Opinion
Case No. 98-10576-SSM
August 11, 1998
Frank B. Bredimus, Esquire, Leesburg, VA, Counsel, for debtros in possession
MEMORANDUM OPINION
This matter is before the court on the motion filed by the debtors in possession on July 13, 1998, for approval of payment to two real estate brokers who assisted with the sale of the debtors' real property. A hearing was held on August 4, 1998, at which counsel for the debtors and the United States Trustee appeared and presented argument. The issue before the court is whether a procuring real estate broker in a sale of real property by a bankruptcy estate may seek compensation from the estate when that broker was employed by and acted as the agent for the buyer in the transaction. At the conclusion of the hearing, the court took the matter under advisement to review the applicable law.
Background
The debtors, John Buchanan, Sr. and Nancy L. Buchanan, filed a joint voluntary petition for relief under chapter 11 of the Bankruptcy Code in this court on January 23, 1998. The debtors remain in possession of their estate as debtors-in-possession. A plan of reorganization, although proposed, has not yet been confirmed. The centerpiece of the proposed plan — which proposes to pay all creditors in full — is the sale of their principal residence, located at 14975 Doe Ridge Road, Haymarket, Virginia. By order entered July 8, 1998, this court approved the debtors' sale of the property for $375,000 to Karen M. Nesbit free and clear of all liens, with any liens attaching to the proceeds of sale without alteration of priority. The order approving the sale expressly made payment of the requested real estate brokers' commissions the subject of a separate hearing.
The motion for approval of the sale of the real property recites that the property is subject to a first lien deed of trust in favor of Southern Financial Bank, with a payoff of $207,172.74 as of July 15, 1998.
By order entered March 6, 1998, this court had previously approved the employment of Hunt Country Properties, Inc. ("Hunt Country") as a real estate broker for the debtors in possession. Although a copy has not been provided to the court, it would appear that the listing agreement with Hunt Country was a typical multiple listing service agreement. The order approving Hunt Country's employment contained language authorizing the debtors to pay Hunt Country 3% of the sales price and the "selling agent" 3% "for services upon application and Order of this Court." The contract of sale, attached to the motion to approve the sale, reflects that Hunt Country was the listing broker in this transaction and that Long Foster Realtors ("Long Foster") was the selling broker. The contract further recites, however, that Long Foster represents the purchaser in the transaction, and is therefore what is colloquially referred to as a "buyer's broker." The United States Trustee attached as an exhibit to his opposition a Virginia Disclosure of Brokerage Relationship which reflects that Long Foster was indeed the broker for the buyer. The United States Trustee has no objection to Hunt Country being paid its commission from the sale — since its employment was specifically approved by the court — but does object to Long Foster being paid out of funds from the estate. The United States Trustee asserts that Long Foster, because it acted as the buyer's broker, holds an interest adverse to the estate which would prevent approval of its employment under § 327, Bankruptcy Code, and therefore cannot seek compensation from the estate.
Conclusions of Law and Discussion I.
There has been no objection raised to Hunt Country being paid its 3% commission as the listing broker in this transactions. Because there is no objection, and because the commission is reasonable, the court will approve it without further discussion.
II.
The critical issue before the court is whether Long Foster may be paid from the estate, specifically, whether a real estate broker may be compensated from the estate when that broker has been employed by an entity whose interests conflict with the estate's.
It is well-settled that a real estate broker providing services to a bankruptcy estate is a "professional" whose employment is subject to the approval by the court. See, e.g., Land West, Inc. v. Coldwell Banker Commercial Group, Inc. (In re Holey), 950 F.2d 588, 590 (9th Cir. 1991); The Binswanger Cos. v. Merry-Go-Round Enterprises, Inc. (In re Merry-Go-Round Enterprises, Inc.), 218 B.R. 361, 368 (Bankr. D. Md. 1998); In re McConnell, 82 B.R. 43, 44 (Bankr. S.D. Tex. 1987); Eastern Inns of New Hampshire, Inc. v. Indian Head Bank and Trust Co. (In re Eastern Inns of New Hampshire), 72 B.R. 418, 420 (Bankr. D. Me. 1987); Click v. Brogan (In re Roberts), 58 B.R. 65, 67 (Bankr. D. N.J. 1986). Accordingly, the court looks to the Code's general requirements for the trustee or debtor-in-possession to employ professionals. Under § 327(a),
Under § 1107(a), Bankruptcy Code, a debtor-in-possession enjoys most of the powers and privileges that a trustee does, including the ability to employ professionals.
