Daily Development for Thursday, April 16, 2003
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
dirt@umkc.edu

BROKERS; LISTING AGREEMENTS; COMMISSION:   Although
a series of letters and other documents, taken together, may satisfy the
Statute of Frauds applicable to brokerage agreements, the requirement
that the writing set forth either a dollar amount or the rate of commission
cannot be satisfied by specifying or implying a "reasonable" commission.

C&J Colonial Realty, Inc. v. Poughkeepsie Savings Bank,355 N.J.
Super. 444, 810 A.2d 1086 (App. Div. 2002).

This lengthy case reads like a bad screenplay - "The Broker Who
Wouldn't Go Away."  I understand that there's an HBO special. . .

A bank, through its subsidiary, became the half-owner (with RTC) of an
abandoned and partially completed condominium development as a
result of foreclosure proceedings.  A real estate broker became aware of
the property and called the bank's contact person.  The bank told the
broker that the bank did not yet own the property free and clear and thus
could not convey title.  The broker also was advised that the bank was
not going to list the property with a broker "because the property had
already elicited substantial unsolicited interest from developers and the
Bank had been successful in selling properties directly."

The broker told the bank's officer "that he wanted to introduce the
property to some people he worked with on an ongoing basis ... [and the
bank's officer] said that would be fine but that the bank would 'not take a
dime less than three million dollars.'" The broker also understood that
there would be other financial requirements for any offer.  The bank's
officer invited the broker "to send him a letter with his business card
requesting a sales information package for the property," and when asked
if the broker could visit the site, he said, "sure, be my guest."

The bank never sent a package about the property.  Nonetheless, the
broker wrote to the bank saying, "I may be a principal in a group to buy
the project but failing that I will offer it out at 3 million plus my
commission to preserve the bank's net figures desired."  There was no
response to this letter.
The broker visited the site with his builders, but they were not interested
or able to meet the bank's cash requirements.  The broker then contacted
various developers and showed the property only to those people who
signed a "notice of showing" which stated that the broker "had the seller's
authorization to offer the property and that the seller would pay the
commission."  None of those notices were ever sent to the bank.
Eventually, after unsuccessful attempts to reach the bank's officer, the
broker wrote to the bank's president listing a number of people who had
been shown the property by the broker.  In each case, the broker had
quoted a purchase price, which after a ten percent commission would still
net the bank more than the minimum amount the bank had been seeking.

The bank's president responded by pointing out that the original bank
officer was "responsible for managing and marketing" the asset and
pointing out that the broker had never been given authorization "either
verbally or in writing to show this property to a prospective purchaser."
Even before the broker received that letter, he arranged to show the
property to two individuals who had responded to the broker's newspaper
advertisements and signed a "notice of showing" indicating that they had
visited the bank's property.  The notice included an acknowledgment by
the two individuals that the broker had informed them that the broker
would claim a ten percent commission on the sale of the property and
that the broker would be specified as the procuring broker.  One of these
two individuals then met with the bank's original officer.

Another real estate developer became aware of the availability of the
property through a chain of contacts in the form of social contacts and
the like that began with one of the two individuals that the broker had
introduced to the property.  Eventually, it appeared that this developer
would be purchasing the property.  At that time, the bank's attorney wrote
to the real estate broker alleging that the broker, "without authority [had]
represented to certain potential purchasers that [it had] authority to show
this property."  It went on to say, "[y]ou have no listing agreement.
Without such a listing, the owners are not obligated to pay you
commission, no matter how many telephone calls or letters your [sic]
may sent [sic] to my client alleging that such a listing exists."

The broker responded that it wanted either an exclusive listing or some
other form of authorization to offer the property for sale on an open-
listing basis.  The broker's letter reiterated that based upon its earliest
discussions with the bank's original officer, the broker believed that it
had authorization to offer the property to several potential buyers.  The
bank instructed its attorney to send the broker a "get-out-of-our-hair
letter" saying, among other things, that the broker had no authority to
represent the bank.  Eventually, the property was sold and the buying
entity did not include any of the individuals that the broker had
introduced to the property.  It did include people that learned of the
property through those individuals.  The sales contract included a
provision whereby the buyer agreed to indemnify the bank for any
commission claimed by the broker.  A separate agreement  between the
buyer and one of the two individuals that the broker had introduced to the
property was executed, whereby the buyer paid that individual on a
monthly basis.  That agreement included a provision whereby the
individual agreed to indemnify the buyer against brokerage commissions
from the original broker.

