Carrega v. Grubb & Ellis Co. (In re Grubb & Ellis Co.)
Docket: Nos. 12 Civ. 3628(PGG), 12 Civ. 3756(PGG)
Court: District Court, S.D. New York; December 14, 2014; Federal District Court
Bankruptcy appeals stemming from the 2012 collapse of Grubb Ellis Company involve objections from former brokers regarding a sale order that authorized the sale of the Company's assets to BGC Partners, Inc., free from claims and liens. The appellants, divided into MSF Brokers and the Ad Hoc Committee of Brokers, raised concerns about pre- and post-petition broker commissions that they believe were improperly included in the sale.
They argue that the bankruptcy court erred by adjudicating their rights without allowing evidence presentation in an adversary proceeding, improperly shifting the burden of proof regarding the commissions, and erroneously concluding that these commissions were part of the bankruptcy estate. The appellants seek an adversary proceeding to clarify their property rights under state law and alternatively request a declaratory judgment asserting that a constructive trust should apply to the commissions and that commissions earned after the Chapter 11 filings are not part of the assets sold to BGC.
At the time of bankruptcy, Grubb Ellis was a publicly traded company employing over 1,300 brokers, facing financial difficulties due to the real estate market collapse and a poorly timed merger with NNN Realty Advisors. The appeals were consolidated by the court on June 4, 2012.
In early 2011, Grubb Ellis initiated a restructuring strategy to enhance its liquidity, raising $28 million through a credit facility with Colfin GNE Loan Funding, LLC, and C-III Investments (referred to as 'Senior Secured Debt'). To facilitate financing or asset sales, the company engaged JMP Securities, LLC, which approached 44 potential buyers, including BGC. Negotiations with BGC did not yield an agreement before the exclusive negotiating window ended. Consequently, Grubb Ellis determined that an out-of-court sale or restructuring was impractical, leading to the decision to pursue a bankruptcy sale under 11 U.S.C. 363.
On February 12, 2012, Grubb Ellis hired Alvarez & Marsal Holdings, LLC for bankruptcy assistance, and on February 20, 2012, the company filed a voluntary Chapter 11 petition. CFO Michael J. Rispoli's declaration highlighted the company's dire financial situation, noting significant broker attrition and anticipated cash shortages. The declaration indicated that A.M. had arranged for BGC to acquire the Senior Secured Debt and submit a stalking horse bid for the company's assets.
The same day, Grubb Ellis sought court approval for bidding procedures and the sale of its assets, emphasizing the need for an expedited process to stabilize operations and retain employees. On March 7, 2012, the bankruptcy court approved the bidding procedures and the asset purchase agreement (APA) with BGC, setting a sale hearing for March 22 and a March 16 deadline for objections. The proposed APA, filed on March 2, stipulated that BGC would purchase substantially all assets for approximately $30 million, plus additional amounts related to debtor-in-possession financing and a $15 million cash component, subject to adjustments.
The Asset Purchase Agreement (APA) does not address broker commissions but broadly defines 'acquired assets' to include cash, cash equivalents, and 'acquired receivables.' It explicitly states that 'excluded assets' do not encompass broker commissions. On March 1, 2012, the Debtors sought bankruptcy court approval for a broker loan program, later amended on March 7, 2012. This program aims to compensate Grubb. Ellis Brokers, who earn commissions as a percentage of brokered deal values and are reimbursed for related expenses. As of the Petition Date, many brokers were owed these commissions and expenses.
The Debtors contended that brokers were vital to their business value and proposed the Loan Program to expedite payments to them, allowing for the preservation of enterprise value until the sale's completion. Under the plan, brokers would receive forgivable loans instead of direct payments for their accrued commissions and expenses. Loans would be forgiven if brokers remained with BGC for up to two years, died, became disabled, or were terminated without cause. However, if a broker left for any other reason, the loan would be due immediately. The program also required brokers to release Grubb. Ellis from any pre-petition claims regarding their commissions and expenses.
A hearing was set for March 14, 2012, to discuss the motion and objections raised by several parties, including the Ad Hoc Committee of Brokers. The Debtors noted that over 60 brokers had departed Grubb. Ellis for competitors post-petition and highlighted that the loan program was voluntary, allowing brokers to draw on their pre-petition commissions without hindering their rights to seek administrative payment. The hearing was postponed to March 22, 2012, coinciding with the sale hearing. The day before this hearing, the Debtors provided a declaration from CFO Rispoli supporting the sale motion, which included broker agreements for eight of the nine MSF Brokers detailing their employment terms and commission rates.
