Broker Listing Agreement: Seller Beware – Be Sure You Get What You Paid For Before You Have To Pay

In re Cimarron Group, Inc., 545 B.R. 646 (Bankr. D. Mont. 2016)

A real estate broker filed a proof of claim in a chapter 7 bankruptcy contending that it was owed a commission based on a pre-bankruptcy listing agreement. The debtor objected, arguing that the broker had not earned the commission.

Long before the bankruptcy the debtor signed a listing agreement with the broker seeking to sell a hotel that it owned. Although the intent was to sell the hotel, the listing agreement provided as follows (emphasis added):

SELLER FURTHER CERTIFIES THAT IT HAS BEEN CALLED TO SELLER’S ATTENTION AND SELLER UNDERSTANDS THAT IF SELLER CONVEYS ANY FEE OR LEASEHOLD INTEREST IN THE PROPERTY DURING THE TERM OF THIS LISTING OR IF SELLER REVOKES THE UNDERSIGNED BROKER’S EXCLUSIVE RIGHT TO SELL, SELLER WILL PAY THE ABOVE-STATED COMMISSION.

The commission was 10% of the sales price, and if the debtor entered into a lease agreement the commission was 10% of the listing price.

The listing agreement expired a year later on November 17, 2009, but included a provision that if “[w]ithin 220 days of the termination of this agreement (hereinafter protection), if Seller enters into an agreement to or does sell, exchange, convey, lease, or rent the property to any party to whom Broker or any cooperating broker has marketed the property, the commission shall be payable at the time such agreement is entered into.”

After the listing expired but during the protection period, the debtor entered into agreements to sell the liquor license for $50,000 and the hotel for $4.45 million. At that time the debtor had not operated the hotel for more than a year. The buyer wanted to begin operations immediately without waiting for a closing because the hotel needed to be operating in order for the buyer to secure financing that it was pursuing.

Consequently in the purchase agreement the debtor agreed “to lease the Assets to Buyer and Buyer agree[d] to lease the Assets from [the debtor]” for monthly rent of ~$20,000. If the buyer was not able to obtain the desired financing within 6 months, the parties agreed that they would execute documents for seller financing.

The agreement to lease the hotel was to expire after 3 months (on June 30, 2010) unless extended. Apparently it was extended to July 31, 2010. The buyer still did not have financing on July 31, so the parties entered into a “Lease” pursuant to which the debtor leased the hotel assets to the buyer for another 3 months. The recitals explained that the buyer had agreed to purchase the hotel, but needed to begin operations immediately. Since the debtor was willing to allow the buyer to do so, the parties agreed to continue the lease arrangements.

When the Lease expired on October 31, 2010, the buyer still had not secured financing and had not followed through with the seller financing alternative. Eventually the debtor hired an attorney, who sent a notice of default on March 15, 2011, and followed with additional letters on May 31, 2011 and June 1, 2011. Ultimately the debtor was able to obtain possession of the hotel around June 4, 2011, and operated it until January 2014, when it once again closed the hotel.

In May 2015 the debtor filed a chapter 7 bankruptcy. The broker filed a proof of claim asserting that it was owed ~$913,000 (consisting of $600,000 plus interest of ~$313,000 for March 2010 through May 2015). It argued that it was entitled to a commission of 10% of the $6 million listing price because the debtor leased the hotel within the protection period.

The court began by noting that under Rule 3001 of the Federal Rules of Bankruptcy Procedures a “proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim.” However, under the rules generally a claim based on a writing must attach a copy of the writing. Since the broker failed to include the listing agreement or any other supporting document with its proof of claim, it was not entitled to the benefit of this rule and was required to prove the validity of its claim.

Under state law:

  • It was clear that “a broker’s right to recover a commission is conditioned on the broker’s ability to accomplish that which he or she undertook to do in the contract of employment.”
  • Generally this requires that the broker procure “a purchaser ready, able, and willing to purchase the seller’s property on the terms and conditions specified in the contract of employment.”
  • This generally means that the broker retained to sell property “does not earn his commission until the purchase price is paid, title is conveyed and the sale completed.”

It was undisputed that the sale did not close, and the broker was deemed to have conceded that the agreement was “first and foremost” a sale agreement with contingencies. The broker simply argued that it was entitled to a 10% commission because the buyer was permitted to take possession of the hotel and operated for a 3½ month period to assist it in securing financing. (Apparently the court disregarded the additional one-month extension and the subsequent “Lease” because they occurred outside the protection period, which expired June 25, 2010.)

The court noted an ambiguity in the listing agreement because it (1) provided for a 10% commission if the debtor leased the hotel, but (2) also provided that “Seller’s acceptance of an agreement to sell and purchase containing contingencies shall not entitle the Broker to a commission unless or until the contingencies have been removed, or unless the Seller breaches the agreement.” The contingencies were not satisfied, the sale did not close, and ultimately the debtor took back possession of the hotel.

Given the ambiguity, the court looked to the intent of the parties. In this case the relevant agreement was a sale agreement (and not a standalone lease or lease with an option to purchase). The debtor hired the broker to sell the hotel. Although the broker found a buyer, it was not ready, able, and willing to purchase. The sale did not close, title was not conveyed, and the purchase price was not paid. In the court’s view under these circumstances the short-term possession by the buyer did not trigger the right to a commission.

Consequently the court sustained the debtor’s objection to the broker’s proof of claim.

Lessons for sellers:

  • Always review a listing agreement to make sure that there is no obligation to pay a commission unless the transaction closes and the seller actually receives payment.
  • Beware of allowing a buyer to take possession prior to closing. In this case the parties signed a contract in May 2010 that initially contemplated a 3 ½ month pre-closing possession period, but the seller did not recover possession until June 2011.
  • Never forget that brokers can be very persistent. In this case the listing agreement was signed in November 2008 and expired in November 2009. The debtor entered into a purchase agreement in March 2010 for a transaction that never closed. The broker filed a claim in September 2015 contending that it was owed over $900,000 based on  the March 2010 agreement.

Vicki R Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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