In re Grubb & Ellis Co.

• Decision Date: 02 October 2012
• Docket Number: No. 12–10685 (MG).,12–10685 (MG).
• Citation: 478 B.R. 622
• Parties: In re GRUBB & ELLIS COMPANY, et al., Debtors.
• Court: U.S. Bankruptcy Court — Southern District of New York

478 B.R. 622

In re GRUBB & ELLIS COMPANY, et al., Debtors.

No. 12–10685 (MG).

United States Bankruptcy Court,

S.D. New York.

Oct. 2, 2012.

Drinker Biddle & Reath LLP, By: Allen V. Farber, Esq., Kristin K. Going, Esq., New York, NY, for the Former Agents.

Togut, Segal & Segal LLP, By: Frank A. Oswald, Esq., Jonathan P. Ibsen, Esq., Melissa Iachan, Esq., New York, NY, for the Debtors and Debtors–in–Possession.

Alston & Bird LLP, By: Martin G. Bunin, Esq., John W. Spears, Esq., New York, NY, for the Official Committee of Unsecured Creditors.

MEMORANDUM OPINION AND ORDER DENYING FORMER AGENTS' MOTION FOR ADMINISTRATIVE EXPENSES CLAIMS

MARTIN GLENN, Bankruptcy Judge.

Pending before the Court is the Motion of Former Agents for Allowance and Payment of Administrative Expense Claims (the “Motion,” ECF Doc. # 1167). Both the Debtor (“Debtor” or “Grubb & Ellis”) and the Official Committee of Unsecured Creditors (the “Creditors Committee”) filed objections (ECF Doc. 1608 and 1655, respectively). The Former Agents (defined below) filed a reply brief (ECF Doc. # 1675), and the Court heard argument on September 25, 2012. For the reasons explained below, the Court DENIES the Former Agents' Motion.

I. BACKGROUND

On February 20, 2012 (the “Petition Date”), Grubb & Ellis and its affiliates filed voluntary chapter 11 petitions.

The Former Agents are eight real estate agents who previously worked for Grubb & Ellis either as employees or independent contractors—Charles Dilks, Andrew Klaff, Keith Lavey, Kurt Stout, Peter Rosan, Kevin McGloon, Bruce McNair, and Steve Morgan. All of the Former Agents except Steve Morgan terminated their employment with Grubb & Ellis before the Petition Date. Steve Morgan terminated his employment after the Petition Date.

Moreover, all of the Former Agents, except Steve Morgan and Bruce McNair, entered into a so-called “Termination Agreement” with Grubb & Ellis. Bruce McNair terminated his employment on February 13, 2012 pursuant to an “adequate justification” clause in an August 31, 2011 letter agreement with Grubb & Ellis. Steve Morgan does not appear to have had any written employment agreement with Grubb & Ellis.

A typical Termination Agreement between one of the Former Agents and Grubb & Ellis provides:

Compensation and Benefits During Employment.

(i) Compensation.... When commissions have been paid to [Grubb & Ellis] from the part[ies] for whom services are performed, a portion will thereafter be paid to you within reasonable time following the Company's receipt of such commissions.... In no event will the Company or any other member of the G & E Family be liable to you for commissions not collected, and the Company is entitled to waive or settle any commission claims, and otherwise decide whether or not to pursue collection of a commission.... You are not entitled to receive advances against commissions to be paid to you in the future, unless the Company agrees in writing to provide advances.See Former Agents' Motion Ex. B. The Termination Agreement also stated that a former agent may only be paid for

transactions closed before the Termination Date ... and for work which meets the definition of “Transaction” [which is] (a) a bona fide written offer to purchase or exchange which has been accepted in writing, with or without contingencies, prior to the Termination Date, or (b) a letter of intent or offer to lease, sublease or joint venture which has been accepted orally ... or in writing.

See Debtors' Objection Exs. C, D, E, O, Q and AA.

The Former Agents are entitled to a commission for each transaction in which the buyer or tenant was procured before the Petition Date. However, these Transactions also gave rise to commissions that were paid to the Debtors after the Petition Date.

The Former Agents argue that the commissions are not prepetition claims. According to the Former Agents, the contractual agreements between the parties indicated that the Former Agents did not have a claim against the Debtors for commissions unless and until the Debtors received payment from a third party. Therefore, the Former Agents argue that they never “earned” or had a right to payment of the commissions until payment was actually received by Grubb & Ellis—all of which occurred after the Petition Date.

