Court Opinion

ID: 2964673
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:29:14.440478+00
Date Added: 2024-06-11T11:42:58.670197
License: Public Domain

USCA1 Opinion

	

                            United States Court of Appeals
                                For the First Circuit

                                 ____________________

          No. 96-1819

                    RICHARD M. GALLIVAN AND EDWARD T. SMITH, JR.,

                                     Appellants,

                                          v.

                      SPRINGFIELD POST ROAD CORPORATION, ET AL.,

                                      Appellees.

                                 ____________________

                     APPEAL FROM THE UNITED STATES DISTRICT COURT

                          FOR THE DISTRICT OF MASSACHUSETTS

                   [Hon. Nathaniel M. Gorton, U.S. District Judge]
                                              ___________________

                                 ____________________

                                        Before

                                Selya, Circuit Judge,
                                       _____________

                            Coffin, Senior Circuit Judge,
                                    ____________________

                              and Lynch, Circuit Judge.
                                  _____

                                 ____________________

               Claudia J. Reed with whom David J. Noonan was on brief for
               _______________           _______________
          appellants.
               Richard L. Neumeier for appellees.
               ___________________

                                 ____________________

                                    April 7, 1997
                                 ____________________

               COFFIN,  Senior  Circuit  Judge.    This  appeal  is  from a
                        ______________________

          district  court judgment  approving a  bankruptcy judge's  orders

          denying  motions of  appellant real  estate brokers  Gallivan and

          Smith  (1) to compel the payment of a brokerage fee by appellees,

          the  debtors-in-possession   in   Chapter  11   proceedings,   as

          administrative  expenses under  11  U.S.C.  503(b);1  and (2)  to

          recover  from a  secured party,  MBL Life  Assurance Corporation,

          their respective  shares of  the brokerage fee,  under 11  U.S.C.

           506(c),  as  a  "reasonable,  necessary  cost[]  of  preserving"

          debtors' property.2

               The district court denied both motions, holding that neither

          cited provision  gave appellants a  priority claim  but only  the

          status of an unsecured creditor.  We agree.

                            Findings and Conclusions Below

               The findings  of fact of  the bankruptcy court,  affirmed by

          the  district  court, are  the following.    One of  the debtors,

                              
          ____________________

               1  Section 503(b) provides, in relevant part:

               (b) After notice and a hearing, there shall be allowed,
               administrative expenses ..., including -
                    (1)(A) the actual, necessary costs and
                    expenses of preserving the estate, including
                    wages, salaries, or commissions for services
                    rendered after commencement of the case ....

               2  Section 506(c) provides, in relevant part:

               [T]he trustee may recover from property secured as an
               allowable claim the reasonable, necessary costs and
               expenses of preserving, or disposing of, such property
               to the extent of any benefit to the holder of such
               claim.

               Appellants also sought recovery under a restitution theory.

                                         -2-

          Springfield Post Road  Corp., owned land  constituting part of  a

          strip  type shopping  mall  in Springfield,  Massachusetts.   The

          remaining  portion was leased under  a ground lease  to the other

          debtor,  Route  20-21 Associates,  Inc.   The  president  of both

          debtors was Melvin Getlan.

               In the spring of  1991 Getlan asked Gallivan, a  real estate

          broker  specializing  in  finding national  restaurant  chains as

          buyers or  lessees of property, to obtain a tenant for one of the

          mall's buildings.   Getlan agreed  to pay a  commission of  seven

          percent of gross rental for years  one through ten of any  lease,

          payable  on the  commencement  of construction.   Through  Smith,

          another  broker with  experience  in finding  restaurant  chains,

          Gallivan pursued  The Olive Garden, a  restaurant chain operating

          as  a division of General  Mills Restaurants, Inc.   Gallivan and

          Smith agreed on an even split of the commission.

               After two  years, a lease was  signed by debtors on  May 17,

          1993 and  by General Mills on June 17, 1993.  The lease envisaged

          the razing of the existing building and the construction of a new

          one.  The  lease was to commence after General  Mills gave notice

          that  all conditions had been met or waived.  Conditions included

          issuance of a liquor  license and building permit, approval  of a

          site plan  by Marshall's,  the debtors'  largest tenant, and  the

          execution of nondisturbance agreements  by prior mortgagees.  The

          seven percent brokerage commission came to $66,780.   On June 25,

          1993 the debtors filed  petitions under Chapter 11  and continued

          in possession.   Smith  and Gallivan, although  claiming to  have

                                         -3-

          worked seventy or eighty  hours on lease-associated matters after

          the  filing of the petitions, were found to have "devoted perhaps

          twenty-five hours" post petition, primarily to obtaining approval

          of the site plan.   Several months after filing,  construction of

          the new building commenced.

