Even though a real estate broker is not entitled to a commission under state law until the transaction closes, the portion of the commission attributable to prepetition work is property of the estate, according to the Ninth Circuit Bankruptcy Appellate Panel.
The Aug. 11 opinion by Bankruptcy Judge Meredith A. Jury resolved a split between the two divisions of the Idaho bankruptcy court, where state law provides that a real estate broker is entitled to a commission by producing a buyer who signs a binding contract. However, the commission is not earned until the buyer closes title.
The debtors were both real estate agents. They were entitled to about $52,500 in commissions on nine transactions that did not close until after they filed their chapter 7 petitions. The bankruptcy judge upheld the trustee’s demand that the couple turn over the commissions. The couple appealed and lost.
In deciding whether the commissions were estate property, Judge Jury said the “touchstone” is Segal v. Rochelle, 382 U.S. 375 (1966), a case under the former Bankruptcy Act where the Supreme Court held that a contingent interest is estate property if it is “sufficiently rooted in the pre-bankruptcy past.” Quoting Ninth Circuit authority, she said that a contingent interest is estate property if it is sufficiently rooted in the pre-bankruptcy era even if the contingency is not satisfied until after bankruptcy.
The debtors argued that the commissions were not estate property under Section 541(a) because the commissions were not earned until the transactions closed after bankruptcy. They relied on Butner v. U.S., 440 U.S. 48 (1979), where the Supreme Court held that property interests are defined by state law.
Synthesizing the two cases, Judge Jury said that the court looks to Idaho law to decide “when and how” the debtors earned the commissions but applies Section 541(a) and Segal “to determine whether the commissions are estate property.”
Employing that analysis, Judge Jury said the outcome was controlled by Jess v. Carey (In re Jess), 169 F.3d 1204 (9th Cir. 1999), a case involving a lawyer and a contingent fee. Although the lawyer had no right to sue the client for a fee on the filing date, the Ninth Circuit held that the lawyer’s interest in the fee was estate property to the extent of “pre-petition work on the cases.”
Consequently, Judge Jury ruled that the debtor at least had a contingent interest in the commissions on the filing date that was attributable to their pre-petition work. The commissions were therefore “property of the estate under the broad parameters of Section 541(a)(1).”
Because the debtors offered no evidence of work they performed after filing, the BAP upheld the bankruptcy court’s decision to require a turnover of all commissions.