A ruling by a state court in Texas dismissing a case brought by a brokerage against a Realogy title company could have repercussions for other real estate agents throughout the state.
While brokerages may expect title companies to have some duty to them if there’s a dispute with a seller over commissions, the ruling indicates title companies only have duties to buyers and sellers, so brokers are on their own when it comes to collecting disputed commission fees from sellers. Depending on which side you’re talking to, this could either be business as usual, or shake the foundations of the real estate industry in Texas.
According to legal filings, in October 2017, Engel & Völkers Austin (EVA) and homeseller Robert Turner signed listing agreements for two of Turner’s properties that were originally listed for $12.99 million total. The listing agreements entitled EVA to a commission of 5 percent of the sales price or 4.5 percent if the co-listing agents, mother and daughter Michele Turnquist and Kathryn Scarborough, acted as an intermediary between buyer and seller.
The listing agreements, which appear to be standard listing agreements from the Texas Association of Realtors, did not mention a specific title company. The agreement’s language did specify, however, that the seller authorized, and the broker could instruct, the escrow or closing agent for the transaction “to collect and disburse to Broker all amounts payable to Broker under this Listing.”
In July 2018, EVA helped Turner secure purchase contracts with one buyer, Lauree Moffett, for both properties for a collective sales price of $11.2 million. The contracts, which appear to be standard purchase contracts from the Texas Real Estate Commission, listed Realogy subsidiary Independence Title as the escrow agent and EVA as the listing brokerage representing “Seller only as Seller’s agent.”
The buyer was represented by an attorney, not another brokerage. According to EVA, as the only broker involved, the listing agreements entitled the brokerage to the entire 5 percent commission, $560,000 payable at closing.
‘Egregious’ or ‘neutral’?
But in the days before closing, Turner, through his attorney Terry Irion, allegedly instructed Independence Title to reduce EVA’s commission to 2.5 percent, or $280,000. After learning this, EVA informed Independence Title of a dispute with Turner and asked the title company to place the disputed funds in escrow while the parties worked out a resolution.
But the seller disagreed with such an arrangement and so Independence refused. Moreover, on the day of closing — Aug. 15, 2018 — Turner’s attorney had EVA’s commission further reduced to 2 percent, so EVA in the end received $224,000.
In November 2018, the brokerage filed suit against Turner, Realogy subsidiary Secured Land Transfers LLC which does business as Independence Title, and ITCOA, whose assets were purchased by Realogy in 2015 but has not done business as Independence Title since then. EVA amended its complaint in December 2019 and again on Friday, Feb. 28. The allegations against Independence Title were for breach of fiduciary duty, negligence and promissory estoppel.
“Real estate brokers and salespersons expect to be paid at closing. If sellers refused to pay their broker the commissions due at the closing table, the real estate brokerage industry would be thrown into chaos,” Turnquist said in an affidavit.
In a phone interview with Inman, Turnquist wondered aloud whether her brokerage’s independent status played a factor in the Realogy subsidiary’s decision to not place the disputed funds in escrow.
“If we were a Sotheby’s or a Coldwell Banker would a Realogy affiliate do that to them at closing?” she said.
Turnquist said she’d never had such a situation in her 43 years in real estate. “No one would have wanted to do this to us. [The title company’s] business would be destroyed … because nobody would use them,” she said.
“How [Independence Title] could have done such an egregious thing is unbelievable and agents need to know we’re not protected,” she added.
In the same phone interview, Scarborough said she gets multiple calls a week from title companies “courting” EVA. “The industry needs to understand that just because you have a listing agreement, doesn’t mean you’re going to get paid,” she said.
“It’s emotionally draining. It’s awful,” she said of the case. “It’s cost us over $100,000 and we haven’t even gone to trial.”
Turnquist said, “I think we should be able to file a lien on the house if we’re not paid.”
“Title companies need to change their policies to protect all parties in a transaction. Legal documents should prevail,” she added.
