NOT JUST A SHORT SALE,
KNOW THE RULES
As the dust settles on one of the rougher periods in recent commercial real estate markets, it’s back to business, perhaps in a more conventional setting.
Owners are mostly breathing a sigh of relief, but there remain
a few failed developments, first in mortgage foreclosure, then
under the jurisdiction of a bankruptcy court. The pattern is
familiar, unfortunately, with the mortgage lender finally ready
to acknowledge a bad loan and take the hit. The lender begins
foreclosure, but the property owner, fighting till the last, finally
files for protection under the bankruptcy code to stay the
inevitable foreclosure decree and resulting sale, whether by
Sheriff’s auction or even sale by the bank’s receiver.
Brokers succeed because they see what can happen, going
forward, rather than wringing their hands over what might
have been. There is a buyer, perhaps a developer, or even a
user for that property, so you seek a sale listing. Anything is
better than the abject defect of the sheriff’s gavel, so why not
give that die hard broker a chance?
You vaguely recall from years past, that selling a property
controlled by the bankrupt owner (the “Debtor” or “Debtor in
Possession”) or even through the court appointed trustee, isn’t
all that simple. Yes, you have a motivated seller, but there are
other parties, the mortgage lender and likely other creditors,
who seek some or all of the proceeds.
Debtors, through counsel, even the trustee, recognize the value
of a coordinated marketing plan, but getting that listing isn’t
all that easy.
First, if the creditors’ claims (secured debt such as mortgagees
and unsecured claims as well) easily exceed the market value
of the property, so the chances of having proceeds sufficient to
pay your sale commission are low. But wait, you wonder, my
efforts aren’t the problem, my efforts (and the buyer your hope
to procure) are part of the solution. Where is the fairness?
I may not often equate the U.S. Bankruptcy Code with fairness
and reason, but there is hope for the broker who brings the
solution, if he does things by the rules, meaning the Bankruptcy
Rules, the Bankruptcy Code allows the Debtor or Trustee to
hire professionals to render services to the Estate, and with a
proper petition and court approval, the professional’s fees will
be treated as an administrative expense of the estate, in essence
allowing the successful listing broker to “jump the line” past
secured and unsecured creditors, toward the head of the line.
Done properly, your fee will come from gross sale proceeds
ahead of the other creditors. Here is what you need to do, either
to get your new listing approved, or to have your existing (pre-
Bankruptcy) listing approved.
First, the trustee’s or debtor’s counsel will prepare the
application for your (or your firm’s) approval as exclusive
sales agent for the property. You will be asked to execute an
affidavit of disinterestedness (yes, that is a word!) to support
your application. You will want to review (and with the help of
your own counsel) determine that your listing if approved by
the Court, affords you sufficient protection. You may be asked
to support the application with your own affidavit setting forth
your experience and qualifications. In some cases, you may
even be asked to testify in support of your credentials.
Next, in the absence of objection or in the court’s discretion,
your application will hopefully be approved and the listing
agreement should contain, either in the agreement itself or by
addendum, the following aspects of protection:
1. You are the exclusive sales agent;
2. Your fee is fixed at a set rate;
3. You are to be paid after approval of the contract:
a. From sales proceeds;
b. Without further order of court;
c. As an administrative expense of the Estate; and
d. On the chance that sales proceeds are insufficient,
then your fee or the unpaid balance will come from
other assets of the estate.
By Jim Hochman