Five of the eight broker agreements stipulate that Grubb Ellis retains ownership of all commissions and fees from real estate services provided by its agents. The Rispoli Declaration outlines the Debtors’ practices related to broker commissions: agents operate under employment or independent contractor agreements, entitling them to commissions based on these agreements. When a new third-party client engages a Debtor for a transaction, a Commission Agreement is established between the client and the Debtor, excluding agents as parties. Upon transaction closure, proceeds are deposited into the Debtors’ general account, which is not exclusively for commissions and commingles funds for general operations. Agents are compensated from this general account after transactions close, a practice consistent before the Petition Date. The Debtors are deemed the sole owners of commissions, with no obligation to segregate or restrict their use. Despite agents’ commissions being contingent on transaction completion, once closed, agents' duties are considered substantially fulfilled.
The MSF Brokers and the Ad Hoc Committee filed objections to a proposed bankruptcy sale. The MSF Brokers' objection is a limited one, seeking assurance that brokers’ commissions will not be unjustly transferred to the purchaser during the sale. They request that the sale order explicitly preserve their rights to pursue commission claims. Meanwhile, the Ad Hoc Committee, while not opposing the sale, seeks clarification on the definitions of pre- and post-petition commissions, BGC's payment intentions, and the retention of commissions post-sale. They assert that several brokers are owed commissions for transactions where payments were received prior to the filing date but withheld by the Debtors.
Commissions owed to brokers are categorized as pre-petition and post-petition, with the latter accruing after the bankruptcy filing due to transactions facilitated by brokers. The Ad Hoc Committee, while not opposing the sale, requested clarifications from BGC, including the scope of what BGC was purchasing, assurance that commissions already owed but not yet collected were not included in the sale, and confirmation that commissions paid post-sale would be paid to brokers in the usual manner. The Debtors responded by asserting that commissions, both collected and receivable, are part of the Debtors' estate and can be sold free of claims. They emphasized that agreements with third-party clients stipulate that commissions are owed to the Debtors, not to the brokers, and that the brokers' rights stem from separate agreements with the Debtors. The Debtors contended that the Appellants were limited by their written agreements, disallowing a constructive trust claim. During the March 22, 2012, sale hearing, objections were raised regarding the relevance of certain declarations and the constructive trust issue. The bankruptcy judge ruled that the objection was pertinent, emphasizing that the burden of proof for the constructive trust claim rested with the objecting party.
Counsel acknowledged the need for a constructive trust claim to be brought through a Rule 7001 adversary proceeding, but Appellants did not initiate such a proceeding. During the sale hearing, Appellants had the opportunity to cross-examine witnesses, including CFO Rispoli, who stated that the Debtors owed approximately $5 million in unpaid commissions and had around $12 million in outstanding commissions for unclosed transactions. Rispoli expressed uncertainty about how former brokers would be compensated, noting that BGC had not clarified their payment intentions. The Ad Hoc Committee’s counsel introduced, for the first time, a lien claim on unpaid commissions under New York Lien Law, while the bankruptcy court hesitated to resolve the constructive trust claims during the sale hearing. Appellants’ counsel requested merely to preserve their right to assert a constructive trust. BGC’s counsel contended that the bankruptcy court should resolve the claim at that time, citing 11 U.S.C. 363(b) and 363(f), emphasizing that a constructive trust is a judicially created interest. The court, however, maintained that it did not see the necessity to decide the issue during the hearing, pointing out the lack of evidence from Mr. Glenn supporting the existence of a constructive trust. Ultimately, the bankruptcy court approved the sale, overruling the MSF Brokers’ objection and determining they failed to prove their constructive trust claim, affirming that the entity asserting an interest has the burden of proof under 11 U.S.C. 363(p).
