Matter of Timberline Property Development, Inc.
OPINION
PROCEDURAL HISTORY
On September 26, 1989, Weichert Realtors filed a motion in this court seeking to be appointed a professional real estate broker for the debtor in connection with a sale of real estate to Denise and David Shipper and for recognition of a claim for commission. No certification or affidavit of disinterestedness accompanied the notice of motion. The application was based upon an exclusive listing agreement dated February 19, 1986. Princeton Crossroads Realty, selling broker for the property in question, filed a separate motion on October 11, 1989.
1
The motions were treated together.
FACTS
On February 19, 1986, R. & R. Property Development, Inc., as owner of a parcel of real estate known as Squires Runne, entered into an exclusive listing agreement (hereinafter referred to as the “listing agreement”) with Weichert Co. Realtors (hereinafter referred to as “Weichert”). The agreement originally expired by its own terms on February 28, 1987, but was extended by an addendum dated February 20, 1987, to expire August 81, 1987. While no explanation is given, the addendum indicates that the name of the owner was changed to Timberline Property Development, Inc., the name of the debtor herein (hereinafter referred to as “Timberline” or “debtor”).
The lengthy agreement provides for a sales commission of five per cent (5%) on the base selling price of each home and ten per cent (10%) on “any lot or lots ... sold during the listing period.” Such commissions were made due and payable on the day title closes. There is no specific provision for the establishment of a lien. The agreement is signed by several officers of Weichert and by I. Allen Rumberg as president of the debtor. In addition, Ellen Rum-berg, wife of I. Allen Rumberg, signed as agent for Weichert. The same parties signed the addendum except for Mrs. Rum-berg. The facts presented demonstrate beyond question that Mrs. Rumberg was merely an agent and, as such has no right to collect a commission from the debtor. 3
On May 29, 1987, during the addendum period, Timberline entered into a contract (hereinafter referred to as the “sales agreement”) with Denise and David Shipper for the purchase of one of the homes in the tract for $457,000.00 (later reduced to $450,000.00 by court order of September 13,1989), known as Lot 36, Block 10. Various addenda in the contract, unexplained in the papers, increased the purchase price to $539,000.00. Since the original listing agreement provided for commission of five per cent on the “base selling price”, this court finds that that price is $450,000.00 and that the commission thereon would be $22,500.00. The contract also contains a provision for the payment of the commission:
Broker: Seller will pay the broker, Weic-hert Realtors, a commission pursuant to a separate brokerage agreement. The commission shall be paid in consideration for services rendered by the broker in bringing about this sale. The commission shall not be deemed to have been earned until the delivery of the Deed and the payment of the balance of the purchase price and not otherwise ...
No other provision in the contract deals with the brokerage agreement. Note should be made of the fact that the contract does contain a prohibition against the recordation of the agreement by the buyer. The closing was to take place on January 15, 1988, but it did not occur until almost two years later in October, 1989.
In the interim and on July 7, 1989, the debtor filed a petition in bankruptcy and continued to operate its business as a debt- or-in-possession. On September 6, 1989, the debtor filed a motion seeking leave to
DISCUSSION
I. WAS THERE A NOVATION?
Three significant changes occurred regarding the contract of sale between the date of the original contract and the date of closing. In the first place, since bankruptcy was filed, any change in the contract would require approval of this court. Secondly, the seller in the contract became a debtor-in-possession. Finally, the contract price was reduced from $457,000.00 to $450,000.00. These changes constitute a novation and make the contract post-petition.
Clearly, the requirement of court approval of the contract adds an element which did not exist prior to the filing of the petition. There is no requirement that a third party approve a normal contract. Under 11 U.S.C. § 363, however, the court must approve the sale of debtor’s property if it is out of the ordinary course of business. Court approval adds an element to the determination, for the court must specifically find that such a sale is in the interest of creditors, is entered into in good faith, and is one in which the price represents fair value.
In re Abbotts Dairies of Pennsylvania, Inc.,
Furthermore, while there is a great similarity between a pre-petition debtor and a debtor-in-possession, they are, in fact, different entities for the purpose of assuming contracts.
Matter of West Electronics, Inc.,
Finally, a change in the purchase price is obviously a new term.
S.N.W. Corp. v. Hauser,
In general, a novation is a “substitution of a new contract for the old agreement.” 15 Williston on Contracts, § 1865 (1972). Although the term “novation” is generally used to describe a change of parties to the contract, it is also used where the purchase price of a transaction is changed. In
S.N.W.,
The S.N. W. court set out a four part test for a novation. These components are: (1) the existence of a previously valid contract; (2) the agreement to make a new contract; (3) the intent to extinguish the original contractual obligation; and (4) the validity of the new contract. Id. In the ease sub judice there is no allegation that either contract is invalid. The fact that the purchase price was lowered shows intent to extinguish the original obligation. The buyers, no doubt, wanted the revised purchase price over the original, higher price, and the motion to approve the sale was brought before the court by the attorneys for the debtor. Thus, there appears to have been an agreement to make the new contract. Since the definition of a novation is satisfied, the change in purchase price makes the second agreement a novation, and the contract became post-petition.
