If a Broker Embezzles, Are Clients’ Boat Sales Still Legal?

I have been reading news reports recently about two different yacht brokers who are accused of embezzling client funds from their brokerage trust accounts. Thankfully, I was not personally harmed by either of these transgressions, but it did raise a few questions that could affect me as a person who is trying to sell a boat. First, if a broker absconds with the buyer’s purchase money before the funds are disbursed to the seller, who owns the boat? Does the deal close when the broker receives the money, or when the seller receives the money? Second, how does this sort of thing affect the active listings of the broker? Are those boat owners free to list their boat with another broker?

These issues are indeed in the news right now. California brokers have a long history as honest, hard-working professionals, but coincidentally two different brokers — one in Northern California and one in Southern California — now stand accused of stealing client funds. Perhaps it’s a sign of the times.

We have received quite a few inquiries in connection with these two embezzlement cases, and it would be impossible to discuss, in this column, all of the concerns raised by the individual buyers, sellers, brokers and salespeople who may be affected. When a broker or other trusted intermediary in a transaction steals client funds, it invariably leads to a painful and expensive battle between a wide range of innocent parties who were damaged by the crime. In the question presented above, our reader has asked about two of the more common issues that will arise in these cases.

The most significant legal concern among the innocent victims in a yacht sale transaction is the question of whether the sale was completed. If legal title passed to the buyer without a transfer of the purchase money to the seller, the seller will have lost the vessel without being paid. If title did not change hands, the buyer will have lost his or her purchase money without receiving title to the boat.

The transfer of legal title and ownership of any property is generally controlled by the agreement between the parties. In the case of a yacht sale, we need to look to the language of the vessel purchase agreement. Unfortunately, there are a lot of different contract forms currently in use, so there is no blanket rule that would cover every transaction.

In California, the most widely used agreements in yacht sale transactions are the form contracts published by the California Yacht Brokers Association. The title transfer provisions of the CYBA Purchase Agreement are set forth in paragraph 9 of the current version of that document. In a transaction subject to the CYBA agreement, title is deemed to transfer upon delivery of the boat to the buyer. And, the seller is required to deliver the boat to the buyer when the broker has received all amounts due from the buyer, and the “Broker is in a position to deliver said funds to Seller . . .”

Unfortunately, the drafters of the CYBA agreements may not have considered the possibility of a broker embezzling client funds, and as such, the title transfer provisions are somewhat ambiguous when evaluated in this type of case. What does it mean for a broker to be “in a position to deliver said funds to Seller?” The question of who owns the boat, and the question of who is the victim of this crime, will probably focus on this provision of the contract.

In the end, it may take a court or an arbitration panel to answer the question. I will note, however, that a broker who has left the country with the deposits from his trust account will probably not be “in a position to deliver said funds to Seller.”

The answer may be a little clearer if the buyer and seller were represented by different brokers, and the second broker played no role in the embezzlement of the funds. In that case, the “embezzling” broker would have been the exclusive agent of the buyer, and his failure to forward the funds to the seller would probably be deemed a breach of the contract by the buyer.

The reader’s next question concerned the owners of the boats that are listed for sale with the embezzling broker, and who would like to list the boat with another broker without being accused of breaching their listing agreement with the original broker. This is a relatively simple question if the embezzling brokerage has closed its doors and stopped answering the phones. This act, by itself, will probably be deemed a breach of the listing agreement, in which case the boat owner would be excused from his or her obligations under that agreement, and they would be free to find another broker.

If the brokerage is still operating, the remaining personnel should be contacted in writing for information on whether it will be possible for the brokerage to meet its obligations to its clients. If the brokerage fails to provide “adequate assurance” to the boat owner that it will be able to perform its obligations under the contract, the boat owner will probably be justified in repudiating the contract and listing with another broker.

Most contracts are drafted without regard to the possibility of a criminal act being committed in the middle of the transaction. Where the crime is committed by an agent or intermediary, the innocent principals are often forced to battle each other to avoid a catastrophic loss. These cases are very complicated and the discussion here is intended only as a brief introduction to several of the issues that the parties may face. A victim of this type of crime should contact an attorney familiar with vessel sale transactions to discuss their particular case in detail.