Prochnow v. Apex Properties Inc

Filing 5

OPINION entered by Judge Sue E. Myerscough on 02/15/2012. SEE WRITTEN OPINION. The decision of the Bankruptcy Court is AFFIRMED. This case is closed. (DM, ilcd)

E-FILED

Wednesday, 15 February, 2012 11:00:03 AM
Clerk, U.S. District Court, ILCD

IN THE UNITED STATES DISTRICT COURT
FOR THE CENTRAL DISTRICT OF ILLINOIS
SPRINGFIELD DIVISION
In re JEFFREY R. PROCHNOW,
Debtor,
JEFFREY R. PROCHNOW,
Appellant,
v.
APEX PROPERTIES, INC., d/b/a
REMAX CHOICE OF
BLOOMINGTON, ILLINOIS,
Appellee.

)
)
)
)
)
)
)
)
)
)
)
)
)
)
)

No. 11-3392

Appeal from the United
States Bankruptcy Court,
Central District of Illinois,
Case No. 09-72295
Hon. Mary Gorman, U.S.
Bankruptcy Judge,
presiding

OPINION
SUE E. MYERSCOUGH, U.S. District Judge:
Debtor/Appellant, Jeffrey R. Prochnow, appeals from the denial of
his Motion for a Ruling Against a Creditor Based on Violations of the
Automatic Stay. For the reasons set forth below, the decision of the
Bankruptcy Court is AFFIRMED.
STATEMENT OF FACTS1
1

The parties filed, in the bankruptcy court, a Joint Stipulation of Facts
(Stipulation), from which the majority of the following facts are taken.

Prochnow was at all relevant times a duly licensed salesperson –
also referred to as a realtor or realtor associate – as defined in the Real
Estate Licence Act of 2000 (225 ILCS 454/1-10 (West 2008)).
(Stipulation ¶ 3). Apex Properties Inc., d/b/a Remax Choice of
Bloomington, Illinois (ReMax) was at all relevant times a duly licensed
real estate broker. (Stipulation ¶ 4).
In August 2006, Prochnow and ReMax, through its predecessor,
entered into a Broker-Realtor-Associate Contract (Associate Contract).
(Stipulation ¶ 5). The compensation paid to Prochnow and other realtorassociates licensed with ReMax was arranged on a commission basis.
(Stipulation ¶ 7).
The Associate Contract provided:
Broker agrees to pay Realtor-Associate as and for
Realtor-Associate’s compensation for services
rendered on a commission basis for work done by
Realtor-Associate in accordance with the
commission schedule adopted by the Broker’s
office and in the Policy Manual. No commissions
shall be considered earned or payable to RealtorAssociate until the transaction has been completed
and the commission has been collected by the
Broker.
Page 2 of 29

The Associate Contract also provided that bills paid by ReMax that were
actually the responsibility of Prochnow would be due within 30 days of
receipt. The parties stipulated, however, that the arrangement on
commissions (which this Court interprets as referring to the percentage of
commissions) was not placed in writing and that some arrangements
regarding expenses were not placed in writing. (Stipulation ¶ 9).
Initially, Prochnow received 100% of commissions, less franchise
and referral fees. (Stipulation ¶ 8). Under that arrangement, Prochnow
also paid rent, certain expenses (including general overhead, expenses
required by the local MLS office, and advertising expenses), and interest
for unreimbursed charges. (Stipulation ¶ 8). In October 2007, the
parties changed the arrangement so that Prochnow would receive 70% of
the commissions he earned with the remaining 30% payable to ReMax.
(Stipulation ¶ 8). Under the new arrangement, Prochnow was no longer
charged rent but still paid office overhead, other billed expenses, and
interest on outstanding balances. (Stipulation ¶ 8).
Historically, ReMax applied a portion of the commission owed to

