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A California bankruptcy court has considered whether a broker could offset marketing costs from a commission owed to a salesperson who had filed for bankruptcy protection.
William Francis Gunn (“Debtor”) worked as a real estate salesperson for PG Partners, Inc. (“Brokerage”). Pursuant to the agreement between the parties, the Debtor could seek an advance of up to $3,000/month for marketing costs. The agreement allowed the Brokerage to withhold a portion of the Debtor’s commissions to recover the marketing advances.
The Debtor filed for bankruptcy protection in June 2008. At that time, the Debtor owed the Brokerage $22,000 in marketing advances. Following the filing of the bankruptcy petition, two sales involving the Debtor closed and a third sale was pending. The Brokerage filed a motion with the bankruptcy court seeking recover its marketing advances from the commissions.
The United States Bankruptcy Court for the Northern District of California denied the Brokerage’s attempt to recover its marketing advances. When a bankruptcy petition is filed, a provision in the Bankruptcy Code called the “automatic stay” prohibits creditors from collecting any prepetition debts from debtors. This prohibition includes offsetting post-petition amounts against pre-petition debts. The Brokerage argued that an earlier case had allowed a brokerage to offset amounts owed to a salesperson against a commission.
The court rejected the Brokerage’s argument, finding that the referenced case was inapplicable to the Brokerage’s situation. In that case, the commission was earned prior to the bankruptcy filing and so the automatic stay was not in effect at the time the commission was earned by the Brokerage. In this case, the marketing advances were a debt incurred prior to the bankruptcy filing and the commission was earned post-filing. Therefore, the automatic stay barred the Brokerage from trying to collect the pre-petition debt, and so the court ruled that the Brokerage could not offset the marketing advances against the commission amounts owed to the Debtor.
In re Gunn, No. 08-43172, 2008 WL 3548001 (Bankr. N.D. Cal. Aug. 11, 2008). [This is a citation to a Westlaw document. Westlaw is a subscription, online legal research service. If an official reporter citation should become available for this case, the citation will be updated to reflect this information].