No. 95-34447DDM Chapter 7, A.P. No. 97-3498DMUnited States Bankruptcy Court, N.D. California
March, 1999
MEMORANDUM DECISION
MONTALI, Judge.
I. INTRODUCTION Trial in this matter was held on March 8 and 9, 1999. Plaintiffappeared 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 awardjudgment to plaintiff, Robert M. Damir, the Chapter 7 Trustee(“Trustee”), against defendant Hilfasco, Inc. (“Alliance”)[1] inthe amount of $26,508.78; against Niel Hildebrand in the sum of$4,000; and against Melanie Hildebrand and Niel Hildebrand jointlyand severally, in the sum of $17,391.66. Charles Colliver isentitled to judgment in his favor.
II. DISCUSSION[2] Century 21 Herd and Co. Realtors, Inc. (“Herd”) is the debtor inthis Chapter 7 case, having filed a voluntary petition in thiscourt on November 28, 1995. Its three corporate shareholders andits officers are defendants Melanie Hildebrand, Niel Hildebrandand Charles Colliver (collectively the “Individual Defendants”).
Herd did business as a licensed real estate sales brokerage inDaly City, California. Melanie Hildebrand and Niel Hildebrand havebeen affiliated with Herd since shortly after its formation in theearly 1980’s. Charles Colliver became affiliated with it in 1990or 1991. Each of the Individual Defendants is a licensedCalifornia real estate broker.
The Individual Defendants, as well as several licensed real estatesales agents, served as independent contractors to Herd. Morespecifically, Melanie Hildebrand and Niel Hildebrand were partiesto personal service contracts (Exs. 140 and 141, respectively)(the “personal service contracts”). Those personal servicecontracts reaffirm that Melanie and Niel Hildebrand were notemployees of Herd but rather were independent contractors. This isconsistent with how real estate offices frequently conduct theirbusiness.
Faced with cash flow problems and increasing debt, including rent,professional fees and exposure to litigation, the IndividualDefendants decided to terminate Herd’s business effective April15, 1995. At that time Herd had at least ten listings withproperty owners appointing Herd the listing agent to sell thoseproperties (the “Herd Listings”). Herd was also broker of recordon two sales agreements whereby it was the selling agent, actingon behalf of buyers of the two properties (the “Herd Sales”).[3]
Although Herd appeared as broker of record, either by way of thelisting agreement or the subsequent sales contracts in the HerdListings and the Herd Sales, when the escrows closed after Herdhad terminated its active business, commissions were paid toAlliance. Trustee seeks recovery from Alliance of the “companydollar,” that is, the amount of commissions he contends wereearned by Herd after payment of franchise fees, advertising fees,and commission “splits” to individual licensed real estate agentshandling the particular Herd Sales.
The court is satisfied from the expert testimony of Leo Saundersthat the Herd Listings and the Herd Sales had value to Herd.Further evidence that Herd itself had a record of treating itslistings as assets of value as is reflected in litigationpreviously brought against Zonia and Fernando Fasquelle, who hadformerly been principals of Alliance. Paragraphs 6 and 7 of thepersonal service contracts are also consistent with the notionthat listings were owned by Herd (rather than the individualbroker) and had value.
