Court: United States Bankruptcy Court, S.D. New York; May 10, 2019; Us Bankruptcy; United States Bankruptcy Court
Angele G. Tese-Milner's motion seeks approval for a stipulation with Urban Compass, a creditor in the chapter 7 bankruptcy case of Scott Kerner, reducing Compass's claim from $57,540 to $40,000. Kerner has moved to expunge Compass's entire claim, effectively objecting to the stipulation, which Compass opposes. The Trustee has submitted a statement regarding the motion, and Kerner has filed a response. The Court grants the motion to approve the stipulation and denies Kerner's motion.
Prior to his bankruptcy filing on December 7, 2017, Kerner engaged Compass to sell his condominium unit under a brokerage agreement that entitled Compass to a 4% commission if sold during the exclusive term ending February 22, 2018. Compass introduced potential buyers, Jennifer Robinson-Khagan and Payam Khagan, leading to a contract for sale at $1,918,000, with a reduced commission of 3% if sold to them. The sale was scheduled for December 22, 2017.
Kerner filed for bankruptcy on December 7 without assuming or rejecting the sale contract, misleadingly claiming Khagan's consent to use the contract as a stalking horse bid in an auction. The Khagans objected, asserting they had not consented and demanded the return of their $191,800 down payment due to Kerner's breach of contract. The Court upheld the Khagans' objection, ruling that Kerner had no right to use the contract without consent and ordered the return of the down payment, effectively terminating the contract. Subsequently, Kerner moved to dismiss his bankruptcy case, followed by Compass's motion to convert it to a chapter 7 case.
On March 28, 2018, the Court converted the Debtor's chapter 11 case to chapter 7, granting Compass' motion. Compass initially filed a claim for a brokerage commission totaling $83,960, which was later reduced to $57,540 after agreeing to a 3% commission on the sale price. Following negotiations with the Trustee, Compass further reduced its claim to $40,000.
Settlements in bankruptcy are encouraged to reduce litigation costs and expedite estate administration. Under Bankruptcy Rule 9019, courts can approve settlements if deemed fair, equitable, and in the estate's best interest. Courts assess whether settlements fall within a reasonable range and must gather necessary facts to determine the likelihood of success if claims were litigated. Opinions from bankruptcy counsel and other parties may be considered in the approval process.
The evaluation of settlements includes several factors: the balance of litigation success versus settlement benefits, the likelihood of complex litigation, creditor interests, support from other parties, the competency of counsel, the scope of releases for officers and directors, and the arm's length nature of the negotiations. The proponent of the settlement carries the burden to demonstrate that it serves the estate's best interests.
The Court applies the business judgment standard to evaluate the Trustee's actions, allowing consideration of the Trustee's and counsel's informed judgments regarding settlements without requiring an independent investigation. The court gives weight to these judgments, recognizing the trustee's discretion in deciding whether to pursue claims. The law favors compromise, and a trustee is not obligated to prosecute every cause of action, as their actions are judged by their good faith, reasonableness, and authority under bankruptcy law.
The Debtor's objection to the Stipulation, which argues for further reduction of Compass' claim, is viewed as an unwarranted challenge to the Trustee's management of the estate. The Stipulation is deemed reasonable due to its immediate benefits, including claim reduction and efficient estate administration, while continued litigation would incur unnecessary costs and delay distributions to creditors. The Court finds no evidence to doubt that the Stipulation arose from arm's length negotiations and concludes that it is fair, equitable, and in the best interest of the estate, supported by major parties involved.
The Debtor has standing to challenge Compass' claim under Section 502(a) of the Bankruptcy Code, as a surplus could exist after all creditor claims are paid. In Chapter 7 cases, a debtor typically lacks a pecuniary interest to object to claims unless a surplus is possible. The Debtor's estate currently holds $274,535.19 after satisfying secured claims, with total administrative expenses of $166,683.07, leaving $107,852.12 available for distribution to unsecured creditors. Even if Compass’ claim of $57,540 is fully paid, a surplus of $25,153.76 would remain after addressing another unsecured claim.
The proof of claim submitted by Compass serves as prima facie evidence of its validity, imposing an initial burden of persuasion on the Debtor, which he fails to meet. The Debtor contends that Compass is not entitled to a commission since it did not procure a buyer for the sale; however, established law dictates that a broker earns a commission upon producing a ready, willing, and able buyer unless otherwise agreed. The Debtor's argument is unconvincing, as Compass successfully introduced the Khagans, who were indeed prepared to purchase under the agreed terms.
The broker's right to compensation is not contingent on the performance of a realty contract or the seller receiving the sale price unless explicitly conditioned in the brokerage agreement. In this case, the Brokerage Agreement entitles Compass to a commission upon the sale of the property, due at closing, and specifies a four percent commission of the total sale price. If another broker is involved, the commission will be split without exceeding the agreed amount. Compass argues that its commission right accrued when the Khagan Contract was executed, with payment due at closing. The agreement does not condition the commission on the sale to the Khagans. Therefore, Compass may be entitled to its commission even if the sale did not close, particularly since the seller, Kerner, was responsible for not completing the sale by the deadline. The court supports the Trustee's decision to negotiate a reduced commission with Compass and denies the Debtor's motion to challenge this agreement.
