First Circuit Instructs Real Estate Brokers in Bankruptcy Cases

Posted on 08/23/2016 at 07:53 pm by Viewed 450 times

On August 19, 2016, the First Circuit Court of Appeals issued a decision in the case of Harris v. Oak Knoll Associates.  Harris was a real estate broker hired to assist in selling an apartment complex in Connecticut.  Harris found a buyer and the owner of the apartment complex, Oak Knoll Associates, signed a purchase and sale contract with the proposed buyer.  However, before the sale was completed, Oak Knoll's principals engaged in litigation against each other, halting the sale process.  Later, Oak Knoll filed a Chapter 11 bankruptcy case in an effort to complete the sale.

Oak Knoll sought approval from the Bankruptcy Court to hire Harris to further negotiate with the buyer and complete the sale.  Harris performed additional services for Oak Knoll before Court approval of his services.  After further negotiations between Harris and the buyer, resulting in a new purchase price, but before the Court approved Harris as the broker, Oak Knoll withdrew the application to employ Harris.  The Court never finally approved Harris to perform any services for Oak Knoll in the bankruptcy case.  The property was sold, resulting in Oak Knoll's creditors being paid in full, and Oak Knoll's principals receiving over a million dollars in profit.

Harris sought payment of his commission for services performed, but the Court denied Harris's request, in large part because the Court had not approved Harris's employment.  Harris appealed the adverse decision, through the US District Court, to the First Circuit Court of Appeals.  The First Circuit concluded that Oak Knoll's withdrawal of Harris's employment application prohibited Harris from being paid for his services.

One important lesson from this case is that real estate brokers, or other professionals, should not perform any services for a bankruptcy debtor until they are employed by the Bankruptcy Court.  Professionals need to protect themselves by being cautious in the bankruptcy arena and not unintentionally providing services for free.

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