Page 3 of 29

Prochnow to Prochnow’s billed expenses. (Stipulation ¶ 9). The amount
of the commission applied to expenses was based on the determination of
the ReMax broker, in consultation with Prochnow, and changed from
time to time to allow Prochnow to retain some commission. (Stipulation
¶ 9)
On August 3, 2009, Prochnow filed his Chapter 7 bankruptcy
petition. Prochnow was at that time still a realtor-associate with ReMax
and continued in that capacity until January 8, 2010.
On his Schedule F, Prochnow listed an unsecured debt owed to
ReMax in the amount of $51,027.47. That debt related to the expenses
billed by ReMax which were unpaid at the filing of the petition.
(Stipulation ¶ 13).
On his Schedule B, Prochnow affirmatively represented that he had
no accounts receivable, no liquidated debts owed to him, and no
contingent or unliquidated claims of any nature. On his Schedule G,
Prochnow affirmatively represented that he had no executory contracts of
any nature.

Page 4 of 29

On September 3, 2009, the Chapter 7 Trustee filed a Report of No
Distribution stating he found no assets to administer in the case. On
December 3, 2009, Prochnow was granted a discharge. On January 8,
2010, Prochnow ceased working as a realtor-associate with ReMax.
(Stipulation ¶ 6). On February 23, 2010, Prochnow’s bankruptcy case
was closed.
On June 16, 2010, Prochnow, represented by new counsel, filed a
Motion to Reopen Case. In the Motion, Prochnow alleged that he
became entitled to the payment of compensation from ReMax for real
estate commissions from three closings occurring after August 3, 2009,
the date Prochnow filed his bankruptcy petition. Prochnow alleged he
was entitled those commissions but that ReMax applied the commissions
to Prochnow’s pre-petition indebtedness to ReMax. (The commissions
were retained by ReMax after the filing of the bankruptcy petition but
before discharge.) Prochnow asked that the bankruptcy case be reopened
for the purpose of hearing his motion to hold ReMax in contempt for
violation of the automatic stay.

Page 5 of 29

Over the objection of ReMax, the bankruptcy court granted the
Motion to Reopen Case. Thereafter, Prochnow filed a Motion for a
Ruling Against a Creditor Based on Violation of the Automatic Stay,
containing substantially the same allegations as those contained in the
Motion to Reopen Case. Prochnow sought an order holding ReMax held
in contempt of court for violation of the automatic stay, money damages
in the amount of $15,322, and attorney fees.
The commissions at issue included: (1) a commission of $13,829.17
for a sale procured by Prochnow pre-petition but that closed post-petition
(the Hudson contract); (2) a commission of $921.09 for a sale procured
and closed post-petition (the Bayberry contract); and (3) a referral
commission of $573.30 for a sale that closed post-petition (the Fifth
Street contract). (Stipulation ¶¶ 15, 16, 17, 18, 19). The parties
stipulated that the Fifth Street and Bayberry contract commissions were
applied to Debtor’s post-petition expenses. (Stipulation ¶¶ 18, 19). The
parties also stipulated that Prochnow incurred $3,596.03 of post-petition
business expenses billed by ReMax to Prochnow to continue to operate

Page 6 of 29

his real estate business following the filing of the bankruptcy petition.
(Stipulation ¶ 14). However, Prochnow disputed he had any liability for
interest assessed on the pre-petition debt. (Stipulation ¶ 14). The
documents attached to the Stipulation show that the post-petition
business expenses, minus the interest charges, totaled $1,600.50.
In May 2011, the parties filed their Stipulation. In June 2011, the
parties filed cross motions for summary judgment. See Bankruptcy Rule
7056 (providing that Rule 56 of the Federal Rules of Civil Procedure
apply in adversary proceedings). In its Motion for Summary Judgment,
ReMax argued the Fifth Street and Bayberry contract commissions were
properly applied to Prochnow’s post-petition debt. ReMax further argued
that all the commissions were properly retained by ReMax pursuant to
the doctrine of recoupment.
In his Motion for Summary Judgment, Prochnow argued that he
had earned the Hudson transaction commission post-petition and that
money was not subject to recoupment. Prochnow conceded that he owed
the post-petition expenses billed to him, excluding the interest on the

Page 7 of 29

pre-petition indebtedness.
The bankruptcy court granted ReMax’s Motion for Summary
Judgment, denied Prochnow’s Motion for Summary Judgment, and
denied Prochnow’s Motion for a Ruling Against a Creditor Based on
Violation of the Automatic Stay. In re Prochnow,

B.R.

