Homes-R-Us of NY, Inc. v Cunningham
Annotate this CaseDecided on October 25, 2007
Civil Court of the City of New York, Richmond County
Homes-R-Us of NY, Inc. and Amerihomes Realty of NY, Inc., Plaintiff,
against
Colleen P. Cunningham, Defendant.
008615/05
Counsel for Plaintiff:
Eric B. Kaviar, Esq.
712 Third Ave.
Brooklyn, NY 11232
718-965-6146
Counsel for Defendant:
Jeffrey F. B. Borrell, Esq.
1500 Hylan Blvd.
Staten Island, NY 10305
718-667-8600
Philip S. Straniere, J.
Plaintiffs, Homes-R-Us of NY, Inc., and Amerihomes Realty of NY, Inc.,
commenced this action against the defendant alleging that the defendant failed to pay real estate
commissions earned by the plaintiffs. A trial was held on July 23, 2007. Both sides were
represented by counsel.
Plaintiffs are real estate brokers licensed by the Department of State pursuant to Real Property Law Article 12A and are entitled to bring an action to recover for commissions (Real Property Law§442-d). Defendant Cunningham, along with Richard Calabro, was the owner of the premises known as 310-312 Hillside Avenue, Staten Island, New York. Plaintiffs allege that the defendants listed the property with Amerihomes Realty. On or about May 5, 2004 an "offer to purchase" was executed by Natela Dgavakhishvili on a form from Amerihomes. Dgavakhishvili sought to purchase the premises from the defendants for a sale price of $485,000.00. The document provided for a contract to be signed on or about May 17, 2004 with the closing of title to take place on or about August 15, 2004. The offer to purchase is often referred to as a "binder" in the residential real estate industry. The binder was signed on behalf of defendant Cunningham by a third party with an unintelligible signature followed by the notation "as attorney in fact." Calabro did not sign the binder. Although this and other documents were signed by this "attorney in fact" at no time has a power of attorney been produced. The binder also listed plaintiff Homes-R-Us and Amerihomes as the "brokers who brought about this transaction." The binder provided for a $10,000.00 deposit and $475,000.00 mortgage. The space for disclosure of the amount or the brokers' commission is blank on the offer to purchase.
By a contract dated only "May 2004" Colleen Cunningham and Richard Calabro, agreed to convey the 310-312 Hillside Avenue to Natela Dgavakhishvili, for the sale price of [*2]$535,000.00. The contract called for a $10,000.00 deposit with $525,000.00 due at closing. Schedule D of the contract designated both plaintiffs as the broker entitled to a commission pursuant to paragraph 14.01. The contract is signed by Cunningham and Calabro and the purchaser. It has a closing date of August 15, 2004. The mortgage contingency clause anticipated the purchaser obtaining a $481,500.00 first mortgage. The time frame in which the purchaser had to obtain the commitment (Commitment Date) is left blank. Attached to the contract is a "Rider to Contract" dated August 26, 2004, eleven days after the original closing date, stating "the purchase price is $499,000.00, sellers agree to a 6% ($29,940.00) credit for closing costs at the closing of title." The rider is signed by the purchaser, Calabro, and Cunningham by the same "attorney in fact."
A closing of title took place on April 1, 2005, almost eleven months after the contract was executed. The HUD-1 from the closing lists the purchase price as $535,000.00-the original contract price and not the amended amount from August 2004. This federally required closing statement reflected a deposit of only $5,000.00, a first mortgage of $428,000.00, proceeds of a second loan of $50,268.00 and a seller's concession of $15,000.00. On the second page of the HUD-1(line 700) is a place to disclose real estate brokers' commissions paid. This column is blank, indicating that no commission was ever disbursed at closing to any real estate broker. Defendant concedes that no commission was ever paid.
Plaintiffs testified that they never were informed of the closing so neither of them sent a
representative to the closing. Neither plaintiff was able to produce a copy of the written listing
agreement with the sellers. Plaintiffs did submit a bill addressed to Calabro dated May 9, 2005,
five weeks after closing, seeking commissions totaling $19,400.00. Interestingly, they did not sue
Calabro, the person they billed.
LEGAL ISSUES PRESENTED:
A. Does a Licensed Broker Need a Written Listing Agreement?
At the trial neither Amerihomes, who listed the property, nor Homes-R-Us, were able to
produce a copy of a written listing agreement with either of the sellers. The General Obligations
Law §5-701 sets forth which contracts must be in writing to be enforceable.
GOL§5-701 requires that a contract to pay compensation for negotiating the sale of real
property be in writing. However, that section specifically excludes licensed real estate brokers.
The plaintiffs have submitted documentation that they both were duly licensed by the New York
State Department of State as real estate brokers when the services were performed. As such, they
are entitled to collect a commission even in the absence of a written agreement. In addition, the
contract of sale signed by both sellers and the purchaser lists the plaintiffs as the brokers who
brought about the sale and recognizes their right to a commission.