Except as otherwise provided in this section, the trustee, with the court's approval, may employ one or more attorneys, accountants, appraisers, auctioneers, or other professional persons, that do not hold or represent an interest adverse to the estate, and that are disinterested per sons, to represent or assist the trustee in carrying out the trustee's duties under this title.
(Emphasis added). The term "adverse interest" is not defined by the Code. Courts, however, have reasoned that to hold an interest adverse to the estate means
(i) to possess or assert any economic interest that would tend to lessen the value of the bankruptcy estate or that would create either an actual or potential dispute in which the estate is a rival claimant; or (ii) to possess a predisposition under circumstances that render such bias against the estate.
In re Envirodyne Industries, Inc., 150 B.R. 1008, 1016-17 (Bankr. N.D. 111. 1993) (emphasis added); see also In re American Printers Lithographers, Inc., 148 B.R. 862, 864 (Bankr. N.D. 111. 1992); National Westminster Bank USA v. Yaeger (In re RPC Corp.), 114 B.R. 116, 119 (M.D.N.C. 1990); In re Star Broadcasting, Inc., 81 B.R. 835, 838 (Bankr. D. N.J. 1988). The purpose of § 327(a) is to ensure that professionals employed by the estate are held to the strictest of fiduciary standards and that the professional possesses no conflict of interest with the estate. Envirodyne Industries, Inc., 150 B.R. at 1016; see also In re Martin, 817 F.2d 175, 180-81 (1st Cir. 1987); In re Mangum, 147 B.R. 875, 881 (Bankr. E.D. Va. 1992) (Bonney, J.) ("[T]he obligations of a debtor, and professionals employed by the debtor, especially debtor's attorney, are necessarily fiduciary. Unless those fiduciary duties are fulfilled, the bankruptcy process appears to creditors and the public to be tainted by self-interest, abuse of the bankruptcy process[.]") (original source omitted); RFC Corp., 114 B.R. at 119 ("Section 327 is intended to prevent even the appearance of a conflict."). An order approving the employment of a professional for the trustee or debtor-in-possession is critically important because the professional may only be compensated for his or her fees and costs if that person's employment has been previously approved by the court under § 327. § 330(a)(1), Bankruptcy Code; see also In re Tamorjira, Inc., 210 B.R. 702, 705 (Bankr. E.D. Va. 1996) (Tice, J.). Furthermore, the Code provides that the court may deny compensation to an entity whose employment has been previously approved by the court if they subsequently hold an interest adverse to the estate with respect to the matter on which such professional person is employed. § 328(c), Bankruptcy Code.
The requirements for being "disinterested" are specifically set forth in § 101(14), Bankruptcy Code. Since no argument was made by the United States Trustee to the contrary, the court assumes, without deciding, that Long Foster is disinterested.
Title 54.1 of the Virginia Code prescribes the duties of real estate brokers in relationship to their clients. Relevant to the present matter, § 54.1-2132, provides that:
A. A licensee [defined under § 54.1-2130 as a real estate broker] engaged by a buyer shall:
1. Perform in accordance with the terms of the brokerage relationship;
2. Promote the interests of the buyer by:
a. Seeking a property at a price and with terms acceptable to the buyer, however, the licensee shall not be obligated to seek other properties for the buyer while the buyer is a party to a contract to purchase property unless agreed to as part of the brokerage relationship;
b. Presenting in a timely manner all written offers or counteroffers to and from the buyer, even when the buyer is already a party to a contract to purchase property;
c. Disclosing to the buyer material facts related to the property or concerning the transaction of which the licensee has actual knowledge; and
d. Accounting for in a timely manner all money and property received in which the buyer has or may have an interest;
3. Maintain confidentiality of all personal and financial information received from the client during the brokerage relationship and any other information that the client requests during the brokerage relationship be maintained confidential unless otherwise provided by law or the buyer consents in writing to the release of such information;
4. Exercise ordinary care; and
5. Comply with all requirements of this article, all applicable fair housing statutes and regulations, and all other applicable statutes and regulations which are not in conflict with this article.
