A federal appeals court has considered whether a financial advisor involved in the securitization of mortgages is required to have a real estate license in order to collect a commission.
The Stephen A. Goldberg Company ("Owner"), based in the District of Columbia, owned and managed a number of apartment complexes in Maryland and Virginia. The Owner retained Remsen Partners, Ltd. ("Broker"), based in New York, to serve as a financial consultant in arranging the "securitized" refinancing of the Owner's holdings. Securitization is a method of raising money by creating securities in an income-producing holding. As payment for the Broker's services, it was to receive a percentage-based fee as well as various closing costs.
Following the closing of the securitization, the Owner began making payments to the Broker, as set forth in their agreement. However, the Owner stopped making payments before it had paid the Broker in full. The Owner filed a lawsuit seeking a judicial declaration that it did not owe the Broker any more money because the agreement was void and unenforceable, since the Broker was not a licensed real estate broker in the District of Columbia. The court ruled in favor of the Owner, and also ruled that the Broker had to repay all of the money it had already received from the Owner. The Broker appealed.
The United States Court of Appeals, District of Columbia Circuit, affirmed the trial court's ruling that the Broker needed to be licensed in order to collect a fee from the Owner. The court first considered whether New York or the District of Columbia's law applied to this case, which was important because the Broker argued that New York law did not require a real estate license to broker a securitization transaction. The court looked to the "choice-of-law" rules used by District of Columbia courts, which are the rules that a court uses to determine which jurisdiction's laws apply when there is a conflict. The District of Columbia's choice-of-law rules require a court to consider a variety of factors, which the court found were not helpful in reaching a decision on which law should govern this dispute. Therefore, the court decided that because the choice-of-law tests failed to determine which law governed the dispute, the court applied the law of the jurisdiction in which it was sitting, namely District of Columbia law.
The District of Columbia real estate license law is designed to protect consumers from entering into agreements with unlicensed real estate brokers. A real estate license is also required for an individual to bring an action for compensation for real estate services. Here, the Broker argued that the funds received from the transaction came from securities, not loan proceeds. The court rejected this argument, ruling that mortgages were a central part of the transaction. The license law states that a real estate license is required for anyone who "negotiates a loan secured by a mortgage, deed of trust, or other encumbrance on real property." Thus, the Broker was required to be licensed in the District of Columbia.
The court also rejected the Broker's argument that it was only an "advisor." The court found that the Broker acted like a traditional broker by introducing the Owner to the investment bank that arranged the securitization and the Broker also received a payment based on the amount of the loan.
The Broker's final argument was that the license law only applies to mortgages when there is a transfer of real estate, which there was not here. The court also rejected this argument, finding that the statutory language quoted above did not require a transfer of real estate, and therefore the Broker was required to have a real estate license in order to collect the fees. Thus, the court affirmed the lower court ruling and stated that the Broker was not permitted to bring a lawsuit for its fees.
The court was unsure if the District of Columbia would require an unlicensed person who received fees for real estate services to return those fees. Therefore, the court certified this question to the District of Columbia Court of Appeals. Following the receipt of an answer to the certified question, the D.C. Circuit ruled that the Broker was not required to give back the payments it had already received from the Owner. [See The Stephen A. Goldberg Co. v. Remsen Partners, Ltd., 2000 WL 1580978 (D.C. Cir. 2000)].
The Stephen A. Goldberg Co. v. Remsen Partners, Ltd., 170 F.3d 191 (D.C. Cir. 1999).