Next we will examine the situation where the broker/debtor has already entered into a listing agreement and a non-binding letter of intent between the seller and buyer exists prior to the filing of the broker’s bankruptcy petition. Subsequent to the filing of the petition, the property is sold to the buyer who executed the letter of intent – what now?
As you will remember from the prior post, an executory contract is one in when there is performance due by both parties of the contract. Here is where the listing agreement takes center stage – what is required to earn a commission under a listing agreement? The broker must produce a ready, willing and able buyer. When according to the facts is that buyer produced? In our situation, the buyer is produced prior to the bankruptcy petition. As such, the contract is not executory; it is contingent. [See, In re Jones, (Bankr. C.D.IL1988) 98 B.R. 399, cited as authority for same proposition by Ninth Circuit in In re HSD Venture, (Bankr. S.D. Cal. 1995.) 178 B.R. 831.] The broker in In re Jones argued that its listing agreement with the debtors was executory because debtors did not actually sign the purchase contract with buyer until some time after the filing of their bankruptcy. [Id. at 401.] The court disagreed, based on the purpose of the contract – which was to provide a ready willing and able buyer, stating: here are many instances in which a real estate broker can earn its commission without there ever being a signed, enforceable, contract of sale.
Let’s look at the rationale behind the treatment of contingent liabilities for a clearer understanding of why a non-binding letter of intent would be treated as a non-executory contract. The controlling question is whether the letter of intent is a provable claim in the bankruptcy proceeding. A claim includes “contingent debts and contingent contractual liabilities.” 11 U.S.C. § 101(a)(5). A contingent claim must be “liquidated or the amount thereof estimated in the manner and within the time directed by the court.” The term “contingent debts” covers “all debts that, either as to their existence or as to their amount, depend on some event uncertain either as to its occurrence altogether, or to the time of its occurrence.” Collier on Bankruptcy, 14th ed., para. 63.30, pp. 1912-1913. As such, since the listing agreement simply requires that the broker bring a ready, willing and able buyer, if the buyer is in place prior to the bankruptcy, the agent has fully performed and is entitled to payment. If payment is all that remains – a contract is not executory making the broker a pre-petition general unsecured creditor.
This blog is provided as an educational service for my clients and friends. This communiqué is an overview only, and should not be construed as legal advice or advice to take any specific action.
