Farthing v. Coco Beach Resort Mgmt., LLC

Filing

OPINION issued by Sandra L. Lynch, Appellate Judge; Rogeriee Thompson, Appellate Judge and William J. Kayatta, Jr., Appellate Judge. Published. [17-1157]

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Date Filed: 07/21/2017

Entry ID: 6107708

United States Court of Appeals
For the First Circuit
No. 17-1157
H. LEE FARTHING,
Plaintiff, Appellant,
v.
COCO BEACH RESORT MANAGEMENT, LLC,
Defendant, Appellee,
JOHN DOE, INC.,
Defendant.

APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Camille L. Vélez-Rivé, U.S. Magistrate Judge]

Before
Lynch, Thompson, and Kayatta,
Circuit Judges.

Richard Schell-Asad and Troncoso & Schell on brief for
appellant.
Alejandro Suárez Vincenty, Hugo Rodríguez Díaz, and Rodríguez
& Rodríguez, PSC on brief for appellee.

July 21, 2017

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LYNCH, Circuit Judge.

Date Filed: 07/21/2017

Entry ID: 6107708

H. Lee Farthing, a South Carolina

resident, brought this diversity suit against Coco Beach Resort
Management, LLC ("Coco Beach"), a Puerto Rico company that employed
Farthing for just over three months on a one-year contract as its
"Marketing and Sales Director."

Farthing alleges that Coco Beach

breached his employment agreement by unilaterally terminating it
early.

He seeks damages to compensate him for unpaid base salary

and anticipated commissions on real estate sales that Farthing
alleges were imminent when Coco Beach fired him.
The court below granted Coco Beach's motion for summary
judgment, holding that the employment agreement was void as against
public policy because Puerto Rico law requires a person working as
a real estate broker to have a license.

It is undisputed that

Farthing had no such license before or after he was employed, and
that no term of the employment agreement required him to have such
a license.
We vacate and remand.

Summary judgment was entered in

error because issues of law and issues of material fact remain in
dispute. It is disputed whether Coco Beach was aware that Farthing
did not have a broker's license at any relevant time, including
when the agreement was signed, and it is disputed whether at least
some of the work Farthing performed and was intended to perform
was permissible without a broker's license.

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It was error to hold

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on summary judgment that Farthing has no viable claim against Coco
Beach for breach of contract.
I.
We briefly review the relevant background, highlighting
along the way the facts that remain in dispute.
Under Puerto Rico law, it is a misdemeanor to "engage[]
in

the

profession

of

corresponding license."

real

estate

broker

.

.

.

without

P.R. Laws Ann. tit. 20, § 3057(a).

the

"Real

estate broker" is defined by statute as
[a] natural person who holds a license to
practice the profession . . . and acts as
intermediary, through the payment or the
promise of payment of any compensation
previously and mutually agreed upon between
the parties that contract to execute in Puerto
Rico a sales transaction, promise of sale,
purchase or sale option, exchange, lease,
auction, property management, or in the
offering, promotion, or negotiation of the
terms of all sales, sales options, promise of
sale, lease management, or exchange of real
property located in or outside of the
Commonwealth of Puerto Rico.
Id. § 3025(g).1

The parties agree that Farthing, at all relevant

times, has lacked the license required to work as a real estate
broker in Puerto Rico.

1

Farthing alleges that there are "discrepancies" between
this translation of § 3025(g), drawn from online databases, and
the official translation that accompanied the provision's
legislative enactment. We need not decide which translation is
more accurate.
The minor differences between them are not
pertinent to this opinion.
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Farthing alleges that, in the past, he was employed in
South Carolina as a "real estate broker with an expertise in 'high
end' or 'luxury resorts.'"

On March 24, 2016, he signed a one-

year employment agreement with Coco Beach; the agreement had no
early termination clause and no requirement that Farthing obtain
a Puerto Rico real estate broker's license.

Farthing, in a sworn

affidavit, alleges that Coco Beach's president knew when he hired
Farthing that Farthing was not a licensed real estate broker in
Puerto Rico and that he "specifically told [Farthing] that under
Puerto Rico's law [Farthing] did not need a real estate license,
as [Farthing] would be an employee of Coco Beach selling [Coco
Beach's own] property."

Coco Beach disputes that allegation and

maintains that it "did not have knowledge that [Farthing] did not
have a real estate license nor that [a license] was required,"
because Coco Beach "was inadequately informed and advised" at that
time.
Per the employment agreement, Farthing's job title was
"Marketing and Sales Director."

