Smithy Braedon Co. v. Hadid

• Decision Date: 12 August 1987
• Docket Number: No. 87-1050,87-1050
• Citation: 825 F.2d 787
• Parties: SMITHY BRAEDON COMPANY, Plaintiff-Appellant, v. Mohamed Anwar M. HADID; Hadid Investment Group, Inc.; Oasis Development Corporation; Executive Office Centre Limited Partnership; Walter M. Cheatle; Ronam Corporation; James F. Quirk; American Real Estate Corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 787

825 F.2d 787

SMITHY BRAEDON COMPANY, Plaintiff-Appellant, v. Mohamed Anwar M. HADID; Hadid Investment Group, Inc. Oasis Development Corporation; Executive Office Centre Limited Partnership; Walter M. Cheatle; Ronam Corporation James F. Quirk; American Real Estate Corporation Defendants-Appellees.

No. 87-1050.

United States Court of Appeals, Fourth Circuit.

Argued June 30, 1987.

Decided Aug. 12, 1987.

Richard John Morvillo (Andrew D. Koblenz, Richardson, Berlin & Morvillo, on brief), for plaintiff-appellant.

Mark Scott Lindon (Michael H. Selter, Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey, Washington, D.C., Price O. Gielen, Melnicove, Kaufman, Weiner, Smouse & Garbis, P.A., Baltimore, Md., on brief), for defendants-appellees.

Before PHILLIPS, ERVIN, and WILKINSON, Circuit Judges.

ERVIN, Circuit Judge:

This case presents the issue whether a contract for real estate brokerage commissions is unenforceable under statutes and regulations of the District of Columbia, Maryland, and Virginia, when, as executed, the contract provides for the splitting of commissions with an unlicensed broker who performed no services. ¹ The district court held that the contract was illegal and directed a verdict against the plaintiff, Smithy Braedon Company ("Smithy Braedon"), a licensed broker, in its suit for recovery of payments owed it by the defendants for services which the parties agreed had been fully performed by Smithy Braedon. We reverse; the affirmative defense of illegality under these statutes does not preclude recovery by a licensed broker on a contract when the unlicensed broker, with whom commissions were shared, performed no services.

I.

Smithy Braedon is a corporation organized and existing under the laws of the state of Delaware, with its principal place of business in Washington, D.C. Smithy Braedon primarily engages in the real estate brokerage business and is licensed to conduct such business in the District of Columbia, Maryland, and Virginia. Defendant Hadid Investment Group, Inc. ("HIG") is a corporation organized and existing under the laws of the Commonwealth of Virginia with its principal place of business in Rosslyn, Virginia. Defendant Oasis Development Corporation ("Oasis") was a Virginia corporation and was merged into HIG in the fall of 1985. Defendant Executive Office Centre Limited Partnership ("EOC") is a limited partnership organized and existing under the laws of Maryland with its principal place of business in Annapolis, Maryland. Collectively these defendants will be referred to as "the Hadid companies."

Smithy Braedon entered into separate contracts with HIG, Oasis and EOC to procure lessees for rental space owned by those companies. The parties have stipulated that Smithy Braedon provided the leasing agency services called for under its contracts and was therefore entitled, if the contracts were valid, to receive commission payments, calculated on an amount per rentable square foot, from the Hadid companies. Before billing the companies, however Smithy Braedon's leasing representative, Gary Faigen, was contacted by James F. Quirk, who was director of marketing for HIG. Quirk directed Faigen to include a "cooperating broker's commission" in its bills to all the Hadid companies. This commission amounted to one to two dollars extra per square foot of leased space for each building. The Hadid companies were to pay the additional commissions to Smithy Braedon, and Smithy Braedon was then to pay the extra money to a company known as American Real Estate Corporation ("American Real Estate"). Faigen testified that Quirk told him: "We have formed a company called American Real Estate. In the event that there is not a cooperating broker on any particular lease transaction, you will bill us as if there was a cooperating broker, that broker being American Real Estate." App. 176.

Faigen's supervisor, Fernando Barrueta, obtained confirmation from Quirk that these were his payment instructions. Barrueta also met with the president of Smithy Braedon, James Eichberg, and a vice-president, William Comerford, to discuss the arrangement. Eichberg requested that the other two men determine whether American Real Estate had a broker's license, and there was discussion about whether Smithy Braedon was entering into a "gray area" legally. Barrueta testified that he decided that the question of American Real Estate's license did not matter, because he thought American Real Estate was an owner of the buildings, as a party affiliated with the Hadid companies. ²

The evidence introduced on Quirk's authority to enter into this arrangement was that individuals at Smithy Braedon believed that Quirk was a partner of Mohamed Anwar M. Hadid and Walter M. Cheatle, the principals in the Hadid companies, and that Quirk was the normal liaison on all the work done by Smithy Braedon for the Hadid companies. On the other hand, Quirk himself never signed leases or checks on the deals consummated between these companies.

