Real estate bro­kers, agents face fidu­ciary bur­dens

Albuquerque Journal - - BUSINESS OUTLOOK - Joel Ja­cob­sen

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. col­

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