The MSF Brokers failed to provide evidence for the imposition of a constructive trust, which under New York law requires a claim of unjust enrichment absent prior agreements governing rights. The court noted that written agreements existed between the Debtors and MSF Brokers. The MSF Brokers cited *In re Rama Group of Companies*, where a constructive trust was found for a broker's commission due to an agreement prior to bankruptcy. However, the bankruptcy court distinguished this case, stating that the Debtors acted as brokers while their agents were only employees or independent contractors with separate agreements. This meant that the agents could not assert a constructive trust over commissions owed to the Debtors. The court found that funds from transactions were deposited into the Debtors' general account, mixed with other funds, and used for overall operations; thus, commissions were owned solely by the Debtors and not restricted in usage. The bankruptcy court also dismissed the Ad Hoc Committee’s objection regarding the New York Lien Law, noting that mechanics' liens can only be placed on real property, not cash commissions, and no evidence of filed liens was presented. The Debtors held contracts with property owners, while the agents were not parties to these contracts. Consequently, the court rejected the objections from both the Ad Hoc Committee and MSF Brokers, approving the sale free of liens or interests. The court stayed its order for seven days for any potential appeals.
Appellants filed appeals on the same day the Sale Order was issued, seeking either a constructive trust over commissions or an evidentiary hearing, and a ruling that commissions earned by brokers after the Petition Date are not included in the sale to BGC. The court's jurisdiction over bankruptcy appeals is governed by 28 U.S.C. § 158(a), which limits the review of factual findings to determine if they are clearly erroneous, while conclusions of law are reviewed de novo. The court notes that the appeals are statutorily moot because Appellants did not seek a stay of the Sale Order. Under Section 363(m) of the Bankruptcy Code, an appeal of a sale authorized by a bankruptcy court is limited to the question of whether the purchaser acted in good faith if no stay was granted. This provision aims to provide finality and reduce the risk of prolonged litigation. The Second Circuit has enforced this limitation strictly, asserting that a court cannot reverse or modify a sale to a good faith purchaser if no stay was sought, thus placing the burden on the appellants to mitigate risks associated with their challenge. Since Appellants did not contest the good faith of the purchasers and failed to seek a stay, the appeal is deemed statutorily moot, although the court retains some discretion to provide relief that does not involve invalidating the sale.
Appellants' choice to seek modification of the Sale Order instead of its reversal does not exempt them from the requirement to obtain a stay, a principle consistently upheld in this District's courts. The bankruptcy court conducted a sale hearing under Section 363(b), where Appellants were notified, participated fully, and objected to the sale. Despite these objections, the court approved the sale of nearly all Debtors' assets, including the disputed commissions claimed by Appellants. They did not secure a stay of the Sale Order prior to their appeal, rendering their appeals statutorily moot. The Sale Order explicitly warned that an appeal would not affect the sale's validity unless a stay was sought, which Appellants failed to do before the sale closed on April 13, 2012. Consequently, the only issue for the court to review is whether the bankruptcy court erred in determining that BGC was a good faith purchaser, a point Appellants do not contest. In attempting to sidestep Section 363(m)'s constraints, Appellants argue that their appeal is not statutorily moot because they do not seek to unwind the entire sale. They reference Mission Iowa Wind Co. v. Enron Corp. to support their position, but this reliance is incorrect as it contradicts Second Circuit rulings that Section 363(m) removes jurisdiction over un-stayed sale orders.
Section 363(m) establishes a rule of statutory mootness that prevents appellate review of any sale authorized under 11 U.S.C. 363(b) or (c) when the sale is made to a good-faith purchaser and not stayed pending appeal. This section acts as a jurisdictional limit on the authority to review a Bankruptcy Court's sale order. The court notes that, similar to *In re MSR Resort Golf Course LLC*, it cannot grant relief because no funds are left under the Bankruptcy Court's jurisdiction for distribution to the appellants, and their claims cannot be recovered without invalidating the entire sale.
The appellants' claims for disputed commissions exceed several million dollars, which would significantly impact the transaction despite their arguments to the contrary. The bankruptcy court found that the purchaser, BGC, would not have proceeded with the sale if it were not free of all claims. The appellants' assertion that they are not seeking to overturn the Sale Order but only to modify its terms is deemed a specious distinction.
The appellants also argue that their trust claims must be assessed under New York state law and cannot be moot if the Bankruptcy Court exceeds its jurisdiction. However, they waived this argument by not raising it until their reply brief. This claim fails as the determination of whether the disputed commissions are part of the debtors' estate falls within the bankruptcy court's core jurisdiction. The bankruptcy court did not disregard the appellants' state law property rights; rather, it provided an extensive analysis of New York law in relation to the Bankruptcy Code.
