In a recent Money Magazine article, Partner Paul Golden explains some of the legal issues surrounding the ruling on real estate commissions by brokerage firms.

Here’s What’s Next for the Housing Market After a Massive Realtor Lawsuit

By: Leslie Cook Nov 09, 2023

Change is coming to how homes are bought and sold.

The U.S. real estate industry was shocked last week when the jury in a class action lawsuit against the National Association of Realtors and two major brokerage firms, Keller Williams and HomeServices of America, decided they conspired to keep real estate commissions higher than needed. After a two-week trial that ended Oct. 31, jurors awarded the plaintiffs $1.78 billion in damages.

Now, everyone from brokerages to independent agents is trying to figure out what the future will look like once the dust has settled. The decision, says Steve deGuzman, CEO of rehavaPress, a software development company for real estate brokerages, could bring benefits “not only to consumers but to the industry all around.”

The lawsuit, known as Sitzer/Burnett, centered around the NAR’s participation rule and the practice of agent commission sharing. Under the rule, in order to advertise a property on a listing site, the seller’s agent must offer compensation to buyer agents. The aim is to attract more people interested in purchasing a home.

When it sells, the listing agent’s commission, which typically averages between 5% and 6% of the sales price and is paid from the proceeds, is split with the buyer’s agent. But the plaintiffs in the lawsuit alleged — and the jury agreed — that this practice unnecessarily increased the real estate transaction cost for sellers.

What happens next?

The next step in the process is for the judge hearing the case, Stephen Bough, to determine the final damages, which could exceed the amount the jury awarded, says Paul Golden, partner at the Coffey Modica law firm.

Golden says Bough could decide to “issue treble damages — that is, three times the damages” awarded by the jury, which would increase the judgment amount to over $5 billion. He could also grant the plaintiff’s court costs, including attorney’s fees and prejudgment interest.

More broadly, Bough could make changes to the commission sharing rule, ban it altogether on a national level or decide to modify the system. If the judge opts to outlaw commission sharing altogether, home sellers and listing agents would no longer be able to determine how much to offer a buyer’s agent or include the information on a listing site — a change that would drastically alter the industry.

Who qualifies for NAR damages?

Sitzer/Burnett is a class action lawsuit in Missouri representing over 500,000 home sellers in that state. Only members of the class are eligible to receive damages as a result of the lawsuit.

But anyone expecting to get a nice chunk of change has a long time to wait. NAR, Keller Williams and HomeServices of America have all signaled their intent to appeal the verdict. (Re/MAX and Anywhere Real Estate, two other defendants in the case, reached settlements with the plaintiffs before the trial and are not included in this decision.)

“These lawsuits are probably going to take years to work through the court system,” says Laura Ellis, chief strategy officer at brokerage Baird & Warner.

It could take up to two years after all the appeals have run out for the plaintiffs to receive any compensation if the damages are confirmed. The amount paid out will depend on how much the final award is after attorney fees and court costs are subtracted.

But Missouri residents aren’t the only ones in line for a payout. There’s another class action lawsuit against NAR, known as Moerhl, set to go to trial sometime next year. Potential damages in that case, which is also targeting commission sharing, could go as high as $40 billion.

A third lawsuit, known as Gibson, with similar claims against NAR was filed within hours of the Sitzer/Burnett decision, naming other major brokerages, including Redfin, Douglas Elliman and Compass, as co-defendants. The class action lawsuit covers home sellers nationwide and could seek damages of up to $200 billion.

What does the NAR lawsuit ruling mean for buyers?

While the monetary outcome of the jury’s decision is unclear, the future of agent commissions is downright murky — and it all depends on what the judge decides.

If Bough strikes down the commission sharing rules, entirely or partially, it opens up a world of possibilities. Buyer agents would no longer be able to advertise their services as free (though they have never been free because the seller has always paid them). Instead, they’d have to be upfront about their fees, regardless of who pays them.

Buyers will still have the option of omitting the services of a realtor and working directly with a listing agent. But for those who want the expertise of an agent to guide them through the negotiation process, the upfront costs of buying a home could increase.

Ellis says some brokerages, including hers, could require clients to sign a buyer’s agreement specifying the services the agent will provide, their commission and the buyer’s responsibility to pay the fee if the seller doesn’t cover it. If the buyer has to pay their agent, it could add thousands of dollars to the cost of a home purchase — on top of the down payment and closing costs.

In the end, “the market is ultimately going to determine the value of that buyer agent’s services,” says Ellis.

What does the NAR decision mean for sellers?

Home sellers are likely to see a more immediate benefit. If commission sharing is no longer allowed, a seller would negotiate a fee with their agent, and a buyer would do the same with their representative. For sellers, this could be a positive: They would no longer have to pay another agent out of their home sale profits.

Indeed, some brokers are already taking steps to eliminate commission sharing from their listings, says deGuzman of rehavaPress, adding, “that’s going to immediately save the seller anywhere from 3% or more.”

A business model based on fixed-fee compensation, where the seller or buyer pays a flat fee for their respective representative’s services, could also emerge and help keep home selling and buying costs down for both parties.

There’s a lot about the Sitzer/Burnett decision that has yet to be determined. The full effects of not only this lawsuit but also others still working their way through the courts will certainly have an impact on the housing market, but the scope isn’t clear.

In the meantime, deGuzman says, “it’s going to be chaos for about a year.”

