By Robert S. Kutner, Esq. Partner, Casner & Edwards
When faced with a conflict between the fee provision in an exclusive listing agreement and instructions to the escrow agent in the P&S concerning division of the broker’s fee, how should the broker handle the disputed portion of the fee held in escrow?
This was the issue faced by the Massachusetts Appeals Court in Zang v. NRT New England, Inc
. d/b/a Coldwell Banker Residential Brokerage). In its decision the Court ruled that the fiduciary duty owed by the escrow agent to buyer and seller is paramount. Appellate review by the Supreme Judicial Court
was requested, but the SJC declined. Therefore, the Appeals Court
decision is a binding precedent.
The Conditions of the Case
Jonathan Zang, buyer of a Boston condominium, sued listing broker and escrow agent, Coldwell Banker Residential Brokerage (CBRB), alleging that it had violated its duty as escrow agent when it declined to pay Zang’s buyer’s agent half the $61,250 broker’s fee as instructed in the P&S. CBRB determined that it was the procuring cause of the sale and was entitled to the entire 5 percent fee, pursuant to its listing agreement. After waiting 6 months from the closing, CBRB retained the entire fee. Zang sued for breach of fiduciary duty and violation of Chapter 93A. The Superior Court (lower court) ruled in favor of CBRB, but the Appeals Court
reversed, finding a breach of fiduciary duty. The key facts are, as follows:
On January 4, 2006, seller Neil Bradford signed an Exclusive Right to Sell Listing Agreement granting CBRB sole right to sell Bradford’s condominium. The listing price was $1,349,000 and the agreement required the seller to pay CBRB "a fee for professional services of 5% of the gross sales price." Bradford expressly authorized CBRB to "retain any deposits held in escrow and apply said deposits against commission due." The Listing Agreement further provided that "Coldwell Banker's usual and customary practice is to compensate cooperating brokers acting as a buyer's agent in the amount of 2.5% of the contract price . . . ."
On January 20, 2006, prospective buyer Zang called the seller inquiring about the property and attended a CBRB open house two days later. On January 25, 2006, after contacting a CBRB agent, Zang again viewed the property. Through CBRB Zang submitted an offer to purchase the property for $1,200,000 with a $1,000 check to bind the offer. CBRB held Zang’s check, but did not deposit it, since his offer had not been accepted.
Negotiations stalled after just 3 days. Zang then pressured CBRB to reduce its commission in order to close the $25,000 gap between Zang's offer and Bradford's counteroffer of $1,225.000. CBRB declined. Zang then retained a buyer's agent to represent him. In exchange for his services, the buyer's agent agreed to be compensated at an hourly rate of one hundred dollars (minimum fee of $3,000) and to “rebate” to Zang any commission he received in connection with the purchase of the property.
Escrow Provision Details
Upon learning of the involvement of a buyer’s agent, CBRB advised Zang that it objected to payment of any part of the broker’s fee to the buyer’s agent. Eventually, buyer Zang and seller Bradford reached an agreed-upon sales price of $1,225,000, and signed a P&S on February 6, 2006. CBRB did not sign the P&S. Zang agreed to deposit 10% of the purchase price, $122,500, with the balance of the price to be paid at closing. The escrow provision stated:
"All deposits made hereunder shall be held in escrow by Coldwell Banker as escrow agent subject to the terms of this agreement and shall be duly accounted for at the time for performance of this agreement. In the event of any disagreement between the parties, the escrow agent may retain all deposits made under this agreement pending written instructions mutually given by the SELLER and the BUYER."
Zang and Bradford also included an instruction concerning the broker’s fee in the P&S:
"A broker's fee for professional services of 5% of the purchase price (i.e., $61,250.00) is due from the SELLER and is to be split evenly between Coldwell Banker (SELLER'S agent) and Real Estate Café (BUYER'S agent), the Broker(s) herein, and is to be paid at closing from SELLER's proceeds, if and only if closing occurs and deed is recorded."
In short, Zang and Bradford agreed (without CBRB’s consent) that $30,625, half the 5% fee, was to be paid to the buyer's agent at closing. Zang’s deposit of $122,500 was held in escrow by CBRB.
Chapter 93A Violation?
Concerned that CBRB objected to paying half the fee to his buyer’s agent, Zang sent a Chapter 93A demand letter to CBRB on March 1, 2006. CBRB had not responded when the closing occurred on March 31, 2006. At closing CBRB issued a check to the seller, Bradford, for the balance of the funds in escrow, excluding the $61,250 broker’s fee. CBRB retained half, $30,625, as payment of the listing side fee, but refused to pay Zang’s buyer’s agent. After 6 months passed without an arbitration or lawsuit, CBRB paid itself the remaining $30,625.