In that capacity, Farthing led

Coco Beach's Marketing and Sales department, which consisted of
Farthing and Rosselyn Pérez, who mainly performed secretarial work
for Farthing.

The parties agree that Farthing's responsibilities

included "identify[ing] potential buyers" for units in the Las
Casas

apartment

complex

and

"offer[ing],

promot[ing]

and

negotiat[ing] with [potential buyers] options and sale agreements

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o[n] behalf of Coco Beach."

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Farthing alleges that his job also

included several other responsibilities, including "[h]iring real
estate brokers," meeting with bank officials to discuss financing,
following up on inquiries and potential clients, negotiating with
venues that might host a "sales concierge" space at which Coco
Beach would recruit buyers for the Las Casas units, and contacting
brokers in the United States for assistance in promoting the Las
Casas units.
Coco Beach alleges by affidavit that the Las Casas units
are managed and operated by Coco Beach but that the units are owned
by a different company, O'Horizons LLC.

Farthing's complaint, by

contrast, alleges that the Coco Beach Golf Club, which contains
the Las Casas units, is "own[ed] and operate[d]" by "Coco Beach
and/or John Doe, Inc."

In his opposition to Coco Beach's motion

for summary judgment, Farthing stated that "Las Casas is property
of Coco Beach, not owned by any third party."

The record does not

clear up this confusion.
Coco Beach terminated Farthing's employment in late
June, 2016.

The parties disagree on several details of the

circumstances of Farthing's termination.

In Farthing's account,

Coco Beach unilaterally terminated the agreement.

On June 28,

Farthing alleges, Coco Beach's president told Farthing that he
"had done an amazing job and accomplished more than [Coco Beach]
had ever hoped for," but that Coco Beach was "letting [Farthing]

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go because [Coco Beach] had decided not to sell real estate and to
start selling timeshares [at Las Casas] instead."

Coco Beach

admits that its president made these statements to Farthing.
On June 29, Farthing further alleges, he was offered two
weeks' severance pay in exchange for agreeing not to pursue any
claims against Coco Beach, but he did not accept the offer.
In support of its motion for summary judgment -- at least
on its affirmative defense of accord and satisfaction -- Coco Beach
submitted sworn statements from Rafael Rovira Ronda, O'Horizons
LLC's Vice President of Real Estate, and from John W. Wilson Gomez,
Coco Beach's Operations Director.

Each statement alleges that

Coco Beach offered Farthing a termination agreement, effective
June 30, 2016, which "consisted of liquidating any unpaid salaries
up to June 30[] . . . plus a severance equivalent to two . . .
additional weeks of his base salary."

Each statement also alleges

that Coco Beach agreed to pay Farthing a commission on the sale of
Unit 401G in the Las Casas complex, per the compensation formula
in the employment agreement, if that sale were ever finalized;
that Farthing "expressly accepted and agreed to the termination
agreement" on those terms; that Farthing was handed a check for
$6750.40, "for [his] services rendered up to that date"; that
Farthing agreed to return to Coco Beach's offices on July 5, 2016
to collect the agreed severance; and that Farthing never returned.

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Neither party alleges that Farthing's lack of a broker's
license was the reason for terminating the agreement or that it
was stated as the reason.

The record shows that Coco Beach first

alleged that the contract was illegal after the fact, in its answer
to Farthing's complaint.
Farthing brought this suit in federal district court on
July 22, 2016.

He demanded a jury trial and pled a single count

of breach of contract, seeking as relief $102,083.31 in "unpaid
base salary" and $294,000.00 in anticipated commissions on real
estate sales, which Farthing alleges were imminent when Coco Beach
terminated the agreement.
After

the

parties

filed

cross-motions

for

summary

judgment, the magistrate judge, sitting by consent,2 issued an
order granting Coco Beach's motion for summary judgment on January
3, 2017.

She found that Farthing's employment agreement was "null

and void because [Farthing] was effecting real estate broker duties
without a license under Puerto Rico law," and therefore that
Farthing was entitled to no relief.
II.
We review de novo both the entry of summary judgment for
Coco Beach and the interpretation of the parties' contract.