B. Did the Plaintiffs Produce Ready, Willing and Able Buyer?
[*3]
Lawyers learn that in order for a real estate broker to collect a commission, that broker must produce a buyer ready, willing and able to enter into a contract and close title on the terms set forth by the seller. The question of whether or not a commission has been earned usually arises in situations where either the seller or the buyer refuses to culminate the transaction and the broker asserts the right to receive the commission. That is not the situation in this case. In this transaction the parties were brought together by the plaintiffs, entered into a written contract and closed title, but no commission was paid. The Court therefore must analyze the facts and determine if the transaction that closed was the same transaction that the brokers put together or did the initial agreement change to such a degree that the brokers are not entitled to compensation.
There is no evidence as to what were the terms on which the defendants sought to sell the property since neither plaintiff was able to produce a listing agreement. Strangely, neither broker could find the document in their respective file nor could either of them obtain a copy from the Multiple Listing Service.
The first document to appear that contains an outline of the terms of the sale is the "binder" dated May 5, 2004 which is signed by the purchaser and an "attorney in fact" for Cunningham on behalf of the sellers. The binder in bold letters provides: "Parties agree this is not a contract or memorandum thereof." This statement is in conformity with the law which holds that the "contract" is the legally binding document and not the "offer to purchase." Fortunately for the plaintiffs the contract of sale acknowledges that the plaintiffs were the brokers who brought about the transaction.
The question remaining however is whether or not the transaction reflected in the contract is the transaction which closed. Clearly it is not. The May 2004 contract provides for a sales price of $535,000.00 with the purchaser obtaining a $481,500.00 mortgage. This is 90% financing, something that is not common for investment properties such as this premises. All other understandings between the parties are merged into the contract (Contract 5.02). There is no mention in the original contract of the sellers giving any monetary consideration in the form of a credit against closing costs to the purchasers. The contract is signed by all of the parties.
On August 26, 2004, a rider to the contract was signed which reduced the purchase price to $499,000.00 with the sellers agreeing to give a credit of 6% or $29,940.00. This amendment provides for a $36,000.00 reduction in the contract price, an amount that will further be diminished by the sellers' $29,940.00 credit to the purchaser. Under this scenario the sellers' are netting $469,060.00 on the sale before any of the sellers' expenses and costs are deducted. The transaction of August 26, 2004 is financially a different transaction than the one set forth in the original contract. The August amendment is signed by the purchaser, Calabro and the mysterious unidentified "attorney in fact" for Cunningham.
Any resemblance between the contract transaction and the deal that closed is apparently coincidental. The transaction that closed as set forth in the HUD-1, reflects a purchase price of [*4]$535,000.00, the same amount as contained in the contract. The contract called for a $481,500.00 first mortgage. The mortgage at closing was $428,000.00, 80% of the sale price. The original contract called for no sellers' credit, the amended rider reflected a $29,940.00 credit while the closing actually had a $15,000.00 sellers' concession. The closing documents disclose that there was a second mortgage in the amount of $50,268.00, which appears as if by wizardry as part of the transaction and has no documented antecedent existence. Submitted as an exhibit at the trial was a mortgage between Dgavakhishvili, as mortgagor, and Cunningham, as mortgagee, dated the date of closing April 1, 2005, not in the amount set forth in the HUD-1, but in the amount of $35,000.00. The recorded mortgage document does not indicate that it is a second mortgage or is in any way subordinate to the First Franklin mortgage of April 1, 2005. There is no mention anywhere of what happened to the additional $15,268.00, difference between the recorded second mortgage and the HUD-1 second mortgage. Did the money vanish into the mist like Brigadoon? That would be a better explanation than perhaps another alternative-such as bank fraud. It is interesting to note that the attorney for the purchaser also represented the lending institution at the closing.
By way of explanation, the concept of sellers' concessions applies when the buyer lacks sufficient cash to make a down payment and pay all the buyer's closing costs. The purchase price is raised by a percentage of the selling price or a sum certain so as to maximize the largest mortgage amount possible to be borrowed. This artificially inflated sale price allows the purchaser to apply for greater mortgage financing. The seller then uses the "credit" monies to pay certain identifiable buyer's expenses exclusive of prepaid charges. The property has to appraise at or near the original sale price, which is raised to permit this scheme to work. The financial institution will make a loan based on a percentage of the appraised value irrespective of the fact that the contract sale price exceeds the appraisal. The unanswered question is: when does this go from a method of allowing individuals to buy a home they can afford to a "Ponzi scheme" where people own property they cannot afford and suddenly surprised lenders require the government to bail both of them out?
Although it is obvious that the transaction that eventually closed is not the one that the brokers brought about, there is no evidence that there ever was another contract between the parties other than the one of May 2004 which recognized the plaintiffs as the brokers. The fact that the closing documents and contracts were signed by all of the parties leads to the conclusion that the brokers were instrumental in initially bringing the parties together. There is no indication that the brokers were ever discharged.
The plaintiffs have established that they did in fact produce a ready, willing and able buyer
who closed on the terms set forth by the sellers since the same parties who entered into the
contract closed title albeit as a result of a different monetary transaction.