,

2011 WL 4424269, at *9 (Bankr. C.D. Ill. 2011). First, the bankruptcy
court found that Prochnow had earned the Hudson contract commission
pre-petition and that it was part of the bankruptcy estate. Id. at

,

2011 WL 4424269, at *5. Because Prochnow failed to disclose his
interest in a share of the Hudson contract commission on his schedules,
the bankruptcy court found he was judicially estopped from claiming an
interest in those funds. Id.
Second, the bankruptcy court found that Prochnow lacked standing
to pursue the Hudson contract commission because his entitlement to
the commission became property of the estate and was never abandoned
by the Trustee. Id. at

, 2011 WL 4424269, at *6. The bankruptcy

court noted that “[t]hese findings are not an invitation to [Prochnow] to

Page 8 of 29

seek reappointment” of the Trustee because (1) even if the Trustee were
reappointed and abandoned the commission, “the principles of judicial
estoppel would still apply to limit [Prochnow’s] claim to the undisclosed
commission” and (2) if the Trustee pursued the commission, ReMax
would prevail on its defense of recoupment.” Id.

Third, the bankruptcy

court found that ReMax’s retention of all of the commissions at issue was
in the nature of recoupment and did not violate the automatic stay. Id.
at

, 2011 WL 4424269, at *6-7. Finally, the bankruptcy court

found that “even if ReMax’s actions were in the nature of setoff rather
than recoupment, ReMax would ultimately have prevailed in its attempt
to retain [Prochnow’s] share of the Hudson [transaction] commission.”
Id. at

, 2011 WL 4424269, at *8.
This appeal followed.

JURISDICTION
The Court has appellate jurisdiction over this matter pursuant to 28
U.S.C. § 158 and Rule 8001 of the Federal Rules of Bankruptcy

Page 9 of 29

Procedure.
STANDARD OF REVIEW
This court reviews the bankruptcy court’s determination on the
cross motions for summary judgment de novo. See In re Solis, 610 F.3d
969, 971 (7th Cir.2010). However, the bankruptcy court’s
determination that Prochnow was judicially estopped from pursuing the
commission is reviewed for an abuse of discretion. See Commonwealth
Ins. Co. v. Titan Tire Corp., 398 F.3d 879, 887 (7th Cir. 2004) (noting
that “judicial estoppel is a matter of discretion” but that “errors of law
require plenary review”).
ANALYSIS
On appeal, Prochnow argues: (1) he should not be judicially
stopped from claiming any interest in the Hudson contract commission
because said commission was earned post-petition and was not an asset
of the bankruptcy estate; and (2) the recoupment doctrine does not
apply. Prochnow appears to challenge on appeal only ReMax’s
application of the Hudson contract commission to the pre-petition debt

Page 10 of 29

and not the Fifth Street and Bayberry contract commissions. In any
event, this Court finds that the commissions on the Fifth Street and
Bayberry contracts, resulting in commissions totaling $1,494.39, were
earned post-petition and were properly applied to the post-petition debt
totaling $1,600.50. See, e.g., In re Davis, 244 B.R. 776, 789 (Bankr.
N.D. Ill. 2000) (post-petition earnings are not part of the Chapter 7
bankruptcy estate); In re Rosteck, 899 F.2d 694, 696 (7th Cir. 1990)
(noting that debts that arise after the filing of the bankruptcy case are
not discharged). Therefore, this Court considers only the Hudson
contract commission below.
A.

