Legal case studies in this issue:

• Broker was liable to agent’s estate for commission.
• Seller’s attempt to avoid sale with new mortgage was unsuccessful.
• Company fined for violating Telemarketing Sales Rule.
• Plaintiff allowed to pierce corporate veil of companies owning and managing mobile homes.
  

Research and analysis by Lisa Harms Hartzler,
Sorling Northrup Attorneys

Broker was liable to agent’s estate for commission

In Alma Logan & Logan Real Estate Assocs., LLC v. Randall, No. 05-19-00043-CV (Ct App. Texas, February 27, 2020), a licensed real estate agent (“Ellis”) was the founder and president of Kwik Industries which, among other things, developed and licensed Kwik Kar automotive oil change and lube shops. Ellis was also a licensed real estate agent who facilitated the sale of existing Kwik Kar shops to new owners.

Ellis had an oral arrangement with a licensed real estate broker (“Logan”). In exchange for Logan acting as his sponsoring broker, Ellis paid Logan a desk fee of $500 per month, a fee for errors and omissions insurance, and 1% of his commissions up to $2,000 on each transaction. Ellis introduced a buyer to an owner of a lube shop who was interested in selling. An agreement was reached, but before a contract could be drawn and executed, Ellis died. The transaction proceeded to closing but Logan refused to turn over Ellis’s commission (minus fees and her percentage) to his estate. The executor of the estate sued Logan for breach of contract under the oral arrangement.

“The general rule has long been that a real estate commission is earned when a ready, willing, and able buyer is produced to whom the property is eventually sold on terms that are satisfactory to the seller.”  The court found that Ellis had produced a ready, willing and able buyer without any involvement by Logan and had earned a commission on the transaction.

Logan argued that the oral commission-sharing agreement she had with Ellis was one for personal services that terminated upon Ellis’s death. “Contractual obligations generally survive the death of one of the parties. The exception to this rule is a contract for ‘personal services.’  This is because performance of this type of contractual obligation depends on the existence of a particular person, or because one party relies on the skill or character of the other party, or because the contract is based on a personal confidence between the parties.”

The court did not necessarily agree that Ellis’ oral commission arrangement with Logan was for personal services, but even if it were, “the only service that was personal to Ellis was his ability to bring together a buyer and seller for the purchase of a Kwik Kar shop.”  According to the court, the evidence showed Ellis fully performed his obligations under the contract before he died. The court affirmed the trial court’s ruling that Logan owed Ellis’ estate the commission, less the deductions due Logan.

Seller’s attempt to avoid sale with new mortgage was unsuccessful.

In Chung v. Pham, 2020 IL App (3d) 190218, defendant seller (“Sonny”) agreed in 2014 to sell to plaintiff buyer (“Dawn”) a commercial property for over $202,000. In the sales contract Sonny warranted that he had good title and that he had no leases or other agreements of any kind whereby a party could claim any title, right or interest that had not been disclosed. A mortgage held by a local bank was disclosed.

After Sonny refused to close at the agreed time, Dawn filed a suit for specific performance and unsuccessfully tried to serve Sonny 14 times before his attorney finally agreed to accept service of the suit on April 21, 2015, whereupon Dawn filed a lis pendens against the property with the County Recorder. Prior to that date, however, on March 5, Sonny borrowed $201,000 from his sister (“Cindy”), paid off the bank loan, and secured the new loan from Cindy by executing a mortgage in her favor.

The circuit court granted Dawn summary judgment against Sonny and ordered him to convey the property to Dawn. Sonny filed an appeal. While that was pending, Sonny’s sister, Cindy, filed a petition to intervene in the case and also a separate complaint to foreclose on her mortgage.

One of the main issues in the case was whether Cindy could validly intervene or foreclose on her mortgage. She argued that her mortgage was superior to Dawn’s interest under the sales contract because it was recorded before Dawn served Sonny in the underlying lawsuit and recorded a lis pendens notice.

The court explained that the doctrine of lis pendens began as an equitable remedy that bound all subsequent purchasers or encumbrancers of property to the outcome of a pending lawsuit affecting the title to or lien on that property. The lis pendens doctrine was premised on the notion that the existence of a lawsuit triggers constructive “notice to the world.”  That worked just fine when communities were small and everyone knew what lawsuits were pending. Today, just filing a lawsuit cannot be considered notice to anyone.

In Illinois, the law (735 ILCS 5/2-1901) requires a party to affirmatively provide formal constructive “notice to the world” of the pending lawsuit by filing a lis pendens notice against the property involved in the county recorder’s office. Without such a filing, a subsequent third party purchaser or encumbrancer of property that is the subject of a pending lawsuit will not be bound by the outcome of that pending lawsuit. Typically, the lis pendens notice is not filed until the defendant has been served. However, the court ruled that even if a lis pendens is not filed, section 2-1901 does not alter the harshness of the common law doctrine for third party subsequent purchasers or encumbrancers of property who have direct knowledge, i.e., actual notice, of a pending lawsuit.

In this case, Cindy admitted in depositions that she had actual notice of the underlying lawsuit before she obtained and then recorded her mortgage. She also admitted that she discussed the underlying lawsuit with Sonny, despite the fact that he was not served with a summons until after Dawn’s 14 good faith but unsuccessful attempts. The court concluded that, although “Cindy may have lacked a malicious intent, we conclude she knowingly aided Sonny’s encumbrance of the commercial real estate, which was an act in derogation of the representations, warranties, and covenants contained in the purchase agreement relating to the underlying lawsuit.”

