Dallas Court: Collecting Real Estate Commissions May Not Constitute Brokerage
File this under curious and confusing.
On May 2, 2018, the Fifth Court of Appeals (Dallas) issued an opinion that has left real estate professionals scratching their heads.
The Dispute
In the case, Shepard vs. MQ Prosper Retail, LLC, et al., the Court was tasked with determining whether payment of $380,000.00 in fees from the purchase of real estate constituted “acting as a broker.” The purchase price was $19 million.
Interestingly enough (but not particularly relevant), the real estate purchased with Shepard’s assistance belonged to none other than Deion Sanders. Yes, that Deion: former Dallas Cowboy. Football Hall-of-Famer. “Prime Time.” “Neon Deion.” “Reverand Do Rag.” Although not mentioned in the Court’s opinion, it was widely reported that the residence on the acreage property was a whopping 29,000 square feet.
Sanders sold the property in 2013. Shepard, who apparently knows Sanders, facilitated the transaction. Further, it appears undisputed that Sanders “procured access” to Sanders.
Following the purchase, a group of affiliated entities with whom Shepard was also affiliated, transferred the property amongst themselves. In 2014, one of these entities and Shepard signed an agreement providing, in part, that Shepard would be paid an “Acquisition Fee” concerning the Sanders property.
Problem is, Shepard is not licensed by the Texas Real Estate Commission to perform real estate brokerage services in Texas.
In furtherance of the agreement, Shepard was paid a total of $380,000 in 2014. The payors characterized this payment as “real estate commissions related to the Sanders transaction.” Shepard denied that the payment was a commission, but instead, compensation due to his role as a “principal” in the project, because of direct or indirect equity ownership interest in the Sanders property and work on the development of that property as a “principal” and member of the development team.
District Court Lawsuit
In 2016, the payors of the $380,000 filed suit against Shepard, alleging he violated the Texas Real Estate License Act (“TRELA”) by accepting real estate brokerage commissions when he was not a licensed real estate broker in Texas. For good measure, they also also sued Shepard for fraud and negligent misrepresentation. They sought as damages the $380,000 they paid him plus twice that amount as a statutory penalty under the TRELA.
Finding that Shepard had engaged in unauthorized real estate brokerage (and that the “Acquisition Fee” was a commission), the district court granted Summary Judgment on the payors’ claims under the TRELA. Shepard appealed, contending that fact issues existed concerning the true nature of the $380,000 payment.
Court of Appeals Ruling
The Dallas Court of Appeals reviewed the definition of “real estate brokerage” under the TRELA. Next, it turned to the various items of evidence in the record – competing affidavits, Shepard’s deposition testimony, and the “memorandum agreement” setting out compensation/splits.
Despite what appears to be overwhelming evidence that Shepard was paid a commission for brokerage activities, the Court reversed the summary judgment. Its rationale is as follows:
Even if the agreement and the exhibit show Shepard was to be paid a fee of $375,000 at acquisition of the Sanders property,it does not describe the actions by Shepard, if any, for which he was to be paid the fee. Therefore, the agreement does not show Shepard was paid $375,000 (or $380,000) for an action listed in section 1101.002(1) that would show he was acting as a broker.
and
Even if the evidence is uncontroverted that Shepard took an action constituting acting as a broker and that appellees paid Shepard $380,000, appellees were not entitled to summary judgment on their cause of action under section 1101.754 unless they proved as a matter of law that hereceived the payments “as a result of acting as a broker.” Instead, a genuine issue of material fact remains regarding whether the payments were the result of Shepard’s acting as a broker or whether they were the result of other acts.
Using this logic, the Dallas court reversed the summary judgment and remanded the case back to the trial court for disposition.
My Takeaway
The fallout from this opinion could be disastrous to claims for unauthorized brokerage under the TRELA. Taken to its logical extreme, it could even impair TREC’s ability to enforce the TRELA and regulate the practice of real estate in Texas.
In my opinion, the evidence clearly demonstrates that Shepard acted as a real estate broker (he performed brokerage activities), and was paid for those specific services. Since he was not a licensed real estate broker in Texas, his liability under the TRELA appears clear. No genuine fact issues blur the true nature of his activities, so summary judgment was appropriate. I believe that the Dallas Court got this one wrong, and that this case will be used to justify others’ unauthorized brokerage activities.
