Commission Express Lawsuit Against Brokerage Dismissed (EC: March 5, 2012)

by Peg Ritenour
VP Legal Services & Administration

A Franklin County court has dismissed a lawsuit brought by a Commission Express franchisee against a central Ohio brokerage involving commission advances its agent received but failed to repay.  In dismissing the suit, the judge upheld a license law provision that prohibits brokers from paying commissions to an agent’s creditor. It also found that the advances made by Commission Express were loans made in violation of Ohio’s Small Loan Act.

Commission Express (“CE”) is in the business of advancing commissions to agents who have a transaction pending on which they expect to receive a commission. The agent involved received advances on 18 pending transactions and assigned her right to these commissions to CE.  CE then notified the brokerage that under this assignment the agent’s commissions were to be paid to CE, not the agent when the transactions closed.  Section 4735.20(F) of Ohio’s license law, however, prohibits a broker from paying an agent’s commission to an agent’s third party creditor; therefore the brokerage notified CE that it would instead pay the commissions to the agent who earned them.

Of the 18 advances the agent received from CE, she subsequently defaulted on six. CE sent a demand for payment to both the agent and the brokerage for the full amount of these commissions plus 18% interest. When the brokerage refused to pay, and the agent failed to do so, CE filed suit against the brokerage.

Following this, the Ohio Department of Commerce began an investigation into whether CE was violating Ohio’s Small Loan Act by lending money without being properly licensed by the Ohio Division of Financial Institutions. CE responded by filing an action asking the court to hold that its business model does not constitute a loan. The Department of Commerce then filed a countersuit asking the court to uphold Section 4735.20.

All parties filed motions for summary judgment asking the court to rule in their favor. In CE’s motion, it argued that under its business model it was not loaning the agent money, but was instead merely purchasing an accounts receivable – namely the agent’s interest in a future commission. (This business practice is also commonly referred to as factoring.) Because it was not making a loan, CE claimed it was not the agent’s creditor and the license law provision prohibiting the payment of a commission to a third party creditor does not apply. Further, CE argued that the Ohio Small Loan Act was not violated because accounts receivable are expressly excluded from this Act.

In analyzing whether CE made a loan to the agent or purchased an accounts receivable, the court relied on several factors outlined in previous legal decisions.   It also closely reviewed the various legal documents that were signed by the agent regarding these advances. In these documents the agent’s commission is referred to in some places as an accounts receivable. However in other places the agent was referred to as a debtor and the cash advance was called a debt.

But more important to the court than the terminology used in the documents was the recourse that was available if the agent defaulted. Based upon decisions in other cases the court held that to be considered the purchase of an account CE must have only limited recourse against the agent. Under CE’s documents, however, it had full recourse against the agent in the event of a default, including a security interest in all of the agent’s current and future assets, garnishment of her income and the right to attach liens to her property.

Based on these facts the court held that the advances made to the sales agent were a series of loans and that CE was a creditor. As such, under Ohio real estate license law the brokerage was precluded from paying the commissions earned by the agent to CE. Moreover, because five of the six loans that were made to the agent were for less than $5,000, CE was required to have a license from the Division of Financial Institutions, which it did not. The court therefore held that the loans made by CE violated the Small Loans Act.

It is not known at this time whether Commission Express will appeal the decision of the Franklin County Court of Common Pleas. Further updates will be reported if they occur.

OAR’s Legal Action Committee provided financial support to the brokerage in this case that was forced  to incur legal fees to defend itself for complying with Ohio’s license law provisions. Read the entire case decision.

It should also be noted that in legislation that OAR supported last year Ohio’s license law was amended to clarify that salespersons cannot sell, assign or transfer any interest in a commission they are owed to an unlicensed entity or person.  In the event an agent does so, the law specifies that the broker cannot pay the individual or entity to which it was assigned and that individual or entity cannot bring suit against the broker for nonpayment.