The Debtors and the Creditors Committee argue that the Former Agents' claims for commissions are actually prepetition claims that would render them, at best, general unsecured claims. Debtors cite a plethora of relevant case law holding that, where a real estate broker procures a buyer or tenant prepetition, the broker's claim for commissions relating to that transaction is not entitled to administrative priority even when the right to payment arises postpetition. The Debtors also argue that even if the Former Agents could establish that their claims are based on postpetition transactions, the motion must still be denied because they fail to establish that they afforded any benefit to the Debtors' estate or that the Debtors induced them to act to provide benefits to the estate.

II. DISCUSSION

According to the Bankruptcy Code, a claim is 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.” 11 U.S.C. § 101(5).

Section 503(b)(1)(A) of the Bankruptcy Code defines administrative expenses and provides in pertinent part that:

After notice and a hearing, there shall be allowed, administrative expenses, other than claims allowed under section 502(f) of this title, including—(1)(A) the actual, necessary costs and expenses of preserving the estate, including—(i) wages, salaries, and commissions for services rendered after the commencement of the case.

11 U.S.C. § 503(b)(1)(A)(i).

Courts in the Second Circuit use a two-part test to determine whether a specific claim qualifies as an administrative expense under section 503(b)(1)(A): first, there must be a postpetition transaction, making it a transaction between the debtor-in-possession and the creditor; and second, the estate must receive a benefit from the transaction. See Trustees of the Amalgamated Ins. Fund v. McFarlin's, Inc., 789 F.2d 98, 101 (2d Cir.1986).

“Accordingly, an expense is administrative only if it arises out of a transaction between the creditor and the bankrupt'strustee or debtor in possession.... A debtor is not entitled to priority simply because the right to payment arises after the debtor in possession has begun managing the estate.” Id. (citations omitted). Moreover, “the services performed by the claimant must have been ‘induced’ by the debtor-in-possession, not the pre-petition debtor.” In re Enron Corp., 279 B.R. 695, 705 (Bankr.S.D.N.Y.2002). A “benefit to the debtor-in-possession alone is not sufficient to warrant entitlement to an administrative claim priority as it would be contrary to this policy reason for allowing the priority.” Id. (citing Matter of Jartran, Inc., 732 F.2d 584, 590 (7th Cir.1984)). In other words, to qualify for administrative priority, a debtor's obligation to make a payment must have arisen out of a postpetition transaction between the creditor and the debtor. In re BH S & B Holdings LLC, 426 B.R. 478, 486–87 (Bankr.S.D.N.Y.2010).

When determining whether a broker's claim for a commission from a seller should be accorded administrative priority, bankruptcy courts focus on when the transaction or consideration giving rise to the claim occurred or was performed, and not the timing of the debtor's receipt of payment. “If the consideration was supplied pre-petition, the claim is not entitled to administrative priority even where the right to payment arises post-petition.” In re WorldCom, Inc., 308 B.R. 157, 166 (Bankr.S.D.N.Y.2004) (citing Jartran );see also In re Baths Int'l, Inc., 25 B.R. 538, 540 (Bankr.S.D.N.Y.1982) (“It is equally clear that a claimant who fully performs under a contract prior to the filing of the petition will not be entitled to first priority even though his services may have resulted in a direct benefit to the bankrupt estate after the filing”), aff'd,31 B.R. 143 (S.D.N.Y.1983).

Courts have viewed a real estate broker's obligation as having been performed when the parties to a deal are brought together, not when the broker receives or has a right to receive payment. See Coldwell Banker & Co. v. Godwin Bevers Co, Inc. (In re Godwin Bevers Co., Inc.), 575 F.2d 805, 807–08 (10th Cir.1978); In re Hackney, 351 B.R. 179, 191 (Bankr.N.D.Ala.2006) (citing In re HSD Venture, 178 B.R. 831, 836 (Bankr.S.D.Cal.1995) (concluding that commissions due from seller to real estate brokers for prepetition efforts which resulted in postpetition contracts for sales of debtor-in-possession's condominium units being obtained would not be allowed as administrative expenses pursuant to 503(b)(3)(D))). See also In re J.M. Fields, Inc., 22...