Escrows on the Herd Listings and the Herd Sales closed after Herdterminated its business activity, and as noted above, thecommissions were paid to Alliance. Except with respect to 38Holloway Avenue, San Francisco, California, defendants did notpresent any evidence that Alliance or the Individual Defendantscontributed any effort to bring about the consummation of thesubject transactions. On the 38 Holloway Avenue sale, Alliance didprovide valuable services after April 15, 1995, and therefore itsobligation to Herd will be reduced to a reasonable referral fee.Thus, there was no consideration flowing to Herd, and Alliance wasthe fraudulent transferee of the “company dollar” for these twelvetransactions.[4]
Mr. Saunders opines that in each of the foregoing instances, Herdshould 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 whichof the two figures would be appropriate, even though in someinstances the company dollar is less than the referral fee and insome instances it is larger. However, consistent with the factthat Alliance took these twelve contractual opportunities fromHerd and did not pay for them, the imposition of referral fee isinappropriate and the court will award the Trustee judgment forthe company dollar transferred in fraud of creditors, except as to38 Holloway Avenue. Thus, judgment will be entered againstAlliance in the sum of $14,658.61 based upon the transactionsinvolving the following properties and amounts retained by it:
Real Property Company Dollar
282 Sunshine Dr. Pacifica, CA $2,299.08 48 Oakmont Dr. Daly City, CA $634.57 36 Shasta Ln. Pacifica, CA $500.00 38 Holloway Ave. San Francisco, CA $1,110.00
(25% referral fee on gross commission)
66 Colby St. San Francisco, CA $2,292.64 110 N. Mayfair Daly City, CA $1,127.00 8 Dunsmuir St. San Francisco, CA $2,178.99 323 El Dorado Daly City, CA $500.00 35 Vista Ct. So. San Francisco, CA $2,190.75 205 Mariposa Ave. Daly City, CA $377.16 3925 Savannah Ct. So. San Francisco, CA $779.60 3924 Geddes Ct. So. San Francisco, CA $668.82
$14,658.61
A separate set of transactions challenged by Trustee include salessimilar to the Herd Listings and Herd Sales. In these twentytransactions (reduced to eighteen during trial) (the “AllianceSales”),[5] after Herd closed its doors listing agreements orsales contracts were signed by a broker or agent purporting to acton behalf of Alliance. The agreements and contracts were signedbefore May 18, or 19, 1995, the earliest date on which the Trusteeargues that the particular real estate professional’s license wastransferred on the records of the California Department of RealEstate (“DRE”). For the Alliance Sales the Trustee contends, hisexpert Mr. Saunders opines, and the court agrees, that a realestate sales person (licensed as an agent but not as a broker)cannot act for any real estate agency other than the one withwhich that sales person’s license is “hung,” meaning the office inwhich the sales person is licensed to do businessaccording to the DRE. Defendants contend that the critical date isthe date the licensee physically transferred the license from oneoffice to another, and thus any listing agreements or salescontracts signed after April 15, belong solely to Alliance.
The law is very uncertain here and the vagueness or lack ofapplicable regulations must necessarily give way to practicalconsiderations. Absent any clear indication for the DRE,California courts, or California law, Mr. Saunders’ experttestimony, unrebutted by any convincing testimony from defendants,will be accepted. He opines that in practice a 25% referral fee onthe gross commission paid to Alliance would be an appropriatecompensation to Herd. However, the Trustee’s theory of the case isthat Alliance is liable as a fraudulent transferee, not on thebasis of an implied contract or referral fee. Thus, the award inhis favor will be limited to the lesser of the “company dollar” or25% of the gross commission paid. Further, as to the propertyat 701-703 Prospect Avenue, San Mateo, California, Melanie Hildebrandwas paid voluntarily by seller after expiration of the listingagreement. It would be inappropriate, therefore, to chargeAlliance 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 followingproperties and the amounts shown:
Real Property Sold Lesser of Company Dollar or Referral Fee
282 Sunshine Dr. Pacifica, CA $1,313.76 48 Oakmont Dr. Daly City, CA $634.57 534 Arch St. San Francisco, CA $1,345.00 163 East Vista Daly City, CA $1,247.50 1826 32nd Ave. San Francisco, CA $338.47 1404 Eddington Ln. Daly City, CA $1,218.75 340 Justin Dr. San Francisco, CA $634.34 4949A Harrington San Francisco, CA $445.31 1024 Gilman Dr. Colma, CA $500.00 310 Victoria San Francisco, CA $415.23 382 Imperial Way #7 Daly City, CA $547.92 171 Wilits Dr. Daly City, CA $246.77 1451 Madrone Way San Pablo, CA $94.30 1831 46th Ave. San Francisco, CA $632.96 2270 Sloat Blvd. San Francisco, CA $837.01 650 Paris St. San Francisco, CA $776.58 325 Santa Barbara St. Daly City, CA $ 621.70
$11,850.17
* * * * * Trustee also contends that each of the Individual Defendants isliable because of the personal service contracts signed by MelanieHildebrand and Niel Hildebrand, or the so-called “assessment”policy that binds Charles Colliver. The evidence is inadequate forthe court to find that such an assessment policy was agreed to byany of the Individual Defendants. Voluntary contributions made byany of the three shareholders at times when Herd needed funds donot rise to the level of a legal obligation to pay money when thedebts of Herd could not be satisfied. Thus, Charles Colliver isnot liable for any assessment now on account of any personalservice contract or otherwise.
