United States District Court, S.D. New York
In re: GRUBB & ELLIS COMPANY, et al. Debtors.
GRUBB & ELLIS COMPANY, BGC PARTNERS, INC., and THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS, Appellees. VINCENT CARREGA, NEIL HELMAN, JON EPSTEIN, CHARLES KINGSLEY, YOAV OELSNER, JASON MESTER, MICHAEL GOTTLIEB, HOWARD GRUFFMAN, MARTIN COTTINGHAM, and THE A.D. HOC COMMITTEE OF BROKERS, Appellants,
MEMORANDUM OPINION & ORDER
PAUL G. GARDEPHE, District Judge.
These bankruptcy appeals arise out of the 2012 financial collapse of Grubb & Ellis Company ("Grubb and Ellis" or the "Company"), a commercial real estate and property management business. Appellants - former Grubb & Ellis brokers - object to an order approving the sale of substantially all of the Company's assets "free and clear of all claims, liens, rights, interests and encumbrances" to BGC Partners, Inc. ("BGC") (the "Sale Order"), entered on March 27, 2012 by United States Bankruptcy Judge Martin Glenn. For the reasons stated below, the Sale Order will be affirmed.
The debtors in this action are Grubb & Ellis and its affiliated entities (collectively, the "Debtors"). Together with Grubb & Ellis's purchaser, BGC, and the Official Committee of Unsecured Creditors, they are the Appellees in this action. Appellants - real estate brokers formerly employed by the Debtors - are comprised of two groups that, for ease of reference, will be referred to throughout this opinion as the MSF Brokers and the Ad Hoc Committee of Brokers (or Ad Hoc Committee) (collectively, "Appellants"). The MSF Brokers and the Ad Hoc Committee of Brokers filed separate appeals of the Sale Order. See Case Nos. 12 Civ. 3628 (PGG) and 12 Civ. 3756 (PGG). On June 4, 2012, at the request of the parties, this Court consolidated the appeals. (Dkt. No. 6)
The subject of these consolidated appeals are certain pre- and post-petition broker commissions that Appellants claim were wrongfully made part of the bankruptcy sale over their limited objections. (See MSF Limited Objection to Motion for Order Approving the Sale of Substantially all of the Debtors' Assets ("MSF Brokers' Objection") (Bankr. Dkt. No. 238) ¶ 6; Statement Seeking Clarification and Reservation of Rights of the Ad Hoc Committee of Brokers with Respect to the Debtor's Motion for an Order Authorizing and Approving the Sale of Substantially all of the Debtors' Assets ("Ad Hoc Committee's Objection") (Bankr. Dkt. No. 239) ¶ 3)
Appellants challenge the Sale Order on three grounds. They contend that the bankruptcy court erred by (1) adjudicating Appellants' rights to the disputed commissions without affording them an opportunity to present evidence at an adversary proceeding; (2) placing the burden on Appellants to prove that the commissions were not the property of the bankruptcy estate; and (3) concluding that the commissions belong to the bankruptcy estate rather than to Appellants. (See MSF Brokers' Opening Br. (Dkt. No. 17) at 3)
Although Appellants disclaim any desire to "unwind" the bankruptcy sale through this appeal (see MSF Brokers' Reply Br. (Dkt. No. 18) at 2), Appellants contend that they "are entitled to an adversary proceeding [pursuant to Bankruptcy Rule 7001] to determine their state law property rights." (MSF Brokers' Opening Br. (Dkt. No. 17) at 46) In the alternative, Appellants argue that this Court should issue a declaratory judgment that (1) a constructive trust applies to the commissions Appellants seek, and that the bankruptcy court erred "in failing to carve out the Commissions from the Debtors' estates"; and (2) the "Commissions earned by [Appellants] and collected by Debtors after the February 20, 2012 Chapter 11 filings are not included in the assets sold to BGC." (Id.)
