Are Your Deposits Bank Collateral?
At the time of filing Chapter 11, Village Homes of Colorado had approximately $2 million in its deposit accounts, of which a portion consisted of earnest money deposits.
There’s a minor wrangle over whether Village Homes can use these funds. On one hand, the home builder asserted that the lenders only had security over the real estate, not these funds. On the other hand, at least 1 lender, Guaranty Bank, has responding by saying that the funds were either sale proceeds or advances made by the banks (i.e., it was the banks’ collateral).
Pending a final hearing on this dispute, the court granted an interim order allowing Village Homes to use these deposits for usual and necessary business expenses, on the condition that it provided adequate protection for the parties claiming an interest in the funds.
What is adequate protection? It means the banks now get a replacement lien on certain real estate for the funds used by Village Homes. It’s a great transformation – if home buyers’ deposits were being used to sustain the builder’s business, they are then transformed from cash into claims on the property held by banks.
