Quick Followup on Horiike v. Coldwell Banker – CA Dual Agency Case

A while back, I wrote about the dual agency case headed to the California Supreme Court: Horiike v. Coldwell Banker. At the time, I speculated on a bunch of things and then said we need to wait and see what the ruling is. Well, the Court has ruled and issued an opinion.

The reaction from the industry, for the most part, is a bit of a big shoulder shrug and a ho-hum with an admonishment to the listing agent (Cortazzo) to disclose square footage info. The ruling, people say, is pretty narrow and already covers what real estate agents ought to do anyhow. This from the LA Times story covering the decision is a pretty typical response:

Nick Segal, chief executive of luxury real estate brokerage Partners Trust, said the kind of relationships covered by the ruling are extremely common.

“We do that fairly often,” he said.

But he doubted the case would have far-reaching consequences, in part because agents already represent both buyer and seller in many cases and the ruling would simply expand that relationship to others.

Instead, he said the case serves as a notice to real estate agents that they will be “held accountable” for things they should have been doing anyway.

And over on Inman, CAR’s legal counsel, June Barlow seems relaxed about the ruling:

“We were most concerned about an expansive ruling that might have been broader than the facts of this case. Since they kept it to the facts of this case, it’s not as remarkable as we were concerned it could be,” she said.

She noted that the court said Cortazzo’s fiduciary duty of disclosure to the buyer was “strikingly similar to the nonfiduciary duty of disclosure that Cortazzo would have owed Horiike in any event.”

The court also said that “Even in the absence of a fiduciary duty to the buyer, listing agents are required to disclose to prospective purchasers all facts materially affecting the value or desirability of a property that a reasonable visual inspection would reveal.”

Well, I’m not going to contradict Nick Segal and June Barlow, as well as hundreds of other very smart brokers and lawyers who have opined already on this. If they say dire consequences were averted, then dire consequences were averted.

Instead, in this brief update, I’ll just get super paranoid about two things from the ruling. One of my specialties is to get super paranoid, since being paranoid doesn’t mean they’re not out to get you.

The Paranoid Reading of the Ruling

This might be a bit of inside-baseball, but the question really is what one thinks the holding of the case is.

One possibility is that this paragraph in the conclusion is the holding of the case:

Because Cortazzo, as an agent of Coldwell Banker in the transaction, owed Horiike a duty to learn and disclose all facts materially affecting the value or desirability of the property, the trial court erred in granting nonsuit on Horiike‘s breach of fiduciary duty claim against Cortazzo and in instructing the jury that it could not find Coldwell Banker liable for breach of fiduciary duty based on Cortazzo‘s conduct.

That would be June Barlow’s narrow reading of the case: it’s about disclosure. Under this reading, the “duty” is merely to learn and disclose all material facts about a paroperty, in which case there’s nothing to worry about folks.

The other possibility, however, is that this is the holding of the case (from the discussion):

Accordingly, when Coldwell Banker agreed to act as a dual agent for both Horiike and the trust in the transaction for the sale of the Malibu residence, Cortazzo, as an associate licensee of Coldwell Banker in the transaction, assumed “equivalent” duties to Horiike.

Now, to be fair, the narrow reading is probably the better one… but the case could be made that the broader reading is the correct one for a few reasons.

First, I don’t know if the Supreme Court did enough to distinguish this ruling/holding from the ruling of the Court of Appeals below. In fact, the opinion cites the reasoning of the Court of Appeals’ decision favorably:

The Court of Appeal reversed the judgment on the breach of fiduciary duty claim against Cortazzo and Coldwell Banker. The court concluded that Cortazzo, as a salesperson working under Coldwell Banker‘s license, owed a duty to Horiike “equivalent” to the duty owed to him by Coldwell Banker. (Civ. Code, § 2079.13, 11 subd. (b).) The court reasoned that because Coldwell Banker acted as the dual agent of the buyer and seller in the transaction, as confirmed on the disclosure forms provided to Horiike, it 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 concluded that a properly instructed jury could find that “Cortazzo breached his fiduciary duty by failing to communicate all of the material information he knew about the square footage,” including the apparent contradiction between Cortazzo‘s representations and the square footage measurements in public record documents. The court remanded the case for a new trial on Horiike‘s breach of fiduciary duty claim. [Emphasis mine.]

Second, to reach even the narrow holding, the Court firmly rejected the arguments of the defendant Coldwell Banker — arguments which were joined by California Association of REALTORS in its amicus brief. That argument was essentially that agency relationship should be imputed “upwards” from the individual agent, rather than “downwards” from the brokerage. The court writes:

Defendants read the sentence following merely as clarifying that the agent‘s responsibility includes assuming whatever duties its salespeople owe to the parties in a transaction. In other words, defendants read the “equivalent” language to call for imputing the duties of the salesperson to the brokerage, but not the other way around.

We believe Horiike has the better reading. By describing an associate licensee‘s duty in a real property transaction as “equivalent to” the duty of the “broker for whom the associate licensee functions,” the provision specifies that when an associate licensee represents a brokerage in a real property transaction, his or her duties are the same as those of the brokerage.

