Brief Fact Summary.
Premier Van Schaack Realty, Inc. (Premier) (Plaintiff), a realtor, argued that Plaintiff was entitled to a brokerage commission because Sieg’s (Defendant) transfer of real property to a limited liability corporation during the term of a listing agreement between the parties created a sale or exchange within the meaning of the listing agreement.
Synopsis of Rule of Law.
The transfer of property to a limited liability company does not create a sale or exchange where the transferor basically maintains the same ownership interest he had in the property before the conveyance, and can prevent the record owner from encumbering the property without his permission.
Sieg (Defendant) owned real estate and had a listing agreement with Premier Van Schaack Realty, Inc. (Premier) (Plaintiff). During the term of the listing agreement, Plaintiff introduced Defendant to several people (collectively, DVJ) who offered to buy the property. However, the sale never closed.Â A few months afterwards, still during the term of the agreement, DVJ proposed forming an LLC, to be called MJTM, with Defendant.Â The parties signed an operating agreement under which Defendant would convey his property to MJTM and would receive a 40 percent interest in the LLC and a preferential return of 9 percent on future profits.Â The agreement also provided that Defendant had a beginning balance of $670,000 in his initial capital contribution account, that MJTM assumed $580,000 of Defendant’s debt, that the property was worth $1.3 million, that the other members of MJTM would not encumber the property without Defendant’s approval, and that, â€œNo Member shall be personally liable to any other Member for the return of any part of the Members’ Capital Contributions.â€Â After Defendant transferred title to the LLC, it borrowed $1.413 million secured by a lien on the property.Â All of the members of MJTM personally guaranteed the loan, and, with the proceeds from this loan, MJTM paid off a $300,000 loan to Defendant secured by the property.Â When Plaintiff learned of Defendant’s transactions with MJTM, it demanded its commission of 7 percent on $1.3 million, claiming that the transaction constituted a sale or exchange as required by the listing agreement.Â When Defendant refused to pay, Plaintiff brought suit.Â Defendant claimed that his contribution of the property was not an exchange or sale, but an investment.Â Plaintiff sought payment of its commission, but the trial court granted summary judgment to Defendant, finding that the transaction lacked consideration and, therefore, was not a sale or exchange.Â The state’s intermediate appellate court granted review.
Does the transfer of property to a limited liability company create a sale or exchange where the transferor basically maintains the same ownership interest he had in the property before the conveyance, and can prevent the record owner from encumbering the property without his permission?
(Greenwood J.)Â No.Â The transfer of property to a limited liability company does not create a sale or exchange where the transferor basically maintains the same ownership interest he had in the property before the conveyance, and can prevent the record owner from encumbering the property without his permission.Â There must be consideration for a sale or exchange to occur.Â Sieg (Defendant) argues that his interest in MJTM, including the preferential interest in future profits and an initial capital contribution account balance, cannot serve as consideration because Defendant maintained an ownership interest in the property, and any debt relief does not count as consideration because Defendant was personally liable for his personal debt plus the debt of MJTM secured by the property.Â Defendant is correct in this case, that he did keep a significant ownership interest in the property that caused him to assume the risks of an investor instead of the risks of a seller.Â He is also correct that the debt relief promised in the operating agreement was not true, as MJTM did not actually relieve Defendant of debt, but instead caused him to personally incur nearly three times more debt than he owed on the property prior to joining MJTM.Â Regardless of whether MJTM could buy property in its own name separate from its members, the key is whether there was valuable consideration.Â The facts in this case demonstrate that Defendant’s ownership interest in the property was largely the same after the deed to MJTM was executed, and because he could prevent the record owner from encumbering the property without his permission, a sale or exchange according to the listing agreement did not occur as there was no consideration.Â Affirmed.
In the court’s conclusion, it emphasizes the investment nature of the transaction, noting that when a person becomes an investor, that person assumes the risk that the value of the investment will increase or decrease over time, or that the investment may be lost completely.Â As a general rule, however, once a person sells property, whether there is appreciation, depreciation, or total loss of the property is of no concern as the sale severs the seller from any interest in the property.Â In this case, Defendant still kept a substantial ownership interest in the property, so that he risked the potential value of its future sale.Â In addition, the value of Defendant’s interest in MJTM was directly tied to the value of the property since the property was the only asset owned by MJTM.