2

See

The parties voluntarily consented to have a federal
magistrate judge conduct all proceedings in the case, including
the entry of final judgment. See Fed. R. Civ. P. 73.
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Dukes Bridge LLC v. Beinhocker, 856 F.3d 186, 189 (1st Cir. 2017).
At summary judgment, we must "credit[] the evidence favorable to
[Farthing] . . . and draw[] all reasonable inferences in [his]
favor," Burns v. Johnson, 829 F.3d 1, 8 (1st Cir. 2016), and we
may affirm only if "there is no genuine dispute as to any material
fact and [Coco Beach] is entitled to judgment as a matter of law,"
id. (quoting Fed. R. Civ. P. 56(a)).

"A fact is material if it

carries with it the potential to affect the outcome of the suit
under the applicable law."

García-González v. Puig-Morales, 761

F.3d 81, 87 (1st Cir. 2014) (quoting Newman v. Advanced Tech.
Innovation Corp., 749 F.3d 33, 36 (1st Cir. 2014)).

The parties

agree that Puerto Rico's substantive law applies in this diversity
case, and "[w]e follow [their] lead."

Dukes Bridge, 856 F.3d at

189 (citing Cochran v. Quest Software, Inc., 328 F.3d 1, 6 (1st
Cir. 2003)).
The agreement between Farthing and Coco Beach was held
to be null and void on the reasoning that the agreement provided
on its face that Farthing would perform the duties of a real estate
broker but Farthing lacked the necessary license.

The holding

relies on title 31, section 3372 of the Laws of Puerto Rico: "The
contracting parties may make the agreement and establish the
clauses and conditions which they may deem advisable, provided
they are not in contravention of law, morals, or public order."
P.R. Laws Ann. tit. 31, § 3372; see also Cecort Realty Dev., Inc.

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v. Llompart-Zeno, 100 F. Supp. 3d 145, 161 (D.P.R. 2015) ("[A]
contract is deemed null . . . if it is contrary to law, morals[,]
or public order.

In such cases of nullity, even a party that has

benefitted from it may challenge a contract for being contrary to
law, morals[,] or public order." (citations omitted) (quoting De
Jesús González v. Autoridad de Carreteras, 148 P.R. Dec. 255, 264
(1999))).

Consequently, it was held that Farthing could not be

heard to seek damages for Coco Beach's purported breach.
The entry of summary judgment was error.

There are

important disputes of fact as to liability -- putting aside the
disputed assertion of accord and satisfaction -- each of which is
material to the question of whether Farthing may seek relief
despite the fact that his employment agreement, in whole or in
part, may have violated Puerto Rico's public policy.
One disputed fact is whether Coco Beach was aware, or
should have been aware, at the agreement's signing that Farthing
did not have a Puerto Rico license and that one would be required.
Another is whether some or all of Farthing's duties under the
agreement required a license.3

The court thought it irrelevant

3

Farthing has consistently argued that, as a Coco Beach
employee, he stepped into Coco Beach's shoes and was selling Coco
Beach's real estate as an "owner . . . acting in his/her own
interest," which the statute excludes from the definition of "real
estate broker." P.R. Laws Ann. tit. 20, § 3025(g). We need not
decide whether Farthing's reading of § 3025(g) is correct. Even
if the court below correctly adopted a contrary reading of the
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whether "Coco Beach had knowledge or not that [Farthing] did not
possess a real estate license when it hired [Farthing]."
disagree.

We

If Farthing was "excusably ignorant" of the fact that

his employment agreement may have violated Puerto Rico's public
policy -- and if Coco Beach was not excusably ignorant -- then
Farthing "has a claim for damages for [the agreement's] breach,"
notwithstanding

the

alleged

violation

of

public

policy.

Restatement (Second) of Contracts § 180 (Am. Law Inst. 1981); see
also P.R. Laws Ann. tit. 31, § 3516 (distinguishing between a
"crime or misdemeanor common to both contracting parties" and a
"crime or misdemeanor on the part of only one of the contracting
parties"); Sánchez Rodríguez v. López Jiménez, 16 P.R. Offic.
Trans. 214, 228 (explaining that "if both parties [to an illegal
contract] are at fault, they would be barred from bringing an
action against each other," but that this "doctrine requires that
the [plaintiff] knows or should know the circumstances from which
the illegality stems, or the illegality itself"), clarified on
reconsideration, 16 P.R. Offic. Trans. 480 (1985).
"[T]he

rule
has

prohibiting

enforcement

exceptions,

as

the

of

citations

illegal

contracts"

itself

above

establish.

