Case: In Re Arrow Mill Dev. Corp. 185 B.R. 190 (Bkrtcy.D.N.J.
Is bankrupt tenant's estate entitled to return of rent paid into
escrow as means of addressing space audit dispute before bankruptcy?
In this case, landlord and tenant disagreed as to amount of square
footage covered by lease. Landlord claimed that the leased premises
included 43,518.18 square feet, while tenant claimed there were only
40,940.76 square feet. The parties agreed informally that tenant would
pay the disputed rent for the questioned square footage into escrow.
The parties then submitted the dispute as to the proper square footage
to arbitration. Thereafter, landlord filed for bankruptcy. The
arbitrator determined that the tenant was entitled to refund of the
sums paid into the escrow. The landlord claimed that its bankruptcy
entitled it to a payment of the escrowed money which it characterized
as rent owned by the estate.
The bankruptcy court held that the sums paid into escrow must be
distributed out of escrow in accordance with the escrow agreement. The
escrow agreement required the escrowed sums to be paid out in
accordance with the arbitrator's decision. The bankruptcy court held
that the tenant was entitled to recover the rents which it paid into
the escrow in accordance with the arbitrator's decision
notwithstanding the landlord's bankruptcy.