January 2017

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                                                                                           Fiduciary Confusion

 

                                                                                             Roger Bernhardt

                                                                              Horiike v Coldwell Banker Residential Brokerage Co.

In Horiike v Coldwell Banker Residential Brokerage Co. 1 C5th 1024, Horiike purchased a residence described as 15,000 square feet but which, he later learned, was only about 10,000 square feet. He thereupon sued the listing salesperson, Cortazzo, as well as Cortazzo’s supervising broker, Coldwell Banker (CB) (although he did not include his showing salesperson, Namba, who worked out of a different CB office, or the vendor, a trust). Because of both Cortazzo’s and Namba’s statuses, CB described itself on the agency disclosure forms as a dual agent. The trial judge held that Cortazzo was not a fiduciary of Horiike and instructed the jury that CB should be held liable for fiduciary breach to Horiike only if a salesperson other than Cortazzo or Namba had breached some fiduciary duty owed to him, which the jury found was not the case. The court of appeal reversed, holding that both Cortazzo and CB were fiduciaries, and the supreme court affirmed that holding. The decision is more fully described at p 20, but this is enough background to get this column started.

The supreme court’s decision was unanimous, meaning that real industry participants now have some certainty in the field of broker standard of care. Clients, brokers, and lawyers will all benefit from clearer knowledge of what real estate agents must do or need not do (or should have done or not done) for their vendor and purchaser clients. Overall, however, in my opinion, we are not that much better off than before.

                                                                                   Dual Agency and Dual Loyalty

When the same real estate brokerage represents both the buyer and the seller, it is now indisputable that our agency disclosure statute makes both salespersons—the listing agent and the selling agent—fiduciaries of both principals in the transaction (even though each of them may be acting as if he or she represents only one of them). This is the effect of the statutory recital that “When an associate licensee owes a duty to any principal, ... that duty is equivalent to the duty owed to that party by the broker for whom the associate licensee functions.” CC §2079.13(b). Therefore, if the house is a dual agent, owing fiduciary duties to both sides, each salesperson employed by it is also a dual agent, notwithstanding that he may be dealing only with one of the two parties. Legal duties flow downward from the broker to the salesperson, not upward. Cortazzo was thus a fiduciary to Horiike, even though he was dealing only with the selling trust, since CB was a dual agent.

Because this conclusion is mandated by the statute’s choice of the word “equivalent” in its dictate, that outcome is probably not alterable by the parties through the use of differently worded documents; only the legislature can change that arrangement. (The court told the legislature what to say if it wants to change things, but has declined to do it for them.) The price of receiving a 100 percent commission through a dual agency is this inevitable dual fiduciary responsibility. (The court’s explanation of what some might consider the absurd result of imposing conflicting loyalties to both sides of the same transaction was that the legislature knew that but declined to alter it, preferring to merely mandate disclosure of it.)

We are surely going to witness occasionally awkward situations (such as when a prospective purchaser tells “his” agent to work exclusively for him, but is met with the response that she cannot because her broker has chosen a different status), and perhaps despite the fact that CC §2079.16 advises each principal “When you enter into a discussion with a real estate agent regarding a real estate transaction, you should from the outset understand what type of agency relationship or representation you wish to have with the agent in the transaction.” (Emphasis added.) The real choice is the agent’s, not the principal’s. Let’s hope that this revelation was made early enough for the clients to have done something about it.

                                                                                                   Explaining the Duties

It’s going to be dicier if the customer asks the agent what it means for her to be a dual rather than an exclusive agent. In a dual agency case (or in an exclusive agency for that customer)—when the agent is a fiduciary—she will owe a duty of “utmost care, integrity, honesty, and loyalty,” whereas in the nonfiduciary case (as an agent only for the other side), she will owe only “[d]iligent exercise of reasonable skill and care in performance of [her] duties” and “honest and fair dealing and good faith”—to use the language of CC §2079.16—qualified by the fact that she also will have “[a] duty to disclose all facts known to [her] materially affecting the value or desirability of the property.”

Because I, as a law professor of some 50 years’ experience, have trouble explaining such differences to a layperson or law students, I have serious doubt about the ability of nonlawyer brokers or salespersons to make them understandably clear to their clients. Is not spotting a termite a failure only of utmost care, or also of reasonable skill and care? Is failing to warn that loan rates are about to change a lack of integrity or loyalty, or of fair dealing and good faith? And so on.

The supreme court did not make these distinctions any easier to grasp by observing that (1 C5th at 1040):

The fiduciary duty of disclosure that Horiike alleges Cortazzo breached is, in fact, strikingly similar to the nonfiduciary duty of disclosure that Cortazzo would have owed Horiike in any event. Even in the absence of a fiduciary duty to the buyer, listing agents are required to disclose to prospective purchasers all facts materially affecting the value or desirability of a property that a reasonable visual inspection would reveal. And regardless of whether a listing agent also represents the buyer, it is required to disclose to the buyer all known facts materially affecting the value or desirability of a property that are not known to or reasonably discoverable by the buyer. Our Courts of Appeal have held, to take a few examples, that a listing agent had a duty to disclose to the seller the fact that a murder had occurred on the property, that “a neighborhood contains an overtly hostile family who delights in tormenting their neighbors with unexpected noises or unending parties,” that a lot was filled with debris thereafter covered over, that the house sold was constructed on filled land, and that improvements were added without a building permit and in violation of zoning regulations or in violation of building codes. [All citations omitted.]

Would even experienced real estate professionals have known that these were all general duties, owed even by nonprincipals’ nonagents, if the courts hadn’t told them so (and after the fact)? Would you have known?

                                                                                               The Particular Duties

Nor does the court help matters as to the particular facts involved here. It opined (1 C5th at 1040):

The primary difference between the disclosure obligations of an exclusive representative of a seller and a dual agent representing the seller and the buyer is the dual agent’s duty to learn and disclose facts material to the property’s price or desirability, including those facts that might reasonably be discovered by the buyer.

From this, “learn and disclose” seem to be the important buzzwords for describing fiduciary obligations, that phrase appearing several times in the opinion. But are such disclosure obligations really imposed only on fiduciaries? The statutory form states that the disclosure duties imposed on an exclusive seller’s agent are owed to both buyer and the seller, as are the disclosure duties owed by an exclusive buyer’s agent (and as are the dual agent’s duties), imported through virtue of the provision’s reference to “[o]ther duties to the Seller and the Buyer as stated above in their respective sections.” CC §2079.16. Is it therefore clear that disclosing, if not also learning, is a general, nonfiduciary duty, as well as a fiduciary one? Can we really advise a salesperson that she does not have to (discover and) disclose some important fact because she is not a fiduciary? Is that what you would tell a broker or salesperson who asked for guidance?

Are you as confused as I am?

 

  40 Real Property Law Reporter 12 (Cal CEB Jan. 2017), © The Regents of the University of California, reprinted with permission of CEB.