In re Pauley & McDonald, Inc.
| Decision Date | 31 July 1996 |
| Docket Number | Bankruptcy No. 95-02965-PCT-SSC,Adversary No. 95-553. |
| Citation | 215 BR 37 |
| Parties | In re PAULEY & McDONALD, INC., Realtors, Debtor. v. Roger W. BROWN, Trustee, and Stockman's Bank, Plaintiffs, v. CAPITAL TITLE AGENCY; et al., Defendants. Don SOMMERS; et al., Counterclaimants, v. Roger W. BROWN, Trustee for Debtor, Counterdefendants, Don SOMMERS; et al., Crossclaimants, v. CAPITAL TITLE AGENCY; et al., Crossdefendants. |
| Court | U.S. Bankruptcy Court — District of Arizona |
COPYRIGHT MATERIAL OMITTED
Michael L. Rubin, Rubin & Rubin, Phoenix, AZ, for Defendants.
Michael P. Lane, Elizabeth C. Amorosi, Brandes, Lane & Joffe, Phoenix, AZ, for First American Title.
Michael Redding, Flagstaff, AZ, Chapter 7 Trustee.
John Graham, Regional Counsel First American Title, Phoenix, AZ, for First American Title.
This matter comes before the Court upon the Motion for Summary Judgment filed by twenty real estate agents (the "Agents") formerly employed by Pauley & McDonald, Inc. (the "Debtor"), the Cross Motion for Summary Judgment filed by ROGER BROWN, the Chapter 7 Trustee (the "Trustee"), and the separate Cross Motion for Summary Judgment filed by STOCKMEN'S BANK, CoPlaintiff with the Trustee (the "Bank"). Oral argument was held on February 9, 1996. Thereafter, the Court took the matter under advisement.
This memorandum decision constitutes this Court's findings of fact and conclusions of law pursuant to Rule 7052, Rules of Bankruptcy Procedure ("RBP"). This is a "core" proceeding, and this Court has jurisdiction over this matter. 28 U.S.C. §§ 1334 and 157.
The Debtor is a real estate brokerage firm which conducted business in Prescott, Arizona. On April 22, 1995, the Debtor filed a Chapter 7 bankruptcy petition, and Roger Brown was appointed the Trustee.
Benjamin Filer, a licensed Arizona real estate broker, was the real estate broker for the Debtor from April 1, 1992 through December 28, 1994. Twenty individuals worked for or were associated with the Debtor as independent sales persons or Agents for the purpose of selling real estate in Yavapai County.
Each of the Agents executed an independent contractor agreement ("Agreement") with the Debtor. During 1994 and 1995, each of the Agents participated in the sales of certain parcels of real property, including the opening and closing of escrows with various title companies. From a factual standpoint, the parties agree that after the closing of the real estate transaction, the Agent's commission was deemed "earned."1 The Debtor negotiated with the Agent as to the amount of the commission to be earned by the Debtor and the amount to be earned by the Agent. The commission owed to the Agent varied between 50 to 100 percent of the actual commission earned in the real estate transaction.
By the time of the filing of the Debtor's bankruptcy petition, all of the escrows had closed and all of the commissions had been earned by the twenty individual Agents.
Various title companies held certain commissions at the time the Debtor filed its bankruptcy petition.2 In some cases, certain title companies are still holding the commissions.3
The Agreement stated that all fees earned by the Agents, who were described as "contractors," were to be collected by the Debtor and transmitted to the Agent.4 The Agreement provides:
The Debtor provided each Agent with office or desk space, a reception area, information on all of the Debtor's listings, forms, a telephone and other means of communication.7 As a result of the Agents' utilizing or having access to all owned listings and the services provided by the Debtor to the Agents, the Debtor collected franchise, errors and omissions, or other fees from any "gross commission" paid to the Debtor at the close of escrow of a real estate transaction.8
By the end of 1994, the Debtor was winding up its business operations. On December 28, 1994, the only designated broker for the Debtor resigned.9 At that time, the designated broker alleges that he forwarded letters to the various title companies as to the escrows that had closed designating the commissions to be paid to the Agents.10
Although the Agents alleged that certain individuals earned "100 percent" of any gross commission collected, no Agreement was presented that reflected that percentage recovery as to any Agent, nor did an affidavit or other competent evidence reflect such "100 percent" commission. The difficulty with the Agents' position is that although the Agents presented a form letter executed by the designated broker around December 21, 1994, stating that the Debtor would receive 25 percent of the gross commission and the designated broker on behalf of the Debtor would "irrevocably assign and disburse" to three Agents equally the remaining 75 percent of the commissions, the letter does not state the name of the title company involved, the precise amount of commissions to be disbursed to the three Agents, or the escrow number of the real estate transaction which was closed.11
Moreover, on January 9, 1996, the designated broker filed yet another affidavit with the Court, this time for the Bank, noting that when commissions were received, they were deposited into the general corporate account of the Debtor to be disbursed subsequently to the Agents according to the Agreements.12 Therefore, the December 21, 1994 letter forwarded by the designated broker was not consistent with the regular or ordinary business practice of the Debtor.13
This Court must resolve the issue of whether the commissions earned prepetition by the Agents became property of the Debtor's bankruptcy estate pursuant to 11 U.S.C. § 541. The parties have requested that the Court consider a number of subissues including:
The Agents argue that a prepetition trust was created between the Agents and the Debtor, that the title companies held the commissions which constituted the property of the trust, and that the commissions never became property of the Debtor's bankruptcy estate.
11 U.S.C. § 541(a)(1) provides that the Debtor's estate, at the time the bankruptcy petition is filed, includes tangible and intangible property and any claims that the Debtor has against third parties which are liquidated or unliquidated.14 Property becomes a part of the bankruptcy estate even though it is not in the Debtor's possession at the time of the filing pursuant to 11 U.S.C. § 541(a)(1) & (3).15 Certain express trusts which are created pursuant to applicable state or federal law are excluded as property of the estate pursuant to 11 U.S.C. § 541(c)(2).16 Under 11 U.S.C. § 541(d), if an express trust is created and the Debtor only holds legal title to the property pursuant to the terms of the trust, then the property becomes part of the bankruptcy estate only to the extent of the Debtor's limited interest and the equitable or beneficial interest in the property held by a third party never becomes part of the bankruptcy estate.17 Trusts may also be imposed by operation of law to effectuate the intent of the parties, or they may be imposed as an equitable remedy to correct a fraud or injustice.18
Although the Court must analyze federal law to determine what constitutes property of the estate under 11 U.S.C. § 541, it must also review Arizona law to determine whether an express trust, a trust imposed by operation of law, or a trust imposed as an equitable remedy has been created and whether the creation of such a trust removes or excludes certain property from the bankruptcy estate.
Turning to the Agreement and the express trust issue, no provision of the Agreement creates an express trust relationship between the Debtor and the Agent. Rather, the Debtor receives a gross commission from the sale of real property, of which a portion or percentage is payable to the Debtor, and a separate percentage is payable to the Agent. On that gross commission, the Debtor must calculate any franchise, errors and omissions, or other fees due and owing to it. Hence, the Agreement contemplates that the gross commissions be considered assets of the Debtor from which certain disbursements are to be made. The Agents argue that since the Debtor must promptly turn over the net commissions to the Agent, a trust relationship is somehow created or the net commissions are carved out from property of the estate. However, 11 U.S.C. § 541(c)(1) provides that even if an agreement restricts or conditions the transfer of the debtor's interest in certain property, the interest still becomes property of the bankruptcy estate.19 The prompt turnover of the commissions is not a restriction on the transfer of the Debtor's interest in the...
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