An Ohio appellate court has considered whether a real estate brokerage is required to pay a commission advance company directly a salesperson's portion of the commission, which the salesperson had assigned to the commission advance company. Click here to read a summary of the lower court's decision in this case.
Commission Express National, Inc. ("Commission Express") advances money to real estate salespeople by providing them an immediate payment for a future commission at a discounted rate. The cash advance is for a commission in a transaction which is under contract but not yet closed. The salesperson executes an assignment requesting the salesperson's broker to pay the salesperson's portion of the commission directly to Commission Express at closing through a secured instrument, which is filed with the secretary of state and notification is given to the brokerage about the assignment.
Ohio has a law which states that "[n]o broker shall pay a fee, commission, or other compensation that is due to an affiliated licensee to a third party creditor of the affiliated licensee." In May 2002, Ohio Factors, Ltd. d/b/a Commission Express of Northeast Ohio, a Commission Express franchisee ("Franchisee"), entered into an agreement with real estate salesperson David Matthews ("Licensee"), who was affiliated with Realty One ("Brokerage"). Based on Ohio law, the Brokerage refused to honor an assignment it received from Commission Express, stating it would be illegal for the Brokerage to honor this assignment.
Commission Express filed a lawsuit against the Brokerage based on the Brokerage's refusal to pay it the assigned commission. Both parties filed motions with the trial court seeking judgment in their favor, with the State of Ohio intervening in the lawsuit in support of the state's law. The trial court ruled in favor of the Brokerage, and Commission Express appealed.
The Court of Appeals of Ohio, Eighth District, partially affirmed and partially reversed the trial court's decision. Commission Express argued that the Ohio law did not bar the Brokerage from paying the commission, as the Ohio law only bars payments "to a third party creditor of the affiliated licensee". Commission Express argued that it was an assignee and not a creditor of the Licensee, pointing to language in the instrument executed by the Licensee and Commission Express. The term "creditor" is not defined in the Ohio law.
The court found that if Commission Express had only purchased an account receivable from the Licensee and was only acting as an assignee, then the assignment would be outside of the Ohio law and the Brokerage would not be prevented from paying the commission to Commission Express. However, if Commission Express paid an advance to the Licensee in the form of a secured loan, then Commission Express would be acting as a third party creditor of the Licensee and so the Ohio law would bar the payment of the commission to Commission Express. The court found that defining Commission Express's role in this transaction was a question of fact and so needed to be resolved by a jury. Thus, the court reversed the ruling in favor of the Brokerage and sent the case to the trial court for further proceedings.
Based on the ruling that Ohio law may not have barred the Brokerage's payment to Commission Advance, the court also sent Commission Express's tortious interference with a contract allegations back to the trial court for further proceedings. The court affirmed the trial court’s rejection of Commission Express’s challenge to the constitutionality of the state’s law.
Comm'n Express Nat'l, Inc., v. Realty One, No. 84745, 2005 WL 488933 (Ohio Ct. App. Mar. 3, 2005). [This is a citation to a Westlaw document. Westlaw is a subscription, online legal research service. If an official reporter citation should become available for this case, the citation will be updated to reflect this information].
Editor's Note: NAR contributed financial support to this case on behalf of the broker, pursuant to the recommendation of NAR's Legal Action Committee. Following the appellate court's remand of this case back to the trial court, Commission Express voluntarily dismissed its lawsuit against the Brokerage.