Dual Agent Beware! California Supreme Court Rules that Seller’s Agent Owes A Fiduciary Duty to the Buyer Where the Broker Accepts A Dual Agency Relationship.
Horiike v. Coldwell Banker Residential Brokerage Company (2016) – Cal.4th – [2016 Cal. LEXIS 9428; 2016 WL 6833005]
On November 21, 2016, the California Supreme Court issued its much anticipated decision in Horiike v. Coldwell Banker Residential Brokerage Company (2016) – Cal.4th – [2016 Cal. LEXIS 9428]. In a unanimous decision, the Supreme Court held that when a real estate brokerage acts as a dual agent, each of the individual salespersons involved in the transaction owe both seller and buyer the same fiduciary duty. The Court rejected the contention advanced by defendant Coldwell Banker that a “listing agent” representing a seller for a dual agent broker only owed a fiduciary duty to the seller.
The Horiike decision would appear to require that the “listing agent” for the seller associated with commercial and residential brokerages accepting dual agency representation take affirmative steps to “learn” all material information about a particular property and disclose it to the buyer. This includes information that might be reasonably discoverable by the buyer.
Facts of the Case
The case arose out of the sale of a residential luxury property in Malibu. In 2006, Coldwell Banker Residential Brokerage Company (CB)salesperson Chris Cortazzo, accepted a listing from a family trust to sell a luxury residence in Malibu property. In preparing to market the property, Cortazzo obtained public record information from the tax assessor indicating the property’s living area was 9,434 sq. ft., and a copy of a building permit which described a residence of 9,224 square feet, a guest house of 746 square feet, a garage of 1,080 square feet, and a basement of unspecified area.
When Cortazzo first entered the property into the MLS in September 2006, he noted the property contained “approximately 15,000 square feet of living areas.” Cortazzo also prepared and distributed a marketing flier making the same statement.
In March 2007, a couple working with another CB salesperson made an offer on the house and asked Cortazzo to verify the square footage. Cortazzo told them CB did not “guarantee or warrant” square footage, and that they should hire a qualified expert. But Cortazzo did provide them with a letter from the architect of the house stating that “[t] he size of the house, as defined by the current Malibu building department ordinance is approximately 15,000 square feet.” In a handwritten cover note, however, Cortazzo again cautioned them that they should hire a qualified specialist to verify the square footage. The couple requested an extension of time to inspect the property, which the Seller refused to grant. The couple then canceled the transaction.
During this time, Plaintiff Hiroshi Horiike had been working with a CB salesperson named Chizuko Namba of CB’s Beverly Hills office. Horikee, a resident of Hong Kong, was seeking a residence to buy in Malibu. In November 2007, Namba arranged for Cortazzo to show the property to Horiike. During the tour, Cortazzo provided Horiike with the original flier stating that the property contained “approximately 15,000 sq. ft. of living area,” and an MLS printout that did not specify square footage, and contained a small print advisement that the “Broker/Agent does not guarantee the accuracy of square footage.” After the viewing, Horiike made an offer, and he and the Trust eventually agreed on a sales price.
Horiike signed the agency disclosure forms required by law. (See Civ. Code §§2079.14, 2079.16 and 2079.17.) The first, “Confirmation Real Estate Agency Relationships” specified that CB was both the “listing agent” and the “selling agent,” and was the agent of both parties. The second, “Disclosure Regarding Real Estate Agency Relationships,” contained the statutory explanation that an agent owes “[a] fiduciary duty of utmost care, integrity, honesty and loyalty in dealings with either the Seller or the Buyer.” Horiike also signed a third disclosure entitled “Disclosure and Consent for Representation of More than One Buyer or Seller.”
Cortazzo did not provide Horiike with a handwritten note advising him to hire a qualified specialist (as he had done with the prior buyers), but did provide through Namba a copy of the building permit, and an advisory stating “[O]nly an appraiser . . . can reliably confirm square footage . . . If Buyer wants information about the exact square footage . . . Broker recommends that Buyer hire an appraiser or licensed surveyor” Horiike also signed an advisory stating that “Broker . . . [s]hall not be responsible for verifying square footage.” Horiike purchased the property without further investigating its square footage.
A few months after close, Horiike reviewed the building permit in preparation to have work done on the property. At that time he noticed the discrepancy between the flier and the permit. Horiike then sued both Cortazzo and CB on claims, inter alia, that Cortazzo and CB had breached their fiduciary duties to Horiike.