Am. Buying Ins. Servs., Inc. v. S. Kornreich & Sons,

Inc., 944 F. Supp. 240, 244–45 (S.D.N.Y. 1996) (explaining that

statute, material disputes of fact preclude entry of summary
judgment for the defendant.
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the rule is not "inflexib[le]" and admits of "myriad exceptions,"
including

situations

in

which

"the

ignorant, and the defendant was not").

plaintiff

was

excusably

In our view, the exception

for excusable ignorance does not undercut, but rather reinforces,
the rule's deterrence aims.

See, e.g., Juliet P. Kostritsky,

Illegal Contracts and Efficient Deterrence: A Study in Modern
Contract Theory, 74 Iowa L. Rev. 115, 138 (1988) (observing that
"it is costly to deter illegal contract formation by placing the
loss on unknowing parties" and that, in appropriate cases involving
excusable ignorance, courts "can further efficient deterrence by
regularly denying the knowledgeable party relief and by granting
recovery to the less knowledgeable party," so that "the person in
the best position to avoid the illegality can do so at the least
cost").

Whether Farthing can avail himself of the excusable

ignorance exception, or any other exception to the "void as against
public policy" doctrine, will require additional factfinding as to
the parties' knowledge, or excusable lack thereof, when Coco Beach
hired Farthing.
Another disputed material fact is whether at least some
of

Farthing's

job

responsibilities

could

have

been

performed in Puerto Rico without a broker's license.

lawfully
Farthing

points out that the agreement had a severability clause, which he
argues would allow enforcement of the agreement's base salary
clause even if the clauses pertaining to sales commissions are

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illegal and void.

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See Santiago-Sepúlveda v. Esso Standard Oil Co.

(P.R.), Inc., 643 F.3d 1, 8 (1st Cir. 2011) (noting that Puerto
Rico law permits enforcement of severability clauses to which
parties stipulated in their contract (citing McCrillis v. P.R.
Mar. Shipping Auth., 23 P.R. Offic. Trans. 109, 132–33 (1989))).
If Farthing is correct that some of his duties did not
require a license, then there is also the issue of whether the
agreement is divisible.

Under McCrillis, even in the absence of

a severability clause, "[c]ivil law accepts that 'in some cases
partial nullity may be used as a means to guarantee the continuity
of a business whose fundamental content is not affected by the
void portion.'"

23 P.R. Offic. Trans. at 131 (citations to

Spanish-language authorities omitted); see also, e.g., Restatement
(Second) of Contracts § 184 (discussing partial enforcement of an
agreement where "the performance as to which the agreement is
unenforceable is not an essential part of the agreed exchange");
2 E. Allen Farnsworth, Farnsworth on Contracts § 5.8 (3d ed. 2004)
(stating that courts "often avoid an 'all or nothing' decision by
holding agreements unenforceable only in part" and that a court
will be "more likely to do so in favor of a party who has already
relied on the agreement, as by preparation or performance").
Farthing claims that at least part of his job was
"organizing the basis of an infrastructure to support the marketing
of his employer's property," and, further, that he engaged in sales

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activities as the employee of a real estate seller -- that is,
Coco Beach -- rather than as an intermediary between a seller and
buyer.

See P.R. Laws Ann. tit. 20, § 3025(g) (defining "real

estate broker" as one who "acts as intermediary" and distinguishing
such an individual from an owner-broker who "acts in his/her own
interest").
even

if

not

Coco Beach argues that Farthing's employment duties,
uniformly

those

of

a

real

estate

broker,

were

"thoroughly intermingled [and] interdependent," and that "[t]here
is nothing in [the agreement] or in the record . . . to suggest
that [Farthing's] bas[e] salary was not compensation for his real
estate brokering duties."

That, in itself, is a disputed issue of

fact, material to both severability and divisibility.
Viewing the evidence in the light most favorable to
Farthing, we do not agree with the court below that "there is no
genuine [factual] dispute" relevant to these issues.
F.3d at 8 (quoting Fed. R. Civ. P. 56(a)).

Burns, 829

If further factfinding

were to reveal that at least some of Farthing's job duties could
be performed lawfully without a license, then Farthing might be
entitled to relief.

We express no view on whether Farthing's

employment agreement is severable or divisible, leaving those
questions for the district court to answer on remand with the
benefit of a more complete factual and legal record.

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III.
We vacate the entry of summary judgment in favor of Coco
Beach and remand for further proceedings consistent with this
opinion.

No costs are awarded.

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