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August 23, 2014

Brokerage No Part of the Ponzi Scheme

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Brokerage No Part of the Ponzi Scheme

McConkie v. Rice Properties | U.S. District Court for the District of Utah, Central District

A listing brokerage that received commissions for the sale of two apartment buildings in 2007, after learning the company buying the properties was being operated as a Ponzi scheme, was entitled to keep its commissions, the U.S. District Court for the District of Utah, Central District, ruled. In a Ponzi scheme, investors in a company are paid dividends not by investment earnings but by money obtained through new investors.

The U.S. Securities and Exchange Commission in 2008 charged the company and its officers with fraud and appointed a receiver to take control of the company’s assets. As part of those duties, the receiver filed a lawsuit against the brokerage to recover its commissions from the sale of the two properties. The receiver claimed that, because salespeople at the brokerage learned of the deceitful activities of the company before the transactions had closed, the commissions constituted “fraudulent conveyances.”

The brokerage argued, and the Court agreed, that the commissions for the two transactions didn’t represent a fraudulent conveyance because the money didn’t come from the buyer; it came from the seller. As a result, the brokerage was a “subsequent transferee” and not a direct recipient of the money.

In agreeing, the court said the brokerage served as the listing broker for the sellers of both properties and was paid from the seller’s sales proceeds. Even though the commission payment happened during the course of the closing, the sellers had obtained legal control of the sales proceeds during the closing and the escrow agent was following the seller’s instructions when it made the payments to the brokerage. Thus, the brokerage was a subsequent transferee, not a recipient of the funds from the buyer, so the commissions were off limits to the receiver.

Editor’s Note: Through its Legal Action Committee, NAR provided financial support to the brokerage in its effort to retain its commissions.

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