I. THE DEBTORS' 2012 BANKRUPTCY FILING
At the time of its 2012 bankruptcy, Grubb & Ellis was a publicly traded real estate company that employed more than 1, 300 brokers, including Appellants. (Declaration of Michael J. Rispoli Pursuant to Local Bankruptcy Rule 1007-2 ("Rispoli 1007 Decl.") (Bankr. Dkt. No. 2) ¶¶ 8, 36) The Company's financial woes were precipitated by the 2007-2009 collapse of the real estate and financial markets and exacerbated by the Company's ill-timed merger with NNN Realty Advisors, Inc., a real estate investment management firm. (Id. ¶¶ 12, 79-81) In early 2011, Grubb & Ellis embarked on a strategy aimed at restructuring its operations and improving its liquidity. (Id. ¶ 94) In furtherance of these goals, the Company raised $28 million in financing through a credit facility with Colfin GNE Loan Funding, LLC, and C-III Investments (the "Senior Secured Debt"). (Id. ¶¶ 45-46) Grubb & Ellis also engaged a financial advisor - JMP Securities, LLC ("JMP") - to help it either obtain financing or sell some or all of its assets. (Id. ¶ 95) As part of its efforts to assist Grubb & Ellis, JMP approached 44 potential sale partners, including BGC. (Id. ¶¶ 97, 104) Although Grubb & Ellis entered into negotiations with BGC, the parties could not reach agreement on sale terms prior to the expiration of BGC's exclusive negotiating window. (Id. ¶ 104) Shortly thereafter, Grubb & Ellis concluded that an out-of-court sale or restructuring was not practical, and that a bankruptcy sale pursuant to 11 U.S.C. § 363 presented the only viable path forward. (Id. ¶ 105) Accordingly, on February 12, 2012, the Company retained Alvarez & Marsal Holdings, LLC ("A & M") to assist it with the bankruptcy process. (Id. ¶¶ 106-07)
On February 20, 2012 (the "Petition Date"), the Debtors formally filed a voluntary petition for Chapter 11 bankruptcy, together with an accompanying declaration from Michael J. Rispoli, Grubb & Ellis's Chief Financial Officer ("CFO") and Executive Vice President. (Chapter 11 Petition (Bankr. Dkt. No. 1); Rispoli 1007 Decl. (Bankr. Dkt. No. 2) ¶ 1) In his Declaration, CFO Rispoli outlined Grubb & Ellis's precarious financial position, noting that a large number of its brokers - representing nearly 30% of the Debtors' overall 2011 brokerage revenue - had already left the Company, and that the Debtors expected to have insufficient cash to meet their operating needs for the first quarter of 2012. (Rispoli 1007 Decl. (Bankr. Dkt. No. 2) ¶¶ 20, 115) Rispoli further explained that A & M had arranged for BGC to purchase the Senior Secured Debt from the Debtors' pre-petition lenders and to submit a stalking horse bid for the Debtors' assets. (Id. ¶¶ 120-27) Accordingly, on the same day as their bankruptcy filing, the Debtors moved the bankruptcy court to, inter alia, approve bidding procedures as well as the sale of substantially all of Debtors' assets free and clear of any interests, claims, or liens pursuant to 11 U.S.C. § 363(b). (Sale Motion (Bankr. Dkt. No. 12)) The Debtors warned that an expedited sale process was "critical":
As the personal relationships among Grubb & Ellis's brokers and clients are essential to its continued successful operations, it is critical that the Debtors' financial condition and liquidity be quickly stabilized and that the Debtors' employees are made confident in the businesses' ability to continue as a going concern. Absent such assurances, it is likely that more employees and contractual counterparties will leave Grubb & Ellis, thereby devaluing its operations further and jeopardizing the Proposed Sale.
