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An Iowa appellate court has considered whether a secured lender could be liable for broker’s commission by waiting until closing to request a larger share of the sale proceeds.
All States Quality Foods, LLP (“Owner”) listed a warehouse for sale with Iowa Realty Commercial and Larry Stewart Realty (“Broker”). Iowa Realty and the Broker had a joint listing agreement for the property; eventually, Iowa Realty assigned all of its commission rights to the Broker. The parties extended the listing agreement a number of times over the years.
In the meantime, the Broker found a tenant for the property, Midwest Bakery L.L.C. (“Tenant”). Within the lease, the Tenant had a right of first refusal if the Broker produced a buyer for the property during the term of the lease.
In 2006, the Owner encountered financial difficulties. The Owner owed approximately $6 million to Highland Crusader Offshore Partners, L.P. (“Lender”). The Lender hired Barrier Advisors, Inc. to help wind down the Owner’s business activities. Barrier sent Harold Kessler (“Kessler”) to oversee this process.
In May 2006, the Broker received an offer to buy the Owner’s property. Kessler reviewed the offer with the Owner, and authorized the Broker to submit a counteroffer. The counteroffer was accepted, and so the Broker drafted a document detailing the likely distribution of closing proceeds. Based on this analysis, the Lender would receive less than $110,000 from the sale.
The Tenant also received notice about the pending sale. Following the receipt of this notice, the Tenant exercised its right of first refusal and sought to purchase the property. The Tenant gave the Broker its earnest money, and the Broker informed Kessler and the Owner that the parties were ready to close.
At this point, the Lender informed the parties that it would not accept less than $130,000 from the sale. While the Broker did offer to cut his commission by 10% in order to help the transaction close, the Lender still would not have received the amount it sought from the closing. Therefore, the Lender refused to release its lien on the property and the transaction collapsed.
The Broker filed a lawsuit against the Lender, claiming that he had satisfied the terms of the listing agreement and was entitled to a commission. The trial court ruled in favor of the Broker and awarded him a commission, and the Lender appealed.
The Court of Appeals of Iowa affirmed the lower court’s award to the Broker. The court first looked at the breach of contract allegations. The trial court had ruled that because the Lender controlled the Owner’s assets, the Lender had assumed the listing agreement between the Owner and the Broker. The court reversed this ruling, finding that there was no contract between the Broker and the Lender. While the Lender had exercised significant control over the Owner’s assets, this did not create a contract between the parties. Thus, the court rejected the breach of contract allegations against the Lender.
Next, the court considered interference with contract claims. The question before the court was whether the Lender had improperly interfered with the contract. The Lender argued that it did not intentionally and improperly interfere with the listing agreement, but instead was attempting to mitigate its losses by maximizing profits from the sale of the Owner’s property. Courts look at a series of factors to determine whether a party improperly interfered with a contract, such as the nature of the other party’s conduct and the relationship of the parties. A party does not act improperly if the party is exercising his/her own legal rights to protect his/her interests.
The court found that the Lender had acted improperly by allowing the Broker to forward a counteroffer without disclosing that the Lender would only allow the transaction to close if it received a certain amount from the sale. While the Lender had the right to demand a certain amount from the sale, it knew that the sale to the Tenant would not likely generate that amount but still let the transaction proceed without alerting the parties that it would seek to obtain proceeds greater than the transaction could generate. The court found that this behavior amounted to bad faith, and harmed the Broker because he had continued to work towards completing the transaction. Thus, the court affirmed the trial court and awarded the Broker his commission.
Stewart v. All States Quality Foods, L.P., 771 N.W.2d 652 (Iowa Ct. App. 2009).