Arecent decision in the United Kingdom’s High Court of Justice, Queen’s Bench Division, offers some interesting insights into the nature of the relationship between a classic-car dealer/broker and its customers. Although the case was decided under the laws of the United Kingdom, U.S. law is quite similar in this regard. Michael Tuke is an engineer who founded a company that developed and marketed artificial hip and knee joints. The company was very successful, and he sold it in 2009 for more than £60 million (about $95 million). Tuke soon became dissatisfied with the interest rates he was earning on his reinvestments, and became enamored with the idea of investing in collector cars. Tuke contacted JD Classics Limited, which was very experienced with the acquisition, restoration and sale of collector cars. Tuke established a relationship with JD, acting through Derek Hood, in 2010. After the parties had a falling out, the issue became the legal nature of their relationship, which would establish their obligations to each other.

A lot of deals

Over a five-year span, Tuke and JD Classics acted together in buying and selling at least 37 cars. The cars seem like a who’s who of major collector cars, including C-type, E-type, Lightweight E-type, XK-SS, SS 100, XK 120 SS and Competition Alloy XK 120 Jaguars, a Ferrari 250 Testa Rossa, a Ford GT40, a 300SL Gullwing, a Bugatti Veyron previously owned by Jenson Button, and a BMW 3.0 CSL Art Car, just to name a few.

Fifteen sale transactions were at issue in the litigation.

Tuke contended that JD Classics was acting as his agent for the sale and purchase of the cars. As such, it owed him fiduciary duties and could not profit at his expense without prior notice. JD Classics denied it was Tuke’s agent, claiming it was always acting as a seller or buyer. As such, it would owe no greater duties to him that any other party to a sale or purchase transaction.

Buying is easier than selling

There weren’t any disagreements while Tuke was buying cars, but Tuke’s financial circumstances changed toward the end of 2010. He faced a large tax bill, and an opportunity arose for him to buy back into his business. He instructed Hood to start selling the cars to raise cash. But the sales proved difficult, and Tuke was routinely forced to take other cars in partial trade for the cars he sold. It appears that a dispute arose about the calculation of JD Classics’ commissions. Tuke claimed their agreement was that JD Classics would be paid a commission of 10% of the profit on a sale, while JD Classics appeared to claim it was 10% of the sale. Inquiries led to the discovery that JD Classics was “flipping” the cars at a profit, rather than acting as a pure commissioned agent — all without disclosure to Tuke. Thus, the nature of their relationship — principal and agent, or contracting parties — became the crux of the litigation.

Questionable transactions

In one transaction, Tuke wanted to sell his Jaguar XK-SS. Hood explained that he could not make a cash sale but was able to arrange a partial-cash exchange. The £3.4 million (about $5.4 million) XK-SS would be exchanged for a Lister Jaguar Knobbly (the Ecosse Jaguar) and £2 million (about $3.3 million) cash. Tuke wasn’t happy about taking the Lister, and he greatly preferred an all-cash sale. Hood explained that was not possible, as the buyer needed to make the Lister part of the deal. Tuke made the exchange — and later learned that JD had been the owner of the Lister all along. The buyer paid all cash, with part of the cash going to JD Classics for the Lister. The judge saw this as intentional deception on Hood’s part. He knew Tuke was looking to raise cash by selling cars and would never have agreed to buy the Lister from Hood and JD Classics. A similar transaction involved the sale of Tuke’s Ford GT40 for £1.8 million, £500,000 (about $800,000) in cash and £1.3 million (about $2.1 million) in the form of a Ferrari 250 Testa Rossa. Tuke had paid £1.4 million for the GT40 and had invested more than £400,000 in upgrades on it, so the overall transaction was a loss. Unbeknownst to Tuke, JD Classics owned the Testa Rossa, which it had purchased 11 months previously for £680,000. All the transactions employed the same questionable documentation format. JD Classics would provide two invoices to Tuke. On the sale sides, JD Classics would issue one showing him as the seller with the sales price, but no indication as to the identity of the buyer. On the buy sides, an invoice would be issued showing Tuke as the buyer with the purchase price given, but with no identification of the seller.

Agent or contracting party?

All of these transactions would have been just fine if Tuke knew that JD Classics was acting on its own account as buyer or seller. A seller never has to disclose how much he paid for a car — you don’t have a right to know that when you walk into a dealer showroom and buy a car in its inventory. A buyer never has to disclose whether he has plans to flip the car or for how much. That’s just capitalism at play. But when the dealer is acting as an agent, it’s an altogether different story. Fiduciary duties require complete honesty. The agent is not allowed to profit on the transaction beyond his agreed-upon compensation. The principal is entitled to know whom the agent is actually dealing with. The agent buying or selling on his own account — or cutting some side deal — is acting improperly without full disclosure. JD Classics insisted that, in each case, it was acting on its own behalf as a contracting party and not as an agent. Since the parties did not have a written contract that established the relationship one way or the other, the court had to look to the surrounding circumstances to determine what their legal relationship was. It made no difference how they saw or described themselves — the law can imply an agency relationship in proper circumstances.

An agency existed

The judge seemed to have little difficulty in ruling that an agency existed, based upon the numerous email communications between Tuke and Hood. Tuke consulted Hood about investing in cars, and Hood stated that he could advise fully in all respects. Hood many times wrote that he was doing certain things “for you” in emails to Tuke. Hood complained when he heard that Tuke had engaged another agent, as he insisted on exclusivity. He complained about how hard he had worked to get deals done for Tuke. In all the sales, Tuke never received any money until the buyer had paid JD Classics, which was inconsistent with JD Classics being the purchaser. In one done deal, the Veyron, Hood reported that the buyer was unhappy that the mileage was slightly higher than expected, and was threatening to back out of the deal. That was inconsistent with JD Classics having been the buyer. Most important, Tuke had been pretty clear and consistent that JD Classics was to be paid 10% of the profit on each sale. Hood never contested that, agreed with it on some occasions, and usually withheld that amount from sales proceeds.

Working with brokers

Our firm has worked with many brokers on many collector-car transactions. All of these different methods of compensation have been used at one time or another. They are all legitimate approaches to the transaction — as long as everyone understands what is going on. Engaging a broker to sell your car on a stated commission is probably the norm. If that is the form of the arrangement, you are legally entitled to have the sales contract entered into between you and the buyer, with the broker’s commission spelled out clearly — just like a real estate transaction. Nonetheless, there is nothing legally improper about the sale agreement being entered into between the broker and the buyer. In that case, you are entitled to see the contract to verify the identity of the buyer (to know it’s an arm’s-length deal) and the sales price. If the dealer resists providing a copy to you, take that as a red flag. Sometimes, the buyer pays a commission to the broker. If the seller is paying a commission to the same broker, each of the parties is entitled to know that — and the amount of the total commissions. The easiest example of this arrangement is an auction. The auction house gets both a seller’s fee and a buyer’s fee, each of which are fully disclosed in the auction rules. Everyone knows about it, and it’s all legitimate. The situation to avoid is where you start out with a sales commission arrangement and, somewhere in the middle of the deal, it changes to a fixed price being paid to you. When that happens, you should strongly suspect that the broker has negotiated a fixed-price sale to the buyer, with the broker’s “commission” having become the spread between the two deals. If that spread exceeds the agreed-upon commission, that is an ethically — and legally — improper change in the deal. ♦ JOHN DRANEAS is an attorney in Oregon. His comments are general in nature and are not intended to substitute for consultation with an attorney. He can be reached through www.draneaslaw.com.

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