Ms. Gilliam contends that the contract did not provide for forfeiture
of the $4,000 should the sale fail to close, and she is entitled to a
return of the funds.
The agreement between the trustee and Ms. Gilliam is memorialized
in the motion to sell free and clear of liens and the order allowing
the sale. While those documents reference the earnest money escrow
deposit, neither provides for the forfeiture of the funds in the event
Ms. Gilliam did not purchase the property. The court agrees with Ms.
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1 It may be that Ms. Gilliam will still be responsible for any
costs incurred by the trustee in preparing for the closing that did not
take place.
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Gilliam that the funds are not automatically forfeited as a result of
her failure to close.
On the other hand, it is possible that the estate will be damaged
by Ms. Gilliam’s breach of contract. At this time, however, the amount
of damages cannot be ascertained. The automatic stay will terminate on
November 10, 2005, after which Stock will pursue its foreclosure.
Should the property sell for more than the balance due on the debt to
Stock, the estate will receive proceeds from the sale. If those
proceeds exceed $4,000, then the estate will have suffered no damages
and Ms. Gilliam will be entitled to a refund of the deposit.1 If the
proceeds do not exceed $4,000, then the estate will have incurred
damages in some amount. Should the property sell for less than the
balance owed on the debt to Stock, the estate may be further damaged by
Stock’s additional unsecured claim against the estate, and Ms. Gilliam
may find herself exposed to more than $4,000 in damages.
In summary, the court finds that the $4,000 will not be forfeited
as a result of Ms. Gilliam’s failure to close, but because Ms. Gilliam
may be responsible for any damages suffered by the estate as a result
of her breach of contract, the trustee shall continue to hold the
$4,000 in trust until the foreclosure sale concludes and any damages
are determined.
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Based on the foregoing, the motion to allow the estate to retain
the earnest money deposit is held in abeyance pending the completion of
the foreclosure sale.
This order should not preclude the parties from seeking a
consensual resolution of this dispute.
SO ORDERED.
DATED: October 25, 2005
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