(Rispoli 1007 Decl. (Bankr. Dkt. No. 2) ¶ 22)
On March 7, 2012, the bankruptcy court issued an order that, among other things, approved bid procedures and bid protections for the sale of substantially all of the Debtors' assets, approved the Debtors' asset purchase agreement ("APA") with stalking horse bidder BGC, and scheduled an auction and sale hearing. (Mar. 7, 2012 Order (Bankr. Dkt. No. 94)) The March 7 Order set the sale hearing date for March 22, 2012, and imposed a March 16, 2012 filing deadline for objections to the proposed sale. (Id. at 5) The Ad Hoc Committee of Brokers and the MSF Brokers each filed timely objections. (Bankr. Dkt. Nos. 238 & 239)
II. THE ASSET PURCHASE AGREEMENT AND BROKER LOAN PROGRAM
The Debtors filed their proposed asset purchase agreement ("APA") with BGC on March 2, 2012. (Bankr. Dkt. No. 74-1) Pursuant to the terms of the APA, BGC agreed to purchase substantially all of the Debtors' assets for (a) $30, 029, 055.70 (the amount of prepetition secured obligations), plus (b) the principal amount of loans made under the debtor-in-possession financing, plus (c) any cure amount paid by BGC for the acquired assets, plus (d) $15, 000, 00 in cash, subject to adjustment in accordance with Section 1.3 of the Stalking Horse APA. (March 7, 2012 Order (Bankr. Dkt. No. 94), Ex. 1, "Bidding Procedures" at 3)
The APA makes no mention of broker commissions. However, the term "acquired assets" is defined broadly and includes, inter alia, "all cash and cash equivalents" as well as all "[a]cquired [r]eceivables." (APA, Art. VIII (Bankr. Dkt. No. 74-1) at 32) The APA defines "[a]cquired [r]eceivables, " in turn, as
all trade and other accounts receivable and notes and loans receivable that are or may become payable to a Seller or a Subsidiary of a Seller for products delivered or services provided pursuant to an Assigned Contract, a note or loan payable, or otherwise....
(Id. at 34) The APA also defines "excluded assets"; this term does not include broker commissions. (Id. at 36-37)
On March 1, 2012, the Debtors filed a motion pursuant to 11 U.S.C. §§ 363(b) and 503(c) (Bankr. Dkt. No. 65), which was subsequently amended on March 7, 2012 (Bankr. Dkt. No. 95), seeking the bankruptcy court's authorization for a broker loan program (the "Loan Program"). The amended motion explains that
[a]s part of their compensation packages, [Grubb & Ellis] Brokers are entitled to receive commissions (the "Commissions") consisting of a percentage of the purchase or rental price from brokered deals. Brokers are also entitled to reimbursement expenses (the "Expenses") incurred in connection with brokered deals. As of the Petition Date, many of the Brokers were owed Commissions and Expenses.
(Id. ¶ 8) At the time of the bankruptcy sale, the money owed to the brokers included commissions and expenses accrued from both pre-petition transactions - that had either already closed or were scheduled to close - and post-petition transactions. (Sale Hearing Transcript ("Tr.") (Bankr. Dkt. No. 839) 84-87) In urging the bankruptcy court to implement the Loan Program, the Debtors declared that the brokers were their "most valuable asset" and noted that, "absent the[ir] retention..., the Debtors' businesses will lose more of their value, hindering a successful Sale." (Amended Motion (Bankr. Dkt. No. 95) ¶ 7) Accordingly, the Debtors and BGC proposed establishing the Loan Program to "allow the Debtors to pay the loan proceeds to the Brokers on an expedited basis to preserve the Debtors' enterprise value pending consummation of the Sale." (Id. ¶ 6)
Under the terms of the proposed Loan Program, Grubb & Ellis would - in lieu of paying the brokers their accrued commissions and expenses - give participating brokers a forgiveable loan. (Id. ¶ 17) So long as a broker continued to work for BGC for up to two years, died or became physically disabled, or was terminated by BGC without cause, the loan would be forgiven. (Id.) If, on the other hand, a participating broker stopped working for BGC for any other reason, the loan would become due immediately. (Id.) The Loan Program further required that participating brokers release Grubb & Ellis from any pre-petition claims relating to their commissions and expenses. (Id. ¶ 19)
The bankruptcy court scheduled a hearing for March 14, 2012 to consider the Debtors' motion and any objections to the proposed Loan Program. (Bankr. Dkt. No. 95-5) Several parties, including the Ad Hoc Committee of Brokers (but not the MSF Brokers), submitted objections. (Bankr. Dkt. No. 112) The Debtors responded to these objections by noting that "post-petition[, ] more than 60 Brokers" had left Grubb & Ellis to seek employment with competitors, and that the Loan Program was intended to "implement a voluntary program whereby a Broker can, if they so choose, avail themselves of the ability to obtain a forgivable loan against [their pre-petition] commissions." (Rispoli Decl. in Support of Amended Motion (Bankr. Dkt. No. 123) ¶ 25) The Debtors further emphasized that the Loan Program would not "prejudice a Broker's ability to seek payment of... Commissions on an administrative priority basis." (Id. ¶ 28) At the March 14, 2012 hearing, Debtors's counsel agreed to postpone consideration of the Loan Program until March 22, 2012, the date of the sale hearing.