Since the appellants did not obtain a stay of the Sale Order and BGC is recognized as a good-faith purchaser, the consolidated appeals are deemed statutorily moot. Additionally, the appeals are also equitably moot.
Consolidated appeals are dismissed based on the doctrine of equitable mootness, which allows a district court to dismiss a bankruptcy appeal if granting effective relief would be inequitable. This doctrine is concerned with whether a remedy can be granted without disrupting a debtor’s reorganization plan. An appeal is presumed equitably moot if the debtor's plan is substantially consummated, defined by the transfer of property, assumption of management, and commencement of distributions as per the Bankruptcy Code.
Determining substantial consummation is fact-dependent, with the burden of proof resting on the proponent of any modifications. An appeal is equitably moot unless five criteria are met: (1) effective relief is possible, (2) it won't affect the debtor's re-emergence as a corporate entity, (3) it won't disrupt intricate transactions or create unmanageable situations for the Bankruptcy Court, (4) adversely affected parties have notice and an opportunity to participate, and (5) the appellant diligently sought a stay of the objectionable order, as failure to do so may render reversal inequitable.
It is established that if a stay of a confirmation order has not been obtained and the plan is consummated, the appeal may be dismissed as moot. The Second Circuit emphasizes that parties must seek a stay regardless of perceived likelihood of success, and cannot neglect their litigation position by claiming otherwise.
An appellant must request a stay, even if not attempting to disrupt the Plan, as established in *In re Metromedia Fiber Network, Inc.* The absence of a stay request raises concerns not only about the feasibility of providing relief without dismantling the Plan but also about fairness considerations. The appellant's argument that a stay was unnecessary due to the Plan's liquidation of the debtors lack merit, given the complexity and volume of transactions required to implement the Plan. The sale of the debtors' assets was significantly completed when the sale to BGC closed on April 13, 2012, with extensive contract assignments and rejections occurring since then, including the retention of nearly 2,000 employees. The appellants' assertion of unchanged circumstances is insufficient to demonstrate that their requested relief is feasible or equitable, and they have not met the necessary Chateaugay factors, particularly since they did not seek a stay of the Sale Order. Furthermore, the large monetary relief sought poses a significant risk to the sale's stability. Consequently, the consolidated appeals are deemed equitably moot, leading to the affirmation of the bankruptcy court's order approving the Sale Motion. The court will terminate any outstanding motions and close the cases.
The Ad Hoc Committee of Brokers includes a comprehensive list of individuals such as Elaine R. Battagia, John W. Beers, and others, totaling 37 members. The Committee has filed opening and reply briefs, referencing the legal arguments from the MSF Brokers’ briefs. Broker agreements vary, with some establishing employer/employee relationships and others categorizing brokers as independent contractors; six agreements have redacted commission rates. The Official Committee of Unsecured Creditors has supported the Sale Motion. The bankruptcy court issued an order outlining evidentiary exhibit marking instructions, indicating that the sale hearing would be evidentiary. This was reiterated in the court's "Memorandum Opinion Approving the Sale of Substantially all of the Debtors' Assets," which noted expectations for evidence presentation at the hearing. Despite reviewing hearing transcripts, the court found no announcement of the hearing's evidentiary nature. Appellants claimed they lacked notice of the hearing's evidentiary status, which they argued deprived them of the chance to present evidence. However, Judge Glenn informed them at the hearing that they bore the burden of proof due to their objections to the sale, and there is no record of them objecting to the evidentiary hearing process.
Appellants did not express unpreparedness for an evidentiary hearing and actively participated by cross-examining witnesses and presenting arguments. They also failed to inform the bankruptcy judge of any additional evidence they wished to introduce at the hearing. Consequently, the Court concluded that Appellants waived any objections regarding the evidentiary hearing. The relief sought by Appellants differs from what was requested in the bankruptcy court, as neither the MSF Brokers' Limited Objection nor the Ad Hoc Committee's Statement addressed the necessity for an adversary proceeding under Bankruptcy Rule 7001 or requested a declaratory judgment concerning post-petition commissions. Established legal principles dictate that appellate courts generally do not consider issues not raised in the lower court, and as such, the Appellants' failure to present their arguments adequately in the bankruptcy court constitutes a waiver of those arguments, providing a basis for rejecting their appeals.
