Broker Commissions: So You Want To Be Paid

Harris v. Scarcelli (In re Oak Knoll Assoc., L.P.), 835 F.3d 24 (1st Cir. 2016)

A real estate broker asserted a claim for a commission in connection with a post-petition sale of property by the debtor. The bankruptcy court denied the claim, the district court affirmed, and the broker appealed to the First Circuit.

As described in a prior post discussing the bankruptcy court decision (Broker Commissions: Technical Requirements Trump Equitable Considerations), a couple of years before the debtor filed bankruptcy it entered into a listing agreement with the broker. The debtor executed a purchase agreement with a potential buyer shortly before the listing agreement expired. After a series of due diligence period extensions the buyer made an offer at a reduced purchase price that was not accepted.

Instead a dispute between the debtor’s partners led to issuance of an injunction prohibiting one partner from entering into a contract to sell the property without the consent of the other partner. The attorney for the partner that obtained the injunction notified the broker that they would seek contempt sanctions if the broker acted in violation of the injunction. Four or five months later the broker sent an invoice demanding payment for his services, and then later filed a lien against the property for his commission.

Fast forward to the debtor’s bankruptcy. Shortly after filing bankruptcy, the debtor filed an application to retain the broker. While the application was still pending the debtor asked the broker to get a contract with the original buyer at a reduced price. In the meantime one of the partners filed an objection to the application to retain the broker. After a hearing, the bankruptcy court granted the application provided that the debtor submit a proposed order that incorporated certain changes.

However, the proposed order was never submitted; so the bankruptcy court never approved the application. Instead, the debtor withdrew the application with the court’s approval. Around the same time the debtor and buyer executed a new purchase agreement that eventually resulted in a sale of the property. The bottom line: the buyer got the property, the debtor got its money, and the broker got nothing.

The broker pursued its claim for a commission based on the original listing agreement. He made an argument that the commission was due upon acceptance of an offer regardless of whether the sale closed, and contended that execution of the original purchase agreement constituted an offer and acceptance. The basis for this argument was the clause that provided that “should there be acceptance of an offer to purchase/lease from the PURCHASER, OWNER agrees to pay the AGENT a commission as per this AGREEMENT.”

However, the court pointed out a number of other facts that made it clear that “as per this AGREEMENMT” meant the commission was owed only if a sale closed. For example (emphasis added):

  • “OWNER agrees that if the property is sold during the term of this Agreement to a Purchaser, procured by Agent during the term of this Agreement as outlined above, OWNER will pay AGENT a commission per Schedule A attached.”
  • “The commission shall be due and payable by certified check in full upon the closing of title (or lease execution).”

The court also did not agree that there had been acceptance of an offer through execution of the original purchase agreement

In addition the broker argued that a provision that extended the agreement while negotiations continued after the initial six-month term served to keep the listing agreement alive through the eventual sale of the property. Again the court found that the facts did not support the broker’s position.

Finally the court rejected the alternative argument that the bankruptcy court could grant equitable relief. A court can grant equitable relief under section 105 of the Bankruptcy Code only if it is “necessary to preserve an identifiable right conferred elsewhere in the Bankruptcy Code.” The broker pointed to a state statute that entitled a broker to recover a commission “if it would be inequitable to deny such recovery.” However, that argument was waived since it was not raised before the lower courts, and in addition the broker failed to provide supporting facts.

Accordingly the First Circuit affirmed the grant of summary judgment to the debtor. In response to the contention that this was not fair since the debtor was able to make a 100% distribution to creditors with money left over to pay insiders, the court commented that it was not asked to decide “whether [the debtor] was deserving of opprobrium, but whether [the debtor] was entitled to summary judgment” – which it was.

This case provides a couple of “lessons learned”: (1) It is always a good idea to be precise in drafting. In listing agreements this includes making it clear exactly when commissions are earned. (2) If a broker plans to do any work for a debtor, it is critical that it first obtain court approval of its retention by the debtor. Otherwise, it is unlikely to be paid.

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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