The mortgagor, as debtor in possession, or a trustee appointed for the bankruptcy estate, may also argue that the automatic stay, which arises by operation of law under § 362(a) of the Bankruptcy Code ("Code"), applies as of the filing date of the bankruptcy petition and prohibits the delivery of the deed and any other escrowed documents.29 Even if the escrowed documents have been delivered out of escrow to the mortgagee prior to the mortgagor's bankruptcy, the mortgagor or the bankruptcy trustee may seek to avoid the transfer as a fraudulent conveyance, a preference, or an unperfected lien subject to the "strong arm" powers of the trustee under section 544 of the Code.29 Section 544 vests a bankruptcy trustee with the rights of a hypothetical lien creditor whose lien was perfected at the time of the filing of the bankruptcy petition. If another creditor who claims a lien against the applicable property has not properly perfected its lien as of the date of the filing of the bankruptcy petition, the trustee or the debtor in possession can avoid that creditor's lien and that creditor then becomes merely a general creditor of the estate.

The bankruptcy court must first determine if the escrowed property is part of the estate. Section 541 of the Code defines property of the estate to include all legal or equitable interests of the debtor in property as of the commencement of the bankruptcy case. In order to determine the debtor's interest in the escrowed property or account, the bankruptcy court must look to state law.30 The issue of when an actual transfer of the escrowed property has occurred, under § 101(54) of the Code, is also a matter of state law. Section 101(54) defines "transfer" as "every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor's equity of redemption."31 The courts differ as to whether title to the escrowed property is transferred at the inception of the escrow32 or only when the condition of the escrow is met.33 Some courts further hold that upon fulfillment of the escrow condition, the vesting of legal title relates back to the creation of the escrow when equitable considerations mandate such a result.34

For purposes of determining the preference limitation period (ninety days, or, in the case of a transfer to an insider, one year, under § 547 of the Code) or the fraudulent conveyance limitation period (one year under § 548 of the Code) for bringing an avoidance action (which are usually significantly longer under similar state fraudulent conveyance and fraudulent transfer laws), some courts (as noted above) have held that the transaction is no longer executory and the transfer period commences when the deed is placed in escrow and not when the deed is conveyed or released out of escrow.35 It is therefore important that the title insurance company handling the escrow arrangement and insuring title upon delivery or release of the deed ascertain, both when the deed is placed in escrow and again when it is released and the title company is asked to provide the policy, that there is fair and adequate consideration for the transaction (such as extinguishment or reduction of the underlying indebtedness and waiver, forbearance or relinquishment of the rights and remedies of the mortgagee otherwise available for non-payment of the debt) and that the value of the property is less than the outstanding debt. Otherwise, the title insurer will be unwilling to remove the creditors' rights exclusion from the title policy insuring the mortgagee's interest in the transferred property.36

The title insurance company will also want to review and approve all the underlying documents and agreements. It will further require that the escrow agreement contain provisions absolving it from all liability except for its gross negligence and permitting it to bring an interpleader action in the event of a dispute among any of the parties to the agreement.37

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