Taken together, my paranoia says to me that the principles laid out clearly say that duty flows down from the brokerage to its agents. What those duties are in this particular case, the Court narrowed significantly by talking only about disclosure requirements. But note this:

Defendants argue that charging associate licensees with the same duties as their brokerages would force salespeople “into dual agency with buyers and sellers whose interests inherently conflict,” requiring them to breach their clients‘ confidence and harm their clients‘ interests. While we do not gainsay defendants‘ concerns about the potential for conflicts of interest in the dual agency context, the narrow disclosure duty at issue in this case creates no such conflict. The fiduciary duty of disclosure that Horiike alleges Cortazzo breached is, in fact, strikingly similar to the nonfiduciary duty of disclosure that Cortazzo would have owed Horiike in any event. [Emphasis mine]

The Narrow Reading people want to point to this and say that the holding is just about disclosure. Maybe. Probably. Likely!

I look at it differently, because… paranoia.

If the Narrow Reading folks are correct, this entire ruling is a nullity. Why bother writing all these words if the “fiduciary duty” here is the same as the nonfiduciary duty? The Court could just as easily have ruled that fiduciary duty flows “upwards” from the agent, but that here, Cortazzo violated the nonfiduciary duty of disclosure. It didn’t need to do all the research, the legislative language analysis, and all that jazz.

The fact that it did so, and the fact that the Court issued a written opinion clarifying the principle that fiduciary duty flows “down” from the brokerage seems very significant to me. And there’s a lot of “dicta” — meaning, stuff the Court says to support its ruling — that should be troubling for brokerages. For example, we have this:

In other cases, a plaintiff‘s allegations may raise more difficult questions about the scope of a real estate salesperson‘s fiduciary duties when functioning as a dual agent in a transaction. Defendants argue that if salespeople owe precisely the same duties as their employers, then buyers and sellers would not have the benefit of the “undivided loyalty of an exclusive salesperson,” and, worse, “[s]alespersons would have a duty to harm their original client by disclosing to the other side confidential information about the client‘s motivations or the salesperson‘s beliefs.” These are significant concerns, but they are also concerns inherent in dual agency, whether at the salesperson or the broker level. [Emphasis mine]

The Court then breezily blames the Legislature for drafting the law the way it did.

So this to me smells like the Court laying the foundation for the next case to raise dual agency issues. By formulating the principle but in a way so as to have little practical impact this time around, the Court sets things up for the next dual agency case where the allegations “may raise more difficult questions about the scope of a real estate salesperson’s fiduciary duties.” It’s a maneuver that all first year law students are familiar with from Marbury v. Madison.

The Next Case

That next case, in my humble opinion, will likely involve negotiation. Because disclosure of confidential information is not required — or even allowed — under the laws governing fiduciary relationships in dual agency, all of the language here is about disclosure of material facts, yadda yadda. The Court even says the real difference between nonfiduciary duty to disclose and fiduciary duty to disclose is one of learning the facts material to the property‘s price or desirability. In other words, Coldwell Banker has a duty to find out what its listing agent knows, then to disclose that to its buyer agent, whereas it has no duty to find out what the Keller Williams listing agent knows.

But it seems to me that where fiduciary duty of undivided loyalty becomes really important in a transaction is in the negotiation. Buyers want to know if the buyer agent is fighting for them, not for the commission check. Sellers expect that the listing agent is negotiating her heart out to get them the most money, instead of taking the easy way out and giving up the farm to get the deal done… for the commission check payday. And there is no connection between negotiating hard and disclosing confidential information.

This, to me, is where things get hairy. I’ve heard it said often that a fair deal is one where both sides walk away pissed off. Under the principle just laid down by the Court, both the seller and the buyer can bring a suit alleging breach of fiduciary duty by the dual agent brokerage, because both the listing agent and the buyer agent “inherit” that duty to both sides from the brokerage dual agent. The brokerage has to defend that suit in court and show somehow that it did not breach the very high standard of fiduciary duty owed to both sides.

So watch for the next case. If it’s about failure to negotiate “properly” whatever that means, strap in and get ready.

By The Way…

Okay, I said brief… so let me try to keep it brief. But I do wonder if other people have caught the interesting linguistic and conceptual framework used by the Court here. Check out these few sentences and paragraphs:

• The department requested an amendment to clarify that, although associate licensees are not themselves agents of buyers or sellers, they “owe parties to real estate transactions the same duties as their employing brokers.”
• Defendants argue that if salespeople owe precisely the same duties as their employers, then buyers and sellers would not have the benefit of….
• Brokers, in turn, are required to supervise the activities of their salespersons and may be disciplined and held liable based on salespersons‘ conduct within the scope of their employment.

All emphasis is mine, of course.

The “downward” flow of fiduciary duty makes all the sense in the world in a traditional employer-employee model. You don’t sue the Fedex driver who hit your car; you sue Fedex. But the “upward” flow likely makes more sense for a truly “independent contractor” model in which the person alleged to have breached whatever duty is a truly independent actor from the principal who contracted with him.

Given how much play the tension between W-2 employees and 1099 independent contractor models are getting in courts around the country — and particularly in California — am I the only one who finds that language significant?

Okay, I’m sure we’ll talk about this more as things develop and come to light. I do have to go do some real work, unlike fun writing for this blog. Your views and thoughts are, as always, welcome.

-rsh