The broker sued for its commission, and after a lengthy bench trial, the
lower court found in favor of the broker (yes, the broker!!) and awarded a
commission based on a five percent rate.  The bank and the buyer were
held to be jointly liable.  Each appealed and the broker appealed the
application of only a five percent commission.

As to the rate of commission, the bank had testified that the typical
commission paid by the bank was two percent or two and one-half
percent and the largest was four percent, which was warranted where
there was a low purchase price.  The bank also testified that it had used a
broker on only two or three of the ten or twelve sales it had accomplished
in the prior two years.  One of the buyers explained that he was
accustomed to paying on a sliding scale beginning with a five percent
commission and running down to about a two percent commission.  The
broker argued that he first told the bank that his commission "could be
five or ten" percent and that the bank responded "I don't care what you
charge."  The broker asserted that the commission on "raw land" was
typically ten percent.  The Appellate Division found the legal basis for
the lower court's commission decision to be less than clear.  It also found
the factual basis for the lower court's conclusions to be "somewhat
contradictory."

The bank argued that the broker did not have an enforceable commission
agreement because it failed to satisfy any element of the Statute of
Frauds.  The lower court had found that the Statute of Frauds was "fully
satisfied by the series of correspondence" because "[w]e don't need a
single writing" and  even if there was a statutory failure, there was "no
question" that the broker was the efficient procuring cause of the
purchase.

The Appellate Division carefully reviewed all of the correspondence and
found that there was never a clear and "uncontroverted" agreement
regarding the amount of the commission.  Further, despite the lower
court's finding that the authorization was based on the "series of
correspondence," the lower court never discussed the ten percent
commission figure, "finding only that the Bank had agreed to pay a
'reasonable' commission."

The Statute of Frauds in force at the time in question required that the
writing state "either the amount or rate of commission."  In fact, "[t]o
hold that the specific statutory direction is satisfied   by an implied
agreement to pay a 'reasonable' commission renders that portion of the
statute meaningless and would be a violation of the basis statutory
construction."  Further, "[a]n implied agreement to pay a 'reasonable'
commission is fraught with the risk of misunderstanding,
misinterpretation and possible litigation, the avoidance of which is the
statute's purpose."

Consequently, the Court concluded that there was "no factual or legal
basis in support of the [lower court's] conclusion that [the critical
broker's] letter satisfied the written authorization requirement of the
statute of frauds entitling [the broker] to a 'reasonable' commission."  The
Court then analyzed all of the other correspondence and concluded that
the lower court's finding that the "parties' writing created an enforceable
agreement under the Statute of Frauds [was] unsupported by the record
and the law, and [that the lower court's] decision that [the broker] was
entitled to a five percent commission must be reversed."

Comment 1: Of course, we don't necessarily know "the truth and nothing
but the truth" about this deal.  The court's recitation of the facts,
however, is the basis for the opinion, and what we should assume to be
the controlling narrative.

The best case for the broker is that it notified the seller that it would
show the property and would expect a commission based upon a net
listing.  The seller never responded positively in writing  to this proposal,
but later acknowledged some responsibility with regard to several
individuals to whom the broker had introduced the property.

In the editor's view, there is a difference between an open listing, to
which the client apparently never agreed, and an acknowledgment that in
one instance the bank would be willing to negotiate a commission
respecting a certain prospect.  In the end, that prospect did not become a
principal of the ownership group.  Because that prospect had local
connections, and there was some bad blood, the ownership group elected
to make some payments to the prospect to "keep him happy."  (In return,
he agreed to indemnify the group for any exposure on commission to the
broker.)

As a consequence of the above in the editor's mind there is no reason to
talk about the vagueness as to the commission amount.  There simply
was no listing.

Comment 2: The case is a good object lesson to those who lack
experience dealing with commercial brokers.  Although most are
reputable and straightforward professionals, some are in the business of
ensnaring clients in a web of half promises and uncertain representations,
leading to a colorable claim that can be used to extort a payoff.  Since we
may not have all the facts, the editor is not saying that the broker here
actually fit that description, but the court's narrative describes a set of
events that illustrates the problem.  The bottom line - authorize no
behavior except what is set forth in a clear and unambiguous listing
agreement.

Readers are encouraged to respond to or criticize this posting.

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