Case Comment: Horiike v. Coldwell Banker—Reaffirming the Broker-Agent Relationship

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Case Comment: Horiike v. Coldwell Banker—Reaffirming the Broker-Agent Relationship

Thomas N. Jacobson

Tom Jacobson concentrates his practice on real estate and environmental matters throughout California and in Utah. During his career he has represented brokers, Associations of REALTORS’, commercial landlords and developers. Tom is a graduate of the University of Utah College of Law. In addition to practicing full time, Tom is a certified instructor for Utah real estate continuing education.

I. INTRODUCTION

The California Supreme Court’s (the "Court") review of Horiike v. Coldwell Banker Residential Brokerage Company1 provoked substantial speculation and conjecture prior to the Court’s decision, published November 21, 2016. Scholars and real estate professionals voiced their concerns about the repercussions of the anticipated decision.2 Depending on one’s perspective, the decision was either a sigh of relief or an unfortunate outcome. Despite considerable anticipation, in the end the Court did nothing more than reiterate existing law, leaving in place all of the advantages, drawbacks, conflicts, issues, and other labels affixed to California’s dual agency balancing act.

Our colleague and learned member of our bar, Rafael Chodos, recently published in the Journal3 an excellent article on the perspective of the Horiike case. Chodos emphasized that scholars may ask certain questions about the case, including why the Court even took the case given the direction of its decision and concurrence with the Court of Appeal.4 Chodos provided an insightful analysis of constructive fraud and fiduciary duty, and questioned why the Court did not address issues of constructive fraud.5 Chodos also provided an excellent analysis of dual agency and the inherent conflict of interest many lawyers perceive with the scheme adopted by the legislature.6

In practice, attorneys who advise brokers, buyers, and sellers do not have the luxury of knowing what was in the minds of the Court justices. Though there was much anticipation surrounding the outcome of the Horiike case and many who thought the days of dual agency might be over, the Court left the law of dual agency untouched and simply based its decision on existing law and precedent. This article details the facts of the Horiike case and analyzes the Court’s decision and its ramifications.

II. THE HORIIKE CASE

One often-joked-about facet of appellate work is that the "facts" adopted by the reviewing court often seem to differ from what the trial attorneys and their clients believed were presented at trial. Some of the commentators to date have taken this approach in interpreting the Horiike decision.7 However, for the lawyers and real estate professionals compelled to address the Horiike case in daily business matters, the facts recited by the Court are controlling.

The Court summarized the facts as follows:

In this case, a seller retained Coldwell Banker Residential Brokerage Company (Coldwell Banker), a real estate brokerage firm, to list a luxury residence for sale. When a buyer, also represented by Coldwell Banker, made an offer to purchase the property, the parties agreed that Coldwell Banker, acting through its associate licensees, would function as a dual agent in the transaction. After the sale was complete, the buyer discovered a significant discrepancy between the square footage of the residence’s living area as set out in its building permit and as represented in the marketing materials for the property. He filed suit, alleging, among other things, breach of fiduciary duty by Coldwell Banker and by the associate licensee who marketed the property and negotiated its sale on behalf of the seller.8

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In a more detailed analysis of the facts at a later point in the opinion, the Court made the following observations pertinent to this discussion and paraphrased here:

  1. The property in question was a luxury residence in Malibu, California.9
  2. The property was owned by a family trust.10
  3. The trust engaged Chris Cortazzo, a sales representative associated with Coldwell Banker’s Malibu West Office to list the property.11
  4. Cortazzo obtained information from public records at the County Assessor’s Office stating the square footage of the property’s living area was 9,434 square feet.12
  5. Cortazzo also obtained additional square footage information from a building permit stating the property contained a single family residence of 9,224 square feet, a guest house of 746 square feet, and a garage of 1,080 square feet.13
  6. Cortazzo listed the property in September 2006 and submitted the property information to the Multiple Listing Service ("MLS") stating the property "offers approximately 15,000 square feet of living areas.14
  7. Cortazzo prepared a flyer reiterating the square footage filed with the MLS.15
  8. In 2007 an offer was made to purchase the property. Cortazzo prepared a handwritten note to the prospective buyer "that Coldwell Banker did not ‘guarantee or warrant’ the square footage of the residence and advised the couple to hire ‘a qualified specialist to verify the square footage.’"16
  9. Cortazzo provided documentation from an architect of the residence stating the square footage was approximately 15,000 square feet, and at the same time provided the prospective buyer with another admonition to hire a qualified specialist.17
  10. The prospective buyer cancelled the transaction after requesting an extension to purchase the property and the seller refused to grant it.18
  11. At the same time, Hiroshi Horiike had been working with a sales representative in the Coldwell Banker Beverly Hills office.19
  12. Horiike viewed the property in November 2007 and was provided with the same flyer Cortazzo prepared when the property was filed with the MLS stating the property contained approximately 15,000 square feet. At the same time Horiike received a disclaimer that "the Broker/Agent does not guarantee the accuracy of the square footage."20
  13. Horiike made an offer, which was accepted.21
  14. Before completing the purchase, Horiike received and signed the two agency disclosure forms, acknowledging Coldwell Banker was acting as a dual agent.22
  15. Cortazzo did not provide Horiike with a handwritten note advising Horiike to hire a qualified specialist to verify the square footage; however, Cortazzo provided to Horiike’s agent a copy of the building permit and a form advisory stating "[o]nly an appraiser can reliably confirm square footage."23
  16. Horiike subsequently learned the square footage on the building permit conflicted with the flyer prepared by Cortazzo.24

The Court noted that the sole question on appeal was whether Cortazzo, as a sales representative (associate licensee) of Coldwell Banker, owed a fiduciary duty to Horiike to investigate and disclose all facts materially affecting the residence’s value or desirability.25 The Court’s focus on the issue of fiduciary duty removed from consideration all of the other potential issues it could have addressed, including the fundamentals of the dual agency concept codified by the legislature and the degree of disclaimers required during a transaction. The Court did not discuss the independent issues of fraud or constructive fraud, nor did it delve into the formation of agency relationships other than what is set forth in current California law.

The Court began its analysis of the fiduciary duty issue by referring to the agreements between Horiike and Coldwell Banker and noted that those agreements are controlled by an existing statutory scheme. The Court first examined and quoted Civil Code section 2079.13(b) as follows:

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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.26

The parties disagreed on the meaning of this section. The Court stated the only reasonable reading of the section was to describe an associate licensee’s duty in a real property transaction as "equivalent to" the duty of a broker for whom the associate licensee functions. 27 As codified in Civil Code section 2079.13(b) and Business and Professions Code section 10177(h), the Court noted that a material aspect of the broker-associate licensee relationship is the requirement that a broker supervise a salesperson; an associate licensee does not have independent standing in a real estate transaction.28 It is axiomatic that a sales representative working for a broker does not own the listing or have the ability to operate in any manner independent of the broker.

The California Code of Regulations dictates that a broker must exercise "reasonable supervision" over the activities of the sales representative.29 The Court followed a concept well-recognized in the real estate industry: a sales representative or associate licensee has no power to act except as the representative of the broker. Brokers and sales representatives traditionally enter into independent contractor agreements, and those agreements traditionally set forth the relationship between the broker and the sales representative. The relationship is a well-established agency relationship wherein the sales representative is an agent of the broker. In confirming this relationship, it is not much of a leap of reasoning for the Court to hold that the sales representative owes to the contracting parties the same duties as the broker on whose behalf the sales representative derives his or her position in the transaction.

