Wednesday, April 20, 2011

Broker Beware

Lang McLaughry Spera Real Estate, LLC v. Hinsdale, 2011 VT 29

We as a society use written contracts for many reasons.  One of the most important reasons is to guarantee that our initial agreements are binding on each other no matter what happens down the road.  A good written contract will almost always contain a clear set of terms and conditions that will guide parties through a relationship no matter how it may sour down the road.  This is important because contractual relationships sour with surprising regularity.  It is one of the basic realities of practicing law and one of the reasons that lawyers can send their children to private academies and tuition-heavy summer camps.  More on that in a moment.

Today’s case is about a fairly small dispute.  In 2007, Plaintiff, a real estate broker, signed a contract with Defendants to exclusively list, market, and sell their 56-acre property in Charlotte for a 6% commission.  Although the property was listed as the Charlotte Berry Farm, nothing in the listing agreement described the business and the farm equipment as part of the sale.  This could have been for a number of reasons, the least not being that 56-acres of open land in Charlotte might sell for more to a developer than to some fresh-faced-Middlebury-grad pumped up on Bill McKibben and Wendell Berry. 

Nevertheless, Broker marketed the property as a farm and promoted its use as an on-going business to potential buyers, among other potential uses.  Soon thereafter, Broker found a buyer who purchased the property for $900,000 (72% of the original asking price).  At closing, buyer specified that $725,000 was being paid for the real estate, $100,000 for the business, and $75,000 for the equipment, stock, machinery, and supplies.  Broker sought his 6% commission on the entire $900,000, but Defendant balked at paying him a commission on the entire amount since $175,000 was paid for personal property, not real estate.  Defendant made a partial commission payment, and Broker went to court for the remainder.

Here is where some of the trouble begins.  First, the total amount sought by Broker was $9,000.  This is barely over the threshold of a small claims court action, but the contract that the parties signed promised attorney’s fees to the substantially prevailing party.  Broker, no doubt convinced of the righteousness of his claim, filed with the belief that the tab for this action would eventually be borne by Defendants, who would have to pay his attorney as well as the $9,000.  Defendants, who were now in a position of risking far more than the $9,000, had little choice but to escalate the issue and counter-sue Broker for breach of contract and consumer fraud.  This led to a situation where attorney’s fees involved quickly dwarfed the actual amounts in controversy and led the parties to harden their positions. 

This is speculation, but it is hard to believe that if attorney’s fees were off the table that the parties would not have—somewhat grudgingly—resolved this dispute far short of trial.  The small amounts in controversy almost demand it, but since the promise/threat of attorney’s fees loomed, the parties kept their respective meters running and took the issue to trial.

At trial, the court ruled that Broker had substantially marketed the farm and that it was due to Broker’s actions that the business sold.  Therefore, Broker was entitled to the full commission and attorney’s fees.   

On Appeal, the SCOV takes a radically different approach.  For the SCOV, the issue goes back to the agreement that the parties drafted and signed.  That agreement did not mention the business, the farm equipment, or anything beyond the property itself.  Furthermore, the Vermont Real Estate Commission Rules—the rules that govern the behavior and performance of all licensed real estate brokers—requires brokers to be specific about what they are selling and requires the courts to read an agreement against a broker when the description is incomplete or ambiguous. 

This is a consumer-protection based rule.  In other words, Brokers are the professionals, they know more about the business than most buyers or sellers and must be held to a higher standard.  The reality behind most listing agreements further supports this policy.  If you have ever seen them, they are forms with fixed terms that have been drafted and promulgated by professional realtor associations.  This is not to disparage these forms, which for the most part are clear and fair and provide terms to cover most disputes.  But it is to say that your average broker will know more about the terms, limits, and conditions of such an agreement than the average seller who is looking at this form for the first time in her life.

The Broker’s best argument—pay me for the actual work I did—is neutralized by this rule, and it forces Broker to argue an awkward position before the SCOV.  Broker has to argue that its work was outside the Real Estate agreement and thus should not be governed by the Real Estate Commission Rules.  The SCOV makes mincemeat of this position, noting that it is unsupported in every other jurisdiction that has considered this issue.  While the SCOV stops short of saying that Broker is governed by the Real Estate Commission Rules for everything it does, it does appear to adopt the position that where the sale of real estate is a significant portion of the deal or contract, the Commission’s Rules will apply. 

This leads the SCOV to conclude that the Defendants do not owe Broker for the outstanding commission fees, and it reverses the trial court.  The SCOV refuses to consider Defendants’ additional breach of contract arguments as they are now unnecessary.  The SCOV also stops short of ruling that the Defendants are the prevailing party and remands the issue back to the trial court.  The language here indicates that there is some doubt about the Defendants’ status of prevailing party.  While the SCOV makes no ruling, it does seem to imply that the whole thing may just be a draw.  Ironically, part of this comes from the fact that neither the SCOV nor the trial court ever took up Defendants’ contract arguments, which were mooted by Defendants’ early victory under the Real Estate Commission Rules.  We will let the trial court logicians puzzle that one out.

Finally, the SCOV dismisses Defendants’ consumer fraud claims.  The problem, which may inform the SCOV’s earlier attorney-fee skepticism, comes from the fact that many of Defendants’ claims appear to be nitpicking issues that neither caused Defendants harm nor objectively breached a consumer fraud standard.  The lesson here is that Defendants may have over-pleaded their counterclaim and raised more issues than the facts would support.  The result is that Defendants’ attorney’s fees may be in danger, which suggests a lesson to attorneys to be judicious in how they chose to escalate. 

End score: no further money shall change hands between the parties, and everyone goes back to trial court to see if one or both sides will be financing their attorney’s children’s upcoming summer camp fees.  

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