Bankruptcy of an Agent #177

Oct 01, 1991

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By Gerry Neely
B.A., LL.B.

There have been fortunately, very few bankruptcies among real estate agencies in British Columbia, but when they do occur, they have unpleasant consequences for salespersons sharing in commissions paid to the bankrupt firm. Usually the bankrupt agency had assigned its receivables to its bank to secure a line of operating credit, and it took the commission because of its security. The salesman's position was that of an employee who was owed an unsecured amount by the bankrupt agent.

Attempts to persuade the provincial government to amend the B.C. Real Estate Act to create a trust of the deposit or other commission monies in favour of the salespersons have failed because of the argument that this would give a preference to real estate salespersons that other employees do not have.

Even without legislative changes however, all may not be lost because of the able arguments made by an Ontario lawyer who appealed the decision of a trustee in the bankruptcy of a real estate agency. The trustee disallowed the claims of two salespersons for commissions in excess of $20,000. This was based on a line of cases which held that the employer/employee relationship between agent and salesperson resulted in only a simple debt owed from one to the other. The difference between these cases and the Ontario case is that the salespersons and the agent had signed agreements which satisfied the judge that the salespersons were independent contractors and not employees.

Although the agent received the real estate commission, by the terms of the agreements the agent had no right to the commission as such. The monies from which commission would be payable to the salespersons were received by the agent in trust for the vendor and purchaser until closing. Following closing, the agent then became a stakeholder or collection agent, holding the trust funds for other brokers and the independent contractor salespersons, subject to the agent's right to payment of an administrative fee and a percentage of the salesperson's commission. judgement was given for the salespersons.

There are differences between the Ontario and British Columbia Real Estate Acts which may make this part of the decision not as favourable for B.C. licensees. The Ontario act defines a salesman as a person employed, appointed or authorized by a broker -. The British Columbia act is more restricted, referring only to the word "employed". However the judge in the Ontario case noted that the act did not prohibit an independent contractor relationship and cited a number of cases where an independent contractor was described as having been employed by his employer.

The second alternative argument which was accepted by the judge was based upon the principle of unjust enrichment. The Bankruptcy Act excludes from property to be divided among creditors, any property held by the bankrupt in trust for any other person. The agency was only entitled to 36% of the commission. The trustee in bankruptcy claimed to be entitled to recover 1 00 % of the commission, more than the agency could have retained if it had remained solvent. This would unjustly enrich the trustee and other creditors at the expense of the independent contractor salespersons. The judge held that the trustee retained the excess commission in trust for the salespersons.

The unjust enrichment argument does not depend upon the interpretation of the British Columbia Real Estate Act, but only upon the interpretation of the agreement between the agent and the salesperson.1

***

The Legally Speaking column #172 incorrectly stated that the reasonable period for a holdover clause should be 80 days; this should have been 60 days.

We are sorry if this error has caused any confusion.

  1. Scharby v. N.R. S. Elgin Realty Ltd., Estate 3 O.R. (3d) 129.

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