Furthermore, courts have held that a no-vation occurs by the substitution of a new obligation
for
an old one between the parties as long as there is intent to extinguish the old obligation.
Morecraft v. Allen,
In
Gordon v. Stevens Institute of Technology,
II. DOES WEICHERT HAVE A LIEN AGAINST PROPERTY OP THE ESTATE?
The attorney for the broker asserts that his client is entitled to an equitable lien on the property or the proceeds of sale. While the third circuit recognizes such liens, their existence and ability to withstand the “strong arm powers” of the trustee is controlled by state law, unless the application of such powers would frustrate federal policy.
Lewis v. Diethorn,
If the trustee is unable to obtain unsecured credit ... as an administrative expense, the court, after notice and a hearing, may authorize the obtaining of credit or the incurring of debt—
(2) secured by a lien on property of the estate that is not otherwise subject to a lien.
It may be argued that if the contract were severable into an agreement for sale and a listing agreement as in
In re Gardinier Inc.,
III. MAY WEICHERT COMPEL THE DEBTOR TO ASSUME THE LISTING AGREEMENT AS A PREPETITION EXECUTORY CONTRACT?
The Bankruptcy Code does not define an executory contract. However, the legislative history of 11 U.S.C. § 365 identifies it as one “on which performance remains due to some extent on both sides.” Notes of the Committee on the Judiciary, S.R.Rep. No. 989, 95th Cong., 2d. Sess. 58 (1978), contained in 1978 U.S.Code Cong. & Admin. News 5787, 5844. See also,
Matter of
Professor Vern Countryman developed an oft-cited definition of an executory contract which reflects the legislative history of § 365. He identified an executory contract as
[A] contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete the performance would constitute a material breach excusing the performance of the other.
Countryman,
Executory Contracts in Bankruptcy: Part I,
57 Minn.L.Rev. 439, 460 (1973), cited in
Dunes,
The courts should use a flexible approach in determining whether a contract is executory. In
Matter of Willingboro Country Club,
A listing agreement cannot be assumed, however, unless the real estate broker has been retained pursuant to 11 U.S.C. § 327. In
In re Channel 2 Assoc.,
... § 365 cannot be used to circumvent the requirements of § 327. Even if the contract were executory, the debtor seeks to pay a professional person. Compensation for professionals is governed by § 330, which requires § 327 court approval.
Channel 2,
Thus, since there was no nunc pro tunc appointment of Weichert, Timberline cannot assume the listing agreement even if the contract is deemed executory.
IV. DID THE SALE TO DENISE AND DAVID SHIPPER GIVE RISE TO THE RIGHT OF WEICHERT TO AN ADMINISTRATIVE EXPENSE?
The Bankruptcy Code allows certain expenses incurred by a debtor to be given priority over other debts owed. 11 U.S.C. § 503 permits, inter alia, the actual, necessary costs and expenses of preserving the estate, including wages, salaries, or commissions for services rendered after the commencement of the case. § 503(b)(1)(A). Cases interpreting this provision have often read its language literally and required that any expenses to be characterized as administrative have to have been incurred after the debtor filed bankruptcy.
Assumption of an executory contract enables pre-petition obligations arising thereunder to be treated as administrative expenses.
In re Wheeling-Pittsburgh Steel Corp.,
If ... these agreements are prepetition executory contracts ... which are not entitled to court approval for rejection, Wheeling-Pittsburgh must assume these agreements, thereby assuming Harmar’s maintenance costs as costs of administration.
Wheeling-Pittsburgh,
Obligations under contracts which are executory at the time bankruptcy is filed are payable as an administrative expense priority when the executory contract has been assumed properly by the bankrupt.
While the above cited rule is the general rule, some courts distinguish between a right to payment that accrued pre-petition and such a right that accrued after bankruptcy was filed. In
Matter of Jartran, Inc,
In holding that the debt could not be given an administrative expense priority, the court found as the determinative factor that
... the transaction out of which these benefits arose was completed before the petition was filed and nothing could have been done to further or cancel the transaction after the petition filing. Thus, the matter was outside the scope of § 503.
Id. at 589.
The court looked to see when the debtor induced its creditors to do the required work, which was pre-petition. The decision, the court stated, was required to be in accordance with the goal of the administrative expense rules.
To serve the policy of the priority, inducement of the creditor’s performance by the debtor-in-possession is crucial to a claim for administrative priority in the context of the furnishing of goods or services to the debtor ... Administrative priority is granted to post-petition expenses so that third parties will be moved to provide the goods and services necessary for a successful reorganization ... In the ease before us no inducement by the debtor-in-possession was required because the liability for the cost of the ads was irrevocably incurred before the petition was filed.
Id.
at 587-88 (emphasis in the original). See also,
In re Public Ledger Inc.,
Furthermore, the appellants argued that they should be given an administrative expense priority based on equity and fairness. The court did not find this argument persuasive since these creditors did not incur any greater hardships by virtue of the bankruptcy than any others, and all creditors assume the risk that their debtors may file bankruptcy.
