Court Opinion

ID: 4195457
Source: CourtListenerOpinion
Date Created: 2017-08-12 00:01:38.507575+00
Date Added: 2024-06-11T07:47:28.230139
License: Public Domain

FILED
 1                         ORDERED PUBLISHED              AUG 11 2017

 2                                                    SUSAN M. SPRAUL, CLERK
                                                        U.S. BKCY. APP. PANEL
                                                        OF THE NINTH CIRCUIT
 3                  UNITED STATES BANKRUPTCY APPELLATE PANEL
                              OF THE NINTH CIRCUIT
 4
 5   In re:                        )      BAP No.      ID-16-1316-JuFB
                                   )
 6   STEPHEN J. ANDERSON and       )      Bk. No.      4:15-bk-40878-JDP
     MELANIE ANDERSON,             )
 7                                 )
                    Debtors.       )
 8   ______________________________)
                                   )
 9   STEPHEN J. ANDERSON; MELANIE )
     ANDERSON,                     )
10                                 )
                    Appellants,    )
11                                 )
     v.                            )      O P I N I O N
12                                 )
     GARY L. RAINSDON, chapter 7   )
13   trustee,                      )
                                   )
14                  Appellee.      )
     ______________________________)
15
                     Argued and Submitted on July 27, 2017
16                          at Pasadena, California
17                          Filed - August 11, 2017
18               Appeal from the United States Bankruptcy Court
                            for the District of Idaho
19
              Honorable Jim D. Pappas, Bankruptcy Judge, Presiding
20                        ____________________________
21   Appearances:     Aaron J. Tolson of Tolson & Wayment, PLLC argued
                      for appellants, Stephen J. Anderson and Melanie
22                    Anderson; Jason R. Naess of Parsons, Smith,
                      Stone, Loveland & Shirley, LLP argued for
23                    appellee, Gary L. Rainsdon, chapter 7 trustee.
                         _____________________________
24
25   Before:    JURY, FARIS, and BRAND, Bankruptcy Judges.
26
27
28
 1   JURY, Bankruptcy Judge:
 2
 3         Appellants/debtors, Stephen J. Anderson and Melanie
 4   Anderson (Debtors), pose the issue in this appeal as an open
 5   question of law which splits the two divisions of the Idaho
 6   Bankruptcy Court.   Debtors argue that because under Idaho law a
 7   licensed real estate professional does not earn a right to a
 8   sales commission until the sales transaction closes (which took
 9   place in this case after the petition date), such commission is
10   not property of the estate and belongs to Debtors.   According to
11   Debtors, this is the position of the trustees in the Boise
12   Division.   To the contrary, in the Pocatello Division, where
13   this case arises, trustees assert that such commissions are
14   estate property, following our decision in Tully v Taxel (In re
15   Tully), 202 B.R. 481, 483 (9th Cir. BAP 1996), a case arising in
16   California where under state law the right to a commission does
17   not require the transaction to close.
18         Despite Debtors’ assertion that this is an open question,
19   we hold that the Ninth Circuit in Jess v Carey (In re Jess), 169
20 F.3d 1204 (9th Cir. 1999), has answered the question, ruling
21   that § 5411 trumps any distinction in state law in this
22   instance, its broad sweep making the contingent right to a
23   commission estate property.   Accordingly, WE AFFIRM.
24   ///
25   ///
26
27
           1
            Unless otherwise indicated, all chapter and section
28   references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532.

