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A Maryland federal court has decided whether a broker can recover a commission from the sale of a commercial property when the broker introduced the eventual buyer to the bankrupt estate's representatives.
In 1995, Binswanger Companies ("Broker") alerted the May Department Stores Company ("Buyer") about the availability of a warehouse owned by Merry-Go-Round Enterprises, Inc. ("Debtor"). The Broker had previously worked with the Buyer. At that time, the Debtor was a debtor-in-possession involved in a reorganization under Chapter 11 of the U.S. Bankruptcy Code.
The Broker showed the Buyer the warehouse with the assistance of the Debtor in January 1996. In February 1996, the Buyer made an offer of $15 million with certain conditions. Simultaneously, the Broker was also negotiating a written agency agreement with the Debtor. In March 1996, the Debtor converted its reorganization into a Chapter 7 liquidation under the U.S. Bankruptcy Code. Later that same month, the trustee in the Chapter 7 case was given approval by the bankruptcy court to hire another brokerage firm to market the warehouse. The trustee also wrote to the Broker twice, informing the Broker that whatever prior relationship had existed between the Debtor and the Broker was now terminated. In June 1996, the Buyer made an offer of $19 million that was ultimately accepted by the Debtor. Representatives of the Buyer testified that they would not have paid the eventual purchase price prior to the Chapter 7 conversion.
The Broker sought payment of its commission from the Debtor in federal bankruptcy court. The Broker argued that it was entitled to recover its commission under two theories: first, the Broker argued that it was entitled to receive its commission because it was the "procuring cause" of the sale, since it introduced the Buyer to the Seller; alternatively, the Broker argued that it was entitled to payment of a commission under a section of the Bankruptcy Code which authorizes payments to professionals who perform services during the bankruptcy. The bankruptcy court ruled against the Broker, and the Broker appealed this ruling.
The United States District Court, District of Maryland, affirmed the rulings of the bankruptcy court. The court first considered whether the Broker was the procuring cause of the sale. The bankruptcy court had ruled that the broker was not the procuring cause because the buyer was never "ready, able, and willing" prior to the conversion to Chapter 7 and also that none of the broker's employees who worked on this transaction were licensed in Maryland. The court agreed with the bankruptcy court, first ruling that Maryland law prohibits unlicensed individuals from seeking payment of a commission for activities which require a Maryland's broker license. None of the Broker's employees who worked on this transaction were licensed in Maryland, and therefore the court ruled that the Broker was barred by Maryland law from claiming a commission.
The court also ruled that the Broker was not the procuring cause of the sale. Under Maryland law, in order to demonstrate that it was the procuring cause of the sale, the Broker would need to show that it had found a purchaser who was "ready, able, and willing" to meet the Seller's terms prior to the Broker's termination. The court found that the evidence undermined the Broker's argument. First, the purchase price was significantly higher than any offer made while the Broker was working on the transaction. Second, testimony revealed that the Buyer was not ready to pay the eventual sale price prior to the time the case was converted to Chapter 7, which marked the conclusion of the Broker's involvement. Thus, the court affirmed the ruling of the bankruptcy court.
The court next considered whether the Broker was entitled to compensation under the Bankruptcy Code as a professional. Section 327(a) of the Bankruptcy Code allows a debtor to pay compensation to professionals who perform work for the bankrupt estate after appointment by the bankruptcy court. The bankruptcy court never appointed the Broker, and so the Broker was now seeking a retroactive appointment. The court found other federal circuits had allowed a broker to claim "retroactive appointment" under a number of limited circumstances. The Ninth Circuit requires that the professional must "satisfactorily" explain why he/she failed to seek court appointment and also demonstrate that the services provided a benefit to the estate. The First Circuit requires the professional to demonstrate that "extraordinary" circumstances prevented the professional from seeking court appointment. The Seventh Circuit allows recovery if the professional can show that the failure to seek appointment was "excusable neglect," such as an "oversight" or "record-keeping errors." The court ruled that the Broker did not satisfy any of these tests, and thus the Broker was not entitled to seek payment of the commission as a professional. Thus, the bankruptcy court was affirmed.
The Binswanger Companies v. Merry-Go-Round Enter., Inc., 258 B.R. 608 (D. Md. 2001), aff'd, No. 01-1378, 2001 WL 155314, 24 Fed. Appx. 135 (4th Cir. 2001). [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].