Jartran,
In the case
sub judice,
the contract of sale for the property was not consummated
Y. MAY WEICHERT NOW CLAIM NUNC PRO TUNC APPOINTMENT?
It is a generally recognized rule that compensation or administrative expenses cannot be granted from the debtor’s estate for professional services unless the court has authorized both the employment and the services prior to performance of the services.
In re Ewing,
In reversing the bankruptcy court’s granting of an administrative expense priority to the broker, the Third Circuit considered § 503(b)(2) and § 503(b)(1)(A). Id. at 108-09. § 503(b)(2) allows as an administrative expense compensation and reimbursement awarded under § 330(a) of the Code. However, for such expense to be allowed by the court, the professional, such as a broker, must receive court approval prior to rendering services to the estate per § 327(a). Id. A broker cannot use § 503(b)(1)(A) to circumvent § 327(a). The court reasoned that if a broker were allowed compensation under § 503(b)(1)(A), § 327(a) would be invalidated and Congress’ intent in providing for prior approval would be contravened. § 503(b)(1)(A) encompasses costs such as expenditures for repairs, upkeep, rent, taxes, and “other costs incidental to protection and conservation of the estate.” Id. at 108.
The court in
Airlease
implied that an administrative expense could be allowed where the broker or other professional received
nunc pro tunc
appointment from the bankruptcy court. However, the standards for such retention are difficult to meet and such employment should only be granted in extraordinary circumstances.
Id.
at 105;
Matter of Arkansas Co.,
1. The bankruptcy court must find, after a hearing, that the applicant satisfies the disinterestedness requirements of § 327(a) and would therefore have been appointed initially; and
2. The court must, in its discretion, determine that the particular circumstances presented are so extraordinary as to warrant retroactive approval. Arkansas,798 F.2d at 650 ; Airlease,844 F.2d at 105 .
Among the factors to be considered in making the determination are:
1. Whether the applicant or some other person bore responsibility for applying for approval;
2. Whether the applicant was under time pressure to begin service without approval;
3. The amount of delay after the applicant learned that the initial approval had not been granted;
4. The extent to which compensation to the applicant will prejudice innocent third parties; and
5. Other relevant factors. Arkansas at 650; Airlease at 105-06. See also, Matter of Freehold Music Center, Inc.,49 B.R. 293 (Bankr.D.N.J.1985).
Among the “other relevant factors” the
AirLease
court examined in refusing to approve
nunc pro tunc
appointment were the attorney’s bankruptcy experience.
Id.
at 106-07. Furthermore, the “time pressure factor” relates only to whether there is sufficient time to request court approval before the professional’s services must begin.
Id.
at 107. The court reiterated that for the time pressure factor to be significant, there must be an emergency situation in which services have to be initiated within a very short period before approval could be sought.
Id.
An example of such exigency would be where counsel was retained by a creditors’ committee just two weeks before a crucial meeting and was required to prepare immediately.
Id.
The court refused to consider the value of the professional services provided the estate when deciding on retroactive approval.
Id.
at 108, quoting
In re Mason,
In the case at bar, the test for nunc pro tunc approval has not been satisfied. There was no time pressure to begin services without prior court approval. Weichert, as a well-known real estate broker in New Jersey, should have known that it needed approval of this court before performing work for the debtor. Since Weic-hert is not entitled to nunc pro tunc approval, it is not entitled to receive an administrative expense priority for its claim against the debtor.
YI. IS WEICHERT ENTITLED TO A GENERAL UNSECURED CLAIM?
Since Weichert does not have a lien on the property or the proceeds of sale and cannot claim an administrative expense priority, it is relegated to a position as a general unsecured creditor. In
In re Charter Co.,
VII. CONCLUSIONS
A. Since the purchase price in the sales contract was changed, the parties changed, and the sale required court approval, there was a novation.
B. The contract was, therefore, post-peti-' tion, and no lien could be imposed on property of the estate without court approval. The court hereby denies imposition of the lien.
C. The contract was not assumable as an executory contract.
D. Since Weichert was never retained by this court to perform brokerage services for the debtor and does not qualify for nunc pro tunc approval, it is not entitled to receive an administrative expense priority for its brokerage commission.
Counsel for debtor-in-possession is directed to submit an order consistent with this opinion.
Notes
. The commission for Princeton Crossroads as selling broker is derivative of the commission
. It should be noted that the application was for $26,950.00. In fact, 5% of the original price of $457,000.00 would yield $22,850.00 and 5% of the revised price of $450,000.00 would yield $22,500.00. The maximum commission allowable therefore is $22,500.
. The court notes the relationship between the debtor and Mrs. Rumberg, and infers therefrom the reason for the low profile taken by the debtor in this case. Whether the fact that Ellen Rumberg was an employee of Weichert, an officer of the debtor, and the wife of I. Allen Rum-berg, the principal of the debtor, created a conflict of interest is not reached by the court since the application for appointment and payment of a commission was made by Weichert, not by Ms. Rumberg personally.
. In the instant case, the original brokerage agreement established the right to the commission as a matter of contract right. It should be noted that a claim based purely on
quantum meruit
cannot be allowed.
In re C.H. Stuart, Inc.,