Daily Development for Tuesday, September 26, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

BROKERS; BROKERS' LIEN; ESCROWS: When an undersecured, mortgaged property is sold and the mortgagee agrees to execute a deed in release subject to application of the sale proceeds to the mortgage, that mortgage does not lose its priority status over a real estate broker's lien.

Dalton Investments, Inc. v. Nooney Company 10 S.W.3d 590 (Mo. Ct. App. 2000)

This case, only the second interpreting the relatively new real estate broker's lien act in Missouri, upheld the right of a mortgage lender to receive sale proceeds over the claims of a Missouri real estate broker, when such proceeds were wholly insufficient to repay the mortgage debt. The editor believes that there are quite similar statutes existing or proposed in other states, so this case is likely to be valuable beyond Missouri.

The mortgagor gave bank a $4.6 million dollar mortgage against a shopping center in 1989 to secure a guarantee of the purchase price. An additional later secured guarantee increased the principal balance by $350,000.00. The mortgagor sold the property in 1997 for $1.2 million. Out of this relatively small sum, an senior judgment creditor took $350,000, leaving approximately $890,000.00 available to the mortgagee. The mortgage balance exceeded $4 million at the time, but the bank agreed to release its lien against this property to permit the sale to proceed. (Presumably the bank had other sources of repayment.)

The brokers made a claim for a lien for their commission prior to closing. Under Missouri's Commercial Real Estate Brokers' Lien Act of 1994 ("CREBLA"), when such a claim is made, the parties may establish an escrow at least in the amount of the broker's lien and, if they do so, the broker is required to release its lien from the property and look only to the escrow.

In this case, the parties set up an escrow of the $890,000 proceeds, but the escrow agreement apparently provided that the proceeds would be paid to the bank in exchange for its release. Shortly thereafter, two brokers filed suit asserting a claim to $90,000.00 of the available proceeds. The trial court recognized the priority of the broker's lien, and the bank appealed.

Held: Reversed. The court of appeals concluded that the escrow in favor of the bank should be upheld.

The court reasoned that CREBLA does provide a lien on commercial real estate in favor of brokers in the amount of the agreedupon broker compensation, yet provides further that prior recorded liens or mortgages have priority over a real estate broker's lien.. The brokers in this case claimed that while the mortgagee did at one time have such a priority lien, it was extinguished at the time of the closing by the mortgagee's execution of the deed of release. The court of appeals reviewed the language and legislative intent of CREBLA to determine that the broker's position would lead to the absurd result that a bank would never agree to release any undersecured mortgage and lose priority to the selling broker's lien; therefore, such properties could never be sold in the state. It was held that the mortgagee, as a matter of law, retained its prior mortgage's priority over the broker's lien filed in this transaction.

Reporter's Note: Readers sympathetic to the real estate brokers' thwarted interests in this case, should note that the alleged "brokers" appeared to have an identify of interest with the subject mortgagor. After the mortgagee lost millions of dollars on this property, the broker/mortgagors then filed this action to obtain a cut of the proceeds that did exist after selling it.

Editor's Comment: Respectfully, the editor disagrees with the court. If this was an escrow designed to facilitate the release of the broker's lien under RMS 429.627, then the proceeds in that escrow belong to the brokers if they are able to prove their lien.

The purpose of escrows established under this statute is to permit a property to be sold free and clear of the lien established in favor of the brokers by statute. Otherwise, the brokers should be able to assert their lien against the property itself. It should not matter that a senior lienholder is willing to let the property be sold for less than the amount of its claim; unless the senior lienholder forecloses, the holders of the brokers lien have an independent right to assert their claim against the property, and thus have the power to block the sale.

The statute says that the brokers cannot block the sale by asserting a lien against the property if an escrow is established sufficient to pay their lien. But an escrow that is already committed to pay the senior mortgagee does not meet that requirement. Although the amount in the escrow is enough to pay the brokers, the funds are committed elsewhere. The escrow does not fulfill the statutory purpose and the brokers should still have their lien or a claim on the proceeds.

Whether the brokers have a claim on the proceeds, rather than a lien on the property, depends upon what the parties agreed. But the court does everyone a disservice by concluding that an escrow committed to repayment of a senior mortgagee satisfies RMS 429.627. It doesn't.

The court states that to conclude that the bank would be willing to set up an escrow and release its lien when the broker can get a priority claim to that escrow is an absurd result. Not so absurd here. The bank already was willing to permit the property to be sold while $3 million remained outstanding on the secured debt. Surely other parties who facilitated the sale got paid before the bank got the net proceeds. Why not permit the brokers who facilitated that sale to be paid as well?

Isn't it equally absurd to think that the legislature would compel a broker to surrender its lien against the property in exchange for the establishment of an escrow in which the broker has not meaningful interest?

The parties certainly should be permitted to set up a proceeds escrow in order to facilitate the release of a senior mortgage lien, but such an escrow should not be counted as a "broker's lien release" escrow under the Missouri statute unless there is money in it sufficient to *really* satisfy the broker's lien. That's what the statute says.

It may be that everyone was totally confused about the statute from the start, and that the brokers agreed to this escrow and should be bound by some contract or estoppel argument. But if the escrow was established simply to cut short the broker's claims against the property under the statute, and the brokers did not stipulate that it cut off their lien, it should not have done so.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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