Contingent Interest in Realty Commissions Is Property of Estate

Posted by NCBRC - September 5, 2017

The debtors’ contingent interest in realty sales commissions based on transactions that were not closed at the time of their bankruptcy filing was property of the bankruptcy estate where all of the debtors’ actual realty services were provided pre-petition. Anderson v. Rainsdon (In re Anderson), No. 16-1316 (B.A.P. 9th Cir. Aug.11, 2017).

Chapter 7 debtors, Melanie and Stephen Anderson, were real estate agents with Keller Williams Realty East Idaho. Under their agreement, sales commissions earned by the Andersons were paid directly to Keller Williams. Keller Williams then retained a portion and paid the remainder to “Bastille,” a separate company established by the Andersons post-petition. Bastille then paid the Andersons a “salary.” On the petition date, the Andersons were involved in thirteen real estate transactions in which the contracts between buyers and sellers had been signed but the sales had not yet closed. The chapter 7 trustee sought turnover under section 542(a) of $52,485.92 in commissions the Andersons would acquire post-petition based on these sales agreements. The bankruptcy court ordered turnover in the amount sought.

On appeal, the BAP began its analysis with section 541(a)(1), which provides that the bankruptcy estate is comprised of “all legal or equitable interest of the debtor in property as of the commencement of the case.” Under Segal v. Rochelle, 382 U.S. 375, 379-80 (1966), such property interests include contingent interests so long as they are “sufficiently rooted” in the debtor’s pre-petition past even if the interest relies on a future contingency that has not occurred at the time of the petition.

The panel turned to whether, as the Andersons argued, under Idaho law, their contingent interests were not sufficiently rooted in the pre-bankruptcy past. In Idaho, a realtor earns a commission when three requirements are fulfilled: 1) a purchaser is found, 2) the purchaser enters into a binding contract with the seller, and 3) the transaction closes according to that contract. In this case, the first two requirements were fulfilled pre-petition and the third, post-petition.

The court noted that while Idaho law governs how and when the Andersons earn the commissions, bankruptcy law applies to the issue of what interests make up the bankruptcy estate. The panel relied on the holding in Jess v Carey (In re Jess), 169 F.3d 1204 (9th Cir. 1999), to find that section 541 is broad enough to encompass the contingent interest at issue in this case. At the time of the petition, the Andersons had performed the services necessary to earn their commissions. Although they did not have a right as of the petition date to sue for those commissions, there were no further post-petition services they needed to provide. The court found, therefore, that the commissions were sufficiently rooted in the pre-bankruptcy past to enter into the bankruptcy estate.

The court also rejected the Andersons’ argument that, at the time of the petition, the commissions were possessed by and therefore property of Keller Williams or Bastille. Section 542(a) is based on the debtor’s interest without regard to current possession, and Idaho law recognizes only individuals as having the right to real estate commissions. Therefore, neither Keller Williams nor Bastille could be the rightful owner of the commissions at any time. Furthermore, given the fact that the Andersons established Bastille post-petition, it could not have possessed the property at the time of the petition.

The Andersons’ constitutional arguments based on the Thirteenth Amendment’s prohibition against involuntary servitude and the Equal Protection Clause were raised for the first time on appeal and, for that reason, were disregarded by the panel.

The panel affirmed the bankruptcy court’s turnover order.

Anderson 9th BAP opinion Aug 2017

 

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