California First District Court of Appeal rules in favor of arbitration in alleged kickback scheme

By Elizabeth Alt | Jun 20, 2017

SAN FRANCISCO — A California appeals court recently reversed a trial court’s decision to reject arbitration requests over allegations of kickback payments made to real estate brokers over the sale of homes.

On May 23, the California First District Court of Appeal ruled that the trial court should not have denied the requests for arbitration.

The legal dispute stems from two “materially identical” class-action suits filed by homeowners in 2015 against a group of real estate brokers, title companies and service providers. The suits alleged that the defendants used TransactionPoint, a software program, to disguise improper kickback payments as sublicense fees.

J. Rockcliff Inc. and Mason-McDuffie Real Estate Inc. were among those named as defendants. The appeals court do not name other defendants in its decision.

The plaintiffs argued that the brokers were not entitled to retain the compensation and sought “declaratory relief, damages, punitive damages and an accounting and disgorgement of the compensation received by defendants from plaintiffs in connection with the home sales,” according to court documents.

The defendants asked the court for arbitration, but the plaintiffs contended that the listing agreement’s arbitration clauses did not apply because they did not dispute their obligation to pay the brokers a commission for selling the homes.

“Because [the] plaintiffs did not all execute the same agreements, three different arbitration clauses in three separate agreements were involved,” according to court filings. “In their motion, [the] defendants contended that all three arbitration clauses require arbitration of the claims in [the] plaintiffs’ complaints.”

The only compensation mentioned in the first arbitration clause, referred to by the court as the residential listing agreement (RLA), “is the commission payable by a seller to the broker.”

The second arbitration clause, referred to as the 2007 residential purchase agreement (RPA), “required arbitration of certain disputes between buyers or sellers and their brokers.”

The third clause, called the 2010 RPA, stipulated that the “buyer and seller agree that any dispute or claim in law or equity arising between them out of this agreement or any resulting transaction… shall be decided by neutral, binding arbitration. [The] buyer and seller also agree to arbitrate any disputes or claims with broker(s).”

The trial court heard the motions to compel arbitration jointly, according the appeals court decision.  

The lower court ruled that the clauses in the RLA and the 2007 RPA were not applicable, but the 2010 RPA was applicable.

“The [trial] court reasoned that the RLA’s arbitration clause does not apply because the clause applies only to disputes over ‘the obligation to pay compensation under this agreement,’ which runs from seller to broker,” the appeals court said in its decision. “Because the basis of the claims is [the] defendants’ alleged failure to disclose the sublicense fees, the court held it does not concern the sellers’ obligation to pay their brokers… The court did, however, find the 2010 RPA arbitration clause applicable to these claims, since the clause applies to all disputes between clients and brokers”

The defendants appealed the trial court’s decision, and the appeals court sided with them.

“The portion of the trial court’s order denying arbitration pursuant to the RLA and the 2007 RPA is vacated and those rulings are reversed,” the appeals court said in its decision. “The matter is remanded to the trial court with instructions to enter an order compelling all plaintiffs to arbitrate their claims with the broker defendants.”

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