                                    -2-
 1                               I.   FACTS2
 2        The facts are not in dispute.     Debtors filed their
 3   chapter 7 petition on September 9, 2015 (Petition Date).
 4   Debtors are both licensed real estate agents.     As agents, they
 5   were required to work under a broker.     Accordingly, they
 6   associated with Keller Williams Realty East Idaho (Keller), as
 7   part of the Mike Hicks Realty Group (Hicks) team.     Under
 8   Keller’s business model, Debtors spent the bulk of their time
 9   interacting with buyers and sellers while Hicks’ staff at Keller
10   prepared the marketing materials, photographed the properties,
11   and performed other administrative tasks.     Keller also provided
12   training to its agents.   For these services, Debtors paid Keller
13   a fee called a “cap.”
14        Per their agreement with Keller, when Debtors earned a real
15   estate commission, it was paid directly to Keller.     In turn,
16   Keller retained 36% of the commission until the $18,000 cap was
17   met each year.   After subtracting the amount applied to Debtors’
18   cap, Keller then cut two checks to split the balance of the
19   commission according to the Group/Team Contract.     When Debtors
20   acted as the buyer’s agent, the contract provided for a 60/40
21   split between Debtors and Hicks, respectively.     When Debtors
22   were the listing agents, the contract provided for a 55/45 split
23   between Debtors and Hicks, respectively.
24        Keller encouraged its agents to have a separate business
25   entity into which the earned commissions were paid.     The entity
26
          2
27          We borrow from the facts set forth in the bankruptcy
     court’s published memorandum decision at 558 B.R. 369 (Bankr. D.
28 Idaho 2016).

                                      -3-
 1   then paid the commission to the real estate agents as a salary.
 2   Debtors organized a company called Melanie Anderson Realty,
 3   Inc., but closed it before the Petition Date.     After the
 4   Petition Date, Debtors created a new business entity called
 5   Bastille Enterprises, Inc. (Bastille).     Melanie is the sole
 6   shareholder of Bastille, while Stephen is an employee.     Bastille
 7   pays Debtors’ business expenses and some of their personal
 8   expenses.     Bastille also pays a salary to both Stephen and
 9   Melanie.     Under the contract between Keller and Debtors, after
10   Keller receives a commission, Keller pays Debtors’ share to
11   Bastille.
12            On the Petition Date, Debtors were involved in thirteen
13   real estate transactions where a sales contract had been
14   executed by the buyer and seller, but the sale had yet to close.
15   Each transaction closed postpetition and Keller paid Debtors’
16   share of the commission to Bastille.
17        On April 6, 2016, appellee/chapter 7 trustee, Gary L.
18   Rainsdon (Trustee), filed a motion for turnover of $52,485.92 in
19   commissions that were paid to Debtors through Bastille.3
20   Trustee argued that the commissions were property of Debtors’
21   bankruptcy estate because they had performed the work necessary
22
23
          3
            Through the thirteen transactions, Debtors had earned
24   approximately $105,222.00 in commissions. The amount of
     $52,485.92 is the “Associate Commission” amount included in the
25   Associate Detail exhibits. The difference was paid to Hicks.
26   Trustee maintained that the $52,485.92 amount was the amount he
     could prove Debtors had control or custody over during the
27   pendency of the bankruptcy case. He did not pursue the
     remaining balance of the commissions which went to Hicks, but
28   reserved his right to do so.

                                      -4-
 1   to earn the commissions prior to the Petition Date.   Therefore,
 2   the commissions were subject to turnover under § 542(a).   In
 3   response, Debtors argued that the commissions were not part of
 4   their estate because the commissions were paid to Bastille.
 5   Alternatively, Debtors asserted that if the commissions were
 6   part of their bankruptcy estate, a portion of the work to earn
 7   the commissions was performed postpetition.   Debtors requested
 8   the bankruptcy court to apportion the commission between the
 9   pre- and postpetition period and order turnover of the portion
10   earned prepetition.
11        After an evidentiary hearing, the bankruptcy court ordered
12   simultaneous post-hearing briefing of the issues and took the
13   matter under advisement.
14        The bankruptcy court issued a memorandum decision, finding
15   that the commissions were property of Debtors’ bankruptcy estate
16   under § 541(a)(1) because all Debtors’ acts necessary to earn
17   the commissions were performed prepetition and therefore were
18   rooted in the pre-bankruptcy past.   The court also noted that
19   under Idaho law, only a licensed real estate broker or
20   salesperson is entitled to collect a real estate commission.
21   Idaho Code § 54-2054.   Therefore, as the licensed agents, the
22   commissions belonged to Debtors, not to Bastille.   The
23   bankruptcy court concluded:   “[T]hat Debtors had entered into a
24   contract with Keller to have their commissions paid to Bastille,
25   a corporation they created after their bankruptcy filing, does
26   not alter the result.   Under § 542(a), a debtor must turn over
27   possession, or account to the trustee, for any property of the
28   estate.” 558 B.R. at 374.

