Premier Van Schaack Realty, Inc. v. Sieg
2002 WL 1058502, 51 P.3d 24, 2002 UT App 173 (2002)
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Rule of Law:
A transfer of real property by an owner to a limited liability company (LLC) in which the owner retains a substantial ownership interest, continues to assume the risks of an investor, and does not receive truly valuable consideration, does not constitute a 'sale or exchange' triggering a real estate brokerage commission under a listing agreement.
Facts:
- On February 7, 1997, Thomas K. Sieg (Sieg) entered into a listing agreement with Coldwell Banker, later assigned to Premier Van Schaack Realty, Inc. (Premier), to 'acquire' (buy, sell, or exchange) his property at 273 North East Capital, Salt Lake City.
- The agreement stipulated that Sieg would pay Premier a 7% brokerage fee if Premier, or anyone else, located a party ready, willing, and able to 'acquire' the property at an agreed price and terms.
- In March 1997, Premier's agent introduced Sieg to Michael Davis, Marion Vaughn, and Jane Johnson (DVJ), who offered to purchase the Property for $1.3 million, and although Sieg accepted their counter-offer, the anticipated sale never closed, and Sieg returned DVJ's earnest money.
- In June 1997, DVJ proposed forming a limited liability company (LLC) with Sieg.
- On September 26, 1997, Sieg and DVJ formed the LLC, MJTM, via an operating agreement, which stated that Sieg would convey the Property to MJTM.
- Under the operating agreement, Sieg received a 40% interest in MJTM, a 9% preferential return on future profits, a beginning balance of $670,000 in his initial capital contribution account (without interest), and MJTM assumed $580,000 of Sieg's debt.
- On January 21, 1998, Sieg transferred title to the Property to MJTM by warranty deed.
- In January 1998, MJTM borrowed $1.413 million from Zions Bank, secured by a lien on the Property, with all MJTM members, including Sieg, personally guaranteeing the loan, and MJTM used part of these proceeds to pay off a $300,000 loan Sieg had secured by the Property.
Procedural Posture:
- Premier Van Schaack Realty, Inc. filed suit against Thomas K. Sieg in trial court, seeking payment of a real estate brokerage commission.
- Both Premier and Sieg filed cross-motions for summary judgment.
- The trial court granted summary judgment in favor of Sieg, ruling that the transaction was not a sale or exchange and thus Sieg did not owe a commission, and additionally awarded attorney fees to Sieg.
- Premier appealed the trial court's decision to the Utah Court of Appeals.
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Issue:
Does a real property owner's conveyance of property to a limited liability company, in which the owner becomes a member and retains a significant ownership interest, constitute a 'sale or exchange' for valuable consideration, thereby entitling a real estate broker to a commission under a listing agreement?
Opinions:
Majority - Greenwood, Judge
No, a real property owner's conveyance of property to a limited liability company, in which the owner becomes a member and retains a significant ownership interest, does not constitute a 'sale or exchange' for valuable consideration, thereby entitling a real estate broker to a commission under a listing agreement. The court affirmed the trial court's grant of summary judgment to Sieg, finding that the transaction between Sieg and MJTM was not a sale or exchange because it lacked valuable consideration. The court defined 'sale' and 'exchange' as requiring valuable consideration, citing definitions that involve a conveyance of title for a purchase price or giving one thing in return for another. The court reasoned that Sieg retained a substantial ownership interest in the Property, causing him to assume the risks of an investor rather than a seller. Similar to cases like Cooley Investment Co. v. Jones and Dahdah v. Continent Realty, Inc., the court found that a change in the form of ownership where the original owner retains an interest, receives no unconditional promise of payment, and assumes investor risks, does not constitute a sale. Sieg's 40% interest, preferential return, and capital contribution account were tied to the property's value as an investment, not a sale. Furthermore, the alleged debt relief was illusory because Sieg personally guaranteed an even larger loan ($1.413 million) that MJTM used to pay off his initial $300,000 debt, effectively increasing his personal liability. While acknowledging that an LLC is a separate legal entity, the court emphasized that the legal structure is less critical than the underlying substance of the transaction regarding valuable consideration and whether the owner truly severs their interest. Since no sale or exchange occurred, Sieg owed no commission, and as the prevailing party under the Agreement, he was correctly awarded attorney fees, and the trial court did not abuse its discretion in determining their reasonableness.
Analysis:
This case clarifies the interpretation of 'sale or exchange' in real estate brokerage agreements, particularly when a property owner transfers title to an entity in which they retain an ownership interest. It establishes that the substance of the transaction—whether genuine valuable consideration is exchanged and whether the owner severs their investment risk—is more important than the form of the legal entity receiving the property. This ruling protects property owners from paying commissions on transactions that are essentially a restructuring of their own investment, and it places a burden on brokers to draft agreements that explicitly cover transfers to joint ventures or LLCs if they wish to collect a commission on such arrangements.