(Emphasis added). Clearly, the statute imposes certain duties upon a broker engaged by a buyer that may conflict with the interests of the seller. Indeed, the regulations promulgated by the Real Estate Board, as authorized by Va. Code Ann. § 54.1-2105, specify that unless all parties consent, acting for more than one party in a transaction is a conflict of interest. 18 Va. Admin. Code § 135-20-280(2) (supp. 1998).
Turning to the present case, the court concludes that Long Foster, as a broker specifically engaged by the buyer in this transaction, holds an interest materially adverse to the chapter 11 bankruptcy estate of the Buchanans. Consequently, its employment cannot be approved under § 327(a) and it cannot be compensated from the bankruptcy estate under §§ 328(c) and 330(a). This is not the typical situation in which the selling or procuring broker, although technically an agent of the seller, has simply not been formally employed prior to submitting a purchase offer from the buyer. Long Foster, specifically engaged in this transaction to be a buyer's broker, clearly owes a duty to the buyer to act in the buyer's interests and to maintain confidential information acquired. Its duties necessarily include obtaining the lowest possible price for the real estate. This goal is in direct conflict with the estate's interest in obtaining the highest possible price from the sale of the property. This conflict is sufficient to conclude that such party holds an interest adverse to the estate. Accordingly, because Long Foster holds an interest that is directly and materially adverse to the estate, it cannot be compensated from the estate.
The court need not reach the issue of whether the ambiguous language in the order entered March 6, 1998, authorized the employment of Long Foster. The court has serious doubts whether an order approving the employment of a listing broker may also — prospectively — effectively approve the employment of the selling broker that has not been identified at the time the original order is entered. Because Long Foster holds an interest adverse to the estate, this court not only can deny approval to be employed, but may remove an employed professional and deny compensation. See §§ 105(a), 328(c), Bankruptcy Code; Mangum, 147 B.R. at 879; Eastern Inns of New Hampshire, 72 B.R. at 421.
Such a situation happens frequently in real estate transactions. When the seller is a bankruptcy trustee or a debtor in possession, however, the employment of the selling broker must nevertheless be approved by the court before compensation may be paid by the estate in the form of a commission. In many instances, the employment of the selling broker has not been previously approved by the court, as, for example, when the broker brings an "upset bid" to the court's attention (often literally at the last minute) during the hearing on approval of the estate's sale of property. In such situations, this court must approve the employment retroactively. In this District, Judge Tice has set forth the following test for when a professional's employment should be approved retroactively: (1) the professional satisfactorily explains the failure to obtain prior approval of employment; and (2) the professional otherwise meets the requirements set forth in § 327 and F.R.Bankr.P. 2014(a). See In re Tidewater Memorial Hospital, Inc., 110 B.R. 221, 226 (Bankr. E.D. Va. 1989); see also Tamorjira, 210 B.R. at 206 (applying Tidewater Memorial Hospital). At least one other court has suggested that court approval of the retention of the procuring broker might not be appropriate until the trustee or debtor-in-possession has determined that the bid would be accepted and presented to the court. Merry-Go-Round Enterprises, 218 B.R. at 368.
This is not to say that Long Foster is not entitled to a commission if, for example, it has a contract with the buyer requiring the buyer to pay its commission if the seller does not. That issue, however, is not before the court. Additionally, the court notes that the practical problems arising from the inability in the bankruptcy context to pay a buyer's broker from the proceeds of sale may — if the issue is recognized at the time the contract is negotiated — ordinarily may be addressed by a corresponding reduction in the offered purchase price. It is indeed unfortunate that the two brokers involved in this case did not focus on the legal bar to compensating a buyer's broker until after the contract was approved and went to settlement. However, this court simply cannot approve a commission to be paid from the estate to an entity that holds an interest directly adverse to the estate. Such approval would be fundamentally at odds with the requirements of the Code.
III.
A separate order will be entered consistent with this opinion.