BY PAUL GOLDEN

This article appeared in the September Issue of New York Real Estate Law Reporter

On June 14, 2023, the Second Department decided Walsh v Ocwen Loan Servicing, LLC. The court, with little fanfare, appeared to rule that cooperative apartment owners are saddled with an unavoidable risk of loss.

That is, if a lender alleges that the owners have defaulted, and then conducts a nonjudicial foreclosure sale, the former owners are left with few remedies. Re-gardless of whether the owners were truly in default, and regardless of whether they were notified of the sale, they can lose their home — for good.
A co-op shareholder does not have the same protections that a traditional homeowner has. The owner of a house, for example, who defaults on a mortgage, would not lose the home in a foreclosure sale until and unless the lender con-ducted a judicial foreclosure action, and until and unless the homeowner had the opportunity to present defenses to the court, and then only if the court specified at the end that the foreclosure would take place.

Shareholders of co-ops do not have those protections. Shareholders do not use the mortgage system — they obtain loans which are secured by their shares. If a lender deems the shareholder to have defaulted, the lender can ultimately conduct a nonjudicial foreclosure sale. This is just as it sounds — the court is not involved at all.

In any event, Walsh concerned a couple that owned cooperative shares to their home, an apartment, for fifteen years. Their position was that their shares (and corresponding lease) were inexplicably sold at a non-judicial foreclosure sale on Jan. 29, 2019. The closing then took place on July 18, 2019. The couple only found out that their cooperative shares had been sold at a foreclosure sale when the successful bidder arrived at their doorstep and claimed that he was the new owner of those shares. That bidder eventually filed a holdover proceeding to evict the couple from their home.

In September 2019, the couple filed an action against Ocwen Loan Servicing, LLC (Ocwen), the alleged assignee of the underlying note. They claimed they were not in de-fault of their promissory note and security agreement, and that they were not even served with any no-tice about the auction.
In the context of their case, the couple moved for a preliminary in-junction, seeking, among other re-lief, to enjoin the eviction during the pendency of the action. In May 2020, Hon. Jimenez-Salta of the Kings County Supreme Court granted the preliminary injunction, based in part on her ruling that there were serious questions on whether plaintiffs were actually in default of the promissory note and security agreement. The successful bidder then appealed.

On appeal, there were two diametrically opposed ways of viewing property rights. The successful bidder argued that UCC 9-617(b) gave him absolute rights of ownership. Under that statute, after there is a sale, a “good-faith transferee” obtains full rights to the collateral “even if the secured party [i.e. the lender] fails to comply with this article ….” The couple, conversely, argued that UCC 9-617(a) applied – which indicated that a secured par-ty only disposes of collateral after a “default.” The couple argued that the Legislature sought to make sure, when they passed UCC 9- 617(a), that parties such as plaintiffs would have to be in “default” in order for the purchaser to potentially obtain rights. They also argued that, to allow them to lose their home even if they were not in default, would violate the Due Process clause of the New York Constitution.

The court did not explicitly discuss the meaning of “default” in the stat-ute. Instead, the court simply ruled that “Where, as here, a debtor pledg-es cooperative shares and a corre-sponding proprietary lease as secu-rity for a debt, article 9 of the UCC applies to the enforcement of the se-curity interest.” Then the court held that the plaintiffs had not established that “that the relief they seek, in ef-fect, to vacate the sale of the shares and proprietary lease following the closing, is available under article 9 of the UCC.” Therefore, it held that the plaintiffs’ remedy was to seek monetary damages against Ocwen. Finally, it held that plaintiffs were not entitled to a preliminary injunction.

There are several critical issues that arise from this order.

One is that, at least in the Second Department, it appears a potential bidder has relatively few worries about whether he or she will actu-ally obtain viable and enforceable rights, in a nonjudicial foreclosure sale, at least once the closing takes place. Therefore, theoretically, such bidders will be willing to offer clos-er to the full value of the shares in a nonjudicial foreclosure sale. This is potentially beneficial for a de-faulting shareholder; the higher the sales price, the less the debt to the lender. There is even a chance the defaulting shareholder could obtain proceeds, to the degree they exceed the sum owed.

Second, a shareholder’s rights are extremely precarious, especially if dealing with a lender that cannot handle accounting records or notic-es properly. In the lender makes a mistake about: 1) whether there was a default; 2) how and when to serve the borrower with notice about the alleged default; or 3) both, then the borrower may suddenly find he no longer owns the shares at all. In such a case, the borrower apparent-ly has few options except to seek relief against the lender. But the chance to potentially win a money judgment against a lender, years af-ter the sale, will be cold comfort to a person kicked out of his home.

Third, lenders should take ex-tremely strong precautions in mak-ing sure that their accounting re-cords are in order, and that they serve notices on an alleged default-ing debtor perfectly, and that all t’s are crossed and i’s are dotted.

Otherwise, the former debtor may be unable to vacate the sale, and will have no choice but to seek full relief against the lender.

Fourth, the courts may eventually need to further clarify how far the law goes. In an extreme case, one could have borrowed funds, but fully paid them back to the lender. In such a case, if the lender makes an incredible error, and “sells” these same shares to a high bidder, which were formerly a security for the debt, how would the court handle it? A bidder would point to the Walsh case and argue that there is no way to seek to vacate a sale of shares under article 9 of the UCC. But presumably, even an extremely cold-hearted court would not go that far.

Read the full September 2023 issue of New York Real Estate Law Reporter.