If a buyer and seller in a real estate transaction are each represented by separate agents from the same brokerage, do those agents owe a fiduciary duty to both buyer and seller?
The California Supreme Court may soon decide that question for the more than 400,000 agents and brokers in the Golden State.
The court will hear oral arguments today over interpretations of a statute that will determine whether the listing agent that participated in the 2007 sale of a Los Angeles home for $12.25 million owed fiduciary duties to the buyer.
In April 2014, an appeals court said he did — and now the case is going to the state’s highest court.
A live stream of the hearing, set to begin at 9 a.m. Pacific, can be found here. (It will be the fourth case heard, according to the docket.)
Potential repercussions
The argument for leaving well enough alone
The listing agent and his brokerage, Coldwell Banker Residential Brokerage Company, and the firm’s supporters — including the California Association of Realtors — say that if the appellate decision is allowed to stand, it could have wide-reaching negative implications for the real estate industry.
According to CAR, which represents more than 160,000 agents and brokers, half of all of its member agents work for real estate brokerage firms where 50 or more licensees work under the same broker’s license.
“Reversing the trial court, the opinion up-ends California law and creates a public-policy nightmare for prospective buyers and sellers of California residences,” Coldwell Banker’s attorneys said in their petition for review.
“Given the prevalence of national and regional brokerage firms, salespersons from the same firm often end up on opposite sides of residential transactions.”
The attorneys’ petition says that upholding the appellate court opinion could cause the following consequences:
- Deprive buyers and sellers in “intra-firm transactions” of the “undivided loyalty of an exclusive agent.” “The salespersons will owe fiduciary duties to parties whose interests inherently conflict,” wrote the attorneys.
- Force agents to disclose “sensitive information about the client’s motivations or the salesperson’s personal beliefs” to the “other side” in the transaction.
- Force agents to “ferret out sensitive information from, and provide counsel to, complete strangers.”
- Limit the pool of properties available for buyers
- Raise transaction costs
“The opinion will be deeply disruptive. Because compliance with fiduciary duties to one client will frequently entail a breach of fiduciary duties to the other, salespersons risk being sued no matter what they do,” they said.
“The opinion inevitably will trigger an increase in litigation that will cause a concomitant increase in insurance premiums. Alternatively, large firms may avoid intra-firm transactions altogether, which would shut buyers and sellers off from huge portions of the market.”
The appeal court’s ruling creates “a startling, dangerous new regime that will severely impair intra-firm transactions” and “have disastrous consequences for California real estate consumers, brokerages and salespersons,” Coldwell Banker’s attorneys said in a separate filing.
The buyer responds
On the opposite side, the buyer plaintiff and supporters of the appeal’s court decision — including the National Association of Exclusive Buyers Agents — argue that the decision is based on a statute whose meaning is “unambiguous” and was intended to protect unwary buyers.
“Section 2079 was enacted as part of legislation designed to protect consumers from salespersons with greater knowledge and bargaining power,” Horiike’s attorneys said in response to Coldwell Banker’s petition.
“The Legislature’s purpose in enacting the statute was to provide real estate licensees with a comprehensive declaration of their duties and for consumers to be aware of the inherently conflicting duties in a dual agency situation.”
“A motivating factor that originally propelled this legislation was the fact that intra-company sales yield the greatest net profits for brokerages, thus prompting the potential for abuse,” the buyer’s attorneys added.
They asserted that only a broker, not a salesperson, contracts with a buyer or seller and that a salesperson’s duties flow from the broker.
“Coldwell Banker’s position is that the public will be worse off if this Court enforces the plain meaning of [the statute] because brokers will then find it more difficult to represent both sides in a real estate transaction,” Horiike’s attorneys said.
“Coldwell Banker’s assumption that dual agencies benefit the public is questionable. Consumer advocates have condemned the practice, which studies have shown results in higher prices.
“In adopting the legislation at issue, the Legislature itself observed that dual agency creates irreconcilable conflicts of interest that are ameliorated only in part by ensuring that the conflicts are disclosed to consumers.
