Adam Wolk, left, and Barbara Goodstein, right, of Mayer Brown. Courtesy photos

Introduction

In February, this column discussed a new state law proposed by the Uniform Law Commission, namely the Uniform Special Deposits Act (the "USDA" or the "act"). The act seeks to eliminate inconsistent treatment across states of structures, such as trusts and escrows, intended to insulate deposit account assets from the risk of the depositor's bankruptcy.

A recent New York case, In re Odonata Ltd., 658 B.R. 62 (Bankr. S.D.N.Y. 2024), held that funds deposited in a purported escrow account were in fact not exempt from being considered "property of the estate." This decision articulates better than most the requirements, at least under New York law, for escrow accounts (see the discussion in our column "Trusts, Escrows and Property of the Estate (or Not)," 269 N.Y.L.J. 109 (June 2023)). It also emphasizes the need for a uniform solution for these and similar structures that is workable across state lines. Today, we discuss the Odonata case and the benefits of a uniform statute on these issues.

Factual Background

In re Odonata Ltd. involved a dispute between Odonata Ltd. ("Odonata"), the owner and operator of a hair salon operating under the name "Cowlicks Japan," which leased space from Baja 137 LLC ("Baja"). In 2021, Odonata and Baja engaged in negotiations to modify and extend Baja's lease, which led to a proposed lease amendment. Odonata executed the proposed lease and sent it to Baja for signature, but Baja refused to sign the amendment, citing change in circumstances, and requesting better terms.