                                    -5-
 1        Finally, the court found that Debtors produced no evidence
 2   which would allow it to apportion the commissions between pre-
 3   and post-bankruptcy efforts.        As a result, Debtors did not show
 4   any portion of the commissions should be excluded from the
 5   estate under the “personal services” exception in § 541(a)(6).
 6   Therefore, the bankruptcy court ordered Debtors to turn over
 7   $52,485.92 to Trustee.       Debtors filed a timely appeal from that
 8   order.
 9                                II.   JURISDICTION
10        The bankruptcy court had jurisdiction over this proceeding
11   under 28 U.S.C. §§ 1334 and 157(b)(2)(E).         We have jurisdiction
12   under 28 U.S.C. § 158.
13                                   III.    ISSUE
14        Whether the commissions, which were paid on contracts
15   entered into prepetition and deposited into the account of
16   Bastille postpetition, should be considered property of Debtors’
17   estate as of the date of the petition, thereby making them
18   subject to turnover under § 542(a).
19                          IV.    STANDARD OF REVIEW
20        Whether an asset is estate property is a conclusion of law
21   reviewed de novo.   Groshong v. Sapp (In re MILA, Inc.), 423 B.R.
22   537, 542 (9th Cir. BAP 2010).
23                                 V.   DISCUSSION
24   A.   Legal Standards
25        Under § 542(a), an entity “in possession, custody, or
26   control, during the case, of property that the trustee may use
27   . . . shall deliver the property to the trustee, and account
28   for, such property or the value of such property,” subject to

                                            -6-
 1   certain exceptions.
 2        Section 541(a) provides that the filing of a bankruptcy
 3   case creates an estate.   The estate is “comprised of all the
 4   following property, wherever located any by whomever held:
 5   (1) . . . all legal or equitable interests of the debtor in
 6   property as of the commencement of the case.”   This definition
 7   of property of the estate has been broadly construed to
 8   encompass a debtor’s contingent interest in future payments, as
 9   long as that interest is “sufficiently rooted” in the debtor’s
10   prepetition past, even if that interest is reliant on future
11   contingencies that have not occurred as of the filing date.
12   Segal v. Rochelle, 382 U.S. 375, 379-80 (1966).    In this
13   Circuit, any contingent interest of the debtor “sufficiently
14   rooted in the pre-bankruptcy past” is estate property, even if
15   the contingency is not satisfied until after the bankruptcy is
16   filed.   See Neuton v. Danning (In re Neuton), 922 F.2d 1379,
17   1382–83 (9th Cir. 1990) (beneficial interest in an inter vivos
18   trust constituted property of the bankruptcy estate as debtor’s
19   interest vested upon the death of the preceding beneficiary
20   which occurred after the bankruptcy petition was filed); Rau v.
21   Ryerson (In re Ryerson), 739 F.2d 1423, 1425–26 (9th Cir. 1984)
22   (contingent interests in payments due under a prepetition
23   contract were property of the estate and passed to the trustee).
24        An exception to the broad definition of property of the
25   estate is the postpetition earnings exception under § 541(a)(6).
26   That section provides that earnings from services performed by
27   an individual debtor after the commencement of the case are not
28   property of his or her estate.    In considering whether the

