So you were going to sell some real property that subsequently became part
of a bankruptcy case
or you were asked to sell real property while it is part of a bankruptcy
estate, what do you do now? It is important to note that brokers can still
market and sell real property that is part of the bankruptcy estate. However,
the broker must first be approved by the bankruptcy court. This article
should serve as a guide for that process.
Generally, A Broker Must Be Approved By The Court Before You Can Sell The Property
Pursuant to 11 U.S.C. § 327(a), court approval is required for a trustee
or Debtor-In-Possession (“DIP”) to employ any “professional
persons.” Real estate brokers selling bankruptcy estate property
on commission are considered “professional persons” subject
to § 327.
See In re Cummins, 8 B.R. 701, 702 (9th Cir. B.A.P. 1981).
How does a broker get approved by the bankruptcy court, you may ask? In
order to be approved, the trustee or debtor, whoever is employing the
broker, must submit an application to the court pursuant to Federal Rules
of Bankruptcy Procedure, Rule 2014.
What The Court Looks For
Generally, the prerequisites to qualify for employment under § 327
are simple. A broker must not have any conflicts of interest, i.e. the
broker must (1) not hold or represent an interest adverse to the estate
and (2) be disinterested.
In re Tevis, 347 B.R. 679 (9th Cir. B.A.P. 2006);
In re Lee, 94 B.R. 172 (Bankr. C.D. Cal. 1988).
The bankruptcy code requires that a broker employed by the trustee or DIP
must not “hold or represent an interest adverse to the estate.”
11 U.S.C. § 327(a). While not defined in the Code, courts generally
find that holding an “interest adverse to the estate” means:
- to possess or assert any economic interest that would tend to lessen the
value of the bankrupt estate or that would create either an actual or
potential dispute in which the estate is a rival claimant; or
- (ii) to possess a predisposition under circumstances that render such a
bias against the estate.
See In re Sundance Self Storage-El Dorado LP, 482 B.R. 613 (Bankr. E.D. Cal. 2012);
Matter of AFI Holding, Inc., 530 F.3d 832 (9th Cir. 2008). The broker must also remain free of “adverse
interests” throughout the term of his or her employment.
The bankruptcy code also requires that a broker employed by the trustee
or DIP must be a “disinterested person.” 11 U.S.C. §
327(a). A “disinterested person” is
- a creditor, equity security holder, or insider of debtor;
- a director, officer, or employee of debtor;
- someone with an interest “materially adverse” to the interest
of the estate or of any class of creditors or equity security holders:
by reason of any direct or indirect relationship to, connection with or
interest in the debtor; or “for any other reason.”
See 11 U.S.C. § 101(14). The broker must remain “disinterested”
throughout the term of his or her employment.
It is important to note again that once hired, a professional must
remain disinterested and free of adverse interests throughout the course of his
or her employment. The court may
reduce or entirely deny a professional’s compensation if at any time during his or her employment
on behalf of the estate the professional is not a “disinterested
person” or holds an interest adverse to the interest of the estate
with respect to the matter on which he or she is employed.
In re McNar, Inc., 116 B.R. 746 (Bankr. S.D. Cal. 1990);
In re Kobra Properties, 406 B.R. 396 (Bankr. E.D. Cal. 2009).
An application to employ a professional person must state:
- The specific facts showing necessity for the employment;
- The name of the person to be employed;
- The reasons for the selection;
- The services to be rendered;
- Any proposed arrangement for compensation (if in writing, attach as an
- To the best of the applicant’s knowledge, all of the person’s
“connections” with the debtor, creditors, any other party
in interest, the respective attorneys and accountants, the U.S. Trustee
or any person employed in the Office of the U.S. Trustee.
See Federal Rule of Bankruptcy Procedure 2014(a);
In re Park-Helena Corp., 63 F.3d 877, 880 (9th Cir. 1995) (finding that Rule 2014 disclosure requirements
are designed to assist court in determining proposed professional’s
disinterestedness and existence or nonexistence of adverse interests).
It cannot be stressed enough that a broker must obtain court approval before
selling property in the bankruptcy estate. If the broker does not make
sure the above steps are taken, the broker is at serious risk of not receiving
In re Cummins, 8 B.R. 701 (Bankr. C.D. Cal. 1981) (denying a broker his commission when
his employment was not approved by the court).
If you are a broker or have questions about this article, the attorneys
at Geraci Law Firm are more than happy to help you.