Gloria Nelson and her mother, Linda Mitchell, rented a single-family house from Bertha McGee. The tenants paid a $2,500 cash security deposit to McGee.

Local city ordinance requires landlords to place tenant security deposits into a segregated interest-bearing account, which McGee failed to do.

Purchase Bob Bruss reports online.

When a dispute arose about the condition of the premises, McGee began an eviction. But the tenants voluntarily moved out, filing a counterclaim for return of their $2,500 security deposit.

However, McGee then spent the security deposit. She said she anticipated the judge would decide she didn’t have to refund the $2,500 to her tenants.

But the judge ruled the tenants had complied with their obligations and McGee owed double damages, plus interest ($5,208) for failing to return the security deposit after the tenants vacated.

Unable to pay the $5,208 judgment, landlord McGee filed Chapter 7 bankruptcy. She sought a discharge from her $5,208 judgment to her former tenants.

In this case of first impression in all the U.S. circuit courts, the judge explained, the issue is whether landlord McGee breached her fiduciary duty to her former tenants by failing to promptly refund their security deposit judgment.

If you were the bankruptcy court judge would you order the debtor landlord to pay the $5,208 judgment to the tenants?

The judge said yes!

The local city ordinance required landlords to keep tenant security deposits in separate interest-bearing accounts, the judge began. Landlord McGee failed to do so, he noted.

Because McGee failed to keep her tenant’s security deposit in a separate account, she breached her fiduciary duty to them, the judge explained.

“Instead she made off with the money, an act of defalcation that disqualifies her from receiving a bankruptcy discharge,” the judge ruled. Therefore, McGee must pay the $5,208 judgment to her ex-tenants before she can receive a bankruptcy discharge, the judge concluded.

Based on the 2003 U.S. Court of Appeals decision in In Re McGee, 353 Fed.3d 537.

(For more information on Bob Bruss publications, visit his
Real Estate Center
).

***

Send a Letter to the Editor for publication.
Send a comment or news tip to our newsroom.
Please include the headline of the story.

Show Comments Hide Comments

Comments

Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
Success!
Thank you for subscribing to Morning Headlines.
Back to top
×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription