
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                        ______________________          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-