In an emailed statement, Independence Title CEO Brian Pitman told Inman,”Independence Title serves as settlement agent for numerous transactions throughout Texas each day, and we approach each customer relationship and transaction professionally and fairly to all parties, regardless of any corporate affiliation.
“It is regrettable that the listing agreement at the root of this litigation was prepared in a fashion that led to a disagreement between the transaction seller and listing broker, such that Independence was instructed to pay only the undisputed portion of the listing broker’s commission from seller’s funds.
“Independence, as a neutral settlement agent, proceeded in this case per the terms of the earnest money contract, which in Texas is a separate and distinct document from the listing agreement — the listing agreement being between the seller and listing broker and in the overwhelming majority of cases, professionally prepared without giving rise to dispute.”
Other than this comment from Independence, Realogy declined to comment. Turnquist told Inman she disputes Pitman’s characterization of the listing agreements, which she said are “completely valid”, and says Independence has “taken this storyline to save face.”
Independence Title moved for summary judgment in the case at the end of December. EVA responded to the motion in a legal filing, but on Friday, the same day EVA filed its third amended complaint, the court ruled in Independence Title’s favor. The title company does not have to respond to the latest complaint because it contains the same allegations against Independence that the summary judgment dismisses.
The judge in the case did not explain why he made the ruling, but Independence Title had argued that escrow agents owe duties only to parties to the contract creating the escrow agreement — which did not include the brokerage.
“In the transactions at issue in this case, Independence was appointed as the escrow agent in two real estate sales contracts between Robert and Leslie Turner, as the sellers, and Lauree Moffett, as the buyer. Those individuals were the only parties to those contracts, and therefore, under Texas law, the only parties to whom Independence owed any duties in connection with those transactions,” the title company said in a legal filing.
“Engel & Volkers was not a party to the real estate sales contracts appointing Independence as escrow agent for these transactions. And, nothing in those contracts provided Independence with any instruction regarding escrowing of funds constituting disputed commissions. Therefore, under clear Texas law, Independence owed Engel & Volkers no fiduciary duties,” the title company added.
Further, the purchase contracts specified that “All obligations of the parties for payment of brokers’ fees are contained in separate written agreements” — agreements that Independence was not a party to, Independence said.
Reached by Inman Monday, Independence said in an emailed statement, “Independence was pleased to be dismissed from this case and appreciates the court’s finding, confirming that Engel & Volker’s claims versus Independence did not merit further review.”
In a phone interview Tuesday, EVA’s attorney Racy Haddad of Coats Rose told Inman that EVA is able to appeal the ruling, and they are currently evaluating that option.
“The significance of the ruling, however, may be that real estate sellers in Texas may utilize their fiduciary relationship with title companies to breach listing agreements at the closing table by instructing the title companies not to pay the broker,” she said.
She added, “This has a far and wide-reaching impact on real estate brokers in Texas who generally are very competent in respect of obtaining written listing agreements with the sellers of properties. If sellers can change their minds and breach contracts at the closing table by instructing title companies [this way] … that has a serious impact on the real estate industry in Texas and not just on our client.”
But Independence Title attorney Jeff Hobbs of Ambrust & Brown told Inman that assertion was “absurd sensationalism.”
“This ruling does not change Texas law whatsoever. Sellers and their listing brokers will still be contractually bound to one another by listing agreements they enter into mutually, and the court will decide the remaining claims between Engel & Volkers and the seller under their listing agreements in this lawsuit,” he said via email. “This result simply affirms what is already the law in Texas, as to title companies as settlement agents, in that the title company is not liable to the listing broker in the event a seller expressly disputes payment of a portion of a listing commission from the seller’s sale proceeds.”
Independence has filed a counterclaim against EVA for its attorney’s fees and costs that is still pending and declined to comment further. On Friday, EVA denied the allegations in that counterclaim in a legal filing.
