Prochnow v. Apex Properties, Inc. (In re Prochnow)
2012 U.S. Dist. LEXIS 18890, 2012 WL 506005, 467 B.R. 656 (2012)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
A debtor's contingent interest in a real estate commission, earned through pre-petition services but contingent on a post-petition closing, is property of the bankruptcy estate. A debtor who fails to disclose such an asset may be judicially estopped from later claiming it, and a creditor may exercise the equitable doctrine of recoupment to offset pre-petition advances against such commissions if they arise from the same intertwined transaction.
Facts:
- In August 2006, Jeffrey R. Prochnow, a licensed realtor-associate, entered into a Broker-Realtor-Associate Contract with Apex Properties Inc., d/b/a ReMax Choice of Bloomington, Illinois (ReMax), a licensed real estate broker.
- The Associate Contract stipulated that Prochnow's compensation would be on a commission basis, and "No commissions shall be considered earned or payable... until the transaction has been completed and the commission has been collected by the Broker."
- The contract also provided that ReMax would pay certain bills that were Prochnow's responsibility, and Prochnow would reimburse ReMax for these expenses.
- Initially, Prochnow received 100% of commissions (less fees); in October 2007, the arrangement changed to 70% for Prochnow and 30% for ReMax, with Prochnow still paying office overhead and other billed expenses.
- Historically, ReMax applied a portion of commissions owed to Prochnow to cover Prochnow's billed expenses, effectively advancing funds.
- Prochnow incurred $51,027.47 in expenses billed by ReMax that remained unpaid.
- Prochnow procured the sale for the "Hudson contract" prior to August 3, 2009, but the closing on that property occurred after that date.
Procedural Posture:
- On August 3, 2009, Jeffrey R. Prochnow filed a Chapter 7 bankruptcy petition in the U.S. Bankruptcy Court for the Central District of Illinois.
- On his Schedule F (unsecured creditors), Prochnow listed an unsecured debt owed to ReMax for $51,027.47.
- On his Schedule B (assets), Prochnow represented that he had no accounts receivable, no liquidated debts owed to him, and no contingent or unliquidated claims. On his Schedule G, he represented he had no executory contracts.
- On September 3, 2009, the Chapter 7 Trustee filed a Report of No Distribution.
- On December 3, 2009, Prochnow was granted a discharge.
- On February 23, 2010, Prochnow's bankruptcy case was closed.
- On June 16, 2010, Prochnow filed a Motion to Reopen Case, alleging ReMax improperly applied commissions to his pre-petition debt and sought to hold ReMax in contempt for violating the automatic stay.
- The bankruptcy court granted the Motion to Reopen Case over ReMax's objection.
- Prochnow then filed a Motion for a Ruling Against a Creditor Based on Violation of the Automatic Stay in the bankruptcy court, seeking contempt, money damages, and attorney fees.
- In May 2011, the parties filed a Joint Stipulation of Facts.
- In June 2011, ReMax and Prochnow filed cross-motions for summary judgment in the bankruptcy court.
- The bankruptcy court granted ReMax's Motion for Summary Judgment, denied Prochnow's Motion for Summary Judgment, and denied Prochnow's Motion for a Ruling Against a Creditor Based on Violation of the Automatic Stay. It found the Hudson commission was pre-petition estate property, Prochnow was judicially estopped, lacked standing, and ReMax's actions were a valid recoupment.
- Prochnow, as the appellant, appealed the bankruptcy court's decision to the U.S. District Court for the Central District of Illinois, with ReMax as the appellee.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
1. Does a real estate commission, where the services were rendered pre-petition but the closing and payment occurred post-petition, constitute property of the bankruptcy estate, thereby requiring disclosure? 2. Can a debtor, who failed to disclose a contingent pre-petition commission interest, later claim that commission, or is the debtor barred by judicial estoppel or lack of standing? 3. Does a real estate broker's retention of a debtor-agent's post-petition commission to offset pre-petition business expense advances constitute a valid recoupment, thereby not violating the automatic stay?
Opinions:
Majority - Sue E. Myerscough, District Judge
Yes, the real estate commission, where services were rendered pre-petition but the closing and payment occurred post-petition, constitutes property of the bankruptcy estate and must be disclosed. No, the debtor, Prochnow, cannot claim this commission as he lacks standing and is judicially estopped due to his failure to disclose the asset. Yes, ReMax's retention of the commission to offset pre-petition advances for business expenses constituted a valid recoupment and did not violate the automatic stay. The court affirmed the bankruptcy court's decision, finding that the Hudson contract commission was property of Prochnow's bankruptcy estate under 11 U.S.C. § 541(a)(1) because Prochnow had a contingent interest in it at the time of filing, and his right to the commission was "sufficiently rooted in the pre-bankruptcy past" (citing Segal v. Rochelle). Although the Associate Contract stated commissions were not "earned" until closing, this only made Prochnow's interest contingent, not non-existent, for bankruptcy purposes. The court noted that Prochnow had completed all necessary services pre-petition. Since the commission was estate property and Prochnow failed to disclose it on his schedules, he lacked standing to pursue it because it was never abandoned by the Trustee. Alternatively, he was judicially estopped from claiming it. The court applied the three factors for judicial estoppel from New Hampshire v. Maine: Prochnow took an inconsistent position (denying the asset in bankruptcy, claiming it post-discharge), convinced a court to accept the earlier position (receiving discharge based on the "no assets" representation), and would gain an unfair advantage while imposing an unfair detriment on creditors if allowed to pursue the claim now. Debtors have an absolute duty to report all property interests, even contingent ones. Finally, the court held that ReMax's retention of the Hudson commission was a valid recoupment. Recoupment permits offsetting debts when obligations arise from the "same transaction or occurrence," meaning a "close, necessary relationship" between the claims. The court found that Prochnow's claim to commissions and ReMax's claim for reimbursement of advanced business expenses were "so intertwined" and arose from the same Associate Contract and historical practice of advancing funds. ReMax's payments enabled Prochnow to earn the commission, making the retention an equitable recoupment, which does not violate the automatic stay.
Analysis:
This case clarifies the broad scope of "property of the estate" in Chapter 7 bankruptcy, including contingent interests rooted in pre-petition services, even if formal earning occurs post-petition. It reinforces the debtor's strict duty of disclosure and the severe consequences of non-disclosure, such as judicial estoppel, which prevents debtors from pursuing undisclosed assets post-bankruptcy. The decision also provides a robust application of the recoupment doctrine, emphasizing the "same transaction" requirement where claims are deeply intertwined by a long-standing contractual relationship and payment practices, thus shielding certain creditor actions from automatic stay violations.