                                      -7-
 1   postpetition earnings exception applies, we first determine
 2   whether any postpetition services are necessary to obtain the
 3   payments at issue.   In re Jess, 169 F.3d at 1208 (citing Towers
 4   v. Wu (In re Wu), 173 B.R. 411, 414-15 (9th Cir. BAP 1994)
 5   (citing In re Ryerson, 739 F.2d at 1426)).   “If not, the
 6   payments are entirely ‘rooted in the pre-bankruptcy past’ and
 7   the payments will be included in the estate.”   Id. at 1208; see
 8   also Tully v Taxel (In re Tully), 202 B.R. 481, 483 (9th Cir.
 9   BAP 1996) (citing Segal, 382 U.S. at 380).   “[W]here the debtor
10   receives a commission post-petition but essentially fulfilled
11   all of his obligations for that commission pre-petition, the
12   commission will be deemed property of the estate.”    In re Tully,
13 202 B.R. at 483.
14        Given this background, in determining whether the
15   commissions at issue here should be included in Debtors’ estate,
16   the touchstone is the Supreme Court’s decision in Segal.    There,
17   the Supreme Court confronted the question whether the estate or
18   the debtors owned a loss carryback tax refund claim arising from
19   losses generated during the year of the bankruptcy filing.    The
20   Supreme Court determined that the refund claim was estate
21   property based on its conclusion that the claim was
22   “sufficiently rooted in the pre-bankruptcy past and [was] little
23   entangled with the bankrupts’ ability to make an unencumbered
24   fresh start.” 382 U.S. at 380.   “The Code follows Segal insofar
25   as it includes after-acquired-property ‘sufficiently rooted in
26   the prebankruptcy past’ but eliminates the requirement that it
27   not be entangled with the debtor’s ability to make a fresh
28   start.”   Johnson v. Taxel (In re Johnson), 178 B.R. 216, 218

                                    -8-
 1   (9th Cir. BAP 1995) (quoting In re Ryerson, 739 F.2d at 1426).
 2   Therefore, the test for purposes of deciding whether a
 3   postpetition payment on a prepetition contract is excluded from
 4   property of the estate under the earnings exception is whether
 5   the payment is “sufficiently rooted in the pre-bankruptcy past”
 6   so as to be included in the bankruptcy estate.
 7   B.   Analysis
 8        Debtors base their right to the commissions on two legal
 9   theories.    First, they contend that, under Idaho law, their
10   commissions were not earned until the purchaser completed the
11   transaction by closing title.    And this did not happen until
12   after their petition was filed.    Implicitly, they suggest that
13   they had no legal or equitable interests in the commissions on
14   the Petition Date and that the timing of the closing was
15   dispositive.
16        Second, they argue that the bankruptcy court erred by
17   disregarding Debtors’ business agreement with Keller and with
18   Debtors’ corporation Bastille.    Debtors maintain that the real
19   estate sales contracts were property of Keller and not Debtors
20   individually.    When the transactions closed, Keller was paid the
21   commission in question.    Keller, in turn, paid Bastille,
22   Debtors’ corporation, and Debtors were paid either a salary or a
23   distribution from Bastille.    Accordingly, Debtors maintain that
24   by the time they received any portion of the commissions, it
25   constituted postpetition earnings which are not subject to
26   turnover under § 541(a)(6).    We are not persuaded by Debtors’
27   arguments.
28        “Property interests are created and defined by state law.”

                                      -9-
 1   Butner v. United States, 440 U.S. 48, 55 (1979).   However, what
 2   constitutes property of Debtors’ bankruptcy estate is not
 3   determined by looking solely at Idaho law.   Instead, we look at
 4   Idaho law to determine when and how Debtors earned the real
 5   estate commissions and then apply §§ 541(a)(1) and (a)(6) to
 6   determine whether the commissions are estate property.
 7        Generally, under Idaho law, a real estate broker is
 8   entitled to a commission when he or she (a) produces a purchaser
 9   ready, willing, and able to buy on the terms fixed by the owner;
10   (b) the purchaser enters into a binding contract with the owner
11   to do so; and (c) the purchaser completes the transaction by
12   closing the transaction in accordance with the contract terms.
13   Margaret H. Wayne Tr. v. Lipsky, 846 P.2d 904, 911 (Idaho 1993).
14   Debtors’ interest in receiving a commission upon the
15   satisfaction of all three prongs set forth in Lipsky is a state
16   law property right.   See In re John Chezik Imports, Inc., 195
17 B.R. 417, 420 (Bankr. E.D. Mo. 1996).
18        Whether Debtors’ state law property right in the
19   commissions is estate property is answered by the analysis and
20   reasoning set forth in Jess.   There, the debtor-attorney argued
21   that because he had no cause of action which would have allowed
22   him to sue his client for any portion of his contingency fee on
23   the petition date, the later-realized contingency fee was not
24   property of the estate.    After a hearing before the bankruptcy
25   court, the debtor was ordered to turn over 78% of the fee to the
26   estate, the amount attributable to the attorney-debtor’s
27   prepetition performance.   The Ninth Circuit affirmed, holding
28   that:   “Although [the debtor] may not have been able to sue his