Because the Commission Was Property of the Estate, Prochnow
Lacks Standing, and, Alternatively, Is Judicially Estopped From
Pursuing the Commission
On appeal, Prochnow argues that he should not be judicially

estopped from claiming any interest in the Hudson contract commission
because he was not required to disclose the commission on his
bankruptcy petition. Specifically, Prochnow asserts the commission was
earned post-petition, when the real estate closing occurred. In support

Page 11 of 29

thereof, Prochnow relies on the language of the Associate Contract which
specifically provides: “No commissions shall be considered earned or
payable to Realtor-Associate until the transaction has been completed
and the commission has been collected by the Broker.” Prochnow further
argues that because “[t]he rights under the contract at issue were not
contingent or executory at the time of the filing of the Petition for
Voluntary Relief”, the commission was not an asset he had to disclose.
ReMax responds that the bankruptcy court did not err by finding
that the commission earned was the property of the bankruptcy estate
and that Prochnow was judicially estopped from claiming an interest in
the commission. ReMax asserts that because ReMax was entitled to the
real estate commission at the time of filing, and because Prochnow was in
privity with ReMax , Prochnow’s right to his share of the commission was
vested when Prochnow filed for bankruptcy.
1. The Commission Was Part of the Bankruptcy Estate
The bankruptcy court found that the Hudson contract commission
was part of the bankruptcy estate. “Whether property is included in the

Page 12 of 29

bankruptcy estate is a question of law.” In re Parsons, 280 F.3d 1185,
1188 (8th Cir. 2002). “To determine the nature of a debtor's interest in
property, we look to state law; to determine whether that interest counts
as property of the debtor's estate, we look to federal bankruptcy law.” In
re Krueger, 192 F.3d 733, 737 (7th Cir. 1999).
Section 541(a) of the Bankruptcy Code defines “property of the
estate” to include “all legal or equitable interests of the debtor in the
property as of the commencement of the case.” 11 U.S.C. §541(a)(1).
This definition of property of the estate is broad–“including interests of
all types and degrees of contingency”– but is generally limited to interests
in existence at the time of the commencement of the case. In re Taronji,
174 B.R. 964, 967 (Bankr. N.D. Ill. 1994).
“Section 541(a)(6) expands this basic definition of property of the
estate to include certain property interests that are acquired after the
commencement of the case.” Id. “However, Section 541(a)(6) contains
an express exception, exempting ‘earnings from services performed by an
individual debtor after the commencement of the case.’” In re Jokiel, 447

Page 13 of 29

B.R. 868, 871 (Bankr. N.D. Ill. 2011) (quoting 11 U.S.C. § 541(a)(6)).
On appeal, Prochnow essentially argues that he earned the
commission post-petition because the Associate Contract provided that
commissions were not earned until the transaction (i.e. the closing on the
property) had been completed and the commission was collected by
ReMax. This Court first notes that the provision in the Associate
Contract merely made Prochnow’s interest contingent. Under Illinois
law, a broker (which in this case would be ReMax), is entitled to a
commission for the sale of real estate when he procures a buyer who is
ready, willing, and able to purchase the real estate on the terms
prescribed by the seller. See Intergroup Financial Serv. v. A-G
Cooperative Creamery, 1991 WL 235182, at *2 (N.D. Ill. 1991) (noting
the general rule in Illinois but also noting that where there are
contingencies in the contract that render it unenforceable by the seller,
the broker is not entitled to a commission if the contingencies are not
met). As the bankruptcy court noted, “once the Hudson [c]ontract was
signed and the financing contingency set forth in the contract was met,

Page 14 of 29

ReMax, as the broker in the transaction, had earned its commission.” In
re Prochnow,

B.R. at

, 2011 WL 4424269, at *5.

