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Adam Leitman Bailey Victorious at Trial; Verdict Acquits Client-Real Estate Broker of All Charges of Fraud and Self-Dealing

In a four-day trial, Adam Leitman Bailey, P.C. was able to show that its client neither committed fraud nor violated his duty as a real estate salesperson despite serving as a broker on a deal in which he had a substantial financial interest. Colin E. Kaufman, a partner in Adam Leitman Bailey, P.C., tried the case in Supreme Court, New York County before Justice Judith Gische.

The firm’s client, defendant, and his partner owned and lived in a condominium unit at One Morton Square in downtown Manhattan. The plaintiffs owned an adjoining unit as an investment. The plaintiff, an experienced and sophisticated real estate investor, had his unit on the market. He and the defendant, a licensed real estate salesperson, decided to market the two units together. The defendant acted as cobroker for the defendant’s apartment. The purchasers bid $7,050,000 for the combined units. That bid was accepted.

Up until there was a bona fide offer, the parties never reached any agreement about how the purchase monies would be allocated between the combined apartments. The plaintiff and the defendant had discussions as to their “bottom lines.” Each had a price below which they would not sell. For the plaintiff, that was $3,725,000; for the defendant and his partner, the amount was $3,325,000.

Immediately prior to the purchase the defendant informed the plaintiff that the purchasers required that they allocate the specific purchase prices of the units in a manner different from the split the plaintiffs and the defendant and his partner had agreed upon: allocating $4, 000,000 to the plaintiff unit and $3,050,000 to the smaller defendant unit ($275,000 more for the plaintiff unit and $275,000 less for the defendant unit than the allocation the sellers’ bottom lines). To reconcile the discrepancy, the plaintiffs, along with the defendant and his partner, entered into a written agreement among themselves whereby the defendant and his partner would receive $275,000 at the closing of the plaintiff’s unit as a portion of the purchase price for the defendant unit. Edward Lee Cave, Inc., the defendant’s brokerage principal received a commission of $50,000 on the sale of the plaintiff unit, in which the defendant shared. Edward Lee Cave, Inc. settled before trial.

The plaintiffs alleged that the issue addressed in the plaintiff/defendant written agreement was made from whole cloth by the defendant. The plaintiffs alleged that they were unaware that the Beards “insisted” on paying $4,000,000 for the plaintiff unit and said that the defendant improperly concealed that from them. The plaintiffs alleged that the purchasers never had any issue with the specific purchase price of the units, but rather, the defendant simply wanted to pocket the $275,000.

The plaintiff claimed that the defendant never expressly notified him that there was any conflict of interest in the defendant acting both as the real estate agent attempting to sell the two apartments together and as owner of one of the apartments being offered for sale. The court found that the defendant implicitly confirmed this, because he testified that he believed there was no conflict of interest.

At trial, the plaintiff and the Beards’ broker testified that the offer of $7,050,000 was the only accepted offer, and that the Beards, for their own tax reasons wanted $4,000,000 allocated to the plaintiff unit and $3,050,000 allocated to the defendant.

The plaintiffs alleged two causes of action: Fraud (actually fraudulent inducement to enter into the agreement among the sellers) with respect to the $275,000 adjustment and the $50,000 commission and violation of the defendant’s fiduciary duty as their broker for the same amounts.

The testimony introduced at trial led the court to find that the defendant did not make material statements intended to induce reliance to the plaintiff and that there either was not reliance or that any reliance was not reasonable. The court, despite holding that there was an inherent conflict in representing another as well as oneself in this type of situation, found that the defendant adequately informed the plaintiff and that the plaintiff decided on his own to proceed with the transaction.

Justice Gische dismissed the whole of the complaint against the firm’s client.

In addition to its importance to the firm’s client and therefore to the firm, the decision clarifies the law relating to required disclosure by a real estate professional who becomes involved in a real estate transaction with a client.

Colin E. Kaufman represented the defendant at trial on behalf of Adam Leitman Bailey, P.C.

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