Memorandum Decision re Fraudulent Transfer of Real Estate Listings and Sales Contracts
Original Filed March 18, 1999
I. INTRODUCTIONTrial in this matter was held on March 8 and 9, 1999. Plaintiff appeared and was represented by Michael B. Bassi, Esq. and Dena M. Roche, Esq,; defendants appeared and were represented by James S. Mori, Esq.
As more particularly explained below, the court will award judgment to plaintiff, Robert M. Damir, the Chapter 7 Trustee ("Trustee"), against defendant Hilfasco, Inc. ("Alliance")(1) in the amount of $26,508.78; against Niel Hildebrand in the sum of $4,000; and against Melanie Hildebrand and Niel Hildebrand jointly and severally, in the sum of $17,391.66. Charles Colliver is entitled to judgment in his favor.
Century 21 Herd and Co. Realtors, Inc. ("Herd") is the debtor in this Chapter 7 case, having filed a voluntary petition in this court on November 28, 1995. Its three corporate shareholders and its officers are defendants Melanie Hildebrand, Niel Hildebrand and Charles Colliver (collectively the "Individual Defendants").
Herd did business as a licensed real estate sales brokerage in Daly City, California. Melanie Hildebrand and Niel Hildebrand have been affiliated with Herd since shortly after its formation in the early 1980's. Charles Colliver became affiliated with it in 1990 or 1991. Each of the Individual Defendants is a licensed California real estate broker.
The Individual Defendants, as well as several licensed real estate sales agents, served as independent contractors to Herd. More specifically, Melanie Hildebrand and Niel Hildebrand were parties to personal service contracts (Exs. 140 and 141, respectively) (the "personal service contracts"). Those personal service contracts reaffirm that Melanie and Niel Hildebrand were not employees of Herd but rather were independent contractors. This is consistent with how real estate offices frequently conduct their business.
Faced with cash flow problems and increasing debt, including rent, professional fees and exposure to litigation, the Individual Defendants decided to terminate Herd's business effective April 15, 1995. At that time Herd had at least ten listings with property owners appointing Herd the listing agent to sell those properties (the "Herd Listings"). Herd was also broker of record on two sales agreements whereby it was the selling agent, acting on behalf of buyers of the two properties (the "Herd Sales").(3)
Although Herd appeared as broker of record, either by way of the listing agreement or the subsequent sales contracts in the Herd Listings and the Herd Sales, when the escrows closed after Herd had terminated its active business, commissions were paid to Alliance. Trustee seeks recovery from Alliance of the "company dollar," that is, the amount of commissions he contends were earned by Herd after payment of franchise fees, advertising fees, and commission "splits" to individual licensed real estate agents handling the particular Herd Sales.
The court is satisfied from the expert testimony of Leo Saunders that the Herd Listings and the Herd Sales had value to Herd. Further evidence that Herd itself had a record of treating its listings as assets of value as is reflected in litigation previously brought against Zonia and Fernando Fasquelle, who had formerly been principals of Alliance. Paragraphs 6 and 7 of the personal service contracts are also consistent with the notion that listings were owned by Herd (rather than the individual broker) and had value.
Escrows on the Herd Listings and the Herd Sales closed after Herd terminated its business activity, and as noted above, the commissions were paid to Alliance. Except with respect to 38 Holloway Avenue, San Francisco, California, defendants did not present any evidence that Alliance or the Individual Defendants contributed any effort to bring about the consummation of the subject transactions. On the 38 Holloway Avenue sale, Alliance did provide valuable services after April 15, 1995, and therefore its obligation to Herd will be reduced to a reasonable referral fee. Thus, there was no consideration flowing to Herd, and Alliance was the fraudulent transferee of the "company dollar" for these twelve transactions.(4)
Mr. Saunders opines that in each of the foregoing instances, Herd should have either received all of the company dollar or a 25% referral fee based upon the gross commission paid to Alliance. Trustee has not provided the court with any analysis as to which of the two figures would be appropriate, even though in some instances the company dollar is less than the referral fee and in some instances it is larger. However, consistent with the fact that Alliance took these twelve contractual opportunities from Herd and did not pay for them, the imposition of referral fee is inappropriate and the court will award the Trustee judgment for the company dollar transferred in fraud of creditors, except as to 38 Holloway Avenue. Thus, judgment will be entered against Alliance in the sum of $14,658.61 based upon the transactions involving the following properties and amounts retained by it:
A separate set of transactions challenged by Trustee include sales similar to the Herd Listings and Herd Sales. In these twenty transactions (reduced to eighteen during trial) (the "Alliance Sales"),(5) after Herd closed its doors listing agreements or sales contracts were signed by a broker or agent purporting to act on behalf of Alliance. The agreements and contracts were signed before May 18, or 19, 1995, the earliest date on which the Trustee argues that the particular real estate professional's license was transferred on the records of the California Department of Real Estate ("DRE"). For the Alliance Sales the Trustee contends, his expert Mr. Saunders opines, and the court agrees, that a real estate sales person (licensed as an agent but not as a broker) cannot act for any real estate agency other than the one with which that sales person's license is "hung," meaning the office in which the sales person is licensed to do business according to the DRE. Defendants contend that the critical date is the date the licensee physically transferred the license from one office to another, and thus any listing agreements or sales contracts signed after April 15, belong solely to Alliance.
