Memorandum of Decision Re: Listing Agreement

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Decisions
IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re SAN RAFAEL BAKING CO.,                                                                           No. 96-12106        Debtor. ___________________________/
Memorandum of Decision
     The Bentley Companies is a business opportunity broker. In November, 1995, debtor San Rafael Baking Co. signed a listing agreement with Bentley whereby Bentley would be entitled to a commission if its efforts produced a sale. The right to a commission was contingent upon an actual sale, not the production of a buyer. The debtor was given the absolute right to reject any offer Bentley produced. The agreement provided that it could be terminated on 30 days' notice after one year. Bentley would be entitled to a commission thereafter only if the debtor's business was sold to someone it found before the expiration of the agreement.      The debtor filed its Chapter 11 petition on June 26, 1996. At its request, the court approved Bentley's employment pursuant to section 327(a) of the Bankruptcy Code.      Bentley produced no offers for over a year after it was employed. On December 12, 1996, the debtor gave written notice of its election to cancel the agreement. Bentley acknowledged that the agreement was terminated effective January 11, 1997, and gave the debtor a list of person it had contacted.      On December 31, 1996, Bentley produced an offer of about $355,000.00 for the business. This amount was considerably less than the parties had anticipated. The debtor initially considered the offer, but then decided that if that was all the business was worth it could be reorganized without a sale. The debtor declined the offer and proposed a plan whereby the existing equity owners, plus a few of their employees and family members, would form a new entity to purchase the business for about the same price.      The debtor used Bentley's efforts in its disclosure statement and at the confirmation hearing to convince its creditors and the court that its plan was fair even though it provided for a sale to insiders. The creditors accepted the plan, and the court confirmed it.      Bentley has filed an administrative priority claim. It argues that under the agreement it is entitled to a commission if the property was sold to anyone whom the debtor became aware of as a prospective purchaser during the term of the agreement and (quoting from Bentley's brief), "the Debtor became aware of itself as a prospective purchaser during the term of this agreement." The debtor has objected to allowance of the claim.      The agreement clearly contemplated that the debtor was under no obligation to accept any offer. The debtor did not accept any offer obtained by Bentley. Bentley admits that the one offer it did receive was for substantially less than anticipated when the listing agreement was signed.      The debtor argues that the contract is unenforceable as a matter of law, because it violates California Business and Professions Code section 10176(f). That section requires an exclusive listing agreement to have a definite, final termination date. Bentley argues that this argument is a "red herring" because the agreement was not an exclusive listing, yet claims a right to a commission if the debtor became aware of a prospective purchaser during the term of the agreement, regardless of whether Bentley found the purchaser. In fact, the agreement appears to be non-exclusive during its term and then exclusive for two years thereafter!      The agreement was very poorly drafted, especially if it was not intended as an exclusive listing. Based on the representation of Bentley that it was not intended as an exclusive listing, the court interprets the agreement to mean that Bentley was entitled to a commission if the debtor sold its business to someone Bentley found during its term, even if the sale did not occur for up to two years after the listing terminated. Bentley did not "find" the debtor, so a sale to the debtor did not entitle Bentley to a commission.      Even if Bentley has some sort of contractual right to a commission, it admits that the sales price is far lower than that contemplated when the agreement was signed, so that it is willing to accept "only" $37,500.00 even though the agreement calls for a minimum commission of $75,000.00. The court agrees with Bentley's assessment of the equities, except for the amount Bentley has chosen.      Even if the court were to find a contractual right to compensation (which it does not), the court has the power under section 328(a) of the Code to award different compensation than that called for in the agreement if the terms of the agreement prove to be improvident in light of unanticipated developments. Two such developments in this case are the lack of a buyer at anywhere near the price originally contemplated by both Bentley and the debtor and the sale to the debtor itself rather than a third party. While the court agrees with Bentley that these circumstances call for a deviation from the fee schedule, the court does not agree with Bentley that a fair commission is $37,500.00. A fair commission in this case is much lower: around $7,500.00.      The court does not find any contractual right to a commission in this case. However, the court notes that the estate did in fact derive a fair amount of collateral benefit from Bentley's efforts. The debtor used Bentley's efforts and the sole offer it produced to convince its creditors and the court that its offer to buy the business was fair even though the sale was to insiders. In the absence of this evidence, the debtor would have had to obtain an extensive appraisal, costing about, in the experience of the court, about $7,500.00.      It appears that section 328(a) works both ways in allowing the court to deviate from the terms and conditions of a court-approved compensation agreement. If the court has the power to lower an improvident contractual right to a fee, there is no reason why it should not also have the power to award a fee for benefit to the estate even when the contract does not provide for such compensation. Since the estate received a value of about $7,500.00 on account of Bentley's efforts, the court can deviate from the terms of the agreement and award this amount.      For the foregoing reasons, the court will allow Bentley an administrative priority claim in the amount of $7,500.00. The balance of the claim will be disallowed. Counsel for the debtor shall prepare an appropriate form of order.
Dated: June 28, 1997                                                                          _______________________                                                                                                            Alan Jaroslovsky                                                                                                            U.S. Bankruptcy