Batt v. Scully
| Decision Date | 16 May 1994 |
| Docket Number | Civ. A. No. 93-1455. |
| Citation | 168 BR 541 |
| Parties | Morton BATT, Trustee of the Estate of Leahy Realty, Inc., Appellant, v. Robert J. SCULLY, Jr., Henry R. O'Connor, Daniel R. Bowersock, Mary M. Helverson, and John A. Binder, Appellees. |
| Court | U.S. District Court — District of New Jersey |
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Markowitz & Zindler by Richard J. Kwansy, Lawrenceville, NJ, for appellant.
Sacharow, Adler, Gold, Taylor & Keyser, P.C. by Robert W. Keyser, Cherry Hill, NJ, for appellees.
The novel issue before the court in this bankruptcy appeal is whether under New Jersey law real estate salespersons are entitled to an equitable lien against their broker on sale proceeds received by the broker after the broker has entered bankruptcy proceedings. For the reasons set forth below, the court holds that the agents do not have an equitable lien.
The facts with respect to the relationship between the parties are not in dispute. William J. Leahy ("Leahy") was the former president, shareholder, and broker of record of Leahy Realty, Inc. ("Debtor"). On December 2, 1991, the Debtor filed a voluntary Chapter 7 Bankruptcy Petition ("Petition"). The Bankruptcy Court permitted the Trustee, Morton Batt, to continue operating the business to utilize Leahy's broker's license for the purpose of collecting commissions.
Appellees are real estate salespersons.1 Prior to the filing of the Petition, Appellees entered into Broker/Agent Agreements ("Agreements") with the Debtor and Leahy. The Agreements stated that the Appellees were independent contractors and not employees of the Debtor. The Agreements further provided for the means of compensation:
Agent\'s only compensation shall be a portion of the brokerage received from the party for whom services are performed. The division in payment of the brokerage shall take place within ten (10) working days after the brokerage is received.
The Agreements did not provide the Appellees with a lien on the commissions obtained by the broker from the closing.
The broker/salesperson relationship is regulated in New Jersey. Two statutes are relevant to the issues before the Court.
The parties' dispute centers on the commissions received from the sale of ten parcels of real estate. The sale of the properties was governed by listing agreements between the sellers and the Debtor. The listing agreements were entered into prior to the filing of the Petition. Appellees were not parties to the listing agreements, although in several instances it appears that the listings were obtained through their efforts. Appellees assert that they are entitled to commissions in their capacities as both listing and selling agents.
The listings produced ten contracts of sale prior to the filing of the Petition. However, all of the contracts closed after the filing.2 In addition, all of the contracts identified the Debtor, and no other person,3 as recipient of the commissions. Although the filing of the Petition initially produced some confusion as to whether the deals should go through,4 the sellers eventually paid $161,000 in commissions. It is these funds, currently held in trust by Batt as Trustee, on which the Appellees seek to impose an equitable lien.
Appellees filed suit in Bankruptcy Court on March 18, 1992. After filing a joint stipulation of facts, the parties cross-moved for summary judgment. Appellees asserted, inter alia, that New Jersey law granted them an equitable lien on the commissions. In an Order filed March 9, 1993, the Bankruptcy Judge agreed with Appellees and held that their claims for commissions were secured by an equitable lien.5
The Bankruptcy Judge framed the issue as "whether the services rendered pre-Petition are such as to create an equitable lien and whether that equitable lien attaches to the fund which was realized post-Petition from the closing of the transaction." Transcript of January 7, 1993 ("Tr.") at 40. In holding that Appellees were entitled to an equitable lien, the judge looked to equitable principles and the statutes regulating brokers and salespersons.6
Batt appealed to this Court. The parties ask us to resolve two issues: (1) whether the Bankruptcy Judge erred as a matter of law in awarding Appellees an equitable lien, and (2) whether the Bankruptcy Judge erred in holding that Appellees were third-party beneficiaries under the real estate contracts.7
This court has jurisdiction to hear appeals from the final orders of the Bankruptcy Judge under 28 U.S.C. § 158(a).8 The Bankruptcy Judge's Order granting summary judgment in favor of Appellees and denying Batt's cross-motion for summary judgment is a final order and thus appealable. Stroehmann Bakeries v. Local 776, 969 F.2d 1436, 1440 (3d Cir.), cert. denied, ___ U.S. ___, 113 S.Ct. 660, 121 L.Ed.2d 585 (1992).