This Court notes that the Associate Contract provided that
Prochnow had not earned the commission until the transaction was
completed, which occurred post-petition. However, at the time
Prochnow filed his bankruptcy petition, he had a contingent interest in
his portion of the commission. “A debtor’s contingent interest in future
income has consistently been found to be property of the bankruptcy
estate.” In re Yonikus, 996 F.2d 866, 869 (7th Cir. 1993). In fact, “[a]
contingency is no bar to [a] property interest becoming property of the
bankruptcy estate, even if the contingency requires additional postpetition services, and even if the right to enjoyment of the property may
be defeated.” In re Allen, 226 B.R. 857, 865 (Bankr. N.D. Ill. 1998).
Moreover, the test for determining whether post-petition income is
property of the bankruptcy estate depends on whether the income
accrues from pre-petition or post-petition services. See In re Laflamme,
397 B.R. 194, 199 (Bankr. D. N.H. 2008) (commissions received post-

Page 15 of 29

petition are property of the estate if “all acts of the debtor necessary to
earn it are rooted in the pre-bankruptcy past”) (internal quotation marks
omitted). As stated by the Seventh Circuit, in a case involving a tax
refund, “[t]he background rule under the old Bankruptcy Act, to which
courts still refer in the era of the Bankruptcy Code, defines the
bankruptcy estate to include property that is ‘sufficiently rooted in the
pre-bankruptcy past and so little entangled with the bankrupts’ ability to
make an unencumbered fresh start.’” In re Meyers, 616 F.3d 626, 628
(7th Cir. 2010) (quoting Segal v. Rochelle, 382 U.S. 375, 380 (1966)).
Although Prochnow’s right to the commission may have vested
post-petition, the payment was actually for pre-petition services. See In
re Jokiel, 447 B.R. at 872 (noting that the key issue to determining
whether a post-petition severance payment was property of the
bankruptcy estate was“whether the severance payment was rooted in preor post-petition services”). When Prochnow filed his petition for
bankruptcy, the amount of the commission was clearly established. In
addition, Prochnow had done all he needed to do to receive the

Page 16 of 29

commission even though the commission was contingent on the
transaction actually being completed. See, e.g., In re Dzielak, 435 B.R.
538, 546 (Bankr. N.D. Ill. 2010) (finding that the debtor’s potential
interest in a 401(k) plan was property of the estate even though the
divorce court had not yet issued an order distributing an interest in the
property; the debtor had “a claim for, or a contingent interest in, all or
part of the retirement account”). Prochnow has not identified any
services performed post-petition which would suggest the need to allocate
the commission between pre- and post-petition services. See, e.g., In re
Bagen, 186 B.R. 824, 829 (Bankr. S.D.N.Y. 1995) (finding that the
debtor’s “pre[-]petition contingent contractual rights to postpetition
property is property of the estate” but allocating the sum between preand post- petition services), aff’d 201 B.R. 642 (S.D.N.Y. 1996).
Therefore, this Court finds that the bankruptcy court properly found that
Prochnow’s portion of the commission for the Hudson contract was
property of the bankruptcy estate. See In re Calder, 94 B.R. 200, 203
(Bankr. D. Utah 1988) (finding “no doubt that the post-petition earnings

Page 17 of 29

of this debtor are in actuality ‘proceeds’ from pre-petition services and
these earnings are property of the estate); In re Braddy, 226 B.R. 479,
483 (Bankr. N.D. Fla. 1998) (insurance renewal commissions received as
a result of services performed prior to filing for bankruptcy and not
contingent upon future services to be performed by the debtor were
property of the bankruptcy estate); see also, e.g., In re Dynacircuits, L.P.,
143 B.R. 174, 178 (Bankr. N.D. Ill. 1992) (debtor’s salesman’s
commissions that were by contract not “earned” until the customers paid,
which occurred post-petition, were not entitled to administrative expense
priority because the services occurred pre-petition).
2.

