Are you Shielded from the Class Action Tsunami?
If you have spoken to us about class action litigation, you know our message is to hope for the best, but plan for the worst. Timing is everything.
Hope for the Best
The Supreme, Federal, and State Courts could reverse their method of trying this case from a Per Se structure to a Rule of Reason structure under the Sherman Antitrust Act. Basically, the Rule of Reason says that the unilateral cooperation between brokers representing the buyer and the seller delivers a consumer benefit that is greater than non-cooperation. As you already know, the Per Se class action case in Missouri is likely to be appealed to plead for a retrial as a Rule of Reason case or… settled.
Settlement is also something that we can hope for. However, with so many copy-cat lawsuits in so many states, it is unlikely that there will be a settlement for every court jurisdiction in the U.S. that will allow brokers, MLSs, and Associations to pay the settlements without seeking bankruptcy protection. Simply stated, the industry does not have the money to pay the plaintiffs.
Planning for the worst if you HAVE been named in litigation
There is not much that you can do if you have already been named in litigation. Attempting to shield assets, after a legal threat has emerged, may be considered fraudulent conveyance.
Plan for bankruptcy
It hurts me to even mention the word bankruptcy, but let’s face the truth; for 100 years, real estate brokers have been unilaterally cooperating on commissions. Under the Per Se structure of the Sherman Antitrust Act, the unilateral conduct of the offer of compensation is enough to demonstrate guilt. Every broker, MLS and each Association of REALTORS has participated in the unilateral conduct.
There are 106,000 real estate brokers in America. How many of them do you believe would be in a position to spend a few hundred thousand in legal bills to even answer the plaintiff’s claim? MLSs and Realtor Associations typically have enough reserves to pay the legal bill, but they do not have the reserves or assets to pay the damages.
Bankruptcy will be the only option, either Chapter 7 – asset liquidation, or Chapter 13 – repayment plan. My belief is that Chapter 7 will most likely be the protection that is sought.
Planning for the worst if you have NOT been named in litigation.
Planning for the worst means working with your attorney to understand your risk. A good plan with good advisors will create the maximum protection of your assets before you get named in litigation. We are not attorneys, and this is not legal advice, but mentioned here are numerous discussion points to have with your lawyer and probably your CPA.
The structure of your business matters. Depending on the type of corporation you operate under, the protections vary.
Have you pierced the corporate veil?
I mention the CPA because it is a good idea to audit your financial transactions to make sure that you have not pierced the corporate veil between personal assets and business assets. If you have, it is important that you discuss ways to repair the corporate veil. If you have pierced the veil, then your personal assets may be fair game for the plaintiff in this litigation.
It is important to note that if you have not followed your corporate governance during board meetings, within budgets, meeting notices, meeting minutes, or whatever else is hosted in your governance, then you may also have some risk. You might want to go back and document those activities and organize those documents.
Check your insurance!
My understanding is that insurance covers accidents and does not cover antitrust activity.
Update your trust
If you have your assets in an irrevocable trust that was established well before any legal issues, assets in the trust have some protection. If you have not placed recently acquired assets into your trust, do that now.
Consider an asset sale
Selling assets with the intent to hinder, delay, or defraud creditors is illegal (fraudulent conveyance). However, if you have not been named in litigation and you sell assets well in advance of a legal threat, you may be shielded from the foreclosure on those assets.
Make sure that your asset sale is for fair market value.
Declare bankruptcy now
Let’s face it, many brokerages are operating at a loss right now. If you declare bankruptcy now, and shut down your business, you may have enough left to start a new company.
The most important element to planning for the worst is timing. You need to look at this litigation like a tsunami wave that is heading for you. Once the wave is in sight, it is too late to protect your business and it may be too late to protect yourself.
If you are a broker or an MLS that would like a valuation on your asset value, please contact WAV Group. Our M&A group is ready to help. Feel free to reach out to me for a confidential discussion.
A philosophical dilemma…
Let’s say that you do find a path to starting over. Have you thought about how you will operate without the offer of compensation?
If you are a broker, then you will clearly only represent the seller and you will not offer buyer broker compensation. If a buyer broker requests a commission, you can take that to the seller but they are under no obligation to pay it.
If you are an MLS, remove all language about commission from your rules and make sure that there is clear separation from the AOR.
If you are an Association, remove all language around commission – and commission arbitration – and figure out how you will operate if NAR is not your parent trade Association.