Greenlake Capital, LLC v. Bingo Investments, LLC (June 14, 2010)
2010 WL 2351460
This case illustrates the broad reach of the California Real Estate Broker’s License law, the risks of noncompliance, and the potential impact of UCC Article 9 (lending secured by personal property).
Greenlake Capital originated and helped negotiate a $150 million mezzanine loan for Bingo Investments, charging a $3 million fee. Bingo reneged on the fee, asserting that Greenlake forfeited its fee by failing to hold a California real estate broker’s license. (Ca. Bus. & Prof. Code Sections 10131, 10136.) The trial court granted summary judgment: Bingo was a victim of unlicensed activity, and therefore not required to pay the fee.
The court of appeal reversed for a full trial. Perhaps Greenlake’s lending activity was not within the definition of real estate loan brokerage. If so, Bingo would be treated as a deadbeat, not a victim, and would be obligated to pay the fee.
The court cited recent cases holding that if some of the services fell outside the definition of real estate loan brokerage, part of the fee may be recoverable based on a theory of severability (services not requiring a license being severed from those that do). If the “central purpose” of the contract was not tainted with illegality, it may be possible to recover a part of the fee for those acts “for which no license was required.” This was important, because “at the start of the relationship, neither party “intended the financing to take a form that would necessarily” violate the licensing requirement.
More importantly, the services may fall outside the scope of the licensing requirement altogether. A mezzanine loan is typically secured by equity in another entity–personal property– rather than a mortgage. When the borrower had “no direct equity position” in the underlying real property, the licensing requirements may not be triggered. Thus, UCC Article 9 may apply, not local mortgage laws. On remand, the trial court will be required to sort it out, based on “a complete factual investigation” into the “nature of the obligations created by the” parties’ credit and security agreements, and the “policies and equities” inherent in the licensing statutes. The case is not a quick fix for legal and financial professionals because the court did not offer any litmus test or even a checklist of factors.
The complicated financing arrangements have generated arguments on both sides as to whether the real estate loan brokerage licensing laws should apply. For businesses raising money, it is better to be safe than sorry. Holding the right license will transform the nonpaying client from a potential victim into a deadbeat. This will make it much easier to enforce the fee. Careful examination of the licensing arena is advisable.