Buyer can't get disgorgement of commission paid to seller's broker

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Falcon Properties LLC v. Bowfits 1308 LLC, 2020 WL 7692153 (Wash. Ct. App. Dec. 28, 2020)

Buyer can’t get disgorgement of commission paid to seller’s broker

Prepared by Dale Whitman

 

Falcon owned a 13-unit apartment building in Seattle which it had purchased in 2015 for $2 million. In 2019 Falcon put the building up for sale, listing it with Sokolov, who was a licensed real estate broker and also Falcon’s managing member. Falcon negotiated a sale of the property to Bowfits for a bit under $4 million. Falcon paid Sokolov a $75,000 commission for the sale.

 

Subsequently, Bowfits discovered that Falcon had misrepresented and overstated the rents for the building, and that its revenues were less than had been stated in the rent roll Bowfits had received prior to the closing. The result of this difference was that the building’s Cap Rate (its Net Operating Income divided by the property’s value) was lower than Bowfits had expected – 4.27% rather than 4.94%.

 

Bowfits sued Falcon and Sokolov for breach of contract and fraud. The trial court found Falcon liable and assessed damages of $13,400, based on the difference in rents. (It’s not clear exactly how this figure was calculated; presumably it represents the shortfall in rents over some fairly short period of time.) The trial court refused to award damages based on the difference in capital value that the building would have had in order to produce the expected Cap Rate of 4.94%. (Needless to say, that measure would have produced a much larger damages figure – according to Bowfits’ expert, about $275,000.)  The Court of Appeals declined to reverse this holding, so Bowfits was stuck with the lower damages figure.

 

Bowfits also claimed that Sokolov was obligated to disgorge the commission he had received, since he had violated his duties as a real estate broker under Washington law, which requires a broker to “deal honestly and in good faith” and to “disclose all existing material facts known by the broker and not apparent or readily ascertainable to a party.” The trial court accepted this argument, but the Court of Appeals rejected it. While Sokolov may have breached his duties, the Court of Appeals said that he owed no duty as a broker to Bowfits, the purchaser. He was Falcon’s broker, had a brokerage agreement only with Falcon, and would have owed a duty only to Falcon.

 

The court of Appeals also refused to order disgorgement of the commission on an unjust enrichment theory. The reason was simple: it was Falcon, and not Bowfits, that had paid the commission, so Bowfits couldn’t “recover” it.

 

There was, however, a little good news in the court’s opinion for Bowfits: the court agreed that it was entitled to attorneys’ fees of $118,000, based on the attorneys’ fee clause in the contract of sale. But even that amount, the court said, might be subject to readjustment by the trial court because Bowfits’ claim for disgorgement of the real estate commission had been rejected by the Court of Appeals.

 

COMMENT: While Sokolov may not have had a statutory duty to Bowfits as a real estate broker, he certainly had a duty not to commit fraud or negligent misrepresentation. (Sokolov testified that he had not even read the false rent roll, although that strains credulity a bit.) But that didn’t matter much; the real problem for Bowfits was the low measure of damages that the Court of Appeals adopted.