Smithy Braedon did not discover that American Real Estate was unlicensed until after Smithy Braedon had requested payment per the new instructions, had received partial payment, and had paid part of each of its partial commissions from the Hadid companies to American Real Estate. A total of $299,000 was paid to American Real Estate. ³ When Smithy Braedon requested that the Hadid companies pay the balance of commissions due on their brokerage contracts, totaling approximately $528,000, the Hadid companies refused to pay, and demanded that Smithy Braedon return the $299,000 that had been paid to American Real Estate. Smithy Braedon sued to enforce the contracts. The Hadid companies defended on the ground that the contracts, construed as requiring the payment of cooperating broker's commissions to an unlicensed broker, were illegal. The Hadid companies counterclaimed for the money paid to American Real Estate.

The district court denied the Hadid companies' pre-trial motion for summary judgment based on the illegality argument, and again refused to accept the argument when presented as a motion for a directed verdict following the presentation of Smithy Braedon's case. After the Hadid companies put on no direct evidence themselves and renewed their motion for a directed verdict, however, the district court granted the motion in a ruling from the bench.

II.

The standard for granting a directed verdict requires a court to view the evidence in the light most favorable to the non-moving party and draw every legitimate inference in favor of that party; having treated the adjudicatory facts in this fashion, the court must determine whether a reasonable trier of fact could draw only one conclusion from the evidence. See, e.g., Walker v. Pettit Construction Co., 605 F.2d 128, 130 (4th Cir.), modified on other grounds sub nom. Frith v. Eastern Air Lines, Inc., 611 F.2d 950 (4th Cir.1979); Mays v. Pioneer Lumber Corp., 502 F.2d 106, 107 (4th Cir.1974) (judgment n.o.v.), cert. denied, 420 U.S. 927, 95 S.Ct. 1125, 43 L.Ed.2d 398 (1975). The showing required is especially high where the moving party carries the burden of proof, see Allen v. Zurich Insurance Co., 667 F.2d 1162, 1164 (4th Cir.1982) ("standard so stringent that its exercise is but rarely appropriate"), as with this defense of an illegal contract. No deference is due the trial court's decision; our review is de novo. See Gairola v. Commissioner of Virginia Department of General Services, 753 F.2d 1281, 1285 (4th Cir.1985).

III.

In general, courts will not enforce contracts made in derogation of statutes designed to protect the public. See, e.g., 6A A. Corbin, Corbin on Contracts Sec. 1512, at 711 (1962); III S. Williston, Williston on Contracts Sec. 1630, at 2865-66 (1920). ⁴ The failure of a party to comply with a licensing requirement often gives rise to such an illegal contract. See Restatement (Second) of Contracts Sec. 181 & comment a (1981). The statutes at issue in this case are clearly designed to protect the public, not merely to raise revenue. See, e.g., Smirlock v. Potomac Development Corp., 235 Md. 195, 202-03, 200 A.2d 922, 926 (1964); Massie v. Dudley, 173 Va. 42, 55, 3 S.E.2d 176, 181 (1939).

Before holding contracts unenforceable on public policy grounds, such as illegality, however, it is necessary to determine just what acts are forbidden. See 6A A. Corbin Sec. 1512, at 717. "[C]ourts are averse to holding contracts unenforceable on the ground of public policy unless their illegality is clear and certain." Wallihan v. Hughes, 196 Va. 117, 82 S.E.2d 553, 558 (1954). An English judge aptly described public policy as "a very unruly horse, and when once you get astride it you never know where it will carry you." Naylor Benzon & Co. v. Krainische Industrie Gesellschaft, [1918] 1 K.B. 331, 342 (quoting Burroughs, J., in Richardson v. Mellish, 2 Bing. 229, 252). The Hadid companies would have this court ride off into uncharted and dangerous territories, in which persons have no certainty that their apparently valid contracts will be enforced, despite one side's full performance.

Public policy is usually made in the face of competing considerations, and in the context of this case the primary such consideration is freedom of contract. As Mr. Justice Holmes put it, "I think that at least it is safe to say that the most enlightened judicial policy is to let people manage their own business in their own way, unless the ground for interference is very clear." Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373, 411, 31 S.Ct. 376, 386, 55 L.Ed. 502 (1911) (Holmes, J., dissenting). Although courts do have a role to play in preventing the making of certain types of contract, the more important role of courts, in aiding the evolution "from status to contract," 6A A. Corbin Sec. 1376 (quoting Sir Henry Maine), lies in enforcing contractual obligations.

[T]he right of private contract is no small part of...