Daily Development for Monday, June 1, 1999

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
prandolph@cctr.umkc.edu

Today's DD's are by our Bankruptcy Reporter: Jim Stillman of San Francisco. Note two cases dealing with brokers in bankruptcy proceedings. Bad news all around for brokers.

BROKERS;COMMISSIONS; BANKRUPTCY SALE: Mortgagee not liable for the broker's commission where the collateral is sold "free and clear of liens" under Bankruptcy Code sec. 363(f) at a price less than the amount due under the mortgage.

First of America Bank-Illinois, N.A. v. Bannockburn Lake Office Plaza Associates Limited Partnership, 1998 U.S. Dist. LEXIS 20591 (E.D. Ill. 1998).

At such a sale, the debtor may receive a portion of the sale proceeds only in the "very infrequent" situation where, after full payment of all allowed claims, an excess remains. The Bankruptcy Court erred, as a matter of law, in ordering the creditor to pay most of the commissions as well as the attorney's fees incurred in conducting the sale.

Reporter's Comment: The District Court opinion does not discuss the various theories on which brokers can be paid at bankruptcy sales - as a retained professional, under Section 327(a), out of an assessment for "preserving or disposing of" the collateral, under Section 506(c), as a "buyer's broker," etc. The bankruptcy-savvy broker achieves a firm agreement from all parties regarding payment of his or her commission, before the transaction comes to court.

BANKRUPTCY; EXECUTORY CONTRACTS; BROKER'S LISTING AGREEMENT: Broker loses a $1.2 million commission in connection with a successful lease for the Chapter 11 debtor, where the broker had not previously been retained with the approval of the Bankruptcy Court, as required by Section 327(a).

In re Keren Limited Partnership, 225 B.R. 303 (S.D.N.Y. 1998).

The court ruled that there is no exception to this requirement on the theory that leasing is in the "ordinary course" of the debtor's business. "Nunc pro tunc" relief was not warranted, where the broker, Cushman & Wakefield, was sophisticated and plainly knew the requirements of Bankruptcy law. Finally, the rule that the debtor must pay for any benefit it retains under an executory contract during the case did not apply, because under the terms of C&W's contract (listing), it had completed its legal duties pre-petition as soon as it had procured the tenant. C&W's ongoing and considerable efforts during the bankruptcy to close the sale were "understandable," the District Court agreed, but not based on "any contractual obligation."

Reporter's Comment: Under the at-times perilously elastic "test" for executory contracts enunciated by Professor Countryman in 1973, to which the District Court deferred, as do virtually all courts, the listing agreement here was no longer executory, insofar as there was nothing the broker could fail to do, post-petition, that would constitute a "material breach." Moving from the academic to the practical, we cannot imagine a professional broker doing "nothing" after procuring the buyer. The court could have found that the essential success of the contract, encompassing the clear economic expectations of both parties, depended on the broker's ongoing post-petition efforts to hold and close the deal.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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