How Not To Lose Your Broker Commission In A Bankruptcy

July 18, 2017 by Alexa P. Stephenson, Esq.

So you were going to sell some real property that subsequently became part of a bankruptcy case or you were asked to sell real property while it is part of a bankruptcy estate, what do you do now? It is important to note that brokers can still market and sell real property that is part of the bankruptcy estate. However, the broker must first be approved by the bankruptcy court. This article should serve as a guide for that process.

Generally, A Broker Must Be Approved By The Court Before You Can Sell The Property

Pursuant to 11 U.S.C. § 327(a), court approval is required for a trustee or Debtor-In-Possession (“DIP”) to employ any “professional persons.” Real estate brokers selling bankruptcy estate property on commission are considered “professional persons” subject to § 327. See In re Cummins, 8 B.R. 701, 702 (9th Cir. B.A.P. 1981).

How does a broker get approved by the bankruptcy court, you may ask? In order to be approved, the trustee or debtor, whoever is employing the broker, must submit an application to the court pursuant to Federal Rules of Bankruptcy Procedure, Rule 2014.

What The Court Looks For

Generally, the prerequisites to qualify for employment under § 327 are simple. A broker must not have any conflicts of interest, i.e. the broker must (1) not hold or represent an interest adverse to the estate and (2) be disinterested. In re Tevis, 347 B.R. 679 (9th Cir. B.A.P. 2006); In re Lee, 94 B.R. 172 (Bankr. C.D. Cal. 1988).

Adverse Interests?

The bankruptcy code requires that a broker employed by the trustee or DIP must not “hold or represent an interest adverse to the estate.” 11 U.S.C. § 327(a). While not defined in the Code, courts generally find that holding an “interest adverse to the estate” means:

  1. to possess or assert any economic interest that would tend to lessen the value of the bankrupt estate or that would create either an actual or potential dispute in which the estate is a rival claimant; or
  2. (ii) to possess a predisposition under circumstances that render such a bias against the estate.

See In re Sundance Self Storage-El Dorado LP, 482 B.R. 613 (Bankr. E.D. Cal. 2012); Matter of AFI Holding, Inc., 530 F.3d 832 (9th Cir. 2008). The broker must also remain free of “adverse interests” throughout the term of his or her employment.

Disinterested?

The bankruptcy code also requires that a broker employed by the trustee or DIP must be a “disinterested person.” 11 U.S.C. § 327(a). A “disinterested person” is not:

  1. a creditor, equity security holder, or insider of debtor;
  2. a director, officer, or employee of debtor;
  3. someone with an interest “materially adverse” to the interest of the estate or of any class of creditors or equity security holders: by reason of any direct or indirect relationship to, connection with or interest in the debtor; or “for any other reason.”

See 11 U.S.C. § 101(14). The broker must remain “disinterested” throughout the term of his or her employment.

It is important to note again that once hired, a professional must remain disinterested and free of adverse interests throughout the course of his or her employment. The court may reduce or entirely deny a professional’s compensation if at any time during his or her employment on behalf of the estate the professional is not a “disinterested person” or holds an interest adverse to the interest of the estate with respect to the matter on which he or she is employed. In re McNar, Inc., 116 B.R. 746 (Bankr. S.D. Cal. 1990); In re Kobra Properties, 406 B.R. 396 (Bankr. E.D. Cal. 2009).

The Application

An application to employ a professional person must state:

  1. The specific facts showing necessity for the employment;
  2. The name of the person to be employed;
  3. The reasons for the selection;
  4. The services to be rendered;
  5. Any proposed arrangement for compensation (if in writing, attach as an exhibit); and
  6. To the best of the applicant’s knowledge, all of the person’s “connections” with the debtor, creditors, any other party in interest, the respective attorneys and accountants, the U.S. Trustee or any person employed in the Office of the U.S. Trustee.

See Federal Rule of Bankruptcy Procedure 2014(a); In re Park-Helena Corp., 63 F.3d 877, 880 (9th Cir. 1995) (finding that Rule 2014 disclosure requirements are designed to assist court in determining proposed professional’s disinterestedness and existence or nonexistence of adverse interests).

Conclusion

It cannot be stressed enough that a broker must obtain court approval before selling property in the bankruptcy estate. If the broker does not make sure the above steps are taken, the broker is at serious risk of not receiving a commission. See, e.g.,In re Cummins, 8 B.R. 701 (Bankr. C.D. Cal. 1981) (denying a broker his commission when his employment was not approved by the court).

If you are a broker or have questions about this article, the attorneys at Geraci Law Firm are more than happy to help you.