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-