               The  most  critical  findings  were  that,  under  the  oral

          brokerage agreement, "the  commission was to  be earned when  the

          lease  was signed  and was  to  become payable  when construction

          commenced;"  and   that  whatever  services  were   performed  by

          appellants  after  the  Chapter  11  petitions  were  filed  were

          gratuitous and not required by their agreement, but were rendered

          in  their  own  interest   to  "facilitate  consummation  of  the

          transaction." 

               The  court held, with  respect to  the claim  under  503(b),

          that, since appellants' post-petition  services were not required

          by  the brokerage  agreement,  they were  not "actual,  necessary

          costs"  of preserving  the  estate or  "commissions for  services

          rendered  after the  commencement of  the case."   The  same fact

          findings  dictated an  alternate  conclusion, that  the  contract

          between  the debtors  and plaintiffs  could not  be viewed  as an

          executory  contract at the time  of filing, which  could later be

          assumed by the estate.

               The  court cited four grounds  in support of  its refusal to

          apply  506(c):  (1)  that the statute contemplates only  required

          post-petition  services; (2)  that  plaintiffs  lacked  standing,

          since  the statute specifies only that "The trustee may recover .
                                                      _______

                                         -4-

          . ." (emphasis added), and no special circumstances existed, such

          as was the case in In re Parque Forestal, Inc., 949 F.2d 504, 511
                             ___________________________

          (1st Cir. 1991);3 (3) that the direct and  intended beneficiaries

          of  any services were the debtors, not the secured party; and (4)

          that any services rendered by appellants merely "enhanced, rather

          than preserved" the collateral secured.

               The  court  did  not   reach  or  deal  with   the  debtors'

          alternative  claim for  restitution, since  this depended  on the

          prior existence  of an executory  agreement, which the  court had

          rejected.

                                      Discussion

               Before commencing  our analysis, we  think it  is useful  to

          place  appellants' claims in perspective.   The issue  is not one

          which should be viewed in  isolation, outside of the  established

          metes and  bounds of bankruptcy law.   That is, it  is beside the

          point  to consider  whether  able,  persistent, resourceful  real

          estate brokers, who  not only  found a ready,  willing, and  able

          lessee,  but worked  to assure  the satisfaction  of a  number of

          conditions  of  the  lease,  are entitled  to  their  commission.

          Rather, we are dealing with  a debt owed by an estate  within the

          realm of bankruptcy, with  its various rules to assist  in making

          the  least  unfair  allocation   of  inadequate  resources  among

          contesting creditors.  The precise question is  whether the post-
                              
          ____________________

               3    In In re Parque Forestal, 949 F.2d 504, 511-12 (1st
                       _____________________
          Cir. 1991), we agreed with two other circuits that third parties
          may recover where they have equitably come to stand in the
          trustees' shoes, especially where a colorable claim exists and
          where a third party is the only one likely to pursue it.  

                                         -5-

          petition services of these appellants were so bargained for or so

          crucially indispensable as to elevate  what would otherwise be an

          unsecured  claim to  a priority  claim that  must be  paid before

          those  of  other  unpaid  pre-petition  suppliers  of  goods  and

          services.

               We  begin  our  analysis  by  addressing  appellants'  legal

          proposition  having  to do  with our  standard  of review.   They

          contend that whether or  not post-filing performance was required

          of  the brokers  is not  only  a question  of law,  but of  state

          (Massachusetts) law.   Appellants cite such  cases as Bennett  v.
                                                                ___________

          McCabe, 808 F.2d 178 (1st Cir. 1987) and Tristram's Landing, Inc.
          ______                                   ________________________

          v.  Wait,  367 Mass.  622 (1975)  for  the proposition  that real
          ________

          estate brokers earn their  commissions, absent breach of contract

          by their principals, when the transaction has been completed, not

          when the  purchase and  sale (or  lease)  agreement is  executed.

          This proposition,  say appellants,  is binding on  the bankruptcy

          court,  forecloses any fact  finding, is reviewable  de novo, and
                                                               __ ____

          warrants reversal of the judgment below.

