- California Supreme Court Affirms Appellate Court Ruling That A Real Estate Agent Who Represented The Seller Owes Fiduciary Duties to The Buyer, Not Just Seller, In A Case Where The Brokerage Represented Both Sides of The Deal.
In the case of Horiike vs. Coldwell Banker Residential Brokerage Co. 2016 DJDAR 11503, the California Supreme Court affirmed the Appellate Court and sent the case back to the Superior Court for another jury trial on the issue of disclosure rules for dual agents who represent both a seller of a residence and a buyer. You will recall that I reported on this case last year and predicted the case would go to the Supreme Court.
Horiike, a Hong Kong multimillionaire, bought a Malibu mansion for $12.25 million all cash in 2007. The listing agent is a celebrity real estate agent, Chris Cortazzo. Cortazzo gave the buyer a flyer that said that the home had 15,000 sqft of living space as well as a MLS listing that did not specify square footage.
A building permit revealed that the total square footage was 11,050 including a guest house and a garage. Malibu has a different way of measuring gross square footage. In Malibu the rule is that square footage includes the garage and other outdoor living spaces beyond the primary residence. The tax assessors records showed that the property was a little less than 10,000 sqft.
Horiike, who speaks no English, but had an agent who spoke Japanese, signed the standard advisory given to him by the listing agent saying that the broker/agent was not responsible for verifying square footage.
In 2009, one year after the real estate collapse, Horiike seeks a building permit to remodel a room. He then, for the first time, discovers the discrepancy in square footage according to his complaint. Horiike’s agent worked at Coldwell Banker and the listing agent worked at Coldwell Banker. Therefore, the firm was considered a dual agent for the buyer and seller. Horiike sues Cortazzo and Coldwell Banker in 2010, but interestingly does not sue his own agent for breach of fiduciary duty.
The defense relied on the argument that Cortazzo was the exclusive agent of the selleronly and didn’t owe a fiduciary duty to Horiike. The trial court agreed and dismissed Cortazzo from the case. The jury in Los Angeles ruled in Coldwell Banker’s favor that there is no breach of fiduciary duty.
After the trial the case went to the 2nd District Court of Appeal. That court held that Cortazzo did not add a hand written note of advise in his broker disclosure stating that the buyer should hire a qualified specialist to verify the square footage of his home as he had done with a previous prospective buyer. This lack of personal note in the broker disclosure, according to the 2nd District Court of Appeal, may not be intentional concealment, but a trier of fact could determine that he breached his fiduciary duty by failing to communicate all material information he knew about the square footage.
The Supreme Court now has held that the case be remanded to the Superior Court for another jury trial against both Cortazzo and Coldwell Banker. The court stated that Coldwell Banker cannot treat employed sales agents as if they are separate and are representing only one side of the deal. The court further determined that the fiduciary duty extended to information known only to Cortazzo since a broker is presumed to be aware of the facts known to its salespersons. The court declined to decide whether Cortazzo or Coldwell Banker actually breached the fiduciary duties to Horiike which will be determined by a jury.
I find the timing of the lawsuit to be more than curious. Horiike pays top dollar for this mansion in 2007. The real estate market crashes in 2008. In 2009 all of the sudden he is worried about the square footage for the first time and claims that he didn’t read the documents that were provided to him stating that he should independently verify the square footage and not rely upon the listing agent. Furthermore, he received a copy of the building permit during escrow which showed a discrepancy of approximately 4,000 square feet. This, in my opinion, would have led a reasonable buyer to have someone competent to investigate the square footage if that was such an important factor. Malibu’s own city ordinances complicate the definition of livable square footage when it includes garages and outdoor living spaces in the equation.
There will be a discussion in each large real estate brokerage, in my opinion, as to how and by what document they can prevent future liability on dual agencies. We know real estate companies will not give up both sides of a commission check because of one Supreme Court case. There will be extensive lobbying, in my opinion, with the legislature as well to rewrite the Civil Code to limit the scope of this ruling for future deals. When commission checks are at stake there will be no stone left unturned.
I predict that this case has a good chance of settling before it gets to another jury.
About the Author
Scott Souders is a real estate attorney who has practiced real estate law in excess of 42 years in Southern California. The Real Estate Law Update cites cases or statutes which are summarized and should not be relied upon without fully reading the cases or statute in the advance sheets and shepardizing the same and consulting with your own attorney.