Daily Development for
Tuesday, January 13, 1998
by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
BROKERS; FINDERS: Where an unlicensed party that contracts to receive a fee for "finding" properties for a buyer provides brokerage services as to certain of these properties, it is barred from receiving a fee as to those properties, but not as to other properties that are submitted under the same contract.
Lindenstadt v. Staff Builders, Inc. 64 Cal. Rptr. 2d 484 (Cal. App. 1997)
With regard to some of the properties, the "finder" provided certain financial and other information and "facilitated meetings" in addition to submitting simply the location and name of the owner. The fee claim originally went to arbitration. In the arbitration, the finder, apparently unaware of the consequences of his testimony, apparently testified quite aggressively as to the degree of his involvement in some of the deals. The arbitrator credited the buyer's witnesses, who indicated that in fact he had played no role at all beyond introducing the property. The arbitrator then found for the finder as to the properties as to which he had played no active role beyond introduction, and denied a fee as to the properties as to which he had played a more active part in negotiations.
On appeal to the trial court, the buyer, now "wised up" from the determination of the arbitrator, but stung by her award, argued that the trial court ought to consider de novo the issue of illegality of the contract, and argued further that if the finder had acted as a broker as to some of the properties, it ought to be disqualified from receiving a fee as to any of them, since one contract controlled the whole claim. The trial court refused to review the question de novo and affirmed the arbitrator.
On appeal to the Court of Appeals, held: Reversed. The question of illegality of contract is always one for a court, not an arbitrator. The court noted that it did not have before it the question of whether the buyer might have waived its claim for judicial determination of the illegality issue by first proceeding through the arbitration before raising the issue.
In the remand to the trial court for the de novo determination, the court indicated that the trial court could have a full evidentiary hearing, including evidence that the arbitrator did not see, but that it ought also to "take into account" the arbitrator's resolution of the facts.
Finally, as to the issue of treating the contract as a whole unit, with the fee standing or falling based upon whether the finder had acted as a broker with regard to any property, the court held that instead each property deal stood on its own merits. The court held that the purpose of the licensing law was to permit freedom of contract while insuring that critical services be provided only by regulated and licensed professionals. Where a party does not provide the cricial service of "brokering," but only introduces the buyer to the property, freedom of contract demands that the fee contract be enforced.
Comment 1: If this case actually does go to trial, each sides will have a rich trove of evidence with which to impeach the other side's witnesses, as each side presented evidence supportive of a result favoring the other in the arbitration proceeding.
Comment 2: The court does not go into much detail concerning the degree of involvement that constitutes "brokering." Thus we don't know from this case whether the mere provision of, say, detailed financial information from seller to buyer would constitute prohibited conduct for an unlicensed party. Should there be a difference between merely passing on an offering brochure, no matter how detailed, and generating information that goes beyond an existing brochure, even if the information ultimately still is supplied by the seller? In any event, should the mere provision of initial information suffice, where the finder does not otherwise participate in the negotiations? In the view of the editor, the answers to these questions would be that providing information ought to be regarded as brokering whenever the finder exercises its own judgment in collecting it, but that merely passing on a preexisting or independently prepared brochure, no matter how detailed, ought to be regarded as merely "finding."
Comment 3: Many real estate lawyers see an opportunity for profit in functioning as finders. Often they operate under the belief that, as lawyers, they are exempt from brokerage licensing laws. In fact, authority in a number of states indicates that the lawyers' exemption in the brokerage laws is intended to protect lawyers who function *as lawyers* in a deal, and not lawyers whose fee is based upon merely introducing the parties and providing other information. If, for example, the fee is payable whether or not the lawyer provides extensive legal services, then arguably the fee is not paid for legal services. If the lawyer then steps modestly beyond the limited function or a finder, facilitating one or two meetings, but does not actually perform extensive legal services, and later claims a large fee when the deal closes, that lawyer may run afoul of broker licensing laws. See the editor's article (somewhat dated: "Thinking of Being a Broker/Lawyer? Think Again." This article is available as a "contributed article" on the DIRT Website: http://www.umkc.edu/dirt/
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