WEARING TOO MANY HATS CAUSES REAL ESTATE BROKER TO LOSE A SIGNIFICANT COMMISSION

• Posted on: Jan 29 2018

In P. Zaccaro, Co., Inc., et al. v. DHA Capital, LLC, et al. (1st Dep’t January 25, 2018), the First Department affirmed the dismissal of plaintiffs’ action seeking a significant brokerage commission on the sale of real property in lower Manhattan (the “Premises”) for in excess of $50,000,000.00 because the plaintiff brokers failed to disclose that they represented both the buyer and the seller.

According to decisions in the underlying action, the facts as alleged in the complaint are as follows. Plaintiffs are licensed real estate brokers. Defendant Sentry Operating Corp. (“Sentry”) was the owner of the Premises. In 2014, the principal of plaintiff P. Zaccaro, Co., Inc. (“Zaccaro”), met with Sentry’s principal to discuss the sale of the Premises. The meeting resulted in a brokerage agreement pursuant to which Zaccaro was to procure a “ready, willing and able” purchaser for the Premises. Thereafter, Zaccaro contacted plaintiff New Golden Age Realty, Inc. (“Golden”), a Century 21 franchisee, to assist it in finding a buyer. David Shargani (“Shargani”) is a licensed broker with Century 21. Zaccaro and Golden determined that defendant DHA Capital LLC (“DHA”) would be a good candidate to purchase the Premises, but DHA had already engaged defendant Nest Seekers, LLC (“Nest”). Believing that Nest Seekers did not have a real purchaser, Sentry refused to deal with it. Thereafter, Nest Seekers contacted Shargani and advised of DHA’s interest in the Premises. Shargani advised Nest Seekers of his connection with the Premises through Zaccaro.

Thereafter, Nest advised Zaccaro and Golden that DHA would pay a 3% brokers commission for the sale. Nest, Golden and Zaccaro entered into an agreement to equally split the 3% commission amongst themselves. Representatives of Nest and DHA and Shargani discussed the terms of the transaction and, thereafter, Shargani made clear to DHA that Nest, Zaccaro and Golden would split a 3% commission. DHA’s representative verbally agreed to the commission split.

The Premises were sold by Sentry to DHA due to the efforts of Golden and Zaccaro. As a result of their oral agreement with the representative of DHA, Golden and Zaccaro claimed they were each entitled to a commission equal to 1% of the sale price of the Premises.

DHA moved (motion Sequence 3) to dismiss the Complaint pursuant to CPLR §3211(a)(7) for failure to state a claim arguing that its failure to consent to Zaccaro acting as a dual agent on behalf of the buyer and the seller in the transaction “warrants forfeiture of the right to collect any commission and dismissal of the amended complaint.” That motion was granted, and the complaint was dismissed as against DHA. In that regard, Supreme Court held that:

Real estate brokers have a fiduciary relationship with their client and an affirmative duty not to act for a party with adverse interests unless consent is obtained from the principal after being provided with full knowledge of the facts. A broker, cannot act as agent for both seller and purchaser of the property. A real estate broker forfeits the right to a commission regardless of the damages incurred if the fiduciary duty is breached. (Internal quotation marks and citations omitted.)

The underlying action was not dismissed as to the remaining defendants, and, therefore, continued to proceed, as against them.

Thereafter, plaintiffs moved (motion sequence 4) for a default judgment and discovery related relief against Sentry for its failure to answer the amended complaint and to respond to discovery demands. Sentry cross-moved for, inter alia, an order dismissing the complaint as against them for the same reasons that resulted in the dismissal of DHA. By Order dated April 4, 2017 (the “April Order”), Supreme Court denied plaintiffs’ motion in its entirety and granted Sentry’s motion to dismiss the amended complaint as against them. Relying on the “law of the case” doctrine, Supreme Court held that because plaintiffs acted in a dual agency capacity without notice to Sentry, this time, plaintiffs’ forfeited their right to a commission from it. Supreme Court rejected Plaintiffs’ argument that “they simply introduced DHA…to Sentry, without being called upon to do anything more, and thus acted as a traditional finder and not a fiduciary.” In so holding, Supreme Court relied on the allegations in the amended complaint that plaintiffs were acting as DHA’s broker as well as Sentry’s broker.

Plaintiffs appealed to the First Department. In unanimously affirming Supreme Court’s April Order, with costs, the First Department found that plaintiffs “engaged in an impermissible dual agency without full disclosure.” (Citation omitted.) Plaintiffs’ argument that it was merely a finder, as opposed to a broker, was also rejected, by the First Department, which held:

A finder has no obligation to negotiate the real estate transaction in order to obtain its fee. Here, the amended complaint indicates that plaintiffs were obligated to negotiate the sale of the premises. (Citations omitted.)

As a result of the dismissal of the complaint as against DHA and Sentry, the plaintiffs lost millions of dollars in commissions.

TAKEAWAY

Real estate brokers should be mindful of their role in the transactions in which they participate. If called upon to act in numerous capacities for different parties, full disclosure to all parties should be made and express written consent should be obtained.

Tagged with: Brokerage Commissions, Business Disputes, Commercial Litigation, Real Estate Litigation