Prochnow Lacks Standing or, Alternatively, Is Judicially
Estopped From Pursuing the Commission

After finding that the Hudson contract commission was part of the
bankruptcy estate, the bankruptcy court concluded that: (1) Prochnow
failed to disclose the commission and was therefore judicially estopped
from claiming an interest in the commission; (2) Prochnow had no
standing to pursue the commission because the commission became
property of the estate and was never abandoned by the Trustee; and (3)
Page 18 of 29

those findings were not an invitation to Prochnow to seek reappointment
of the Trustee because (a) even if the Trustee was reappointed and
abandoned the commissions, judicial estoppel would still apply to limit
Prochnow’s claims to the undisclosed commission and (b) ReMax would
nonetheless prevail on its defense of recoupment. In re Prochnow,
B.R. at

, 2011 WL 4424269, at *6.

On appeal, Prochnow only addresses the bankruptcy court’s finding
that ReMax would prevail on its defense of recoupment. Prochnow does
not address judicial estoppel except on the ground that the commission
was not part of the bankruptcy estate. Neither does Prochnow address
the bankruptcy court’s conclusion that Prochnow lacked standing to
pursue the commission because it was property of the estate never
abandoned by the trustee. Therefore, Prochnow has forfeited these
arguments and this Court need not address them. See, e.g., In re
McCormick Road Associates, 127 B.R. 410, 416 (N.D. Ill. 1991) (finding
that the appellant’s “failure to address why the Bankruptcy Court’s
application of a ‘clear and convincing’ standard was erroneous forfeit[ed]

Page 19 of 29

the point”).
For the sake of completeness, however, the Court will address
standing and judicial estoppel. See Biesek v. Soo Line RR Co., 440 F.3d
410, 413 (7th Cir. 2006) (stating that before a court considers the
judicial estoppel issue, it should first consider whether the debtor or the
trustee is the real party in interest). Because the commission was part of
the bankruptcy estate and the Trustee did not abandon the claim (having
not known about it), Prochnow lacks standing to pursue the commission.
See Esparaza v. Costco Wholesale Corp., 2011 WL 6820022, at *3
(N.D. Ill. 2011) (debtor lacked standing to bring a cause of action that
was part of the bankruptcy estate where the trustee had not abandoned
the claim); Becker v. Verizon North, Inc., 2007 WL 1224039, at *1 (7th
Cir. 2007) (unpublished disposition) (“A debtor who fails to disclose ‘an
asset, including a chose in action or other legal claim, cannot realize on
that concealed asset after the bankruptcy ends’”) (citations omitted)).
Moreover, this Court finds that even if the Trustee did abandon the
claim, thereby giving Prochnow standing, Prochnow is judicially estopped

Page 20 of 29

from pursuing the commission. See Cannon-Stokes v. Potter, 453 F.3d
446, 448 (7th Cir. 2006) (noting that “[j]udicial estoppel is an equitable
doctrine, and it is not equitable to employ it to injure creditors who are
themselves victims of the debtor’s deceit”, but applying judicial estoppel
to the debtor where the trustee had abandoned any interest in the
litigation, such that the creditors no longer had an interest either). The
factors considered when determining whether to apply judicial estoppel
include: whether the party to be estopped (1 ) took a position
inconsistent with an earlier position; (2) convinced a court to accept the
earlier position such that “judicial acceptance of an inconsistent position
in a later proceeding would create ‘the perception that either the first or
the second court was misled’”; and (3) “would derive an unfair advantage
or impose an unfair detriment on the opposing party if not estopped.”
New Hampshire v. Maine, 532 U.S. 742, 750-51 (2001) (quoting
Edwards v. Aetna Life Ins. Co., 690 F.2d 595, 599 (6th Cir. 1982)).
This Court reviews the bankruptcy court’s decision to employ judicial
estoppel for an abuse of discretion. Commonwealth Ins. Co. v. Titan

