Broker Commissions: Trying To Climb The Payment Priority Ladder

In re Grubb & Ellis Co., 478 B.R. 622 (Bankr. S.D.N.Y. 2012)

Real estate agents who worked for Grubb & Ellis Co. prior to its bankruptcy sought allowance of their claims for commissions as an administrative expense.  Grubb & Ellis addresses the question of whether a commission due for a sale that closes post-petition where the buyer was procured prepetition is entitled to treatment as an administrative expense.

Section 503(b)(1)(A) of the Bankruptcy Code describes administrative expenses as including “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.”  Classification as an administrative expense is beneficial because generally administrative expenses are entitled to payment before unsecured claims are paid.

Under the typical termination agreement between an agent and Grubb & Ellis, it was clear that it was liable to pay the agent only after a commission was collected by Grubb & Ellis.  Since it typically collects a commission at closing, this meant that for transactions that closed after it filed bankruptcy, the agents did not earn their commissions (in the sense that they were not entitled to payment) until post-petition.

According to the court, a two-part test is used in the Second Circuit to determine whether a claim is an administrative expense:  (1) there must be a post-petition transaction between the debtor-in-possession and the creditor, and (2) the estate must receive a benefit from the transaction.  In other words, it is not sufficient that the debtor-in-possession receives the benefit (as was the case here).  Rather, another key question is when the transaction or consideration giving rise to a claim occurs or was performed, as opposed to the timing of entitlement to payment.  In this case, although the agents did not have any right to payment until post-closing, the buyers or tenants were procured before the bankruptcy was filed.

The agents relied on non-bankruptcy cases that held that there is no claim for a shared commission until the primary broker receives payment and tried to distinguish unfavorable bankruptcy cases by arguing that they dealt with commissions paid by a seller to a broker which was different from commissions paid by a broker to an agent.  However, the court rejected these arguments and concluding that this was a distinction without a difference.

The agents also relied on a Manville decision that held the right to payment is critical to determining whether a claim exists.  However, Manville was a decision on whether indemnification rights were “claims” and whether they arose pre-petition or post-petition, and not whether they qualified as administrative priority claims.

Here the focus was on when consideration was provided, and the agents were viewed as providing consideration when they procured a willing buyer or tenant, not when conditions to their right to payment were met. Accordingly, the court determined that the agents’ claims were for pre-petition efforts, and thus should be treated as general unsecured claims, not administrative priority claims.

This result may seem unfair in that the bankruptcy estate obtains the benefit of the agent’s services without giving it a right to priority payment.  However, administrative expense status is specifically intended to encourage post-petition services, not just pay for benefits received post-petition.  In that regard, an agent or broker that wishes to do business with the post-petition debtor-in-possession should be aware that it needs court approval to be retained as a professional.

Vicki R. Harding, Esq.

About BankruptcyRealEstateInsights

Vicki R. Harding was a partner in the Detroit office of Pepper Hamilton LLP who moved to Arizona seeking warmer weather. Ms. Harding continues to handle commercial transactions with an emphasis on real estate and bankruptcy issues (but no longer owns a snow shovel).
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