Section 541 Property of the estate

In re S.H Leggitt (April 12, 2011)
Issues:   Plaintiffs had filed a class action suit in state court against certain corporations as Defendants in a district court in Kansas. Previously, the Debtor (one of the named Defendants), and several other corporations had entered into a stock purchase agreement whereby certain funds were deposited into escrow pursuant to an escrow agreement (“Escrow Funds”). Plaintiffs filed a Motion for Relief from Stay in Debtor’s bankruptcy case requesting the Court to determine that the automatic stay of 11 U.S.C. §362 did not apply to the state court suit and the Escrow Funds, or alternatively for relief from stay. The Debtor and Creditors Committee opposed the Motion. Holdings:  The Court determined that the Debtor’s interest in the Escrow Funds was, at a minimum, “arguable property” of the Debtor’s bankruptcy estate and the subject of a “non-frivolous dispute”; and thus the automatic stay of 11 U.S.C. §362 applied to a portion of the Escrow Funds. From the limited evidence presented, it appeared that the Debtor had a right to a portion of the Escrow Funds upon termination of the escrow agreement.  The Court also concluded that a determination and declaration of whether and the extent the Debtor had an interest in such Escrow Funds must be made as part of an adversary proceeding (and not through a motion for relief from stay) due to intertwined and complex facts, numerous potential impacted parties, and complex transactional documents in this particular case.  The Court also lifted the automatic stay for “cause” to allow the state court suit to proceed subject to the limitations placed on the Escrow Funds by the Court, as the state court suit dealt with interpretation of Kansas law and other state laws, issues relating to class certification were pending in state court, and after considering the interests of judicial economy, comity, jurisdiction, and balancing of harms.