Tenant Must Return Refunded Security Deposit to Bankrupt Owner

November 1, 2003

A beer and wine store's lease required it to pay a security deposit and to get a liquor license. The lease said that if the tenant was unable to get the license, the lease would be terminated and the owner would return the security deposit. The tenant applied for the liquor license, but his application was denied. So the owner refunded the tenant's security deposit. The next day, the owner filed for bankruptcy and sued the tenant to get back the refunded security deposit.

A beer and wine store's lease required it to pay a security deposit and to get a liquor license. The lease said that if the tenant was unable to get the license, the lease would be terminated and the owner would return the security deposit. The tenant applied for the liquor license, but his application was denied. So the owner refunded the tenant's security deposit. The next day, the owner filed for bankruptcy and sued the tenant to get back the refunded security deposit.

A federal bankruptcy court in Delaware ruled that the tenant had to return the refunded security deposit because it was the property of the owner's estate. The court rejected the tenant's argument that the owner was essentially holding the security deposit in escrow. It noted that the lease said that the owner wasn't required to hold the security deposit in escrow and could mix it with other funds [In re: Hechinger Investment Co. of Del., Inc. v. Monga].

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