                                     -10-
 1   client for a portion of his fee at the time he filed his
 2   bankruptcy petition, he had an interest in the fee attributable
 3   to pre-petition work on the case.” 169 F.3d at 1208.   This
 4   interest, the court stated, was “clearly property of the estate
 5   under section 541(a)(1).”   Id.
 6        Here, like the debtor-attorney in Jess, Debtors entered
 7   into the real estate sale contracts prepetition.       Under Idaho
 8   law, their right to receive the commissions was contingent upon
 9   the sales closing.   Therefore, on the Petition Date, like
10   Mr. Jess, Debtors had, at least, a contingent interest in the
11   commissions that was attributable to their prepetition work.
12   Id. at 1207-08; see also In re Neuton, 922 F.2d at 1382–83; In
13   re Ryerson, 739 F.2d at 1425–26.     This contingent interest which
14   was attributable to their prepetition work is property of their
15   estate under the broad parameters of § 541(a)(1).
16        Unlike Mr. Jess, Debtors presented no evidence at trial
17   that shows they performed services postpetition in connection
18   with the closings.   This lack of evidence prevented the
19   bankruptcy court from apportioning the commissions between pre-
20   and postpetition work.   Accordingly, the commissions, although
21   received postpetition, were sufficiently rooted in the pre-
22   bankruptcy past as to constitute property of Debtors’ estate.
23        Finally, contrary to Debtors’ arguments, the bankruptcy
24   court considered Debtors’ relationships with Keller and Bastille
25   in deciding whether the commissions were property of Debtors’
26   estate.   Under Idaho law, only a licensed real estate broker or
27   salesperson is entitled to collect a real estate commission.
28   Idaho Code § 54-2054.    And, under Idaho law, only an individual

                                       -11-
 1   may hold a real estate license.   Idaho Code §§ 54-2004; 54-2002.
 2   Melanie testified that the commissions were earned by her and
 3   her husband.   She also testified that she had never heard of a
 4   corporation earning a real estate commission.     Her testimony was
 5   thus consistent with Idaho law.
 6        Because Debtors were the licensed agents, only Debtors
 7   could have a legal or equitable interest in the commissions as
 8   of the commencement of their case.     Bastille legally could not
 9   earn the commission.    Furthermore, Bastille was not formed when
10   Debtors filed their petition, and property of the estate is
11   determined as of the petition date.
12        In addition, as the bankruptcy court held, Debtors’
13   contract with Keller to have their commissions paid to Bastille
14   does not change the result under § 542(a).    Under the statute,
15   Debtors must turn over property in their possession, and account
16   to the trustee, for any property of the estate.    Section 542(a)
17   does not require current possession of the property.    Newman v.
18   Schwartzer (In re Newman), 487 B.R. 193, 200 (9th Cir. BAP
19   2013).
20        Debtors also argue that § 542 as applied in this case
21   violates the Thirteenth Amendment’s prohibition against
22   involuntary servitude because the statute, in effect, forces
23   Debtors to close the transactions in question for the sole
24   benefit of their creditors after filing for bankruptcy.    They
25   further contend that § 542 violates their right to equal
26   protection under the law.   These arguments are raised for the
27   first time on appeal.   Therefore, we do not address them.   See
28   Cold Mountain v. Garber, 375 F.3d 884, 891 (9th Cir. 2004).

                                     -12-
 1                           VI.   CONCLUSION
 2        In sum, for the reasons stated, we AFFIRM.   The bankruptcy
 3   court properly determined that the $52,485.92 in real estate
 4   commissions paid by Keller to Debtors postpetition constituted
 5   property of their estate.   Therefore, Debtors are required to
 6   turn over the commissions to Trustee under § 542(a).
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