[BROKERDIRT] DD 10/20/06 Does presence of unlicensed broker so poison a contract that the arbitration clause is void?

Daily Development for Friday, October 20, 2006
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

ALTERNATIVE DISPUTE RESOLUTION; ARBITRATION; AGREEMENTS TO ARBITRATE:  An arbitration clause in a real estate sales agreement compels arbitration of a contract dispute despite the fact that the contract was negotiated by an unlicensed agent of the buyers.  

Shotkoski v. Denver Investment Group, Inc., 2006 WL 408313 (Colo. App.)

An incorporated group of investors had an agreement whereby they compensated one of their principles as a representative to negotiate contracts to purchase real estate.  This representative was neither an attorney nor a broker.  The group of investors and their representative became defendants in this case after purchasing a home in distress from plaintiffs (a married couple).  The parties closed under the contract, and defendants acquired title to the home. 

After the closing and transfer of title, but before final payment, the sellers divorced, and one of them filed a lis pendens.  The defendants argued that this created a cloud on title, making the home impossible to sell, and withheld final payment.  The sellers sought to rescind the agreement on the ground that it was wholly unenforceable because of the fact that it had been negotiated by an unlicensed representative of the buyers.

The buyers, relying on an arbitration clause in the sale agreement, made a motion to compel arbitration.   Sellers claimed that the customer agreement was illegal and unenforceable, including the arbitration clause.  The trial court agreed.

The appellate court reversed.  It  found that the validity of the agreement was separate from the question of defendants’ failure to obtain a license.  It followed authority in Maine and Florida, reasoning that the fact that an agreement was negotiated by an unlicensed party might be an undisclosed defect in title for subsequent purchases of the property.

The court acknowledged that sellers might nevertheless have the right to rescind the contract as a potential remedy for buyers’ breach of contract, but concluded that the issue of whether buyers were in breach was one that first had to be resolved through the arbitration process. 

The court also reversed the trial court’s secondary finding that the negotiation of the sale contract was an unfair consumer practice under Colorado statute and could be declared void on that basis.  It indicated that the statute does not apply to real estate purchases, but rather to the performance of services and the sale of real property.  It did not make clear what the difference is between a “real estate purchase” and a “sale of property.”  Presumably Colorado lawyers will delve into the statute to find the answer to this one.  The court went on to find that, in any event, questions of whether there was a deceptive trade practice were themselves arbitrable. 

Comment 1: The editor has no quarrel with the result on these facts, but the court’s reasoning, based upon precedent elsewhere, strikes the editor as sour note.  Normally, any equities that might render a contract unenforceable will not affect the validity of title passing under that contract in the hands of a third party BFP unless the defect is sufficient to render the delivery of the deed itself void, rather than voidable.  There is not indication here that any defect with regard to the contract was sufficient to render the completed deed delivery totally void. 

Consequently, the reasoning that the fact that the contract could not be avoided because the consequences might be troublesome for third party BFP’s doesn’t really make sense.  There were no such BFP’s here.  The buyers, one assumes, knew or should have known that their own representative was not licensed, and did not deserve protection. 

Comment 2:  If deceptive practices lead one to execute a contract that one might not otherwise have executed, then perhaps such victims also deserve protection from an arbitration clause contained in such a contract.  The editor doesn’t conclude that one should assume that the presence of an unlicensed agent necessarily renders a contract so fraudulent as to disable the arbitration clause, but he certainly can imagine that circumstances might exist that would be sufficient for such disability, and he’d hate to see this case read to prevent a court from denying arbitration in such cases.  Even though many states now have policies favoring arbitration, this does not mean that parties should have it stuffed down their throats as a consequence of fraud or sharp dealing.

Readers are encouraged to respond to or criticize this posting.

Items reported on DIRT and in the ABA publications related to it  are for general information purposes only and should not be relied upon in the course of representation or in the forming of decisions in legal matters.  The same is true of all commentary provided by contributors to the DIRT list.  Accuracy of data provided and opinions expressed  by the DIRT editor the sole responsibility of the DIRT editor and are in no sense the publication of the ABA.


Parties posting messages to DIRT are posting to a
source that is readily accessible by members of
the general public, and should take that fact
into account in evaluating confidentiality
issues.

ABOUT DIRT:

DIRT is an internet discussion group for serious
real estate professionals. Message volume varies,
but commonly runs 5 - 15 messages per work day.

Daily Developments are posted every work day.  To
subscribe, send the message

subscribe Dirt [your name]

to

listserv@listserv.umkc.edu

To cancel your subscription, send the message
signoff DIRT to the address:

listserv@listserv.umkc.edu

for information on other commands, send the message
Help to the listserv address.

DIRT has an alternate, more extensive coverage that includes not only
commercial and general real estate matters but also focuses upon residential real estate matters.  Because real estate brokers generally find this service more valuable, it is named “BrokerDIRT.”  But residential specialist attorneys, title insurers, lenders and others interested in the residential market will want to subscribe to this alternative list.  If you subscribe to BrokerDIRT, it is not necessary also to subscribe to DIRT, as BrokerDIRT carries all DIRT traffic in addition to the residential discussions.

To subscribe to BrokerDIRT, send the message

subscribe BrokerDIRT [your name]

to

listserv@listserv.umkc.edu

To cancel your subscription to BrokerDIRT, send the message
signoff BrokerDIRT to the address:

listserv@listserv.umkc.edu

DIRT is a service of the American Bar Association
Section on Real Property, Probate & Trust Law and
the University of Missouri, Kansas City, School
of Law.  Daily Developments are copyrighted by
Patrick A. Randolph, Jr., Professor of Law, UMKC
School of Law, but Professor Randolph grants
permission for copying or distribution of Daily
Developments for educational purposes, including
professional continuing education, provided that
no charge is imposed for such distribution and
that appropriate credit is given to Professor
Randolph, DIRT, and its sponsors.

DIRT has a WebPage at:
https://e2k.exchange.umkc.edu/exchweb/bin/redir.asp?URL=http://www.umkc.edu/dirt/

Members of the ABA Section on Real Property, Probate
and Trust Law or of the National Association of Realtors can subscribe to a quarterly hardcopy report that includes all DIRT Daily Developments, many other cases, and periodic reviews of real estate oriented literature and state legislation by contacting Antonette Smith at (312) 988 5260 or asmith4@staff.abanet.org






-----

To be removed from this mailing list, please go to
<https://e2k.exchange.umkc.edu/exchweb/bin/redir.asp?URL=http://listserv.umkc.edu/listserv/wa.exe?SUBED1=BROKERDIRT%26A=1>
or send an email message to the address listserv@listserv.umkc.edu,
with the text SIGNOFF BROKERDIRT in the body of the message. Problems
or questions should be directed to manager@listserv.umkc.edu.

randolphp@UMKC.EDU