The misrepresentation and fiduciary duty claims proceeded to a jury trial. At the close of evidence, Cortazzo moved for nonsuit on the fiduciary duty claim. The trial court granted the motion on the ground that Cortazzo represented exclusively the seller and therefore owed no fiduciary duty to Horiike. The trial court further instructed the jury that in order to find CB liable for breach of fiduciary duty, it would have to be based on the actions of some individual other than Cortazza or Namba (Horiike had conceded that Namba had not breached his fiduciary duty). So instructed, the jury found in favor of Cortazzo and CB. Horiike appealed.
The Court of Appeal reversed, concluding that as a CB salesperson under the CB license, Cortazzo owed Horiike a duty “equivalent” to the duty owed him by CB. (Civ. Code §2079.13(b).) The court of appeal reasoned CB acted as a dual agent in the transaction and therefore owed “a fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with either the seller or the buyer.” Observing that Cortazzo executed the forms on behalf of Coldwell Banker as its associate licensee, the court held that Cortazzo owed the same duty to Horiike. The court remanded the case for a new trial on the breach of fiduciary duty issue. Cortazzo and CB then sought review by the Supreme Court.
The Supreme Court granted review to consider the sole question of “whether Cortazzo, as an associate licensee representing Coldwell Banker in the sale of the Malibu residence, owed a duty to Horiike to take certain measures to inform him about the residence‘s square footage: specifically, to investigate and disclose all facts materially affecting the residence‘s value or desirability, regardless of whether such facts could also have been discovered by Horiike or Namba through the exercise of diligent attention and observation.”
Holding of the Supreme Court
In answering the above-referenced question under review, the Court held “It is undisputed that Coldwell Banker owed [a fiduciary] duty to the buyer. We now conclude that the associate licensee, who functioned on Coldwell Banker‘s behalf in the real property transaction, owed to the buyer an ‘equivalent’ duty of disclosure under Civil Code section 2079.13, subdivision (b). We accordingly affirm the judgment of the Court of Appeal.”
As a prelude to its opinion, the Court observed that dual agency is a rather recent development. Historically, real estate agents were deemed agents of the Seller. Cooperating or “selling” brokers were deemed subagents of the seller. Caselaw affirmed that real estate agents owed sellers the same duties as are imposed on a trustee in favor of a beneficiary. (Batson v. Strehlow (1968) 68 Cal.2d 662, 674.) This was not always made clear to buyers, and over time courts held that listing agents and cooperating brokers could be deemed dual agents with fiduciary duties to both parties. In the 1980s, this became a focus of attention nationwide and in California the legislature adopted Civil Code sections 2079.14, 2079.16 and 2079.17 both to require adequate disclosure and to define the duties of brokers and salespersons.
These laws mandate that a broker acting as a dual agent inform the client that it owes fiduciary duties to both the buyer and seller. The statute does contain a limitation. An agent need not disclose the minimum price a seller will accept or the maximum price a buyer will pay. (Civ. Code, § 2079.21.) This provision does not, however, “alter in any way the duty or responsibility of a dual agent to any principal with respect to confidential information other than price.” (Ibid.)
Only licensed Brokers can act as real estate agents, and any licensed salesperson must be affiliated with a brokerage. (Civ. Code, §2079.13 (b).) That sub-section concludes:
“The agent in the real property transaction bears responsibility for his or her associate licensees who perform as agents of the agent. When an associate licensee owes a duty to any principal, or to any buyer or seller who is not a principal, in a real property transaction, that duty is equivalent to the duty owed to that party by the broker for whom the associate licensee functions.” (Italics and emphasis supplied.)
In the light of this history, the Court viewed this case as turning on the interpretation of this last sentence from Section 2079.13(b). Plaintiff Horiike contended that the statutory language extended to salesperson the same—or “equivalent”—fiduciary duties as those owed by the broker for which they work. Defendant Coldwell Banker contended that “equivalent” merely expanded on the meaning of the prior sentence, and only confirmed that the real estate agent (i.e., the Broker) remained responsible for whatever its salespersons did, but did not extend a broker’s fiduciary duty to the principals to each of its salespersons in a dual agency situation.
