Grubb & Ellis Company

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UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK 	FOR PUBLICATION
In re:
GRUBB & ELLIS COMPANY, et al.,
Debtors.
Case No. 12-10685 (MG)
Jointly Administered
MEMORANDUM OPINION AND ORDER DENYING FORMER AGENTS’ MOTION
FOR ADMINISTRATIVE EXPENSES CLAIMS
A P P E A R A N C E S:
DRINKER BIDDLE & REATH LLP
Counsel for the Former Agents
1177 Avenue of the Americas, 41st Floor
New York, New York 10036-2714
By: 	Allen V. Farber, Esq.
Kristin K. Going, Esq.
TOGUT, SEGAL & SEGAL LLP
Counsel for the Debtors and Debtors-in-Possession
One Penn Plaza
Suite 3335
New York, New York 10119
By: 	Frank A. Oswald, Esq.
Jonathan P. Ibsen, Esq.
Melissa Iachan, Esq.
ALSTON & BIRD LLP
Counsel for the Official Committee of Unsecured Creditors
90 Park Avenue
New York, New York 10016
By: 	Martin G. Bunin, Esq.
John W. Spears, Esq.
MARTIN GLENN
UNITED STATES 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
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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
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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
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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’s trustee 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
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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
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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 B.R. 861, 865 (Bankr. S.D.N.Y. 1982) (holding that even though commissions
did not become payable until after the petition was filed, the commissions were a general
unsecured claim because they were earned prepetition when a buyer was procured); In re
Moskovic, 77 B.R. 421, 423 (Bankr. S.D.N.Y. 1987) (denying administrative priority to a
broker’s claim where the broker obtained a purchaser for the debtor’s real estate and executed
the sale contract prepetition but the sale closed postpetition, holding that the broker earned his
commission when he obtained the buyer prepetition); In re Precision Carwash Corp., 90 B.R.
34, 38 (Bankr. E.D.N.Y. 1988).
In this case, the buyers for the Transactions were all procured before the Petition Date.
Indeed, many of these Transactions either closed or were on their way to closing before the
Petition Date. The Former Agents’ arguments cannot withstand the clearly-established case law
that holds that commissions received postpetition for deals that were procured prepetition simply
cannot be classified as administrative expense claims.
The Former Agents cite to cases holding that, at least in the nonbankruptcy context, no
claim for a portion of a shared commission lies until the primary broker receives payment. See,
e.g., William T. Bell & Assocs., LLP v. Pyramid Brokerage Co., Inc., 721 N.Y.S.2d 893, 894
(N.Y. App. Div. 2001); Sven Salen AB v. Jacq. Pierot, Jr. & Sons, Inc., 559 F. Supp. 503, 506
(S.D.N.Y. 1983). 1 In arguing that this case law applies here, the Former Agents also attempt to
1 In their Motion, the Former Agents also compare the payment of commissions shared between brokers to
severance payments. 	If the severance payments are earned at the time of the employee’s dismissal (which they
generally are), then they are entitled to administrative expense priority. See Supplee v. Bethlehem Steel Corp., No.
04-CV-2413 (GBD), 2006 U.S. Dist. LEXIS 8029, at *8 (S.D.N.Y. Mar. 2, 2006). The Former Agents argue that,
similarly, the commissions were only “earned” when the Debtors received the commissions. The Court finds this
analogy untenable.
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distinguish away unfavorable cases by arguing that those cases, unlike the case now before the
Court, involved brokers trying to collect postpetition commissions from sellers (not agents of the
broker seeking to collect from the broker). The Court agrees with Debtors that this is a
distinction without a difference. Moreover, no legal authority suggests that the agent of a broker
should be treated any differently than the broker itself with respect to whether commissions paid
out postpetition, when consideration for the deal accrued prepetition, should give rise to
administrative expense claims.
The Former Agents also cite Olin Corp. v. Riverwood Int’l Corp. (In re Manville Forest
Prods. Corp.), 209 F.3d 125 (2d Cir. 2000), for the proposition that the right to payment is the
critical element in determining whether a claim exists. See id. at 129 (stating that a claim will be
deemed prepetition if “the relationship between the debtor and creditor contained all the
elements necessary to give rise to a legal obligation—‘a right to payment’ under the relevant
non-bankruptcy law”). However, the issue in Manville concerned whether certain
indemnification rights met the definition of “claims” and arose prepetition for purposes of their
discharge by the bankruptcy confirmation, not whether these claims qualified for administrative
priority. Id. at 128-29. In addition, as Debtors point out, the court acknowledged that “[t]he fact
that the contingency in this case . . . materialized post-petition does not transmogrify the claim
into a post-petition claim.” Id. at 130 (citing In re Chateaugay Corp., 102 B.R. 335, 352 (Bankr.
S.D.N.Y. 1989) (emphasis added)). The Former Agents’ reliance on Manville is misplaced.
Lastly, the Former Agents cite this Court’s Memorandum Opinion Approving the Sale of
Substantially All of the Debtor’s Assets (the “Sale Opinion”) (ECF Doc. #829), stating that “[t]he
Debtors’ contracts with their agents create the rights to payment of commissions to the agents,
which may be general unsecured claims, priority claims, or administrative claims, depending on
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when the commissions are earned by the agents.” Sale Opinion at 15. In addition to the fact that
the Court was not deciding the issue it now faces, the Former Agents misconstrue this statement
to mean that the Court has already ruled that the commissions, which are the subject of this
dispute, must be considered administrative expense claims because the operative date is “when
the commissions are earned by the agents.” The Former Agents incorrectly assume this Court
used the word “earned” to mean when commissions are actually paid out. The Court
acknowledged that the claims arising out of commission payments “may be general unsecured
claims . . . or administrative claims.” The Court said nothing about whether the phrase
“commissions earned by the agents” indicated that a commission was “earned” when a right to
payment arises, or when the consideration for the transaction accrues. The Former Agents take
the Sale Opinion too far out of context.
III. 	CONCLUSION
For all the reasons stated above, the Former Agents’ Motion is DENIED.
IT IS SO ORDERED.
Dated: October 2, 2012
New York, New York
_____Martin Glenn____________
MARTIN GLENN
United States Bankruptcy Judge
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