Page 21 of 29

Tire Corp., 398 F.3d 879, 887 (7th Cir. 2004) (noting that “judicial
estoppel is a matter of discretion” but that “errors of law require plenary
review’); In re Pansier, 2011 WL 6323020, at *3 (7th Cir. 2011)
(unpublished) (noting that application of judicial estoppel was within the
discretion of the bankruptcy court).
Here, the bankruptcy court did not abuse its discretion by finding
Prochnow was judicially estopped from pursuing the Hudson contract
commission. Each of the factors for applying judicial estoppel weigh in
favor of applying judicial estoppel.
Prochnow was required to disclose any assets on his schedule when
he filed his bankruptcy petition. See 11 U.S.C. 521(a)(1)(B)(i)
(requiring that a debtor file a schedule of assets); 11 U.S.C. § 101(5)(A)
(defining a claim to include a “right to payment, whether or not such
right is reduced to judgment, liquidated, unliquidated, fixed, contingent,
matured, unmatured, disputed, undisputed, legal, equitable, secured, or
unsecured”). As this Court noted above, Prochnow’s interest in the
Hudson contract commission at the time he filed for bankruptcy was part

Page 22 of 29

of the bankruptcy estate. Prochnow had a duty to report that
commission. “Debtors have an absolute duty to report whatever interests
they hold in property, even if they believe their assets are worthless or are
unavailable to the bankruptcy estate.” In re Yonikus, 974 F.2d at 904
(citations omitted).
However, Prochnow represented on his schedules that he had no
accounts receivable, no liquidated debts owed to him, and had no
contingent or unliquidated claims of any nature. The Trustee and
bankruptcy court relied on Prochnow’s assertion, which ultimately
resulted in Prochnow receiving a discharge. Prochnow now seeks the
Hudson contract commission by way of his Motion for a Ruling Against a
Creditor Based on Violations of the Automatic Stay. Allowing Prochnow
to pursue the Hudson contract commission now, after his failure to
disclose the asset in his bankruptcy petition, would give Prochnow an
unfair advantage and impose an unfair detriment on Prochnow’s
creditors.
The Seventh Circuit has held that “a debtor in bankruptcy who

Page 23 of 29

denies owning an asset, including a chose in action or other legal claim,
cannot realize on that concealed asset after the bankruptcy ends.”
Cannon-Stokes, 453 F.3d at 448 (citing cases). That is precisely what
Prochnow is attempting to do here. The bankruptcy court did not
therefore abuse its discretion by finding Prochnow was judicially
estopped from pursuing the commission.
B.

ReMax Was Entitled to the Commission Pursuant to the Doctrine
of Recoupment
Finally, this Court also agrees with the bankruptcy court’s

conclusion that even if the Trustee were to pursue the commission for the
benefit of the estate or even if Prochnow pursued the commission upon
abandonment by the Trustee, ReMax would prevail on its defense of
recoupment. See In re Chapman, 265 B.R. 796, 807 (Bankr. N.D. Ill.
2001) (“The weight of authority holds that recoupment does not violate
the automatic stay”), aff’d 2001 WL 818300 (N.D. Ill. 2002).
The bankruptcy court found that recoupment applied because
Prochnow’s claim against ReMax arose from the contractual obligation of
ReMax to pay Prochnow commissions pursuant to the terms of the
Page 24 of 29

Associate Contract. In re Prochnow,

B.R.

,

2011 WL

4424269, at *7. The bankruptcy court further noted that ReMax’s claim
against Prochnow arose from Prochnow’s obligation to reimburse ReMax
for expenses advanced pursuant to the Associate Contract. Id. The court
found “the rights of the parties pursuant to the Associate Contract are so
intertwined that [the bankruptcy court] must find that the obligations do
arise from the same transaction.” Id.
On appeal, Prochnow argues that recoupment does not apply
because there was no advancement of compensation and that ReMax
merely billed Prochnow on a monthly basis for current expenses, not
future expenses. Moreover, Prochnow asserts that no evidence tied any
of the expenses billed pre-petition to the post-petition event that created
the compensation at issue. Finally, Prochnow argues that the billed
expenses constituted unsecured debt that did not arise from a
“transaction.” Prochnow argues, “[i]f it were transactional, then the
entire working life and career of a real estate salesperson would be one
big, unending transaction.” Appellant Brief, p. 15.

