26 May Real Estate Commissions Lost to Chapter 7 Trustee, Even When Closings Occurred After Bankruptcy Filing
According to the Eighth Circuit Bankruptcy Appellate Panel, real estate commissions due from purchase agreements entered into prior to the filing of a chapter 7 case were property of the bankruptcy estate, even though the closings occurred after the case was filed, and even though the real estate agent continued to perform services after the filing to ensure that the closings actually occurred.
In re Smith, 2009 WL 674136 (8th Cir. BAP March 17, 2009), involved an Iowa real estate agent who filed a chapter 7 case after obtaining two purchase agreements for a buyer. After filing bankruptcy, the agent needed to perform services, such as extending one purchase contract and assisting the buyer in obtaining necessary zoning for the other contract. The sales eventually closed, and the agent received commissions of $35,100 and $5,940. The trustee of the agent’s chapter 7 case asked the bankruptcy court to order the agent to turn over the commissions as property of the bankruptcy estate.
The agent argued that the commissions were contingent on successful closings, and therefore they could not have been fully earned by the agent as of the date of the chapter 7 filing. The appeals court disagreed, noting that under Iowa law, a real estate commission is earned by (1) producing a binding purchase agreement, (2) producing a willing purchaser, or (3) producing a purchaser who is ready, willing and able to purchase the property on the specified terms. Accordingly, the agent earned his commissions when the purchase agreements were signed prior to the chapter 7 filing.
The appeals court held that this was true even if the agent continued to perform services after the bankruptcy filing. The agent had presented no evidence that the terms of the purchase agreements were changed after the bankruptcy filing so as to alter his right to receive the commissions. The agent was therefore required to turn over the commissions to the chapter 7 trustee.
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