C. Are the Plaintiffs in Compliance with Licensing Rules?
In New York, real estate brokers are licensed by the Department of State. The Secretary
[*5]of State has promulgated certain rules and regulations
governing the conduct of licensed brokers (RPL§442-k) which includes the requirement that
brokers maintain certain records.
Each licensed broker shall keep and maintain for a period of three years, records of
each transaction effected through his office concerning the sale or mortgage of one-to four-family
dwellings. Such records shall contain the names and addresses of the seller, the buyer,
mortgagee, if any, the purchase price and resale price, if any, amount of deposit paid on contract,
amount of commission paid to broker or gross profit realized by the broker if purchased by him
for resale, expenses of procuring the mortgage loan, if any, the net commission or net profit
realized by the broker showing the disposition of all payments made by the broker. In lieu thereof
each broker shall keep and maintain in connection with each such transaction a copy of (1)
contract of sale, (2) commission agreement, (3) closing statement, (4) statement showing
disposition of proceeds of loan (19 NYCRR §175.33).
The fact that neither broker knew of the closing, maintained a copy of their listing agreement, nor knew the correct sale price calls into question whether or not plaintiffs were in compliance with this rule. Unfortunately, the statute provides no penalty for a broker failing to comply with these rules. Presumably, repeated violations could lead to the Department of State revoking the broker's license. Analysis of this rule calls into question its effectiveness. It would seem that maintaining copies of the documents is a much better and more accurate record of the transaction than the required notations set forth at the beginning of the rule. In fact, the language of the rule calls for self-serving record keeping rather than documents prepared by independent third parties such as attorneys who owe a fiduciary relationship to their clients. The Secretary of State should make keeping copies of those listed documents mandatory, rather than optional, especially in this age of questionable sub-prime lending practices.
There does not appear to be any rule or regulation that a broker does anything more to service their respective clients once the contract is signed other than show up at the closing and collect a check, often referred to as "Rosie Ruiz" brokers. An attentive, professional broker would have stayed on top of this transaction even though it was eleven months between contract and closing. An attentive, professional broker would have been aware of the permutations that this transaction underwent. An attentive, professional broker would have known when the closing was taking place. An attentive, professional broker would have been monitoring the process so as to be available should problems arise. It appears that the plaintiffs abandoned this transaction once the contract was signed and sat back to wait for their check to arrive. They are seeking to collect almost $20,000.00 in commissions when the attorneys apparently did all of the work to make this complicated lengthy deal a success.
The plaintiffs are not in compliance with Department of State regulations, however, there is
no legal penalty that can be enforced for being an inattentive unprofessional broker.
D. To What Damages are the Plaintiffs' Entitled?
[*6]
Plaintiffs are unable to produce a commission agreement
and allege that they are entitled to commissions totaling 4% of the sales price. First, plaintiffs are
so out of touch with the realities of this transaction that they are seeking a commission on the
$485,000.00 listing price and not on the $535,000.00 sale price. Second, they have no
documentation to support their claim of a 4% commission. Had they maintained their books and
records as required by the Department of State rules, they would be able to establish what was
the compensation agreed to by the sellers. They are seeking to collect a commission based on
their own self-serving statements. Even the binder prepared by the plaintiffs is blank in the space
for disclosure of the commission. Third, defendant does not admit that any commission was due
and even though agreeing to pay such a commission in the contract, the contract states that "the
commission of such broker shall be paid pursuant to a separate agreement by the party specified
in Schedule D" (Contract 14.01). Since the plaintiffs cannot produce any agreement, they would
have to establish what the standard commission charged by other brokers in Richmond County
would be for a similar transaction. There is no testimony from an independent broker as to what
is the standard commission in the community in type of this situation. Fourth, there is no
showing that there ever was a demand for payment from this named defendant. The bill placed
into evidence was sent to Calabro only and not the named defendant. Perhaps because
Cunningham never agreed to pay a commission?
CONCLUSION:
There are two elements to every trial, proof of liability and proof of damages. The Court has determined that the defendant is liable for a commission based on the fact that the contract contained a clause authorizing a commission and the sale eventually closed between the parties brought together by the plaintiffs. However, there is no proof as to what was the commission agreed to by the defendant. The plaintiffs as licensed brokers were required to keep evidence of the commission agreement, but they cannot produce it. In fact, the binder prepared by them has no amount of commission being due. Four percent of naught is naught. Plaintiffs have established that their commission is zero. They have never explained why if they had a commission agreement with both sellers they only sued one of them, Cunningham.
Plaintiffs have not established the value of their services. They have not proven any damages that may be quantified by the Court.
The foregoing constitutes the decision and order of the Court.
Dated:October 25, 2007
Staten Island, NYHON. Philip S. Straniere
Judge, Civil Court
[*7]
ASN by ________ on ____________.
APPEARANCES
Counsel for Plaintiff:
Eric B. Kaviar, Esq.
712 Third Ave.
Brooklyn, NY 11232
718-965-6146
Counsel for Defendant:
Jeffrey F. B. Borrell, Esq.
1500 Hylan Blvd.
Staten Island, NY 10305
718-667-8600
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