In a highly anticipated ruling, the California Supreme has upheld an appellate decision ruling that a listing agent owed a fiduciary duty to a buyer when the buyer and seller were represented by the same brokerage.
The Horiike v. Coldwell Banker case has had the attention of the real estate community for several years now. In fact, we previously wrote about the initial appellate decision.
However, as a brief recap, Horrike (“the Buyer”) purchased a Los Angeles property (“the Property”) in 2007. The seller retained Coldwell Banker to list the Property. The Buyer was represented by another Coldwell Banker agent, and the parties agreed to the dual agency. The two agents worked in different offices, and had never met prior to the showing of the Property.
During the showing of the Property, the Listing Agent gave 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. After purchasing, Buyer learned the square footage was significantly less than 15,000 square feet, including by discovering a building permit that listed the square footage of the Property as 11,050 square feet. Other evidence suggested the square footage was actually much less.
It is also important to note that the Listing Agent had provided a prior buyer a written recommendation to verify the square footage of the Property, but not such note was provided to the Buyer in the subject transaction.
In light of this information, the Buyer filed suit against Coldwell Banker and the Listing Agent for negligent representation, breach of fiduciary duty and other claims. The Selling Agent was not named in the suit.
The Trial Court determined that the Listing Agent did not owe a fiduciary duty to the Buyer. As the Buyer had not named his own agent in the lawsuit, the jury was instructed that it could only find Coldwell Banker liable if an agent other than the Listing Agent or Selling Agent had breached their fiduciary duty to Buyer. Unsurprisingly, as there were no other agents involved, the jury found for Coldwell Banker.
The case was then brought to the Court of Appeal, which reversed the Trial Court’s decision. The Court of Appeals held, in no uncertain language, that the Listing Agent, as an associate licensee of Coldwell Banker, owed a fiduciary duty to him equivalent to the fiduciary duty owed by Coldwell Banker. The Court relied on the language of Civil Code § 2079.13 to determine that the “agent” in this transaction was Coldwell Banker, and as the Listing Agent was an associate licensee of Coldwell Banker, the Listing Agent owed a fiduciary duty to Buyer.
Supreme Court Decision
The Supreme Court was tasked with responding to the narrow question of whether an associate licensee acting as a listing agent owes a fiduciary duty to a buyer (ie to disclose all material information related to the discrepancy in square footage in the advertised vs. publicly recorded documents).
The Supreme Court affirmed the Court of Appeal decision, determining that the associate licensee owed to the Buyer an “equivalent” duty of disclosure under Civil Code section 2079.13, subdivision (b).
The Court detailed the history of dual agency, both the statutory provisions and case law. Moreover, the Court considered the argument that requiring a listing agent to have a fiduciary duty to a buyer would make it difficult or impossible to fully represent the interests of their own client. However, the Court was not convinced, primarily relying on the statute and Legislative intent.
What Does this Mean?
This is a significant case. The California Association of Realtors, Consumer Attorneys of California, The Civil Justice Association of California and several other groups submitted Amicus Curiae opinions on this matter, stressing their respective concerns with the potential rulings.
The specific concerns from the brokerage community include the idea that buyers and sellers in an “intra-firm” transaction will lose the undivided loyalty of their agent, that the pool of properties available to some buyers would be limited as brokerages may avoid in-house transactions all together, transaction costs could increase to off-set additional litigation expenses and premiums etc. On the other side, consumer advocates have argued that the idea of a dual transaction is inherently a conflict of interest and should not be allowed all together.
The Court acknowledged some of these concerns, but ultimately held that the Legislature was aware of the concerns and “undoubtedly understood that the dual agent‘s loyalty must extend to both parties, and that it cannot bear any fiduciary duty to one party that requires it to breach its duty to the other party.”
Frankly, the decision is not surprising to me. The Courts have consistently found ways to punish dual agency, and this is just another decision in a line of decisions that favor the consumer in these transactions. Although dual agency remains legal, this decision further increases the risk to brokerages when taking on a dual agency, to the point where one must wonder whether brokerages will even consider taking them on at all.
Before the decision was announced, there were arguments that the Supreme Court’s affirmation of the Court of Appeals decision could essentially lead to the “death” of large brokerages. Specifically, some of the fear was that large brokerages would disband and boutique brokerages would form that would exclusively represent buyers or sellers. The potential for a hundred plus agent brokerage representing a buyer and seller is fairly high, and the brokerages will be faced with tough decisions as to how to treat those transactions.
The potential scenarios are fascinating. It will be very interesting to see how this plays out over the next few months, and whether a further appeal will ensue (note, having this heard by a higher court may be a long shot, as the court does not have to accept the case). In any event, one must anticipate extensive lobbying and changes to the way many brokerages operate.