Melanie Hildebrand and Niel Hildebrand each signed personalservice contracts that obligate them to pay their share of officeoverhead expenses, including office rent, clerical and bookkeepingexpense, utilities and telephone. Since the Trustee has notoffered evidence of actual claims on file, the court must rely onthe schedules of unsecured priority and nonpriority debt (Ex.163-11 to 163-14). Those scheduled claims that fall within thegeneral overhead category include taxes and obligations for goodsand service to various parties, as follows:
Creditor Amount
Lee Buffington San Mateo County Tax Collector $1,266.00 Century 21 NAF $375.00 Century 21 San Francisco $680.00 Dataquick $188.04 First National Bank $553.68 Liccardo, Rossi, et al. $575.00 Steven L. Pollok $5,463.28 She, Labaugh, et al. $195.66 Henry Trim $225.00 Westlake Development Corp. $7,870.00
$17,391.66
Excluded from the foregoing are scheduled obligations to ThomasFinnegan Realtor, Inc. for $36,150.76 and Taber for $5,500. Thoseclaims arise from litigation against Herd and fall outside ofgeneral office overhead. There is no proof that Melanie Hildebrandor Niel Hildebrand agreed to pay these obligations of Herd.
Trustee contends that the individual defendants should be liablefor their respective shares of $63,493.98, their “PrincipalsTake-Home Dollar” is set forth in Exhibit 3. To reach this resultwould be grossly unfair. First, in each instance the IndividualDefendants acted as listing or selling agent and were entitled totheir commission for the services they rendered. Stated otherwise,but for their services as listing or selling agent, there wouldhave been no commission in the first place.
That being said, Melanie Hildebrand and Niel Hildebrand must beheld accountable for their share of overhead and expenses. Theirretention of 100% of the actual office commission earned by Herd(less only a $200 transaction fee in some instances) is grosslyunfair to creditors, violates the spirit and the letter of thepersonal service contracts, constitutes a fraud on creditors and abreach of fiduciary duty by these two corporate officers in theface of Herd’s insolvency. Trustee is entitled to judgment againstNiel Hildebrand and Melanie Hildebrand, jointly and severally, inthe amount of $17,391.66 as set forth above.
* * * * * Finally, Trustee contends that the Individual Defendants mustreturn to the estate excessive management fees they were paid inthe weeks prior to Herd’s closing its doors. Specifically, CharlesColliver received $2,500, Melanie Hildebrand received $6,000 andNiel Hildebrand received $4,000 and Trustee, without specificproof, wants the court to order a refund of all of those fees thatare “excessive.”
The evidence establishes that Melanie Hildebrand and CharlesColliver serviced in a management capacity with Herd until itclosed and were entitled to be paid their management fees. Thecourt cannot say that those fees were either unearned orexcessive. At worst payment may have been on account of antecedentdebt, but the Trustee did not cast his action as a preferenceaction. His attempt to recover from those individuals on afraudulent transfer theory must fail because their managementservices were of reasonably equivalent value to the amount paidfor them.
Niel Hildebrand did not perform management services for Herd in1995, nor is there any evidence that he was owed any deferredmanagement fees. Thus the payment to him of $4,000 within days ofHerd’s cessation of business constituted fraudulent transfers andTrustee may have judgment against him for $4,000.
* * * * * The Trustee has asked that the defendants be held liable foractual fraud under 11 U.S.C. § 548(a)(1), but no proof has beenoffered to carry Trustee’s burden. The court’s oral granting ofdefendants Fed.R.Bankr.P. 7052(c) motion during trial need not bediscussed further here. The Trustee also seeks punitive damagesbut has not provided any evidence to justify such an award.
III. DISPOSITION Within twenty (20) days from the date of service of thisMemorandum Decision, counsel for Trustee should submit a form ofjudgment against defendants (together with the Trustee’s costs)consistent with the foregoing. Counsel for Trustee should complywith B.L.R. 9022-1 and 9022-2.