The Court rejected Defendants’ proposed interpretation of the statute. It noted that had the legislature intended to impute a salesperson’s duties to the broker but not vice versa, it could easily have clearly provided such language. It also observed that salespersons can only function through brokers under California’s statutes, and that brokers are liable for their sales associates and must exercise reasonable supervision over their associates.
Thus a salesperson has no independent agency relationship with a client, that “agency” exists only between the broker and the client. Therefore Section 2079.13(b) is most “naturally read to mean that the associate licensee owes the parties to that transaction the same duties as the broker” for which they act in a transaction.
The Court noted that the legislative history of the statute also supported this interpretation. As originally proposed the draft legislation did not discuss the duties of salespersons at all. The then California Department of Real Estate (now Bureau of Real Estate) requested an amendment so as to clarify that associate licensees owe parties the same duties as their brokers.
The Court also rejected the argument that this was an attempt to hold the listing (seller’s) agent liable for a breach of duty by his broker, Coldwell Banker. The Court noted that it was holding that under the statutory scheme the listing agent had his own “equivalent” duty to the buyer under the law.
In the final section of the opinion, the Court discussed practical concerns raised by Defendants. It notes that generally brokers and salespersons already have a duty to disclose. (Civ. Code §2079; §1102.6.) Regardless of whether it represents the buyer, a listing broker must disclose to that buyer all known facts materially affecting the value or desirability of a property that are not known or reasonably discoverable by the buyer. (§2079.16; Lingsch v. Savage (1963) 213 Cal.App.2d 729, 735.)
The Court explained that the primary difference between the obligations of a broker acting as an exclusive agent of seller and one acting as a dual agent is the dual agent’s duty to learn and disclose facts material to the property’s price or desirability, including facts that might be reasonably discoverable by the buyer. (Assilzadeh v. California Federal Bank (2000) 82 Cal.App.4th 399, 414–416.)
It further commented regarding what the broker is deemed to know from its salespersons acting as its agents:
“[A] a broker is presumed to be aware of the facts known to its salespersons. (See Civ. Code, § 2332 [“As against a principal, both principal and agent are deemed to have notice of whatever either has notice of, and ought, in good faith and the exercise of ordinary care and diligence, to communicate to the other.”]; 3 Witkin, Summary of Cal. Law (10th ed. 2005) Agency and Employment, § 150, p. 195 [“An agent is under a duty to inform the principal of matters in connection with the agency that the principal would desire to know about. [Citation.] Even if the agent fails to do so, the principal will in most cases be charged with that notice.”].) It is true, as defendants observe, that [the selling agent for buyer] owed Horiike a fiduciary duty to learn and disclose material information. But defendants do not explain how [buyer’s agent’s] purported failure to discharge her fiduciary duty would excuse [the broker] from its duty to disclose material information that may have been known only to [the listing agent for seller], who was also its agent in the transaction. A broker cannot discharge a duty to disclose information known only to its associate licensee except through the licensee himself. (Cf. Black v. Bank of America (1994) 30 Cal.App.4th 1, 6 [“A corporation is, of course, a legal fiction that cannot act at all except through its employees and agents.”].) (emphasis added.)”
Finally, the Court acknowledged that in certain situations a broker might find themselves in an irresolvable conflict but observes that “In approving the practice of consented-to dual agency, however, the Legislature undoubtedly understood that the dual agent‘s loyalty must extend to both parties, and that it cannot bear any fiduciary duty to one party that requires it to breach its duty to the other party. (See Civ. Code, § 2079.16 [―[i]n a dual agency situation, the agent owes ―[a] fiduciary duty of utmost care, integrity, honesty and loyalty in the dealings with either the Seller or the Buyer].)
This case confirms that traditional agency and fiduciary legal principles do still apply in the context of modern real estate practice. That an agent is a fiduciary of his or her principal has stood as a bedrock principle of agency law for centuries. The adoption of legislation allowing for dual agency did not fundamentally change that law, other than as expressly provided with regard to pricing information.
The defendant sought to have the Court to limit the duties of salespersons in dual agency transaction so as to create a situation where a salesperson might only have a fiduciary duty to one principal or the other. The Court rejected that limitation on the statutory scheme.
Going forward, whether the Horiike decision will have the wide-ranging detrimental impact upon brokerages predicted by Coldwell Banker in its briefing is to be seen. For now, what can be said is that fiduciary obligations are alive and well in dual agency relationships.
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