“When a broker like Coldwell Banker chooses to represent both parties to a sale, it must meet its fiduciary duties to both sides. And it can do so only if the salesperson best situated to fulfill those duties is also required to do so.”
What happened?
A foreign buyer searches for a home
In 2003, Hong King-based millionaire Hiroshi Horiike started looking for a home in Los Angeles and hired Chizuko Namba, an agent in Coldwell Banker’s Beverly Hills office.
Horiike speaks Japanese and Mandarin Chinese but limited English and communicated with Namba in Japanese.
Chris Cortazzo
In 2006, Chris Cortazzo, an agent in Coldwell Banker’s Malibu West office, listed a custom Malibu home for $16.75 million in a multiple listing service, saying the property had approximately “15,000 square feet of living area,” according to attorneys for Horiike.
In February 2007, a Mr. and Mrs. Lee agreed to purchase the home for $13.8 million, but they raised questions about the advertised size of the property, the attorneys said.
In a disclosure form, Cortazzo had his assistant handwrite a note: “Buyer is advised to hire a qualified specialist to verify the square footage of home. Broker does not guarantee or warrant square footage.”
He also urged independent verification of the square footage in a separate letter.
The Lees backed out of the deal when the sellers refused a six-day extension to inspect the property.
In July 2007, Cortazzo allegedly changed the square footage on the MLS listing to zero and indicated there were “other comments” available. At the same time, the sellers lowered the asking price to $14.995 million.
On Nov. 1, 2007, Cortazzo showed the property to Horiike, Namba and Horiike’s colleague Tsutomu Yokoi. This was the one and only day Horiike and Cortazzo met and the first time Namba and Cortazzo met.
During the showing, Cortazzo gave Horiike an MLS listing sheet and a copy of a one-page color flier advertising that the home had 15,000 square feet of living area.
Later that day, Horiike decided to make an offer on the property. Namba gave him a seven-page “Disclosure Regarding Real Estate Relationships,” which he acknowledged receiving.
The form explained that Coldwell Banker represented both the seller and the buyer and was therefore acting as a “dual agent.”
No guarantees
Attorneys for Horiike contend that Horiike “completely trusted” Cortazzo because of his Coldwell Banker affiliation and that the disclosure form said Coldwell Banker was acting as a dual agent “through one or more associate licensees” — one of which was Cortazzo.
Afterwards, Horiike said he believed that his agents were Coldwell Banker, Cortazzo and Namba.
During escrow, Cortazzo forwarded to Namba a copy of a 1998 building permit for the property listing its “total development square footage” at 11,050, according to a filing from Coldwell Banker’s attorneys.
No “living area” calculation was included, they said.
(Over the course of the litigation, the buyer’s expert and the defendants’ expert would come up with different square footage figures for what constituted “living areas.”)
Namba read the permit and sent it to Horiike and Yokoi in Hong Kong, but Horiike never read it, relying on Yokoi to ensure it was consistent with what they had been told, the attorneys said.
“Neither Namba nor Cortazzo asked Horiike to review the permit, and neither alerted him to the fact that the home might be smaller than the advertised 15,000 square feet of living area,” Horiike’s attorneys said.
They noted that “the only practical difference” between the fiduciary duty owed to a seller client and the non-fiduciary duty owed to a third-party buyer is the fiduciary duty by the seller’s representative to investigate facts that may not be obvious from a brief visual inspection of the property.
When the brokerage becomes a dual agent, then both salespeople are responsible for ensuring the broker satisfies its duties — including a duty to investigate — to both of the firm’s clients, the buyer’s attorneys said.
“In this case, it would have been a simple matter for Cortazzo to satisfy his fiduciary duty to Horiike,” they said, by pointing out the square footage discrepancies and recommending he hire a specialist, as Cortazzo did for the Lees.
“His earlier recommendation is evidence that he knew he had an obligation to make the same recommendation to Horiike, yet he chose to remain silent,” the buyer’s attorneys said.
“Had Horiike hired a specialist to measure the property, he would have discovered that the advertised size was inaccurate, a discovery that might have scuttled the deal and, at least, would have affected the selling price — and Cortazzo’s commission.”
