Marshall's Law

Court considers commission compensation cases

"[S]ins of commission are mortal, sins of omission venial."
-- Theodore Tronchin (1929)

By Marshall H. Tanick

The sagging real estate market has caused financial harm to a number of individuals and institutions. Owners of property, prospective buyers, mortgagors and mortgagees, financial institutions and many others have been hurt by the market's current state.

So too, have real estate agents. Most of them, who are paid on commissions once transactions conclude, have found that the real estate recession impaired their ability to obtain commissions for their work.

The Minnesota Court of Appeals recently considered three cases involving real estate commissions. In two cases, the Court denied compensation to the claimants, but in the third reinstated a whistleblower claim brought over a commission agreement.

Conversion Case

A claim for sales commissions by a tenant of an apartment building that was converted into condominiums was rejected in Hammann v. Falls/Pinacle, LLC, 2008 WL 933446 (Minn. App. Apr. 8, 2008) (unpublished).

The tenant, a licensed real estate agent, had some involvement in the sale of some of the units and claimed that he was entitled to commissions for seven transactions. The Hennepin County District Court judge denied his claim on grounds that he was not entitled to commissions in the absence of a written commission agreement, as required by Minn. Stat. sec. 82.18, subd. 2. The court also sanctioned the claimant with an award of attorney's fees and costs.

The Court of Appeals affirmed, holding that none of the documents that the agent claimed supported his argument "satisfies the requirement under the statute" of a written commission agreement. The tenant's claim that he was not required to comply with the statute because he acted as a "principal" in some of the transactions rather than an agent was rejected because the transaction forms used by the facility stated that commissions will not be paid for a sale to any customer who is a resident at the time of the conversion. Other claims of breach of contract, interference and violation of the Minnesota Common Interest Ownership Act also were not maintainable.

The trial court judge's award of attorney fees under Rule 11 of the Minnesota Rules of Civil Procedure also was upheld. Sanctions were warranted because "each of the claims lacked merit, and [the claimant] did not have a good-faith basis in law or in fact to bring the claims."

Compulsory Counterclaim

A failed real estate transaction did not warrant payment of a sales commission to a real estate brokerage company that didn't file a compulsory counterclaim concerning the deal in Burnet Realty, Inc. v. Uppal, 2008 WL 1800103 (Minn. App. Apr. 22, 2008) (unpublished).

After entering into a commission sales agreement with the property owner, the real estate broker found a buyer, but the transaction fell through when the owner refused to close the deal. The prospective buyer then sued the owner and another intermediary prospective buyer.

The owner filed a third-party complaint against the real estate broker, claiming that it should forfeit any fees because of breach of fiduciary duty. The broker denied the claim but did not assert any counterclaim for commissions due.

The Hennepin County District Court entered a ruling requiring specific performance on behalf of the prospective purchaser, which prompted the real estate broker to file a separate lawsuit against the seller of the property for the sales commission. The trial court found in favor of the broker.

But the Court of Appeals reversed, holding that the claim for a commission constituted a compulsory counterclaim, which was required to be filed in the prior litigation under Rule 13.01 of the Minnesota Rules of Civil Procedure. The counterclaim was "ripe" because the real estate company could have asserted a cause of action to recover the commission when it was served with the third party complaint.

The two cases - the underlying lawsuit for the conveyance and the second lawsuit for the commission - arose out of "an aggregate of operative facts common to both claims," which satisfies the compulsory counterclaim rule.

The court found that denying recovery to the real estate agent for failure to pursue a compulsory counterclaim is equitable. It serves the purpose to "induce parties to bring all claims in a single action," as contemplated by Rule 13. Because the compulsory counterclaim was not timely brought in the underlying case, it cannot be pursued now, and the real estate agent was not entitled to any commission for the forced sale of the property it helped secure.

But a real estate broker who claimed he was fired for reporting that his co-worker was engaged in an illegal fee arrangement, won reinstatement of his whistleblowing claim in Kratzer v. Welsh Companies, LLC, 2008 WL 1747607 (Minn. Ct. App. April 15, 2008) (unpublished).

The claimant was terminated late in 2002, about two years after he complained about the way that a colleague had represented both parties in a transaction and failed to disclose to the seller that the commission would be increased if the proceeds to the seller were decreased.

The broker sued under the whistleblower statute, which prompted a counterclaim by the company for breach of contract and misappropriation of trade secrets. The Hennepin County District Court held that the whistleblower claim was not actionable and also dismissed the counterclaim.

The Court of Appeals reversed both determinations, holding that the whistleblower claim was maintainable and the counterclaim could proceed. The whistleblower claim was actionable because the employee established a prima facie case that his termination was attributable to a statutory "report" of illegal activity by a co-worker.

The employer's contention that the employee had a pre-existing duty to report any conflicts of interest failed for two reasons: the employee did not have a "regular responsibility to advise [the company] on its violations of the law," and he was not required, as his employer contended, to make his report to an outside authority in order to receive "protected status" under the whistleblower law. His "reports to various [company] supervisors" were enough to satisfy the statutory requirements.

* * * * * * * *

Marshall H. Tanick is an attorney with the law firm of MANSFIELD, TANICK & COHEN, P.A., in Minneapolis and St. Paul. He is Certified as a Civil Trial Specialist by the Minnesota State Bar Association (MSBA) and represents employers and employees in a variety of workplace related matters.