Gallivan v. Springfield

• Court: Court of Appeals for the First Circuit
• Decided: April 7, 1997
• Docket: 96-1819
• Status: Published

Opinion

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
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          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,



                              
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               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.



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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


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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 .
                                                      _______


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. ." (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-

                              
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               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
          _______


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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


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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. . . ?


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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


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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.
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