The law is very uncertain here and the vagueness or lack of applicable regulations must necessarily give way to practical considerations. Absent any clear indication for the DRE, California courts, or California law, Mr. Saunders' expert testimony, unrebutted by any convincing testimony from defendants, will be accepted. He opines that in practice a 25% referral fee on the gross commission paid to Alliance would be an appropriate compensation to Herd. However, the Trustee's theory of the case is that Alliance is liable as a fraudulent transferee, not on the basis of an implied contract or referral fee. Thus, the award in his favor will be limited to the lesser of the "company dollar" or 25% of the gross commission paid. Further, as to the property at 701-703 Prospect Avenue, San Mateo, California, Melanie Hildebrand was paid voluntarily by seller after expiration of the listing agreement. It would be inappropriate, therefore, to charge Alliance with any liability for this sale.
Judgment will be entered against Alliance in the additional sum of $11,850.17 based upon the Alliance Sales involving the following properties and the amounts shown:
Trustee also contends that each of the Individual Defendants is liable because of the personal service contracts signed by Melanie Hildebrand and Niel Hildebrand, or the so-called "assessment" policy that binds Charles Colliver. The evidence is inadequate for the court to find that such an assessment policy was agreed to by any of the Individual Defendants. Voluntary contributions made by any of the three shareholders at times when Herd needed funds do not rise to the level of a legal obligation to pay money when the debts of Herd could not be satisfied. Thus, Charles Colliver is not liable for any assessment now on account of any personal service contract or otherwise.
Melanie Hildebrand and Niel Hildebrand each signed personal service contracts that obligate them to pay their share of office overhead expenses, including office rent, clerical and bookkeeping expense, utilities and telephone. Since the Trustee has not offered evidence of actual claims on file, the court must rely on the schedules of unsecured priority and nonpriority debt (Ex. 163-11 to 163-14). Those scheduled claims that fall within the general overhead category include taxes and obligations for goods and service to various parties, as follows:
Excluded from the foregoing are scheduled obligations to Thomas Finnegan Realtor, Inc. for $36,150.76 and Taber for $5,500. Those claims arise from litigation against Herd and fall outside of general office overhead. There is no proof that Melanie Hildebrand or Niel Hildebrand agreed to pay these obligations of Herd.
Trustee contends that the individual defendants should be liable for their respective shares of $63,493.98, their "Principals Take-Home Dollar" is set forth in Exhibit 3. To reach this result would be grossly unfair. First, in each instance the Individual Defendants acted as listing or selling agent and were entitled to their commission for the services they rendered. Stated otherwise, but for their services as listing or selling agent, there would have been no commission in the first place.
That being said, Melanie Hildebrand and Niel Hildebrand must be held accountable for their share of overhead and expenses. Their retention of 100% of the actual office commission earned by Herd (less only a $200 transaction fee in some instances) is grossly unfair to creditors, violates the spirit and the letter of the personal service contracts, constitutes a fraud on creditors and a breach of fiduciary duty by these two corporate officers in the face of Herd's insolvency. Trustee is entitled to judgment against Niel Hildebrand and Melanie Hildebrand, jointly and severally, in the amount of $17,391.66 as set forth above.
Finally, Trustee contends that the Individual Defendants must return to the estate excessive management fees they were paid in the weeks prior to Herd's closing its doors. Specifically, Charles Colliver received $2,500, Melanie Hildebrand received $6,000 and Niel Hildebrand received $4,000 and Trustee, without specific proof, wants the court to order a refund of all of those fees that are "excessive."
The evidence establishes that Melanie Hildebrand and Charles Colliver serviced in a management capacity with Herd until it closed and were entitled to be paid their management fees. The court cannot say that those fees were either unearned or excessive. At worst payment may have been on account of antecedent debt, but the Trustee did not cast his action as a preference action. His attempt to recover from those individuals on a fraudulent transfer theory must fail because their management services were of reasonably equivalent value to the amount paid for them.
Niel Hildebrand did not perform management services for Herd in 1995, nor is there any evidence that he was owed any deferred management fees. Thus the payment to him of $4,000 within days of Herd's cessation of business constituted fraudulent transfers and Trustee may have judgment against him for $4,000.
The Trustee has asked that the defendants be held liable for actual fraud under 11 U.S.C. § 548(a)(1), but no proof has been offered to carry Trustee's burden. The court's oral granting of defendants Fed.R.Bankr.P. 7052(c) motion during trial need not be discussed further here. The Trustee also seeks punitive damages but has not provided any evidence to justify such an award.
Within twenty (20) days from the date of service of this Memorandum Decision, counsel for Trustee should submit a form of judgment against defendants (together with the Trustee's costs) consistent with the foregoing. Counsel for Trustee should comply with B.L.R. 9022-1 and 9022-2.
1. The caption names Hilfasco, Inc. as "Century 21 Alliance." It is undisputed that the correct corporate name is Hilfasco, Inc. and its d/b/a is Century 21 Alliance.
2. The following discussion constitutes the court's findings of fact and conclusions of law. Fed. R. Bankr. P. 7052(a).
3. The locations of the properties and other relevant data concerning the respective transactions, the dates the listing agreements were signed, the dates the applicable sales contracts were signed, the dates escrow closed, etc. are set forth in plaintiff's Exhibit 1.
4. Defendants have not contested that at the time of the transfer of the Herd listings and the contractual rights evidenced by the Herd Sales that Herd was insolvent. Further, there is no dispute that the taking over of these rights were "transfers" for purposes of 11 U.S.C. § 548.
5. The locations of the properties and other relevant data concerning the respective transactions, the dates the listing agreements were signed, the dates the applicable sales contracts were signed, the dates escrow closed, etc., are set forth in plaintiff's Exhi