Carrega v. Grubb & Ellis Co. (In re Grubb & Ellis Co.)

• Decision Date: 12 December 2014
• Docket Number: 12 Civ. 3756PGG.,Nos. 12 Civ. 3628PGG,s. 12 Civ. 3628PGG
• Citation: 523 B.R. 423
• Parties: In re GRUBB & ELLIS COMPANY, et al., Debtors. Vincent Carrega, Neil Helman, Jon Epstein, Charles Kingsley, Yoav Oelsner, Jason Mester, Michael Gottlieb, Howard Gruffman, Martin Cottingham, and The AD HOC Committee of Brokers, Appellants, v. Grubb & Ellis Company, BGC Partners, Inc., and the Official Committee of Unsecured Creditors, Appellees.
• Court: U.S. District Court — Southern District of New York

523 B.R. 423

In re GRUBB & ELLIS COMPANY, et al., Debtors.Vincent Carrega, Neil Helman, Jon Epstein, Charles Kingsley, Yoav Oelsner, Jason Mester, Michael Gottlieb, Howard Gruffman, Martin Cottingham, and The AD HOC Committee of Brokers, Appellants

v.Grubb & Ellis Company, BGC Partners, Inc., and the Official Committee of Unsecured Creditors, Appellees.

Nos. 12 Civ. 3628PGG

12 Civ. 3756PGG.

United States District Court, S.D. New York.

Signed Dec. 12, 2014.

Filed Dec. 15, 2014.

Christopher John Major, Michael Barry Sloan, Stephen Bruce Meister, Meister, Seelig & Fein LLP, Andrew Kenton Glenn, Kasowitz, Benson, Torres & Friedman, LLP, New York, NY, for Appellants.

The Ad Hoc Committee of Brokers, pro se.

Frank A. Oswald, Togut, Segal & Segal LLP, Emanuel C. Grillo, Goodwin Procter, LLP (NYC), New York, NY, for Appellees.

MEMORANDUM OPINION & ORDER

PAUL G. GARDEPHE, District Judge.

These bankruptcy appeals arise out of the 2012 financial collapse of Grubb & Ellis Company (“Grubb and Ellis” or the “Company”), a commercial real estate and property management business. Appellants—former Grubb & Ellis brokers—object to an order approving the sale of substantially all of the Company's assets “free and clear of all claims, liens, rights, interests and encumbrances” to BGC Partners, Inc. (“BGC”) (the “Sale Order”), entered on March 27, 2012 by United States Bankruptcy Judge Martin Glenn. For the reasons stated below, the Sale Order will be affirmed.

BACKGROUND

The debtors in this action are Grubb & Ellis and its affiliated entities (collectively, the “Debtors”).¹ Together with Grubb & Ellis's purchaser, BGC, and the Official Committee of Unsecured Creditors, they are the Appellees in this action.² Appellants—real estate brokers formerly employed by the Debtors—are comprised of two groups that, for ease of reference, will be referred to throughout this opinion as the MSF Brokers³ and the Ad Hoc Committee of Brokers (or Ad Hoc Committee)⁴ (collectively, “Appellants”). The MSF Brokers and the Ad Hoc Committee of Brokers filed separate appeals of the Sale Order. See Case Nos. 12 Civ. 3628 (PGG) and 12 Civ. 3756 (PGG). On June 4, 2012, at the request of the parties, this Court consolidated the appeals. (Dkt. No. 6)⁵

The subject of these consolidated appeals are certain pre- and post-petition broker commissions that Appellants claim were wrongfully made part of the bankruptcy sale over their limited objections. (See MSF Limited Objection to Motion for Order Approving the Sale of Substantially all of the Debtors' Assets (“MSF Brokers' Objection”) (Bankr. Dkt. No. 238) ¶ 6; Statement Seeking Clarification and Reservation of Rights of the Ad Hoc Committee of Brokers with Respect to the Debtor's Motion for an Order Authorizing and Approving the Sale of Substantially all of the Debtors' Assets (“Ad Hoc Committee's Objection”) (Bankr. Dkt. No. 239) ¶ 3)

Appellants challenge the Sale Order on three grounds. They contend that the bankruptcy court erred by (1) adjudicating Appellants' rights to the disputed commissions without affording them an opportunity to present evidence at an adversary proceeding; (2) placing the burden on Appellants to prove that the commissions were not the property of the bankruptcy estate; and (3) concluding that the commissions belong to the bankruptcy estate rather than to Appellants. (See MSF Brokers' Opening Br. (Dkt. No. 17) at 3)⁶

Although Appellants disclaim any desire to “unwind” the bankruptcy sale through this appeal (see MSF Brokers' Reply Br. (Dkt. No. 18) at 2), Appellants contend that they “are entitled to an adversary proceeding [pursuant to Bankruptcy Rule 7001] to determine their state law property rights.” (MSF Brokers' Opening Br. (Dkt. No. 17) at 46) In the alternative, Appellants argue that this Court should issue a declaratory judgment that (1) a constructive trust applies to the commissions Appellants seek, and that the bankruptcy court erred “in failing to carve out the Commissions from the Debtors' estates”; and (2) the “Commissions earned by [Appellants] and collected by Debtors after the February 20, 2012 Chapter 11 filings are not included in the assets sold to BGC.” (Id. )