Page 25 of 29

ReMax argues that the expenses Prochnow owed to ReMax and the
commissions earned by Prochnow pre-petition both arose out of the
unwritten agreement between Prochnow and ReMax relating to
commission and expenses. ReMax argues that ReMax agreed to pay
ongoing business expenses by Prochnow and to be subsequently
reimbursed by Prochnow from the commissions earned by Prochnow.
Therefore, ReMax argues, Prochnow’s earnings were always subject to the
debt owed to ReMax, which rendered ReMax’s payment of Prochnow’s
business expenses an “advance” on his commissions. According to
ReMax, to allow Prochnow to retain his commission– earned entirely
through pre-petition efforts–but at the same time discharging the debt
ReMax paid for advances of Prochnow’s business expenses, would be
unjust.
“Recoupment is an equitable remedy which permits the offset of
debts when the respective obligations are based on the same transaction
or occurrence.” In re World Access, Inc., 324 B.R. 662, 686 (Bankr.
N.D. Ill. 2005) (also noting that the justification for the doctrine is that

Page 26 of 29

it would be inequitable not to treat the creditor’s claim as a defense to
the debtor’s claim); see also In re Klinberg Schools, 68 B.R. 173 (N.D. Ill.
1986), aff’d 837 F.2d 763 (7th Cir. 1988). The “same transaction”
criteria is met where there is a “close, necessary relationship between the
events that gave rise to the debtor’s post-petition claim and the events
that gave rise to the creditor’s pre-petition claim that the amount of the
former cannot fairly be determined with accounting for the latter.” In re
St. Francis Physician Network, Inc., 213 B.R. 710, 719 (Bankr. N.D. Ill.
1997). Recoupment may also apply where the “transactions are so
intertwined that the amount of one cannot be determined without
resolving the latter.” In re Clark Retail Enterprises, Inc., 2003 WL
21991624, at *11 (Bankr. N.D. Ill. 2003). Although the same
transaction requirement may be met when the two claims arise from a
single contract, the existence of a single contract does not automatically
satisfy the “same transaction’” requirement. In re St. Francis, 213 B.R.
at 719.
In this case, the parties stipulated to a historical practice of

Page 27 of 29

applying a portion of Prochnow’s commissions earned to outstanding
expenses billed. The practical effect of this practice was that ReMax, in
essence, advanced commissions to Prochnow. Without those
“advancements”, Prochnow could not have earned the Hudson contract
commission. Prochnow’s claim to his portion of the Hudson contract
commission and ReMax’s claim to reimbursement of the business
expenses advanced are so intertwined that Prochnow’s claim cannot be
adjudicated without also resolving ReMax’s claim. Therefore, this Court
finds the bankruptcy court did not err in finding that ReMax’s retention
of the Hudson contract commission constituted a recoupment. See, e.g.,
Waldschmidt v. CBS, Inc., 14 B.R. 309, 314 (D.C. Tenn. 1981)
(allowing a recoupment, finding that the post-petition royalties for prepetition work could be withheld by the creditor until the pre-petition
advancements the creditor made to the debtor had been recovered); In re
Kosadnar, 157 F.3d 1011, 1016 (5th Cir. 1998) (finding the withholding
of commissions constituted a recoupment where the “repayment of the
unearned and advanced commissions arise out of the same commission

Page 28 of 29

pool and employment contract as the commissions earned by [the
debtor] for which he is paid”).
THEREFORE, the decision of the Bankruptcy Court is
AFFIRMED. This case is closed.
ENTER: February 15, 2012
FOR THE COURT:
s/Sue E. Myerscough
SUE E. MYERSCOUGH
UNITED STATE DISTRICT JUDGE

Page 29 of 29