In Schaffter v. Creative Capital Leasing Group, (— Cal. Rptr.3d —, 2008 WL 3274444, Cal.App. 4 Dist., Aug. 11, 2008), a California Court of Appeal considered whether a real estate investment company defaulted under various agreements with third parties to purchase condominiums, thereby triggering its responsibility under a Buyer Broker Compensation Contract to pay commissions to its broker. The Court of Appeal concluded that the real estate investment company had defaulted under its various agreements to purchase condominiums, and therefore it was required to pay the commissions to its broker.
Jack Winick is a real estate broker and attorney who formed Creative Capital Leasing Group, LLC (“CCLG”) with his two sons. CCLG’s business model was to purchase condominiums before their construction in downtown San Diego, anticipating substantial appreciation during the one to two year escrow periods. Brett Schaffter is a real estate agent that specialized in the downtown San Diego market and CCLG hired Schaffter to find desirable properties. CCLG entered into a California Association of Realtors’ standard form Buyer Broker Contract with Prudential California Realty (“Prudential”), under whose broker’s license Schaffter worked. Under the agreement, Schaffter was to exclusively represent CCLG in the purchase of condominiums in a development called Park Place in exchange for a 2.3 percent commission, 1.5 percent of which was to be paid by Park Place. In April 2002, CCLG contracted to purchase eight units at Park Place for approximately $500,000 each, though CCLG did not intend to finalize the purchases, or pay the commissions, if the value of the condominiums did not appreciate.
Before the Park Place purchases, in June of 2001, Schaffter left Prudential and began working as an independent contractor for Re/Max Real Estate Consultants (“Re/Max”). In January 2002, CCLG entered into an exclusive Buyer Broker Contract with Re/Max for Schaffter’s representation, again for a 2.3 percent commission, in the purchase of condominiums at the Renaissance and Pacific Terrace developments. Throughout 2002, CCLG contracted to purchase six units at the Renaissance development, and another two units from the Pacific Terrace development, each unit for roughly $500,000. Again, CCLG did not intend to perform or pay the commissions on units that did not appreciate as expected.
In late December 2002, Schaffter learned from Pacific Terrace that CCLG sought to cancel its purchases. Schaffter contacted CCLG to confirm this information. Winick informed Schaffter that it was true and that CCLG may not complete the Renaissance purchases either because of insufficient appreciation. Winick also informed Schaffter that CCLG would not pay any commissions on units that did not close escrow. Ultimately, CCLG did not close escrow on any of the Pacific Terrace or Renaissance units, and though the developers deemed CCLG to be in default, they allowed CCLG to cancel the purchases to avoid litigation. CCLG did not pay Schaffter commissions in connection with the Pacific Terrace or Renaissance developments. After much difficulty, CCLG eventually closed escrow on the Park Place units, but refused to pay Schaffter the .8 percent commission it owed beyond the 1.5 percent paid by Park Place.
Schaffter and Re/Max sued for breach of contract and were awarded $38,400 for the commissions in connection with Park Place, $20,235 for the commissions on the Pacific Terrace units, and $88,397 for the commissions on the Renaissance units. The court also awarded contractual attorneys fees of $36,822 to Schaffter and $42,318 to Re/Max. CCLG appealed.
The Court of Appeal began by considering whether CCLG had in fact defaulted. CCLG argued that it did not default on its purchase agreements for the Renaissance and Pacific Terrace condominiums because the cancellation on those agreements were “voluntary and mutually beneficial” to both CCLG and the developers. In addition, CCLG argued that even if it did default, a buyer and a seller may “unwind” a purchase transaction to the parties’ mutual benefit “thereby extinguishing the buyer’s obligation to pay a commission.” The court reviewed the terms of the purchase agreements for Renaissance and Pacific Terrace and concluded that CCLG had defaulted. The purchase agreements did not allow cancellation for insufficient appreciation, which is precisely why CCLG cancelled them. The Buyer Broker Contracts between CCLG and Schaffter provided for payment of commission upon the close of escrow or default.
CCLG countered, arguing that neither Renaissance nor Pacific Terrace sought to enforce the default provisions of the purchase agreements, and therefore Schaffter had no right to the commissions. The court was not convinced by CCLG’s argument, and observed that “under the plain terms of the Renaissance and Pacific Terrace purchase agreements, CCLG defaulted and that triggered the payment of commissions under the Buyer Broker Contract.” Moreover, the court pointed to testimony by managers of Renaissance and Pacific Terrace who said that the developers chose not to seek the default penalties because Winick threatened litigation.
Next, the court examined the contract expiration dates on the Buyer Broker Contracts. CCLG argued that the Buyer Broker Contracts were void because the contracts did not contain a date certain for their termination as required under section 10176 of the Business and Professions Code (the “Code”). CCLG also cited a court decision that interpreted section 10176 of the Code where commissions were denied to a broker for lack of a definite termination date to the broker’s representation. The Court of Appeal pointed out that the denial of commissions in the case cited by CCLG was for future unearned commissions. On the other hand, courts have enforced Buyer Broker Contracts without specific termination dates when the commissions have already been earned. The court then said that the commissions here had already been earned: when CCLG entered into the purchase contracts with Park Place. The court concluded that CCLG would have been unjustly enriched for the services rendered by Schaffter if CCLG was not required to pay the contracted for commissions.
Finally, the Court of Appeal considered whether the assignment of rights to the commissions by Prudential to Schaffter was void. CCLG argued that the transfer of the right to the commissions was void because the transfer was done prematurely, before the close of escrow. CCLG also argued that Prudential could not assign the interest to Schaffter because it still owed a duty to CCLG for the purchase of the condominiums until the close of escrow. The court disagreed, and found that Prudential assigned its rights to Schaffter on the good faith belief that CCLG was going to default on the purchase of the Park Place units, and not in an effort to “shirk its responsibilities as a broker.” Moreover, the court pointed out that by the time Prudential made the assignment, the scheduled escrow date had passed, and CCLG was actually in default. Also, the court said that Prudential assigned earned commissions and not unearned commissions, and therefore was not in violation of the policy reasons behind section 10138 of the Code. The court also found that CCLG owed attorneys fees on appeal.
In conclusion, the Court of Appeal found that CCLG had defaulted under its various agreements to purchase condominiums, and therefore it was required to pay the commissions to Schaffter.