Zang sued for breach of fiduciary duty and for unfair and deceptive acts in violation of Chapter 93A. Finding that the undisputed facts allowed the case to be decided without a trial, the Superior Court judge found that the instructions in the P&S conflicted with the fee provision in the listing agreement. He ruled in favor of CBRB on motions for summary judgment, dismissing all claims. Zang appealed, claiming a breach of fiduciary duty.
CBRB responded that Zang’s buyer’s agent was not the procuring cause of the sale and that Zang had intentionally interfered with CBRB’s Exclusive Listing. CBRB argued that it had earned the full 5 percent fee. The Appeals Court declined to discuss either of those defenses, focusing solely on the fiduciary duties of an escrow agent. It ruled that since the buyer and seller had instructed that half the broker’s fee be paid to the buyer’s agent in the P&S that the escrow agent could not ignore that language and help itself to the balance of the broker’s fee from escrow. The Court ruled that CBRB had breached its fiduciary duty based on the unambiguous instructions of buyer and seller in the P&S concerning payment to the buyer’s agent. As escrow agent, CBRB had a duty to not to ignore those instructions and that “self-dealing” by CBRB (paying itself the disputed fee) was prohibited. The Court reasoned that even though CBRB had not signed the P&S, it was aware of the instruction concerning splitting the broker’s fee.
Missing from the appellate opinion was any discussion whether the instruction of the buyer and seller was unlawful or unethical, since it directly conflicted with the express fee provision of the listing agreement. The Appeals Court also avoided dealing with the issue whether the buyer and his agent had wrongly interfered with CBRB’s contractual rights as procuring cause.
The Court also gave little mention of the fact that in the Listing Agreement that the seller had expressly authorized CBRB to pay itself a 5 percent fee at closing from funds held in escrow. Once CBRB undertook to act as escrow agent according to the P&S, the Appeals Court reasoned that it owed a fiduciary duty to buyer, Zang, as well as to the seller.
Appeals Court Suggestions
Realizing that the conflicting provisions of CBRB’s listing agreement and the P&S created a dilemma for brokers, such as CBRB, the Appeals Court offered several suggestions.
First, it noted that CBRB had known before the P&S was signed that language was to be included that required payment of half the broker’s fee to the buyer’s agent. CBRB could have tried to negotiate different terms or could have declined to act as escrow agent. These suggestions by the Appeals Court do not appear to have been well thought through. Since CBRB was not a party to the P&S, suggesting that it insert itself into negotiations between buyer and seller would have been inappropriate. Doing so would have forced CBRB to advocate its own interest above the interests of its client, the seller.
Second, proposing that CBRB should have declined to act as escrow agent conflicted with CBRB’s rights according to the listing agreement that had given it the security of knowing that it had the right to retain funds from escrow to pay the 5 percent broker’s fee.
A third alternative offered by the Appeals Court was that an escrow agent faced with conflicting contractual provisions could file an “interpleader action” or otherwise could have asked the Court for instructions concerning to whom the escrowed funds (broker’s fee) should be paid. Curiously, the Appeals Court did not mention that CBRB had held the disputed $30,625 for more than 6 months after closing, giving both Zang and his agent an opportunity to pursue their fee claim. Apparently, the Appeals Court did not consider passage of 6 months to be sufficient, but ruled that CBRB, as escrow agent, should have initiated action to resolve the conflict.
It is important to note that the Appeals Court decision in Zang does not establish that the buyer and seller can control which broker is to receive the selling fee, but merely that if the escrow agent disagrees with the instructions of the buyer and seller in the P&S, the escrow agent must first seek advice from a court or arbitration panel before disbursing the disputed funds.
Based on the Zang decision, a listing broker may wish to obtain advance protection. Perhaps the best approach is to urge the seller not to enter into a P&S that creates such a conflict, since doing to will be a breach of the exclusive listing agreement. MAR has added language to its standard exclusive listing agreement (MassForms) to provide protection for the listing broker, including the right to recover attorneys’ fees and costs from the seller as well as interest on the disputed fee at the “legal rate” (currently 12 percent). Based on the Zang precedent, escrow agents should not make unilateral decisions concerning disbursing disputed fees when there is a conflict. In addition, should a dispute arise, the listing agreement should provide that an arbitration panel of the local board of REALTORS® is authorized to resolve the controversy, not merely a Court.