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A federal appellate court has considered whether a real estate brokerage could claim past commissions as part of a bankruptcy reorganization.
The New Seabury Company Limited Partnership (“Debtor”) filed a petition under Chapter 11 of the federal bankruptcy code. Chapter 11 allows a business debtor to reorganize its operations while under the protection of the bankruptcy court. The Debtor had owned and operated a large planned resort, and the Debtor was composed of three different divisions: the Recreation Division, the Hotel Division, and the Real Estate Division. The money from all three divisions was commingled in the same accounts. The Recreation Division operated the athletic facilities located on the resort, such as the golf courses and swimming pools. The Hotel Division, not surprisingly, operated a hotel.
The Real Estate Division operated a real estate brokerage (“Brokerage”). The Brokerage had two separate companies, one which listed property for sale in the resort and the other which leased property located in the resort. Commissions were the Brokerage’s main source of income, and it sold most of the property listings within the resort as the Debtor’s exclusive broker. The Brokerage did not list its properties for sale in the MLS, and only a small percentage of the resort’s sales involved outside brokers.
Curing the bankruptcy process, the Debtor and New Seabury Properties, LLC (“Purchaser”) entered into an agreed reorganization plan where the Purchaser would acquire most of the Debtor’s assets. The parties stipulated that the Purchaser would not acquire the Brokerage, and the Debtor would retain the assets necessary to operate its brokerage business, such as a license to use its trade name, its trade licenses, its office space, and access to the resort facilities. The Purchaser also agreed to not compete with the Brokerage within the resort, although nothing prohibited the Purchaser from listing its properties with other brokerages. The agreed-upon reorganization did not address the portion of the Debtor’s bank account attributable to the Brokerage.
The bankruptcy court confirmed the agreed-upon reorganization plan. However, following the hearing, a dispute arose between the parties over the commission amounts in the Debtor’s bank accounts, estimated by the Debtor to be $533,762. The Debtor argued that this money was part of the Brokerage’s assets and necessary for the Brokerage to continue its business operations, while the Purchaser argued that this money was not mentioned in the reorganization plan and so should not be transferred to the Brokerage. The parties agreed to place the disputed amount of money in escrow pending the resolution of the dispute.
The bankruptcy court ruled that because the reorganization plan did not address the commission amounts, this money did not belong to the Debtor. The Debtor appealed, and the district court ruled that the Debtor was entitled to retain the commission amounts, and so sent the case back to the bankruptcy for computation of the appropriate amount. On remand, the bankruptcy court concluded that the Debtor was entitled to receive $479,457, as this was the amount attributable to the Debtor’s brokerage efforts. The case was again appealed to the district court, and the district again reversed the bankruptcy court, determining that the Debtor could only recover a reasonably foreseeable amount, which would be something less than $100,000. On remand, the bankruptcy court determined that the Brokerage was entitled to $55,670, and the district court affirmed this ruling. Both parties appealed this ruling.
The United States Court of Appeals for the First Circuit affirmed the initial ruling of the bankruptcy court in favor of the Purchaser. The court first looked at the reorganization plan. A reorganization plan is a contract between the parties, and so the court will evaluate the agreement in the same way it would analyze a contract. Looking at the four agreements between the parties, the Debtor had agreed to transfer all of its assets to the Purchaser, only retaining those assets specifically identified by the parties. One of the assets the Debtor would retain was the Brokerage, and the parties had entered into a stipulation specifying exactly what assets the Brokerage would retain. The stipulation was very specific in its terms as to what the Brokerage would retain, but the commission amounts contained in the Debtor’s bank accounts was not mentioned in any of the documents.
The Debtor argued that the various agreements mentioned that it was entitled to retain “the real estate brokerage segment of the Debtor’s business” and so this necessarily included the real estate brokerage’s funds. However, the court found it was very difficult to identify what funds were attributable to the real estate brokerage business, since the funds from all three of the Debtor’s divisions were commingled. Additionally, the court determined that courts should not read language into an agreement which does not exist.
Because the real estate brokerage funds were not expressly mentioned in the reorganization plan, the court affirmed the initial ruling in favor of the Purchaser. The parties had not referenced these funds anywhere in their agreements, but they had taken the time to specify exactly what other assets the Debtor would retain. The court also noted that it was unclear what funds would be considered part of the real estate brokerage’s operating fund, since these funds were mixed together with funds from the Debtor’s other divisions. Therefore, the court affirmed the bankruptcy court’s initial ruling and reversed all of the subsequent rulings.
New Seabury Co. v. New Seabury Properties (In re New Seabury Co.), 450 F.3d 24 (1st Cir. 2006).