Opinion
No. 00-53226-MM
April 19, 2001
OPINION
INTRODUCTION
This matter comes before the Court on the motion of Whitney Cressman Limited for retroactive appointment as broker and for payment of its real estate commission. For the reasons stated hereafter, the Court grants the motion for retroactive appointment and approves the application for award of the commission. Following the authority of Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1 (2000), the Court allows payment of the commission only to the extent that payment can be made from unencumbered funds of the estate.
FACTUAL BACKGROUND
In February 2000, Baymark L.P. engaged Whitney Cressman to sell a multi-unit real estate development located in Walnut Creek, California. On behalf of Whitney Cressman, Clayton Jew began marketing the property and eventually devoted over three hundred hours to the transaction. He prepared a four-color flyer, which he mailed to over one thousand potential buyers, and responded to inquiries about the property. He also prepared a thirty-one page Offering Memorandum, complete with schematics, renderings, plot plans, feasibility and demographic analyses, and forwarded it to selected prospects. Jew received several offers to purchase and letters of intent, including an offer from Branagh Development Company. Branagh's offer was accepted after negotiations involving sixty to eighty hours of Jew's time.
While the property was being marketed, Baymark filed for relief under Chapter 11 of the Bankruptcy Code. The filing was prompted by an order entered in an action pending in the United States District Court between Baymark and Primecore Mortgage Trust, Inc. The District Court had ordered Baymark to post a $1 million bond; if it failed to do so, Primecore would have been allowed to proceed with a foreclosure sale on the Walnut Creek property. Wayne Aosaza, Baymark's general partner, testified by declaration that he "informed Mr. Jew of the bankruptcy and assured Mr. Jew that [Whitney Cressman] would be paid upon a sale."
After the petition date, Baymark and Branagh executed a sale agreement, and Baymark sought bankruptcy court authority to sell the property. The proposed sale terms provided for $5.1 million in cash at closing, an additional $145,000 upon the approval of a building permit, and $200,000 upon the completion of construction. The buyer also proposed to pay 10% of future profits to Baymark. Primecore opposed the sale because the cash payable at closing was insufficient to pay its secured claim of approximately $5.4 million, and it was unwilling to bear the risk of non-completion of the project. Primecore independently contacted Branagh and negotiated the payment of $5.4 million at closing. During negotiations over the sales price and other terms, Whitney Cressman voluntarily reduced its commission to 2%. Primecore subsequently dropped its opposition to the sale on condition that it receive $4,375,000 at closing, that real property taxes be paid, and that the remainder of the proceeds be held pending resolution of Baymark's objections to Primecore's claim. The Court approved the sale on September 8, 2000. Six months later, a Trustee was appointed when the case was converted to Chapter 7 on motion by the United States Trustee.
Contemporaneous with the conversion motion, Whitney Cressman sought both retroactive appointment as real estate broker and payment of its 2% sales commission in the amount of $110,000. Aosaza filed a declaration in support of the motion. Primecore objects to Whitney Cressman's request on the grounds that: (1) it is untimely, and a Whitney Cressman representative was present but silent in the sale hearing when the modified sale terms were approved; (2) the sale closed not as a result of Whitney Cressman's efforts but only because Primecore negotiated a higher sales price; (3) Primecore would be prejudiced if the motion were granted because the funds reserved are still inadequate to pay the balance of its secured claim; and (4) Primecore's consent to the sale free and clear of liens was expressly conditioned on payment only to Primecore and of the delinquent real property taxes until resolution of the objection to Primecore's claim.
LEGAL DISCUSSION Retroactive Employment Is Warranted Under the Circumstances .
Although general bankruptcy counsel usually obtains authority for employment of the estate's professionals, Whitney Cressman has standing to seek approval of its own employment. See Mehdipour v. Marcus Millichap (In re Mehdipour), 202 B.R. 474, 479-480 (B.A.P. 9th Cir. 1996), aff'd, 139 F.3d 1303 (9th Cir. 1998). Bankruptcy courts have discretion to approve retroactive employment of a professional in "exceptional circumstances." Law Offices of Ivan W. Halperin v. Occidental Fin. Group, Inc. (In re Occidental Fin. Group, Inc.), 40 F.3d 1059, 1062 (9th Cir. 1994). To establish "exceptional circumstances," the professional seeking retroactive employment must satisfactorily explain its failure to obtain prior judicial approval and demonstrate that its services benefitted the estate in a significant manner. Atkins v. Wain, Samuel Co. (In re Atkins), 69 F.3d 970, 974 (9th Cir. 1995).
Whitney Cressman has established the "exceptional circumstances" warranting retroactive employment by the estate. First, Whitney Cressman's failure to seek prior judicial approval has been satisfactorily explained. While Jew is an experienced commercial real estate broker, this was his first transaction in bankruptcy court. He is not an attorney and was unaware of the necessity of court approval. He appears to have been acting in good faith by rendering services without court approval of his employment. It also was reasonable under the circumstances for him to rely on Aosaza's assurances that Whitney Cressman would receive its commission. See Atkins, 69 F.3d at 976 (finding a satisfactory explanation existed where "the debtors led the firm to believe that they would secure the requisite court approval").
With respect to the second requirement, Whitney Cressman's services were of significant benefit to the estate. Through his extensive efforts to market the property, Jew located a buyer that was ready, willing and able to perform, not only on the initial sale terms but also on renegotiated terms. He also continued to market the property even after receiving Branagh's offer so that Baymark would not be left without a buyer if Branagh failed to close escrow.
