Debtors Can’t Collect from Team Leader

Read the full decision from the United States Bankrupty Court District of Idaho.

Two real estate licensees (“Debtors”) joined a real estate team (“Team”) that was headed by a single individual (“Team Leader”). The Team was part of a real estate brokerage (“Firm”) and the Firm received all of the Team’s commissions.

The contract between the Debtors and the Team set forth the method for paying the commissions collected by the Firm. The Debtors paid a certain percentage of their portion of the commission to the Firm up to a capped amount annually, after which the Debtors received their entire split. The Team Leader also collected a set percentage from each transaction that was based on the role that the Debtors played in the transaction. In return for these payments, the Team and the Firm paid for the Debtor’s office space, advertising costs, and other upfront costs related to their listings.

The Debtors filed for Chapter 7 bankruptcy protection. Chapter 7 of the U.S. Bankruptcy Code involves a liquidation of the debtor’s assets in order to satisfy the debtor’s outstanding debts. At the time of the filing, the Debtors had twelve active transactions that eventually closed. The Firm paid the commission splits to the Debtors and the Team Leader according to their contractual arrangement (the Debtors had satisfied their annual obligation to the Firm). The bankruptcy trustee (“Trustee”) filed a motion seeking turnover of the entire commission amounts for the twelve transactions, including the split paid to the Team Leader. The Team Leader filed a motion seeking judgment in his favor, arguing that the Debtors had no right to the split paid to him by the Firm.

The United States Bankruptcy Court for the District of Idaho rejected the Trustee’s attempt to claim the Team Leader’s commission split and entered judgment in favor of the Team Leader. Section 541 of the Bankruptcy Code allows the Trustee to collect all amounts owed to a debtor for services provided. The question before the court was whether the Trustee had a claim to the amounts paid to the Team Leader by the Firm.

The court found that the Debtors had no contractual right to the portion of the commission paid to the Team Leader. Idaho law requires that all commissions be paid to a broker, and the broker can split the commission with other licensees. In this instance, the commissions belonged to the Firm as the principal broker, and the Debtors had entered into an agreement with the Team Leader on how all commissions would be split between the Firm, Team Leader, and the Debtors. Since the Debtors had no claim to the entire commission amounts pursuant to their agreement with the Team Leader, the court ruled that the Trustee could not claim the entire commission on behalf of the Debtors. Thus, the court entered judgment in favor of the Team Leader.

In re: Anderson , No. 15-40878-JMM (Bankr. Idaho May 10, 2018). [This decision is not yet reported in an official reporter. Please consult with counsel prior relying upon the decision as judicial precedent].

Editor’s Note: Special thanks to Jason Risch of Risch Pisca PLLC for alerting NAR Legal Affairs to this decision. The Idaho REALTORS® Legal Defense Fund paid for the defense of the Team Leader.