A controversial real estate agreement that angers both consumers and brokers will be aired today in U.S. District Court in Baltimore. Judge C. Stanley Blair must decide if a scrip system for reimbursing home sellers who were overcharged in a fee-fixing scheme by six major realtors is fair and reasonable.
Some of the sellers are expected to demand cold cash instead of the "funny money" certificates offered by the realtors, while lawyers for 28 other real estate companies doing business in the county will argue that the settlement is another form of price fixing unless they can be cut in on the action.
The case dates back to a 1974 country club dinner at which John P. Foley Jr., president of Jack Foley Realty Inc., allegedly asked officials of five other major real estate firms to back him by raising their commissions to 7 percent from the prevailing 6 percent rate. The increase netted them $700,000 extra on sales of $350 million between Sept. 1. 1974, and April 1, 1977. Convicted along with Foley were Bogley Inc. and its president, Robert W. Lebling; Colquitt-Carruthers Inc. and its president, John T. Carruthers Jr., plus Robert L. Gruen Inc., Schick & Pepe Realty Inc. and Shannon & Luchs Co.
The defendants appealed the jury verdict. Arguments have been heard but a decision is not expected until later this year.
This was the first criminal trial involving the real estate industry under the Sherman Antitrust Act since Congress changed the law in 1974 to make violations felonies instead of misdemeanors and greatly increased the maximum penalties. The companies could have been fined $1 million each and the executives $100,000 each and/ or sentenced to three years in prison.
Judge Blair imposed lighter sentences; $160,000 in fines for the corporations and $40,000 additional for the individuals, and no prison terms. He cited among other reasons that their conviction could make the firms liable to heavy damages in civil cases. Under the law, the 3,300 home owners who paid 7 percent commission to one of the companies during the period in question would be entitled to sue for triple damages amounting to more than $2 million.
Attorneys for the defendants and other observers agreed that awards of that size could bankrupt three or four of the firms, which also face about $350,000 in legal fees. Therefore they were anxious to settle out of court. So were the State of Maryland and the plaintiffs' attorneys, who reasoned that insolvent firms would never be able to pay back the home sellers.
The settlement, which is not an admission of guilt and would not be affected if the case were reversed on appeal, calls for the injured parties to receive certificates entitling them to sell their houses for a 5 percent brokerage fee by 1985. If they do not wish to sell, they may sell the scrip to a third party. Most would be expected to do nothing.
The scrip concept was tried in a similar case in Prince George's County a few years ago.Between 250 and 300 individuals opted for the 5 percent scrip, but the other 2,250 home owners elected to accept a pro-rata share of a $280,000 settlement fund established by the brokers. Each share amounted to $78. No such fund has been set up in Montgomery County.
In Minneapolis, scrip with a dollar value was issued to injured home owners in 1976. The average was between $400 and $500, but Minneapolis newspaper ads showed its owners were offering it for sale for half price. Maryland Assistant Attorney General Charles Monk estimates that the Montgomery scrip, which represents about one percent of the house's sale price, will be worth about $400 on the open market. Moreover, he says it will increase in value as house prices increase. Scrip can be transferred to two successive buyers. A clearinghouse will be set up to advertise it.
Some of the injured home sellers apparently do not like the idea. Since the settlement was proposed, about 100 persons affected have written letters to the court expressing concern about it or opposition to it. According to attorney William Sammons, most of them want money instead of scrip. One man who sold his home and moved to North Carolina wrote it would cost him more money than he overpaid in commissions to return to Washington, get a lawyer and find a buyer for the scrip. Two-fifths of the affected parties have left the Washington area.
Dissatisfaction with the proposed settlement also has been expressed by a group of 28 other Montgomery County realtors including Long and Foster, Snider Bros. and many small firms. In a legal petition filed with the court, they charged that the settlement would guarantee future business for the convicted firms. Realtor Wayne McDonald declared it amounted to "price fixing in reverse" and restraint of trade. The nondefendant realtors asked that the scrip be redeemable with any broker. The defendant brokers agreed to this but not to other changes requested in the settlement.
Given the complexity of this situation, attorneys say they expect a ruling will not be made soon.