Because Cindy had actual notice of the equities involved in Dawn’s lawsuit, her subsequent mortgage was not superior to Dawn’s interest in the property. The trial court’s ruling that Sonny was required to sell the property to Dawn without being subject to Cindy’s mortgage was affirmed.

Company fined for violating Telemarketing Sales Rule

In United States v. DISH Network, LLC, No. 17-3111 (7th Cir., March 26, 2020), the district court found that DISH and its agents violated the Telemarketing Sales Rule issued under the federal Trade Commission Act and fined DISH millions of dollars based on each sales call made in violation of the rule. DISH appealed the decision that it was responsible for the acts of the companies it hired to make those sales calls.

The Telemarketing Sales Rule prohibits (i) calls to people who placed their names on the National Do Not Call Registry, (ii) calls to people who placed their names on a vendor’s internal do-not-call list, and (iii) “abandoned” calls (so named because a system that fails to put the consumer in contact with a live person within two seconds of the call connecting is deemed “abandoned”).  DISH argued that its contracts with the companies required them to follow all applicable laws and regulations and that, therefore, it should not be held responsible if the companies violated the Telemarketing Sales Rule.

The Court of Appeals disagreed. “The norm of agency is that a principal is liable for the wrongful acts of the agent taken within the scope of the agency—that is, the authority to complete the task assigned by the principal. …A principal that learns of illegal behavior committed by its agents, chooses to do nothing, and continues to receive the gains, is liable for the agent’s acts.”

The companies hired by DISH were authorized to sell DISH’s service by phone nationwide. In exercising that authority, the companies made calls that violated the telemarketing prohibitions. DISH knew about the companies’ wrongful acts (a factual finding not challenged on appeal). That was enough to make DISH liable as the principal.

Plaintiff allowed to pierce corporate veil of companies owning and managing mobile homes

In Angell v. Stantefort Family Holdings LLC, d/b/a Tri-Star Estates, 2020 IL App (3d) 180724, plaintiff was seriously injured when she was being shown a mobile home at Tri-Star Estates. Plaintiff stepped into an uncovered vent hole in an unlit bathroom. She filed suit against Santefort Family Holdings, LLC (defendant), which owned the real-estate where Tri-Star Estates is located, for negligently failing to cover the vent hole or warning her.

Defendant’s Chief Operating Officer and Chief Financial Officer (“Gallagher”) testified that the Santefort Family 2012 Irrevocable Trust (irrevocable trust) owned Santefort Real Estate Group, LLC, which in turn owned and operated defendant. There were at least 11 companies related to the irrevocable trust, each set up as a separate legal entity and managing a specific home community or apartment building. Gallagher testified that it was common to have separate corporations for real estate holdings, for management, and for sales.

Gallagher was the chief operating officer of a number of the Santefort companies, including Gallagher Santefort Property Management, Inc. (“SPMI”), whom defendant hired under this structure to manage properties within the umbrella of the irrevocable trust. Another entity, Midwest Home Rentals, LLC (Midwest), owned the mobile homes on the Tri-Star Estates property. Midwest’s personnel handled the sales. Gallagher was also the chief operating officer of Midwest.

Gallagher admitted that it was “hard to keep track of” all the various entities and managing companies. Therefore, Santefort Services, LLC was created on January 1, 2016 to centrally pay the employees of the entire organization through a single entity.

Defendant filed a motion for summary judgment, arguing that it did not own the mobile home at issue and, therefore, owed Angell no duty of care. Angell responded, arguing in part that defendant and Midwest were “inextricably linked, functioned as a “single business” under the Santefort Family 2012 irrevocable trust umbrella, and, therefore, Defendant was liable for the tort of Midwest under the doctrine of piercing the corporate veil. The trial court granted defendant’s motion.

In Illinois, “the doctrine of piercing the corporate veil is an equitable remedy.”  It “is not itself a cause of action but rather is a means of imposing liability on an underlying cause of action, such as a tort or breach of contract.”  It allows courts “to pierce the veil of limited liability where the corporation is merely the alter ego or business conduit of another person or entity.”  It can be used to reach shareholders of a corporations or “sister” corporations.

The corporate veil can be pierced where “(1) there is such a unity of interest and ownership that the separate personalities of the corporations no longer exist and (2) circumstances exist so that adherence to the fiction of a separate corporate existence would sanction a fraud, promote injustice, or promote inequitable consequences.”  Courts look at a number of factors to determine whether there is a unity of interest, including failure to observe corporate formalities, commingling of funds, and failure to maintain arm’s-length relationships among related entities.

In this case, the court found that defendant blurred the lines between itself, Midwest and SPMI. Under the irrevocable trust’s structure, defendant owned the real-estate property, Midwest owned or held the home as inventory for sale, and SPMI managed the property. First, the same person, Gallagher, was chief operating officer of multiple entities, including defendant and Midwest. Second, the entities failed to maintain arm’s length relationships in transferring assets as “accounting entries” and recording revenues from Midwest in defendant’s accounting books. The companies commingled funds, especially when a single payroll function was placed into one corporation. Further, documents regarding the actual ownership of the mobile homes were unclear. Gallagher also admitted it was hard to keep the entities’ operations separate.

The court concluded that defendant, Midwest, and SPMI were affiliated or sister entities that were so inextricably linked they could not be considered separate entities. The court held that applying the doctrine of piercing the corporate veil to disregard the separate legal identities of defendant and Midwest was appropriate in this case and reversed the trial court’s grant of defendant’s motion for summary judgment.