               We disagree.  Appellants, it seems to us, have  misconceived

          the thrust of  the authorities cited,  as well as  the source  of

          governing law.  In  Bennett we were addressing the  sole question
                              _______

          whether, under current Massachusetts law, an unintended, innocent

          seller's default  resulting in  the frustration of  a transaction

          would  justify  the  seller's refusal  to  honor  an  agreed upon

          broker's commission.   Bennett, 808 F.2d  at 179-80.   Tristram's
                                 _______                         __________

          Landing announced the basic proposition that when a commission is
          _______

                                         -6-

          payable "on the  sale," a broker is not  entitled to a commission

          until  the transaction  is  completed.   Tristram's Landing,  367
                                                   __________________

          Mass. at  626.  But there the  court made very clear  that it was

          not  defining an obligation of the broker, but rather was dealing

          with a special agreement or circumstance "wherein consummation of

          the sale became a condition precedent for the broker  to earn his

          commission."  Id. at 627. 
                        __

               This difference  was explicitly recognized in  In re Munple,
                                                              _____________

          Ltd.,  868 F.2d 1129, 1130-31  (9th Cir. 1989),  where a purchase
          ____

          and  sale agreement provided that a broker's commission was to be

          payable "at the close of escrow."  The conclusion of the deal was

          delayed by a  dispute between seller and buyer.   The seller then

          filed under Chapter  11; the two  parties finally composed  their

          differences  and the seller  then sought  to assume  the purchase

          agreement free  and clear of  the broker's claim  for commission.

          The  broker argued that the agreement was executory, and thus had

          been  assumed by the estate because payment was contingent on the

          closing of the sale.  The Court of Appeals observed:

               This  argument  confuses  performance  obligations  and
               conditions precedent. . .  . The condition precedent to
               [seller's]  obligation to pay the commission imposed no
               further  obligations  on  [broker],  nonperformance  of
               which  would have  excused  [seller]  from  paying  the
               commission.    Because  [broker]  had  done  everything
               required of  it to earn the  commission, the commission
               provision in the purchase agreement was not executory.

          We therefore do  not agree that  these cases support  appellants'

          claims.

               Moreover, the  governing statute in  this case is  11 U.S.C.

           503(b).   Its requirements are to be assessed under federal law.

                                         -7-

          In re Munple, Ltd., 868  F.2d at 1130.  As we have held  in In re
          __________________                                          _____

          Mammoth  Mart, Inc.,  536  F.2d 950,  954  (1st Cir.  1976)  with
          ___________________

          reference to the predecessor of  503(b), 

               It  is . . .  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 after the filing.

          What is not  foreclosed under  503(b)  is an executory  contract,

          which may be  assumed by the debtor.  Federal  courts have pretty

          generally settled  upon the following definition  of an executory

          contract: "a  contract under which the obligation[s]  of both the

          bankrupt  and  the  other  party  to  the  contract  are  so  far

          unperformed that  the failure  of either to  complete performance

          would constitute  a material  breach excusing performance  of the

          other."   In re  Columbia Gas System  Inc., 50 F.3d  233, 239 (3d
                    ________________________________

          Cir. 1995)(citation  omitted).  

               We  therefore proceed with our review for clear error of the

          bankruptcy court's finding  that the brokers' bargained-for  work

          had  been  done  as  of the  filing  of  the  petitions and  that

          subsequent efforts were gratuitous.

               Gallivan's  testimony was that not  only was the  fee set at

          seven percent,  but that in  dealing with  ground leases  (leases

          where a tenant  must construct  his own improvement  on the  land

          leased), "There are  a number of conditions that  a broker has to

          perform .  . . .  [s]uch as site  plan, hazardous waste,  in this

          case nondisturbance, liquor licenses."   A broker is,  he further

          testified, entitled to a  ground lease commission "normally" upon

                                         -8-

          the initiating of construction, when all the conditions have been

          met.  Later, when he told Smith of the terms of the agreement, he

          referred to  the "payable upon construction"  term, saying, "[H]e

          and  I have done a  number of restaurant  deals and that's fairly

          common in our  industry."  He said that Getlan  had indicated his

          agreement  to a seven percent  fee, payable on  construction.  No

          specific  conditions were  identified as  having  been discussed.

          The lease  itself, signed  well after the  discussions, contained

          some dozen  conditions, some requiring action  from the landlord,

          some from the tenant.  

               Getlan  testified that  he had  never accepted  a letter  of

          agreement that the brokers had prepared.  He even denied that  he

          had agreed  on the fee and  time of payment; on  these points the

          court found against him.   He said he normally did not  settle on

          commission  details before he had  a live tenant  before him, and

          that every deal  was different.   As for  discussing services  in

          addition to  finding a  tenant, Getlan acknowledged  that it  was

          normal for  brokers to  do  what they  could  in their  own  best

          interest.  He, however,  thought that The Olive Garden  chain had

          their own resources.

               When asked  if he discussed  with Gallivan  help in  getting

          other approvals, he said:

               THE  WITNESS:   He volunteered  to help,  if necessary,
               with the building department to get any permits or find
               out what was needed  or what.  He volunteered  for that
               and I assume he did whatever he was asked to do by them
               or he may have done something on his own, I don't know.

               THE COURT:  Did you ask him to do anything. . . ?