III. TERMS OF THE BROKER AGREEMENTS
The day before the sale hearing, the Debtors submitted a declaration from CFO Rispoli in further support of the Sale Motion. ("Rispoli Decl." (Bankr. Dkt. No. 765)) Broker agreements between Grubb & Ellis and eight of the nine MSF Brokers were attached to the Rispoli Declaration as exhibits. (See Bankr. Dkt. No. 765-3 through 765-10)
The broker agreements, which contain different terms, set forth the nature of the employment relationship between each MSF Broker and Grubb & Ellis, and the governing commission rate. Five of the eight broker agreements contain language to the effect that Grubb & Ellis "owns all commissions and fees paid in exchange for the real estate services provided by its agents." (See, e.g., Helman Agreement (Bankr. Dkt. No. 765-4) at 2)
The Rispoli Declaration, which was introduced at the sale hearing, contains the following explanation of the Debtors' practices regarding broker ("Agent") commissions:
21. The Agents' relationships with the Debtors are either memorialized in an employment agreement or independent contractor agreement. The Agents are entitled to commissions from Debtors based on the terms of their respective agreements with the Debtor entities.
22. When the Debtors obtain a new third-party client - for a purchase, sale or lease transaction - the client enters into a contract with a Debtor entity ("Commissions Agreements").
23. These Commission Agreements are between the client and the relevant Debtor entity, as broker. The Agents are not parties to the Commission Agreements.
24. Upon the closing of a sale transaction, the relevant Debtor entity receives proceeds to consummate the sale. The funds are deposited into the Debtors' general account, which was the practice prior to the Petition Date.
25. The general account is not used exclusively for commissions, and as such, these funds are co-mingled with funds from other sources, all of which, are available for the general operations of the Debtors.
26. For sale transactions, Agents are paid commissions from the Debtors after transaction closings and receipt of funds.
27. For lease transactions, Agents are generally paid after the transaction is closed and the commission is received by the Debtor. In either case, Agents are paid from the Debtors' general account, which was also the practice prior to the Petition Date.
28. The Debtors are the sole owner of the commissions received from the clients. Presently, and prior to the Petition Date, the Debtors are not required to segregate the commissions and are not subject to any restrictions on use of the commissions.
29. Although an Agent's right to a commission is contingent upon the closing or signing of that particular transaction and the payment to the Debtor, once a transaction is closed or signed, the Agent's performance is considered substantially complete.
(Rispoli Decl. (Bankr. Dkt. No. 765) ¶¶ 21-29) Appellants did not submit any declarations or rebuttal evidence in advance of the sale hearing.
IV. APPELLANTS' OBJECTIONS AND THE DEBTORS' RESPONSE
Both the MSF Brokers and the Ad Hoc Committee filed objections to the proposed bankruptcy sale. (MSF Brokers' Objection (Bankr. Dkt. No. 238); Ad Hoc ...