Real estate brokers, agents face fiduciary burdens
When Hong Kong businessman Hiroshi Horiike went looking for a real estate investment in California, he was thinking big. How big? He wound up paying $12.25 million for a house so large that 5,000 square feet could go missing without its absence being immediately obvious.
Horiike engaged a real estate agent to help him find his dream home. The agent was affiliated with Coldwell Banker, which served as qualifying broker. The agent showed him a Tuscan-style Malibu estate with an infinity pool overlooking the ocean. The estate had been listed by another Coldwell Banker agent, Chris Cortazzo, who produced a flyer extolling its “approximately 15,000 square feet of living areas.” The flyer added, however, that the “broker/ agent does not guarantee the accuracy of the square footage.”
Cortazzo had good reason for including the disclaimer. He had in his possession a tax record from the county assessor that listed the house at 9,434 square feet. He also had a copy of the building permit, which put the square footage of the main house at 9,224, plus a guesthouse of 746 square feet. While a jury subsequently found that Cortazzo did not intentionally misrepresent the square footage, there’s no doubt he failed to bring some pretty significant discrepancies to Horiike’s attention.
Horiike bought the house. Because both agents worked for Coldwell Banker, the company acted as “dual agent” in the deal. According to the California Supreme Court, the very concept of dual agency in real estate transactions dates only to the 1980s. There hasn’t yet been time for judges to explore all its nuances and ramifications.
For instance, in an ordinary real estate deal, where the broker represents only the seller or only the buyer, the broker owes a fiduciary duty to the client. A fiduciary duty means considerably more than the due care we owe to everyone we come into contact with every day. All of us, real estate agents included, have a duty to refrain from committing fraud. But a fiduciary is held to a much higher standard. A fiduciary must act with “utmost good faith” in all dealings with its client, to quote one New Mexico case. In particular, a real estate agent or broker has a fiduciary duty to disclose “all facts within his knowledge which might affect his principal’s decisions, rights and interests.” That duty to disclose goes far beyond the general duty to refrain from lying.
Horiike’s agent was his fiduciary, but she couldn’t disclose the discrepancy in the square footage because she was unaware of it. Cortazzo, by contrast, had evidence of the discrepancy, but was he Horiike’s fiduciary? He denied it, arguing that he had been retained by the seller and therefore owed a heightened duty of disclosure to the seller only.
In an opinion that sent shock waves through the real estate industry but probably shouldn’t have come as much of a surprise, the California Supreme Court ruled that both agents were Horiike’s fiduciaries. It didn’t matter that Horiike hadn’t hired Cortazzo personally, because he had hired Cortazzo’s broker, Coldwell Banker. The broker, as dual agent, owed an identical fiduciary duty to both buyer and seller. The broker’s fiduciary duty ran through both agents to each client, like electricity transmitted through two wires simultaneously.
The California court ruled that a dual agent has a “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.” That last clause is especially significant. It made no difference that Horiike could have hired someone to verify the square footage, or obtained the building permit and tax assessment documents for himself. He was entitled to trust his fiduciary to reveal the discrepancies. That’s what the duty of utmost good faith means.
The California Supreme Court’s decision was based on California law. It’s not binding in New Mexico. But its reasoning is hard to argue with. And the rule it announces would fill a gap in our own law. The New Mexico Real Estate Commission’s regulations permit dual agency, but don’t explain whether the dual agent owes a fiduciary duty to both parties, to one or the other, or to neither. No published New Mexico case explores the issue.
But a 1993 case from the New Mexico Supreme Court comes close. Moser v. Bertram held that a seller’s agent doesn’t owe a fiduciary duty to the buyer of real estate, even when the seller’s agent and the buyer’s agent work for the same qualifying broker. The catch is that, in Moser, the broker wasn’t a party to the lawsuit. Only the seller’s agent was a defendant, a circumstance that led the court to declare that “this case does not involve an issue of dual agency.” Notice the court’s careful wording. While the underlying real estate transaction did indeed involve dual agency, the parties’ legal arguments didn’t raise any issue regarding the dual agent’s responsibilities. Moreover, Moser didn’t involve the failure to disclose material information, but rather the alleged loss of an investment opportunity. Consequently, the court had no occasion to rule on the extent of a dual agent’s legal duty to disclose. That sector of our state’s legal map remains blank. New Mexico’s real estate brokers would probably be wise to anticipate eventual adoption of the Horiike rule.
Horiike’s case against Coldwell Banker was sent back to the trial court. It seems ripe for an out-ofcourt settlement. As for Horiike himself, the Los Angeles Times reports that he made his fortune in electronics but, in retirement, “heads efforts to end the consumption of dog meat in Asia.” I think I speak for all the canines of Asia when I wish him long enjoyment of his infinity pool. Joel Jacobsen is an author and has recently retired from a 29-year legal career. If there are topics you would like to see covered in future columns, please write him at legal. column.tips@gmail.com.