The seven justices of the California Supreme Court heard oral arguments yesterday in a dual agency lawsuit that could change how the state’s agents and brokers do their jobs when participating in in-house deals.
The suit was filed in 2010 by a homebuyer, Hiroshi Horiike, who alleged that the listing agent for a multimillion-dollar Malibu property he bought in 2007 violated his fiduciary duty to Horiike by not investigating discrepancies in the size of the property.
Horiike’s buyer’s agent and the listing agent belonged to the same brokerage firm, Coldwell Banker. This made Coldwell Banker a dual agent in the transaction, owing fiduciary duties to both buyer and seller.
Chris Cortazzo
Horiike contends that as an agent of Coldwell Banker, the listing agent, Chris Cortazzo, owed him the same fiduciary duties — in particular, the duty to investigate material facts that could affect the value or desirability of the property.
Coldwell Banker counters that Cortazzo owed Horiike only non-fiduciary duties, which did not include a duty to investigate.
Horiike named Cortazzo and Coldwell Banker in the suit, but he did not name his buyer’s agent, Chizuko Namba.
An appellate court agreed with Horiike. At Wednesday’s California Supreme Court hearing, each side got 30 minutes to argue their case.
The justices have 90 days to issue a written decision to uphold or overturn the appellate ruling.
What duty did Coldwell Banker owe?
Before the hearing began, this was the question before the justices:
“When the buyer and the seller in a residential real estate transaction are each independently represented by a different salesperson from the same brokerage firm, does Civil Code section 2079.13, subdivision (b), make each salesperson the fiduciary to both the buyer and the seller with the duty to provide undivided loyalty, confidentiality and counseling to both?”
That statute reads, in part:
“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.
Coldwell Banker’s attorney, Edward L. Xanders, began and ended his remarks to the justices focused on the possible consequences to buyers and sellers of having their agent transformed from their exclusive agent to an agent that owes fiduciary duties to both buyer and seller — with the attendant duties to investigate, provide counsel and possibly disclose confidential information.
But the justices’ questions did not focus much on the possible consequences of the interpretation of the statute. Instead, they asked about the role of the brokerage as a dual agent.
If the buyer’s agent drops the ball, does that absolve Coldwell Banker of fulfilling its duty?
The justices’ first questions to Coldwell Banker’s attorney attempted to ascertain the brokerage firm’s duty to Horiike.
“Do you agree that Coldwell Banker, the brokerage itself, owed a fiduciary duty to Mr. Horiike to learn of and disclose any information that materially affected the value of the property?” asked Justice Leondra R. Kruger.
Xanders agreed Coldwell Banker had a fiduciary duty to Horiike but said that duty flowed from the buyer’s agent — Namba — up to the broker, not from the broker down to both agents, as asserted by Horiike’s attorneys.
Since Horiike elected not to sue Namba, he stipulated that Coldwell Banker could not be held liable for her conduct, Xanders said.
Justice Goodwin Liu, Courtesy of the Supreme Court of California
But Justice Goodwin H. Liu said, “Whether or not Mr. Horiike brings Namba into the suit, that is a matter for the plaintiff to figure out. I’m not going to speculate the tactical motive of that.
“It seems to me that this [statute] language is pretty clear that the associate licensee doesn’t function as a sort of … free agent in this regard. The associate licensee only functions as an agent of the broker, Coldwell Banker. The duty that is owed from the associate licensee to the client, the prospective buyer, is the same duty that Coldwell Banker owes.”
Xanders responded that it is salespersons who drive agency relationships.
Liu replied, “I know that is the common understanding, as most people who experience real estate transactions can attest. That is not the world that we’re dealing with here because we’re trying to figure out what the statutes actually say and not just what common experience is.”
Dual agent
Justice Kathryn Werdegar, Courtesy of the Supreme Court of California
Justice Kathryn M. Werdegar remarked that it seemed “odd” that Namba isn’t being sued, but she noted that Coldwell Banker was acting as the agent for both parties in the deal.
Xanders responded, “But the nature of the fiduciary duty is not necessarily the same as the salesperson’s duty. Their duty in a situation where each salesperson has essentially been acting as an independent agent — their duty is to keep them separate.”
Liu said that made “sense,” but he then asked where the existing statute outlines the nuances of fiduciary duty.
“I’m not debating the policy merits of what you said,” he told Xanders.
“[The statute] doesn’t say that Coldwell Banker only bears responsibility for Namba with respect to Mr. Horiike and with respect for Cortazzo to the seller. It says that the brokerage bears responsibility for the associate licensees. Both of them.”
Xanders answered, “If you take it Namba out of the picture … the question is whether Mr. Cortazzo owes a fiduciary duty which is imputed upward to Coldwell Banker.”
Justice Leondra Kruger, Courtesy of the Supreme Court of California
Kruger responded, “I do not understand the premise, which you keep repeating, that all of the fiduciary duties necessarily have to be imputed upward when the statute begins from the premise that it is the brokerage that we care about and the brokerage that acts as the dual agent in the transaction.
“And these are the licensees that have no power to operate in the real estate transaction except as representatives of the broker.”
The buyer in the hot seat
Horiike’s attorney, Frederic D. Cohen, said the meaning of the statute was not “a matter of real dispute” between the parties because both say the statute equates the duties of brokers and salespeople.
“The real question is … where do the duties originate? The answer to that is clear.
“Only brokers, under statute and under case law, are permitted to enter into contracts with buyers and sellers,” Cohen said.
“Those contracts are which create the duties. They create fiduciary duties or non-fiduciary duties or whatever the duties are. They are created at the broker level. The salespeople … are employed by the brokerage to help the broker carry out the duties.
“The notion that duties are imputed upwards is a something that we strongly dispute and we think is contrary to the whole scheme by which real estate brokers and their employees work. Yes, you go in and call a salesperson. But until the broker signs a contract [that] doesn’t create a duty. Without a written agreement, there is no enforceable contract.”
What the listing agent could have done
What Cortazzo should have done to fulfill his fiduciary duty to investigate was to simply ask the property’s architect a few more questions about how the home’s square footage was calculated, Cohen said.
“In our view a jury could find that it’s a breach of fiduciary duty. By simply following up and simply asking a logical question, he would have satisfied that fiduciary duty as he was required to as an employee of Coldwell Banker that owed a fiduciary duty to Mr. Horiike,” he said.
When Kruger remarked that Horiike’s interpretation of the statute comes with “inevitable potential for conflict” in regards to sharing confidential information, Cohen replied, “It is not a problem of this statute. It is a problem that would have to be dealt with in some other way.”
‘Designated’ agency
Kruger noted that a number of other states had adopted a “designated agency” model that was “more in tune” with what Coldwell Banker was advancing.
In 32 other states, when a buyer and seller are represented by separate agents from the same brokerage firm, the relationship between the agents and their clients becomes one of “designated agency,” where the broker is a dual agent but the agents continue to represent their clients separately and owe fiduciary duties to their respective clients, according to a legal filing from Coldwell Banker.
California has no such legislation.
Cohen said he didn’t think that legislation would be difficult to draft — but that it would not look like the statute at issue in this case.
Legal filings for this case are available here.
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