Legal Blog

The Risk is Real: Customer Deposits Lost in Bankruptcy

This is the first post in the three-part blog series, The Risk is Real.

Case Study No. 1:

An award-winning custom home builder that had been in business in Maryland for over thirty years suddenly ceased operating and filed a bankruptcy liquidation proceeding in November 2015.  In the few weeks just prior to the bankruptcy filing, approximately twenty customers had signed contracts and paid deposits of up to $25,000 for the construction of their dream homes.  Their deposits were not held in escrow; they were used to pay operating expenses.  For several other customers, their homes were nearly completed, but for the past several weeks, there were only  delays and excuses.  Some of these families were stranded in hotels or staying with relatives as they waited helplessly for their homes to be completed.  Now, these customers would have to pay another builder to complete construction of their home, if they could afford to do so.  In addition, many of these customers learned that subcontractors and suppliers were not paid, and there were mechanic’s liens against their home that would have to be paid.  As the Thanksgiving Holiday approached, customers were asking questions that had never crossed their minds.

“Isn’t it a crime to spend my deposit?  I cannot buy a home without that money.”

“I made all of my payments to the builder on time.  Now, I have to pay the subcontractors and suppliers, and pay another builder to finish my house?”

Case Study No. 2:   

A Maryland vineyard boasting stunning views of the Chesapeake Bay served as a popular venue for weddings and other events for over ten years, until it suddenly closed its doors in August 2016.  The company filed a bankruptcy case to reorganize, but its case promptly converted to a liquidation proceeding.  Several brides-to-be had paid deposits of up $10,000 over a year ago to reserve the venue, and now they had only a few weeks or months to find another venue and figure out a way to pay for it. Numerous brides-to-be received an email from the owner bearing the bad news:  “We regret to inform you that [the company’s] ability to continue operations has been adversely impacted due to circumstances beyond our control.  Accordingly, we will generally not be able to host weddings or other events after August 9, 2016, and [the company] will be unable to honor any prior agreements in that regard.”  For many, cancelling their wedding was not an option, as out of town friends and relatives had booked their flights and hotels.

Brides-to-be were in a panic. “How am I going to pay for another venue? I paid over $5,000 and now they’ve closed down right before my wedding.”

One customer had heard rumors from her caterer that the venue may close, and so she called the owner looking for reassurance that her big day would not be ruined.  “The company promised me that my wedding would be fine. It’s shocking how fast they just closed everything down without a word to anyone.”


The businesses to whom consumers pay deposits of money are not like FDIC-insured banks.

When you deposit money in an account with a FDIC-insured financial institution, your money is insured (up to $250,000 in most instances) by Uncle Sam. That is a good thing, because over 500 financial institutions have failed since the housing market crashed in 2008.  Think of paying a deposit to a company as the exact opposite as depositing money into an insured bank account.  Think instead of walking up to the bank to make a withdrawal, only to find that the doors are locked, and this sign is posted on the doors:  “The Bank is Out of Business. 

The two case studies are actual companies that closed their businesses in the past two years, leaving several customers with significant financial losses, primarily in the form of deposits.  Home buyers had saved for years to be able to pay their deposits to the home builder.  For young people getting married, the deposit to reserve a venue is a big expense.  Notwithstanding how hard it was to come up with the money, most consumers give very little consideration to the risk of losing their deposits should the company go out of business.  If some focus on the risk, they do not feel comfortable asking a blunt but very important question: “Will I get my deposit back if your company shuts down?” 


What should you do? Find out in part two of this blog post, to be posted soon.


Questions about customer deposits or other bankruptcy concerns? Contact us









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