I. THE DEBTORS' 2012 BANKRUPTCY FILING

At the time of its 2012 bankruptcy, Grubb & Ellis was a publicly traded real estate company that employed more than 1,300 brokers, including Appellants. (Declaration of Michael J. Rispoli Pursuant to Local Bankruptcy Rule 1007–2 (“Rispoli 1007 Decl.”) (Bankr. Dkt. No. 2) ¶¶ 8, 36) The Company's financial woes were precipitated by the 2007–2009 collapse of the real estate and financial markets and exacerbated by the Company's ill-timed merger with NNN Realty Advisors, Inc., a real estate investment management firm. (Id. ¶¶ 12, 79–81) In early 2011, Grubb & Ellis embarked on a strategy aimed at restructuring its operations and improving its liquidity. (Id. ¶ 94) In furtherance of these goals, the Company raised $28 million in financing through a credit facility with Colfin GNE Loan Funding, LLC, and C–III Investments (the “Senior Secured Debt”). (Id. ¶¶ 45–46) Grubb & Ellis also engaged a financial advisor—JMP Securities, LLC (“JMP”)—to help it either obtain financing or sell some or all of its assets. (Id. ¶ 95) As part of its efforts to assist Grubb & Ellis, JMP approached 44 potential sale partners, including BGC. (Id. ¶¶ 97, 104) Although Grubb & Ellis entered into negotiations with BGC, the parties could not reach agreement on sale terms prior to the expiration of BGC's exclusive negotiating window. (Id. ¶ 104) Shortly thereafter, Grubb & Ellis concluded that an out-of-court sale or restructuring was not practical, and that a bankruptcy sale pursuant to 11 U.S.C. § 363 presented the only viable path forward. (Id. ¶ 105) Accordingly, on February 12, 2012, the Company retained Alvarez & Marsal Holdings, LLC (“A & M”) to assist it with the bankruptcy process. (Id. ¶¶ 106–07)

On February 20, 2012 (the “Petition Date”), the Debtors formally filed a voluntary petition for Chapter 11 bankruptcy, together with an accompanying declaration from Michael J. Rispoli, Grubb & Ellis's Chief Financial Officer (“CFO”) and Executive Vice President. (Chapter 11 Petition (Bankr. Dkt. No. 1); Rispoli 1007 Decl. (Bankr. Dkt. No. 2) ¶ 1) In his Declaration, CFO Rispoli outlined Grubb & Ellis's precarious financial position, noting that a large number of its brokers—representing nearly 30% of the Debtors' overall 2011 brokerage revenue—had already left the Company, and that the Debtors expected to have insufficient cash to meet their operating needs for the first quarter of 2012. (Rispoli 1007 Decl. (Bankr. Dkt. No. 2) ¶ ¶ 20, 115) Rispoli further explained that A & M had arranged for BGC to purchase the Senior Secured Debt from the Debtors' pre-petition lenders and to submit a stalking horse bid for the Debtors' assets. (Id. ¶¶ 120–27) Accordingly, on the same day as their bankruptcy filing, the Debtors moved the bankruptcy court to, inter alia, approve bidding procedures as well as the sale of substantially all of Debtors' assets free and clear of any interests, claims, or liens pursuant to 11 U.S.C. § 363(b). (Sale Motion (Bankr. Dkt. No. 12)) The Debtors warned that an expedited sale process was “critical”:

As the personal relationships among Grubb & Ellis's brokers and clients are essential to its continued successful operations, it is critical that the Debtors' financial condition and liquidity be quickly stabilized and that the Debtors' employees are made confident in the businesses' ability to continue as a going concern. Absent such assurances, it is likely that more employees and contractual counterparties will leave Grubb & Ellis, thereby devaluing its operations further and jeopardizing the Proposed Sale.

(Rispoli 1007 Decl. (Bankr. Dkt. No. 2) ¶ 22)

On March 7, 2012, the bankruptcy court issued an order that, among other things, approved bid procedures and bid protections for the sale of substantially all of the Debtors' assets, approved the Debtors' asset purchase agreement (“APA”) with stalking horse bidder BGC, and scheduled an auction and sale hearing. (Mar. 7, 2012 Order (Bankr. Dkt. No. 94)) The March 7 Order set the sale hearing date for March 22, 2012, and imposed a March 16, 2012 filing deadline for objections to the proposed sale. (Id. at 5) The Ad Hoc Committee of Brokers and the MSF Brokers each filed timely objections. (Bankr. Dkt. Nos. 238 & 239)

II. THE ASSET PURCHASE AGREEMENT AND BROKER LOAN PROGRAM

The Debtors filed their proposed asset purchase agreement (“APA”) with BGC on March 2, 2012. (Bankr. Dkt. No. 74–1) Pursuant to the terms of the APA, BGC agreed to purchase substantially all of the Debtors' assets for (a) $30,029,055.70 (the amount of prepetition secured obligations), plus (b) the principal amount of loans made under the debtor-in-possession financing, plus (c) any cure amount paid by BGC for the acquired assets, plus (d) $15,000,00 in cash, subject to adjustment in accordance with Section 1.3 of the Stalking Horse APA. (March 7, 2012 Order (Bankr. Dkt. No. 94), Ex. 1, “Bidding Procedures” at 3)

The APA makes no mention of broker commissions. However, the term “acquired assets” is defined broadly and includes, inter alia, “all cash and cash equivalents” as well as all “[a]cquired [r]eceivables.” (APA, Art. VIII (Bankr. Dkt. No. 74–1) at 32) The APA defines “[a]cquired [r]eceivables,” in turn, as

all trade and other accounts receivable and notes and loans receivable that are or may become payable to a Seller or a Subsidiary of a Seller for products delivered or services provided pursuant to an Assigned Contract, a note or loan payable, or otherwise....

(Id. at 34) The APA also defines “excluded assets”; this term does not include broker commissions. (Id. at 36–37)

On March 1, 2012, the Debtors filed a motion pursuant to 11 U.S.C. §§ 363(b) and 503(c) (Bankr. Dkt. No. 65), which was subsequently amended on March 7, 2012 (Bankr. Dkt. No. 95), seeking the bankruptcy court's...