Rogers Towers: Garnishing Professional Fees After Close of Bankruptcy Proceeding

It is not an uncommon practice for commercial lenders or real estate owners to employ a broker to assist with the sale of property for a commission. Recently, a corporation owning a marina in South Florida filed for Chapter 11 and, with court approval, employed real estate broker and his agency to sell the marina for a commission of 4%. The broker secured the sale of the marina to a joint venture formed by an investor with whom the broker had a pre-existing relationship and received a commission of $535, 000, which was $45,000 more than agreed upon by the bankruptcy court.

Nearly two years after the confirmation of the reorganization plan, the marina’s largest unsecured creditor alerted the bankruptcy court about the relationship between broker and the joint venture and the overpayment. The creditor thereafter filed motion seeking disgorgement of the entire commission, which the bankruptcy court granted.

Clearly put out, the broker argued that disgorgement was improper, because the Chapter 11 plan had released all claims against professionals arising from the bankruptcy case.

Unquestionably, a bankruptcy court may deny fees to a professional if at any time during such person’s employment under § 327 of the Bankruptcy Code if such a professional is (a) not disinterested, or (b) represents or holds an interest adverse to the interest of the estate with respect to the matter on which such a professional person is employed.

At issue, however, was whether a bankruptcy court retained jurisdiction over an award of fees even after the conclusion of a bankruptcy case, as the Sixth Circuit had found in a 2006 case.

The Eleventh Circuit found that an entity has an interest adverse to the estate when its position would (a) tend to lessen the value of the bankruptcy estate, (b) create an actual or potential dispute in which the estate is the rival claimant, or (c) possess a predisposition under the circumstances that render such bias against the estate. Most importantly, the Eleventh Circuit adopted the holding of its sister circuit and held that a bankruptcy court retains jurisdiction to disgorge fees.

The results of this decision are important for brokers, attorneys and creditors alike, as it demonstrates the broad discretion of the bankruptcy court to disgorge fees even well after the bankruptcy case is closed. Brokers and other professionals must avoid any appearance of a conflict of interest, and creditors should vigilantly monitor all such professionals, during and even after a bankruptcy proceeding.

Topics:  Broker Commissions, Brokers, Disgorgement, Fees, Garnishment, Jurisdiction

Published In: Bankruptcy Updates, Civil Procedure Updates, Civil Remedies Updates, Finance & Banking Updates, Commercial Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Rogers Towers | Attorney Advertising

Don't miss a thing! Build a custom news brief:

Read fresh new writing on compliance, cybersecurity, Dodd-Frank, whistleblowers, social media, hiring & firing, patent reform, the NLRB, Obamacare, the SEC…

…or whatever matters the most to you. Follow authors, firms, and topics on JD Supra.

Create your news brief now - it's free and easy »