Legal Blog

The Risk is Real: Customer Deposits Lost in Bankruptcy (Part 3 of 3)


This is the third post in the three-part blog series, The Risk is Real. Visit here to read Part One and Part Two.

 

Customer Deposit Claims in Bankruptcy

If the company filed bankruptcy, the customers only recourse in most instances is to file a claim in the bankruptcy case.  There is some good news in all this, for some of the customers, some of the time.  A portion of a customer deposit claim is entitled to “priority” treatment as it is one of the types of claims that the Bankruptcy Code places toward the top of the order of priority for payment of creditors’ claims.  The amount of the deposit that is given priority treatment is presently capped at $2,775, and is adjusted based on the consumer price index every three years.   As brick and mortar retail stores suffer substantial losses of market share to on-line retailers, there have been several large retail stores that have filed for bankruptcy with significant customer deposit claims. If a customer paid a deposit of $3,500 toward the purchase of a new sofa and before the sofa is delivered, the store files for bankruptcy, $2,775 of the customer’s claim is entitled to priority status, and is paid ahead of most other claims.

Does the provision for priority status of consumer deposit claims cover deposits paid to home builders?  The bankruptcy court for the Eastern District of Virginia answered that question affirmatively in In Re  James R. Corbitt Co., 48 B. R. 937 (Bankr. E.D. Va. 1985).  Not only was the claim entitled to priority status up to the cap amount, each individual who signed the contract with the builder held his or her own claim; it was not one priority claim per contract, but one priority claim per individual.

 

 

The portion of the claim for each individual in excess of the statutory cap falls into the pool of general unsecured claims that are paid last and are therefore at much higher risk of receiving no payment or a small percentage of their claims.  Thus, while it is possible that the priority portion of the claim is paid in full, to the extent that the claim amount exceeds the cap amount for priority claims, the general unsecured claim will in most instances receive pennies on the dollar, if anything.

 

Other Sources of Payment of Customer Deposit Claims

There may be insurance or bonds to cover losses such as customer deposits if a company goes out of business.  The State of Maryland has a Home Builder Guaranty Fund that will pay claims for lost deposits, defective work, and other claims, subject to certain caps, terms and restrictions.  For forms and frequently asked questions, visit here.

 

 

Questions about customer deposits or other bankruptcy concerns? Contact Joe Bellinger at jbellinger@offitkurman.com or 410-209-6415.

 

 

 

 

ABOUT JOSEPH BELLINGER

jbellinger@offitkurman.com | 410.209.6415

Joseph Bellinger has over 25 years of experience as a bankruptcy attorney and has represented virtually every party in interest in Chapter 11 business bankruptcy cases, including Debtors, equity holders, secured lenders, Committees of Unsecured Creditors, Chapter 11 trustees, and purchasers of the Debtor’s business. Mr. Bellinger brings to each case his breadth of experience litigating cases in bankruptcy courts, federal district courts, and state courts as an aggressive litigator and an effective negotiator. Mr. Bellinger works with his clients to evaluate the costs and benefits of alternative strategies in order to develop a strategy that his clients understand and can afford, and that will lead to a favorable outcome at trial or in a negotiated settlement.

 

 

 

 

ABOUT OFFIT KURMAN

Offit Kurman is one of the fastest-growing, full-service law firms in the Mid-Atlantic region. With over 140 attorneys offering a comprehensive range of services in virtually every legal category, the firm is well positioned to meet the needs of dynamic businesses and the people who own and operate them. Our eleven offices serve individual and corporate clients in the Virginia, Washington, DC, Maryland, Delaware, Pennsylvania, New Jersey, and New York City regions. At Offit Kurman, we are our clients’ most trusted legal advisors, professionals who help maximize and protect business value and personal wealth. In every interaction, we consistently maintain our clients’ confidence by remaining focused on furthering their objectives and achieving their goals in an efficient manner. Trust, knowledge, confidence—in a partner, that’s perfect.

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