                                         -9-

               THE WITNESS:  I don't think I asked him to do  anything
               personally.

               On  this record, we cannot  find clear error  in the court's

          determination that appellants had  earned their commission in the

          sense that they had done all that they were obligated to do prior

          to  the debtors'  filing  and  that  their further  efforts  were

          gratuitous.  We have already  noted Getlan's comments with regard

          to  any work done in pursuing  various governmental permits, such

          as liquor licenses.   The major efforts, according to  the court,

          were directed toward obtaining the  approval of Marshalls to  the

          site plan. Here, the  court could reasonably find that  the basic

          approval  had been given before  execution of the  lease and that

          the delay in getting written approval of details long settled was

          occasioned by a complete  change of staff in the  relevant office

          of  Marshalls.   Similarly,  Getlan performed  whatever work  was

          necessary  to  get  the  mortgagees  to  execute   nondisturbance

          agreements,  insofar as  the mortgagees  were involved.   Smith's

          efforts were directed  toward persuading the tenant that it could

          live with what the first mortgagee had insisted on.  And there is

          no  evidence that  these services,  as well  as the  others, were

          requested by Getlan.

               The  efforts  expended  by  appellants,  post petition,  are

          reminiscent of  those of the  brokers in In re  Munple, Ltd., 868
                                                   ___________________

          F.2d at 1131:

               [Broker]   contends   that   the   purchase   agreement
               "authorized" it to render  such services and gave  it a
               "strong  incentive"  to  help close  the  deal  because
               payment of  the commission was  contingent on  closing.
               [Citation  omitted.]  Even if  true, these facts do not

                                         -10-

               render the commission agreement executory on [broker's]
               part  after  it had  produced the  buyer.  . .  . [T]he
               critical question  is whether [broker] was  required to
                                                           ________
               perform such services in  order to earn its commission.
               [Emphasis in original.]

               In short, we are  unable to find clear error  in the finding

          of  the  bankruptcy court  that  appellants  had completed  their

          services  under the contract before  the filing date.   This also

          means that, as of the filing date, the brokerage contract was not

          executory and could not be  assumed by the debtor.  As  the Third

          Circuit has commented, in a similar situation,

                    In  cases  where the  nonbankrupt party  has fully
               performed, it  makes no sense to  talk about assumption
               or rejection.  . . .  Rejection is meaningless  in this
               context, and assumption would  be of no benefit  to the
               estate, serving only to convert the nonbankrupt's claim
               into a  first  priority expense  of  the state  at  the
               expense of the other creditors. [Citation omitted.]  In
                                                                    __
               re Columbia Gas System, Inc., 50 F.3d at 239.
               ____________________________

          The claim under  503(b) was, therefore, properly denied.

               We  address  briefly  the  claim  under   506(c).    Without

          reaching other grounds relied on by the lower courts, we think it

          sufficient  to hold that the finding that the direct and intended

          beneficiaries of appellants' services was the debtor, and not the

          secured party, was supported by the evidence.  The mere fact that

          revenues from the lease  would help the debtors to  meet mortgage

          payments  due MBL does  not suffice to  carry appellants' burden.

          See In  re Visual Industries,  Inc., 57  F.3d 321,  327 (3d  Cir.
          ___ _______________________________

          1995) (mere fact that  raw material furnished to debtor  by trade

          creditor  assists  debtor  in continuing  operation,  and thereby

          allows debtor  to reduce  indebtedness to secured  creditor, does

                                         -11-

          not entitle  trade creditor  to reimbursement from  collateral of

          secured creditor.)

               Collier, after noting  that recent circuit court  authority,

          including  our own In re Parque Forestal, Inc., 949 F.2d 504 (1st
                             ___________________________

          Cir. 1991),  would  allow standing  in  some instances  to  third

          parties, with lower courts being divided, concludes:

               The  better view is that  a secured creditor  who received a
               direct  benefit  from  the  rendition  of  services  of  the
               provision  of  goods  [or  services]  by  an  administrative
               claimant should have the collateral charged for that benefit
               and that the claimant should have standing to seek to charge
               the collateral  for  the benefit  received.   The burden  of
               proof is on  the party seeking  the recovery to  demonstrate
               the  existence  and  amount  of  the  benefit.    2  Collier
                                                                    _______
               Bankruptcy Manual  506.05, at 506-38 (Lawrence P. King, ed.,
               _________________
               3d ed. 1996).

               Even  assuming this were a proper case in which to recognize

          third party standing, appellants on  this record have not carried

          their burden  of establishing  the  existence and  amount of  the

          benefit to MBL.

               Finally,  the bankruptcy and district courts  did not err in

          not addressing appellants' claim for restitution.

               Affirmed.
               ________

                                         -12-