The First Circuit Court of Appeals recently decided the case of Ford, Trustee v. Skorich, holding that the creation of an escrow account for the proceeds of the sale of real estate did not constitute a preferential transfer. The $300,000 from the sale of the real estate were generated during a divorce in which the debtor and his former spouse placed the money into the escrow account pursuant to a state divorce court order which protected the funds until a final divorce judgment. The state court awarded the entire account to the debtor's former spouse in the divorce judgment.
After the debtor fled Chapter 7, the debtor's bankruptcy trustee attempted to recover the funds in the escrow account, asserting that the placement of the money into the account was a preferential transfer. Preferential transfers can be "avoided" in bankruptcy if the transfers are to a creditor for a debt that arose before the bankruptcy.
The First Circuit concluded that the placement of the funds into the account took place at a time when the debtor's spouse was not a creditor, and the transfer was not on account of of a pre-petition debt. This decision is important in its discussion of the intersection of bankruptcy and divorce. Where there is a divorce pending at the time of a bankruptcy filing, and assets are transferred from the names of the divorcing parties into escrow accounts, it is unlikely that a bankruptcy court will intefere with a state court distribution of those assets in a divorce judgment.