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Court Overturns Association Arbitration

Read the full decision: Sotheby's Intl. Realty v. The Relocation Group, LLC

A Connecticut federal court has considered a challenge to an arbitration award made by a REALTOR® association.

Sotheby’s International Realty (“Listing Broker”) served as a listing broker for a property located in Greenwich, Connecticut.  The Listing Broker placed the property into the Greenwich Multiple Listing Service (“MLS”), offering a cooperative commission to other participants who produced a buyer for the property.

Meanwhile, real estate firm The Relocation Group (“Relocation”) entered into a representation agreement with Amy Kauffman (“Buyer”) on October 19, 2010.  The agreement expired on June 30, 2011. 

On August 19, 2011, the Buyer entered into a new representation agreement with the Listing Broker.  A week later, the Buyer entered into an agreement to purchase the Greenwich property, directing the entire commission to the Listing Broker.  Prior to closing, Relocation filed a broker’s lien on the property, claiming that it was entitled to its portion of the commission for producing a buyer for the property.  The Listing Broker also filed a broker’s lien claiming the entire commission, and the commission from the buyer’s representative side of the sale was placed into escrow at the closing, as required by the state’s broker lien law.

Thereafter, the Listing Broker filed a lawsuit seeking a judicial determination over who was entitled to receive the cooperative commission from the sale of the property.  Two months after the Listing Broker filed the lawsuit, Relocation filed a motion seeking to compel arbitration and stay the lawsuit, arguing that both parties’ membership in the Greenwich Association of REALTORS® (“Association”) and NAR required them to arbitrate the dispute.  The trial court found that Article 17 of NAR’s Code of Ethics required the arbitration of the dispute and so stayed the lawsuit pending the arbitration. 

The Association’s arbitration panel awarded half of the commission to Relocation.  The Listing Broker requested a procedural review of the decision, but the Association’s board of directors adopted the decision of the arbitration panel.  The Listing Broker withdrew its state court action and filed a lawsuit in federal court challenging the arbitration conducted by the Association.  Both parties filed motions seeking judgment in their favor.

The United States District Court for the District of Connecticut ruled that the Association’s arbitration panel’s award to Relocation constituted a “manifest disregard for the law” and so the court vacated the award.  When courts review challenges to arbitration proceedings, the proceedings are entitled to judicial deference and the review is usually limited to the grounds enumerated by statute.  However, courts within the Second Circuit also recognize a non-statutory ground for review if the arbitrator’s decision constitutes a manifest disregard for the law.

The court looked at the state statute allowing licensees to collect commissions.  The statute contains seven specific requirements for those seeking to collect a commission, including that there be a written agreement allowing the individual to collect the commission.  Since Relocation was seeking portion of the commission, the court determined that it would need to comply with this statute.  The court ruled that Relocation was attempting to collect a commission pursuant to the Listing Broker’s agreement with the seller.  Therefore, Relocation’s commission claim from the Listing Broker would need to comply with the seven requirements in the state statute for commissions. 

The court found that Relocation had failed to meet the requirements of the statute, as Relocation did not have a representation agreement with the Buyer at the time of the transaction because its representation agreement had expired two months before closing.  Because the court found that Relocation had not complied with the commission statute, the court ruled that Relocation could not collect a commission under state law.  Based on assertions made by the Listing Broker’s counsel that he had mentioned the commission statute during the arbitration, the court determined that the Association’s arbitration panel had been aware of the commission statute and so its award constituted a manifest disregard for the law.  Thus, the court vacated the award to Relocation.

Sotheby's Int'l Realty, Inc. v. Relocation Grp., LLC, No. CIV.A. 12-01322-WGY, 2013 WL 6704876 (D. Conn. Dec. 9, 2013).  [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:  Upon the recommendation of NAR’s Legal Action Committee, NAR provided financial support to Relocation in its attempt to uphold the arbitration award by the Association’s panel.  Relocation is appealing the trial court decision.