But Cortazzo said he did offer warnings, albeit not handwritten ones.
The MLS listing sheet he gave Horiike said that “Broker/ Agent does not guarantee the accuracy of the square footage” and “Buyer is advised to independently verify the accuracy,” Coldwell Banker’s attorneys said.
Horiike also acknowledged that he had received two other written advisories about the square footage — his attorneys characterized them as “boilerplate” — but allegedly never read them.
“[B]ecause Namba described the documents she sent Horiike as standard forms that simply required his signature, Horiike signed the documents without asking that they be translated,” his attorneys said.
Escrow closed in December 2007. Cortazzo received $275,625 as his commission on the deal, and Coldwell Banker profited over $100,000 in addition to Cortazzo’s and Namba’s commissions, Horiike’s attorneys said.
In May 2009, while preparing to add to the home, Horiike discovered the original building permit.
In November 2010, he filed suit against Coldwell Banker and Cortazzo for negligent representation, breach of fiduciary duty, and other claims.
Namba was not named in the suit.
Contradictory rulings
In a 2012 trial, the court ruled in favor of Cortazzo and Coldwell Banker, ruling that Cortazzo did not owe a fiduciary duty to Horiike.
The jury also found that Cortazzo made a “false representation of material fact” to Horiike, but did not find Cortazzo liable because he had “reasonable grounds” for believing the representation was true when he made it.
In April 2014, an appeals court overturned that decision.
“The buyer contends that the salesperson had a fiduciary duty equivalent to the duty owed by the broker,” the appeals court said.
“We agree. When a broker is the dual agent of both the buyer and the seller in a real property transaction, the salespersons acting under the broker have the same fiduciary duty to the buyer and the seller as the broker.”
The court sent the case back to a lower court for a new trial, saying that the jury’s findings do not resolve whether Cortazzo breached his fiduciary duty to Horiike.
“Cortazzo knew the square footage of the property had been measured and reflected differently in different documents,” the court said.
“He did not explain to Horiike that contradictory square footage measurements existed. A trier of fact could conclude that although Cortazzo did not intentionally conceal the information, Cortazzo breached his fiduciary duty by failing to communicate all of the material information he knew about the square footage.
“He did not even provide the handwritten advice given to other potential purchasers to hire a specialist to verify the square footage.”
What does the statute actually say?
At issue in the case is how a particular California statute, Civil Code section 2079.13 (b) should be interpreted:
“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.”
In this instance, “the agent” refers to a broker and “associate licensees” are the agents or brokers under the broker.
Horiike’s attorneys say the statute’s language is “clear and unambiguous”: “[S]ection 2079 .13 expressly states that when a broker is the dual agent of both the buyer and the seller in a real property transaction, the salespersons acting under the broker have the same fiduciary duty to the buyer and seller as the broker does.”
Coldwell Banker’s attorneys disagree.
They contend that agents involved in an “in-house” or “intra-firm” deal owe a fiduciary duty only to their buyer or seller client and owe non-fiduciary duties of honesty and fair dealing to the buyer or seller who is not their client.
To assert otherwise, they say, would impute the brokerage’s dual fiduciary duties downward to their salespersons, which Coldwell Banker says the California Legislature did not intend when crafting the statute.
“The most reasonable reading is that the Legislature merely intended to confirm that associate licensees and their brokers are in an agency relationship, and therefore whatever duty the associate licensee owes to a particular buyer or seller is imputed to the broker,” Coldwell Banker’s attorneys said.
Horiike’s attorneys say Coldwell Banker is correct that a broker’s liabilities are not imposed on his or her agents.
“However, Horiike has never argued that Cortazzo is vicariously liable for the misconduct of Coldwell Banker. Quite the opposite, Horiike seeks to hold Coldwell Banker liable for the misconduct of Cortazzo,” they said.
Of note: This is not the only lawsuit Cortazzo is facing. A Malibu couple has filed a $3.3 million lawsuit against the top listing agent, alleging fraud, according to the Hollywood Reporter.
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