Haddad said EVA will continue to pursue its case against the seller, which is unaffected by the summary judgment ruling. The complaint’s allegations against Turner are for breach of contract, common law fraud and statutory fraud in a real estate transaction. The complaint alleges economic loss and harm in an amount of at least $336,000 and seeks to have Turner cover the plaintiff’s legal costs.
Turner fires back
But the story does not end there. Last month, on Feb. 18, Turner filed an answer to EVA’s second amended complaint and also countersued. The answer denied EVA’s allegations and demanded “strict proof thereof.”
The countersuit alleged Turner had only expected to pay EVA a two percent commission from the very beginning. He alleged that he had originally intended to pay a buyer’s broker 2.5 percent and EVA 2 percent for a total 4.5 percent commission, but Scarborough had convinced him to offer 3 percent for a buyer’s broker and 2 percent for EVA by telling him that some buyer’s agents will not show property to their clients if a 3 percent commission is not offered.
So Turner offered 5 percent, but EVA then allegedly only listed a buyer’s broker commission of 2.5 percent in the multiple listing service.
In May 2018, Scarborough showed Turner’s properties to Moffett, but Turner did not accept her initial offer of $10.2 million. Scarborough allegedly asked Turner if he would reduce his asking price if he did not have to make certain upgrades to the properties and if he did not have to pay 3 percent to a buyer’s broker. Turner said he agreed to lower the price based on those conditions but did not accept Moffett’s subsequent offer of $10.6 million.
According to the counterclaim, Turner’s lawyer then took over the negotiations from Scarborough, and Moffett and Turner ended up agreeing to an $11.2 million sales price.
Despite Scarborough’s alleged promises to Turner that he would not have to pay 3 percent of the 5 percent commission, EVA instructed Independence Title to pay the full amount — an instruction Turner then countermanded, telling Independence Title to only pay the 2 percent, according to the counterclaim.
Turner’s claims against EVA include breach of fiduciary duty, breach of written contract, breach of oral contract, promissory estoppel, common-law fraud, statutory fraud, negligence, negligence per se and negligent misrepresentation.
“EVA and its sales agents owed Turner a fiduciary duty which included the duty to refrain from self-dealing, the duty to deal fairly and honestly with Turner, the duty of candor, the duty to act with integrity of the strictest kind, the duty of full disclosure, the duty to be faithful and observant to the trust Turner placed in EVA, the duty to be scrupulous and meticulous in performing its functions, the duty not to place its own interest above that of Turner’s, the duty to ensure that Turner understood clearly whose interests EVA represented if in addition to his own, and the duty to convey to Turner all known information which may affect his decisions relating to the sale of the Properties,” the counterclaim said.
The countersuit seeks damages, attorney’s fees and costs, ordering the forfeiture of the amount of commissions for which EVA is suing Turner, and the return of the 2 percent commission EVA previously received. On Friday, EVA filed an answer to the countersuit as well as a motion for leave to designate a responsible third party: the seller’s attorney, Terry Irion of Sprouse Shrader Smith.
The latter asserts that any damages Turner suffered, if any, were caused by Irion, who “single handedly represented Turner in all of the negotiations,” including drafting the final contracts with the buyer and the buyer’s attorney, thereby discharging EVA from those negotiations.
“We deny everything that the seller has asserted and there really is no legal basis for the breach of fiduciary duty claim,” Haddad told Inman.
“We believe the claims to be invalid particularly because the seller of the property was represented by legal counsel who took on the role of actively representing the seller in the transaction. Brokers are not attorneys in Texas. So when the seller tells the broker that they will be represented by counsel in negotiations, then the broker’s response is to defer to that attorney, which is what happened in this case.”
Inman reached out to Turner’s counsel, Jeff Henry of Sprouse Shrader Smith, for comment on behalf of Turner, Irion or his firm. He declined to comment.
The case is set to go to trial May 4.