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In re Dowell

August 26, 1998

IN RE: CHARLES DOWELL AND SUSAN DOWELL, DEBTORS.


The opinion of the court was delivered by: Irenas, District Judge

HONORABLE JOSEPH E. IRENAS

OPINION

Presently before this Court is the appeal of Charles Dowell ("Dowell") and Susan Dowell (collectively "debtors") from the orders of the Bankruptcy Court, entered in favor of appellees Brick Real Estate, Inc. ("Brick") and Weichert Real Estate ("Weichert"), on December 9, 1997 and January 9, 1998, denying a motion for relief from a violation of the automatic stay of 11 U.S.C. § 362(a) and reconsideration of this denial. This court has jurisdiction to hear this appeal pursuant to 28 U.S.C. § 158(a)(1).

Upon the filing of a bankruptcy petition, § 362(a) of Title 11 automatically stays "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate," 11 U.S.C. § 362(a)(3), and "any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title," 11 U.S.C. § 362(a)(6). *fn1 Subject to the automatic stay, 11 U.S.C. § 553 preserves the right of a creditor to offset mutual debts with the debtor, as long as both debts arose prior to the bankruptcy petition. The doctrine of recoupment allows a creditor to bypass both of these restrictions and extinguish certain mutual claims that could not be setoff under 11 U.S.C. § 553. Lee v. Schweiker, 739 F.2d 870, 875 (3d Cir. 1984).

Dowell was a real estate salesman whose compensation was based on commission, but who received monthly draws from Brick which was to be deducted from future commissions when earned. At the time he filed a Chapter 13 petition, Dowell had received draws which substantially exceeded the commissions earned up to that point. In this appeal we are asked to decide whether an employer violates the automatic stay, 11 U.S.C. § 362(a), by deducting amounts attributable to pre-petition draws or advances from gross commissions *fn2 earned on sales made post-petition.

Relying on two assumptions debtors argue that Brick's offsetting pre-petition draws against post-petition gross commissions violates the automatic stay. First, the debtors assume that draws or advances should be characterized as "loans" giving rise to a pre-petition liability. The second assumption, which is really the other side of the same coin, is that under the broad definition of property of the estate in a Chapter Thirteen filing, 11 U.S.C. § 1306(a)(2), the gross commissions earned by Brick on post-petition sales made by Dowell (before reduction for prior draws or advances) form part of the bankruptcy estate. Based on these assumptions, the debtors argue that the actions of the employer amounted to an offset of mutual debts proscribed by the automatic stay under §§ 362(a)(3) or (6). Without challenging either of these assumptions, the Bankruptcy Court held that pre-petition draws could be offset against the post-petition gross commissions under the equitable doctrine of recoupment.

Neither of the two assumptions is correct. The term claim, as defined in 11 U.S.C. § 101(5), is defined as a "right to payment," and § 101(12) defines debt as "a liability on a claim." In order to violate the automatic stay, or the restrictions of § 553, the draws or advances made by Brick to Dowell must have created a repayment obligation independent of any contractual right Brick might have to reimbursement from future gross commissions earned on his sales. Under established contract law and tax law the draws and advances made against future commissions were taxable income and, as such, did not give rise to a claim by the employer for repayment independent of the calculation of such future commissions. As a necessary corollary, gross commissions payable to Brick upon a sale made by Dowell did not become the property of Dowell, or his estate, but only the amount paid to him after any reduction for previous draws or advances.

Although the bankruptcy court erroneously accepted the premise that the draws created a "claim" of Brick against Dowell, the effect of its decision was to uphold Brick's deduction of pre-petition draws in computing post-petition payments owed to Dowell. Therefore, I concur with the Bankruptcy court's decision and will affirm the judgment.

I. BACKGROUND

On December 4, 1995, Dowell became a Brick salesman pursuant to a written agreement (the "Agreement") which was modified by a letter agreement dated May 15, 1996. Brick made an immediate $20,000 loan to Dowell. The Agreement required that $10,000 of the $20,000 would be interest free and "forgiven" on January 15, 1996. *fn3 The other $10,000 was to be repaid by December 5, 1997, with interest at the rate of seven percent per annum. Brick issued promissory notes for each of the $10,000 loans, the second of which was secured by a mortgage on Dowell's Voorhees, New Jersey residence.

Dowell's earnings were to be based on commissions earned with a provision for periodic draws until his sales volume reached the desired level:

Brick Real Estate shall retain all commissions against the total outstanding accumulated draws until the draws have been repaid in full. Thereafter, each commission earned by you shall be paid to you unless there are outstanding draws in which case Brick Real Estate shall retain the commission and apply it against the outstanding draws. Any portion of any commission in excess of the outstanding draws shall be paid to you. It is the mutual objective of Brick and Dowell that as soon as possible the draw arrangement will cease and Dowell will be paid each commission as it is earned once the outstanding draws have been repaid in full. See Agreement, Exh. A. to Certif. of Steven Brick, dated November 14, 1997, in opposition to Appellee's motion, at 1-2. From December 11, 1995 through September 26, 1996, Brick made ten monthly advances of $6,500. During that same period gross commissions totaled only $34,996.25 so that Dowell received no additional income, leaving a balance of $30,003.75 of draws in excess of earned commissions.

On October 4, 1996, debtors filed a petition for Chapter 13 bankruptcy. The only debt listed in the petition to Brick was the $10,000 note secured by a mortgage on Dowell's Voorhees, New Jersey home. The balance of draws over commissions was not listed as a debt anywhere in the bankruptcy petition. Dowell treated the pre-petition draws as income and reported them on his state and federal income tax returns. *fn4

On the day Dowell filed his petition he received one more draw for $5,000. *fn5 Thereafter Brick advanced "advances," totaling an additional $4,661.75. One advance was for $2000, while the remaining four of $429, $429, $1,306.50 and $497.25 appear to have been calculated as a percentage of specifically anticipated sales. In all, Brick withheld $23,455.83 from post-petition commissions on sales made by Dowell to satisfy the post-petition advance of $9,661.75 as well as some of the draws made prior to the bankruptcy filing. However, when Dowell terminated his association with Brick in September of 1997 there remained more than $16,209.67 in ...


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