The Amount of the Commission is Approved .
Section 330(a) authorizes reasonable compensation for the actual, necessary services of a professional. Jew expended over three hundred hours in connection with this transaction and incurred numerous expenses, including on-site signage, advertising in the Wall Street Journal and on two Websites, and preparation of the flyer and Offering Memorandum. Additionally, he spent approximately sixty to eighty hours negotiating with the eventual buyer. As a result of these services, he brought a qualified buyer to the table. Approval of the amount of Whitney Cressman's commission under § 330(a) is appropriate.
Payment of the Commission Must Be From Unencumbered Estate Funds .
Approval of the commission, however, merely allows Whitney Cressman an administrative claim under § 503(b), which provides for allowance of the actual, necessary costs and expenses of preserving the estate. The more problematic issue is payment of the commission since, as a general rule, administrative expenses do not have priority over secured claims and may not be charged against a secured creditor's collateral. 11 U.S.C. § 506(c); Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 5 (2000); Central Bank of Montana v. Cascade Hydraulics and Utility Service, Inc. (In re Cascade Hydraulics and Utility Service, Inc.), 815 F.2d 546, 548 (9th Cir. 1987).
The Commission May Not Be Paid as a § 506(c) Claim.
An exception to this general rule exists where the administrative expense is incurred primarily for the benefit of the secured creditor or where the secured creditor consents to the expense. Hartford Underwriters, 530 U.S. at 5; Compton Impressions, Ltd. v. Queen City Bank, N.A. (In re Compton Impressions, Ltd.), 217 F.3d 1256, 1260 (9th Cir. 2000). Section 506(c) provides:
(c) The trustee may recover from property securing an allowed secured 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.
Interpreting § 506(c), the Supreme Court determined that only the trustee or the debtor in possession has standing to bring a motion to surcharge a secured creditor's collateral. Hartford Underwriters, 530 U.S. at 6. The reason for this limitation is in the text of the Bankruptcy Code.
[T]he statute appears quite plain in specifying who may use § 506(c) — "[t]he trustee." It is true, however, . . . that all this actually "says" is that the trustee may seek recovery under the section, not that others may not. The question thus becomes whether it is a proper inference that the trustee is the only party empowered to invoke the provision.
Id. (footnote omitted). The Supreme Court concluded that an administrative claimant does not have an "independent right" to seek payment of its claim from property encumbered by a secured creditor's lien. Id. at 11-13.
This result is not affected by Bank of Honolulu v. Anderson (In re Anderson), 66 B.R. 97 (B.A.P. 9th Cir. 1986), which held that a commission to a third party real estate broker benefits the secured party. 66 B.R. at 100. In that case, real property was sold by a trustee who had retained a real estate agent to facilitate the sale. The sale proceeds were insufficient to satisfy the claim of secured creditor Bank of Honolulu, which had been about to foreclose at the time the bankruptcy petition was filed. Nevertheless, the Bankruptcy Appellate Panel found that the Bank received a benefit from the sale and that the broker was entitled to surcharge the proceeds. Consent of the secured party was not necessary for payment of the real estate commission. Id. However, on the issue of standing, Anderson has been effectively overruled by Hartford Underwriters.
The Supreme Court anticipated Whitney Cressman's problem when it considered the policies underlying § 506(c) and the argument that a trustee may lack incentive to pursue payment on behalf of an administrative creditor. Its response to this concern is that a trustee must seek recovery under § 506(c) "whenever his fiduciary duties so require," or alternatively, that administrative creditors have other remedies, including "paying attention to the status of their accounts, a protection which, by all appearances, [was] neglected here." Hartford Underwriters, 530 U.S. at 12. A creditor may also safeguard its interests by insisting on cash payment, negotiating directly with the secured creditor, or seeking superpriority or secured status under § 364.Id.
The facts in this case are more compelling than those in Hartford Underwriters. Whitney Cressman could not insist on cash payment, its interests were not protected by the debtor in possession, and the Chapter 7 Trustee has no fiduciary duty to it. Whitney Cressman's only culpability appears to be that, like Hartford Underwriters, it "neglected its own account." Nonetheless, § 506(c), as interpreted in Hartford Underwriters, does not afford relief to Whitney Cressman.
The Court May Not Impose an Equitable Lien Without Further Proceedings.
With respect to Whitney Cressman's request for an equitable lien, the imposition of an equitable lien requires a separate adversary proceeding in order to satisfy due process requirements. See F.R.Bankr.P. 7001(2);Wolf v. Mahrdt (In re Chenich), 100 B.R. 512, 515 (B.A.P. 9th Cir. 1987). Whitney Cressman will further be required to establish its entitlement to an equitable lien under California law. See Kabayan v. Yepremian, 190 B.R. 389, 393-94 (C.D.Cal. 1995), aff'd, 116 F.3d 1295 (9th Cir. 1997); Jones v. Sacramento Savings and Loan Ass'n, 56 Cal.Rptr. 741, 746 (Cal.Ct.App. 1967) ("equity permits imposition of an equitable lien where the claimant's expenditure has benefited another's property under circumstances entitling the claimant to restitution"). See also Grappo v. Coventry Fin. Corp., 286 Cal.Rptr.2d 714, 722-723 (Cal.Ct.App. 1991) (no equitable lien where party continued to advance funds despite explicit refusals to grant a security interest).
CONCLUSION
Whitney Cressman's motion for retroactive employment is granted. Also, its real estate commission in the amount of $110,000 is approved and may be paid as an administrative claim to the extent there are sufficient unencumbered funds in the estate.