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...