Monday, May 20, 2013

Brokerage Commissions [redux]

Dean A. Smith Sales, Inc. (out of Pflugerville – what is the right way to pronounce Pflugerville anyway) entered into a listing agreement with Metal Systems, Inc. Dean, as broker, was engaged in 2008 to sell Metal’s business for $4.5 million, which amount included real estate owned by Metal.

Two years later Dean sued Metal for $160k in damages. The trial court ruled for Metal. Dean appealed.

The Listing Agreement stated that Dean was to receive a 7% commission if real estate was included. Evidently, although not specifically stated, when Metal learned that Dean did not have a TREC issued real estate brokerage license Metal refused to pay.

One can only assume that real estate was included in the deal. And the license issue was the cause of the non-payment.

Dean first argued that the transaction did not involve real estate, so no TREC license was required. However, the listing agreement stated otherwise.

Argument Number Two was that there was an oral amendment to the written listing agreement, removing real estate from it. Dean Smith submitted an affidavit stating that:

“I never had any expectation of a commission for the sale of real estate . . . The sale . . . was expected to be a stock transfer . . . The sales price listed in the contract was based on the value of the business without any real estate.”

The Court of Appeals used Dean’s own Listing Agreement against him to refute this contention.

The Court then evaluated the Texas Real Estate License Act regarding commission claims. Section 1101.806(b) of the TRELA states that a party may not collect a real estate commission unless the party proves it was a license holder at the time the act [for which a commission became payable] was commenced.

And so the Court of Appeals concluded: (a) a listing agreement was signed; (b) the listing agreement provided for the disposition of real estate (and fairly, other assets too); (c) real estate services were provided by Dean as defined by the TRELA; and (d) Dean did not hold a brokerage license issued by TREC.

Do you recall the previous article about quantum meruit? Well, of great interest to me anyway, the Court teased us with that as Argument Number Three, but then dismissed it on a technicality.

So, Metal Systems, Inc. wins again, and Dean A. Smith Sales, Inc. loses again.

See Dean A. Smith Sales, Inc. v. Metal Systems, Inc.; 05-11-01449-CV; Texas Court of Appeals 5th District, Dallas; March 11, 2013.

Lessons learned:

1.      If you want to get paid a commission for a deal involving real estate, you’d better have a TREC brokerage license. And a written commission agreement too. Which describes the property with specificity.

2.      Business brokers not holding TREC licenses might be wise to engage TREC brokers for the real estate component of the deal.

Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.

Thursday, May 2, 2013

Quantum Meruit [To know it is to love it]

Quantum meruit is of course a Latin phrase. It means “what one has earned.” In the context of contract law, it used something like “reasonable value of services."

Northeast Independent School District (San Antonio) hired STR Constructors to renovate a middle school. In turn, STR engaged Newman Tile as a subcontractor, to install about 3500 square feet of tile in the kitchen.

Problems arose between STR and Newman right away. STR demanded that Newman use epoxy grout to install the quarry tile. Newman insisted that its bid excluded epoxy grout. Under protest and claiming that epoxy grout and the added labor necessary to use it were unnecessary, Newman complied with STR’s instructions.

And then Newman submitted a change order seeking recovery of its added costs.

And then STR refused to pay it.

And then Newman sued STR for quantum meruit and breach of contract. Newman won in trial court; STR appealed.

We don’t get many cases involving quantum meruit, probably because appellate courts have told us for years that the remedy of being paid “the value of your services” is inapplicable when the parties have signed a contract. As STR and Newman did in this case.

Regardless, Newman claimed that it was entitled to quantum meruit damages – the value of its services – because STR and ultimately Northeast ISD accepted and retained the benefits of Newman’s work.

The evidence submitted by Newman was that it provided labor and materials for STR’s benefit, including additional mortar bed on the kitchen floor, blue bullnose tile as a finishing trim on a tile wall, epoxy grout, restocking fees, and weekend and overtime work. Newman submitted five Change Orders and Payment Requests aggregating approximately $25,000 for such labor and materials.

The Appeals Court determined that, if the trial court judgment is not upheld, STR would be unjustly enriched while Newman would be unfairly penalized. The Court then reviewed the [relatively] small claims submitted by Newman and compared to the overall contract price of $5.2 million paid by Northeast ISD.

And just to seal the deal, the Court concluded with “STR now seeks to escape liability on a contract it drafted by claiming that its behavior should be ignored because a strict construction of the contract imposes no liability on it.” In English I read that to mean that “STR had an airtight contract which Newman breached, but we are not going to let STR beat up a small subcontractor.”

The Appeals Court then ends with “STR, by [its] course of conduct, has violated the reasonable expectations and values that permeate business transactions.” Yes that is exactly what it says on the 8th page. Serious.

Newman wins, again. STR loses, again. And good news for us lawyers – we have a new case on quantum meruit!

See STR Constructors Ltd v. Newman Tile, Inc.; 08-10-00210-CV; Texas Court of Appeals 8th District, El Paso; February 20, 2013.

Lessons learned:

1.      The theory of “quantum meruit” still lives in Texas.

2.      Although not part of this case, you should know that TREC laws and rules prohibit real estate commission claims based on quantum meruit. In Texas you need a written commission agreement to be lawfully entitled to receive payment.

3.      Little guys confronting “The Machine” don’t always get beat up in Court. Thankfully.

Reprinted with the permission of North Texas Commercial Association of REALTORS®, Inc.