By: Tim DiPrisco
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
In In re Anderson, the United States Bankruptcy Court for the District of Idaho held thatas a matter of law, the commission earned in a real estate sale belonged to the broker, not the debtors individually as real estate agents.[1]Therefore, the portion of the commission paid by the broker to the agent-debtors’ team lead was not part of the agent-debtors’ chapter 7 bankruptcy estate and could not be recovered by the Trustee.[2] The debtors, Stephen and Melanie Anderson, were licensed real estate agents who worked through a broker affiliated with Win Realty, LLLP doing business as Keller Williams Realty East Idaho (“Keller”).[3]The debtors signed a contract with Mike Hicks, who managed Mike Hicks Realty Group within Keller. Pursuant to the contract, the debtors would work for Hicks and split their commissions with Hicks either 60/40 or 55/45, depending on the nature of the sale.[4]The debtors also had to pay a yearly “cap” of $18,000 to Keller, and did so by having Keller withhold 36% of each commission they earned until the cap was satisfied.[5]
The debtors filed voluntary petitions for relief under chapter 7 of title 11 of the United States Code (the “Bankruptcy Code”) and a chapter 7 trustee was appointed to administer their estates. At the time that the debtors filed their chapter 7 petitions, they were involved in twelve real estate deals “in process” which would go on to close post-petition.[6]The Trustee of the bankruptcy estate sought to reclaim commissions totaling $52,836.26 which had been paid to Keller and then allocated to the team lead, Hicks.[7]The court noted that property interests are governed by state law, and that Idaho law requires that all commissions earned for the purchase and sale of real estate must be paid through a broker.[8]The court relied on Idaho Code § 54-2054(9) to conclude that as a matter of law, the sales contracts, and thus the commissions, were owned by the broker, Keller.[9] Therefore, they reasoned, the debtors only had a property interest in those commissions, as defined contractually.[10]
The Anderson Court held as it did because the Trustee in the case was trying to recover money for the estate that was never the rightful property of the debtors. The court’s reasoning here was simple – section 541 allows the estate access to the debtor’s property, and Hicks’ commission was never the debtors’ property. Thus, it was beyond the reach of the bankruptcy estate.
The set of facts in In re Anderson was unique, and the court stated that there was no applicable precedent. The court emphasized that it was applying state law in terms of the relevant property interest. Therefore, it’s possible that this case would come out differently in a different jurisdiction. But at the heart of the case was the principle that a bankruptcy estate can only recover legal and equitable interests of the debtor. After the court determined the relevant property interests under state law, the issue facing the court was straightforward and its holding was fairly narrow.
[1]In re Anderson, No. AP 17-08040-JMM, 2018 WL 2179174, at *6 (Bankr. D. Idaho May 10, 2018)
[2]See id.
[3]See id. at *1.
[4]See id,
[5]See id. at *2.
[6]See id.
[7]See id. See also11 U.S.C. § 542(a) (providing that“an entity, other than a custodian, in possession, custody, or control, during the case, of property that the trustee may use, sell, or lease. . . shall deliver to the trustee, and account for, such property or the value of such property, unless such property is of inconsequential value or benefit to the estate”).
[8]See id.at *3-4.
[9]See id. at *4. See also11 U.S.C. § 541(a)(6) (stating that proceeds earned from work performed pre-petition are part of the bankruptcy estate. But see In re Anderson, at *4 (implying that the case turned on whose property the sale contract and commission were).
[10]See id.