With respect to the Bankruptcy Court's findings of fact, a District Court applies a clearly erroneous standard of review. B. Rule 8013; Brown v. Pennsylvania State Employees Credit Union, 851 F.2d 81, 84 (3d Cir.1988). With respect to the Bankruptcy Judge's conclusions of law, a District Court's review is plenary. Id.; Sharon Steel Corp. v. National Fuel Gas Distribution Corp., 872 F.2d 36, 38-39 (3d Cir.1989). Both parties accept this standard of review.
The issue in this case is one of state law but derives from federal bankruptcy law. The Bankruptcy Code gives Trustees certain enumerated powers, the most formidable of which is the "strong arm" provision captured in 11 U.S.C. § 544. Section 544 gives the Trustee the power to prevent any transfer of a debtor's property that would be voidable by one who obtains a judicial lien against the debtor on the date the bankruptcy petition is filed. 11 U.S.C. § 544(a)(1) (West.Supp. 1993). Essentially, the provision gives the Trustee the power to defeat any unperfected security interests as of the date of the filing. Benjamin Weintraub and Alan N. Resnick, Bankruptcy Law Manual § 7.01 at 7-7 (3d ed. 1992). A creditor whose security interest is defeated is reduced to the status of an unsecured creditor. Id. However, the determination of whether there is a valid pre-Petition security interest, or lien, is almost universally considered the province of state law. Lewis v. Diethorn, 893 F.2d 648, 650 (3d Cir.1990) (); Weintraub and Resnick, supra, at § 7.01 at 7-1 ().
Whether a real estate agent is entitled to an equitable lien on commissions received by the broker is a question of first impression in New Jersey. The interpretation of a novel question of state law imposes certain guidelines on federal courts. Following Erie R.R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), federal courts are bound to apply the law in a manner consistent with the laws of the state and the decisions of the highest state court. Id. at 78, 58 S.Ct. at 822. The duty to ascertain and apply state law binds federal courts even if the issue has not been considered by the highest court in the state. 1A-Pt 2 Moore's Federal Practice § 0.3072. The court's task in this situation was well defined by the Third Circuit in Pennsylvania Glass Sand Corp. v. Caterpillar Tractor Co., 652 F.2d 1165 (3d Cir.1980):
In the absence of an authoritative pronouncement from the state\'s highest court, the task of a federal tribunal is to predict how that court would rule. To make this prognostication, we are not inflexibly confined by dicta or by lower state court decisions, although we should look to such statements as indicia of how the state\'s highest court might decide. The policies underlying the applicable legal doctrines, the doctrinal trends indicated by these policies, and the decisions of other courts may also inform our analysis. In addition, we may consult treatises, the Restatement, and the works of scholarly commentators.
Id. at 1167 (citation omitted). More recently, the Third Circuit held that in predicting how a state supreme court would rule, the court would rely on persuasive decisions of state intermediate appellate courts unless it was convinced that the supreme court would decide otherwise. Fleck v. KDI Sylvan Pools, Inc., 981 F.2d 107, 113 (3d Cir.1992), cert. denied sub nom., Doughboy Recreational, Inc., Div. of Hoffinger Indus., Inc. v. Fleck, ___ U.S. ___, 113 S.Ct. 1645, 123 L.Ed.2d 267 (1993). In other words, lower court decisions are instructive rather than binding. Borse v. Piece Goods Shop, Inc., 963 F.2d 611, 614 (3d Cir.1992); Dillinger v. Caterpillar, Inc., 959 F.2d 430, 434 n. 11 (3d Cir. 1992).
Batt opposes the imposition of an equitable lien. He argues that New Jersey law and the Agreements between the Debtor and Appellees restrict the source of real estate salespersons' commissions to funds received by the broker. Because these funds were received post-Petition, Batt claims that, as Trustee, he may avoid their transfer to Appellees.
Batt also...
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