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Case:  In Re Arrow Mill Dev. Corp. 185 B.R. 190 (Bkrtcy.D.N.J. 1995)

Issue
Is bankrupt tenant's estate entitled to return of rent paid into escrow as means of addressing space audit dispute before bankruptcy?

Discussion
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.

Holding
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.