To find otherwise would initiate a new set of rules relating to agency. If Cortazzo could have had a different duty to the contracting parties than to his broker, the proverbial umbilical cord would be severed and a sales representative or associate licensee could be allowed to act independently from the broker. Not only is the industry unprepared for such a leap, there is no statutory scheme in place to address the role of the sales representative vis-à-vis the buyer or other transaction obligations. By way of example, if Cortazzo did not have the same duties and responsibilities as the broker, could he sue the buyer directly for compensation without including the broker? Could he enter into separate buyer-sales representative agreements without the broker’s participation? The answers are obvious and neither the Court nor the legislature appears to be prepared to allow the sales representative to act independently from the broker. As the Court noted:

[A]n associate licensee has no power to act except as the representative of his or her broker. This means that an associate licensee does not have an independent agency relationship with the clients of his or her broker, but rather an agency relationship that is derived from the agency relationship between the broker and the client. Against that backdrop, Civil Code section 2079.13, subdivision (b), is most naturally read to mean that the associate licensee owes the parties to that transaction the same duties as the broker on whose behalf he or she acts.30

The Court continued its analysis by directly addressing the argument made by proponents of setting up an independent agent duty. Specifically, the Court noted:

As a practical matter, it is unclear how a corporate brokerage like Coldwell Banker would fulfill its fiduciary disclosure duties as a dual agent under the rule that defendants advance. This case perhaps illustrates the point: It is undisputed that Coldwell Banker owed a fiduciary duty to Horiike, including a duty to learn and disclose all information materially affecting the value or desirability of the residence. That duty extended to information known only to Cortazzo, since a broker is presumed to be aware of the facts known to its salespersons.31

Given these reaffirmations of existing law and everyday real estate reality, the Court did nothing more than follow existing law. The Court recognized that once the broker was placed in the position of representing both the buyer and seller, the broker owed a fiduciary duty to both the buyer and the seller. Though Cortazzo attempted to argue that making such a finding would place associate licensees into dual agency relationships with inherent conflicts, the Court did not take the bait to delve into the foundation of dual agency law. Instead, the Court found Cortazzo’s argument lacked substance:

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. 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. And regardless of whether a listing agent also represents the buyer, it is required to disclose to the buyer all known facts materially affecting the value or desirability of a property that are not known to or reasonably discoverable by the buyer.32

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The Court took the time to address the difference between an agent working for a broker as a dual agent and an agent working for a broker that represented only the seller. The Court stated the major difference was the obligation of the agent representing the seller to learn and disclose material facts known to the broker regarding the property’s price or desirability.33 If knowledge is imputed to the broker in a dual agency relationship, and disclosure is not addressed in the statutes controlling dual agency, the listing agent has a duty to disclose everything that may be known to the brokerage and would be material to the transaction.34

As the Court noted, the associate licensee is required to "learn and disclose facts material to the property’s value and desirability."35 This requirement is not a new duty or use of new terminology. In Salahudtin v. Valley of California, Inc. ,36 the Court used similar language when addressing the obligation of an agent in a dual agency relationship:

[T]he broker has a fiduciary duty to investigate the material facts of the transaction, and he cannot accept information received from others as being true, and transmit it to the principal, without either verifying the information or disclosing to the principal that the information has not been verified. Because of the fiduciary obligations of the broker, the principal has a right to rely on the statements of the broker, and if the information is transmitted by the broker without verification and without qualification, the broker is liable to the principal for negligent misrepresentation.37

In Field v. Century 21 Klowden-Forness Realty,38 the court addressed this issue and stated:

Under the common law, unchanged by Easton and section 2079, a broker’s fiduciary duty to his client requires the highest good faith and undivided service and loyalty. The broker as a fiduciary has a duty to learn the material facts that may affect the principal’s decision. He is hired for his professional knowledge and skill; he is expected to perform the necessary research and investigation in order to know those important matters that will affect the principal’s decision, and he has a duty to counsel and advise the principal regarding the propriety and ramifications of the decision. The agent’s duty to disclose material information to the principal includes the duty to disclose reasonably obtainable material information. The facts that a broker must learn, and the advice and counsel required of the broker, depend on the facts of each transaction, the knowledge and the experience of the principal, the questions asked by the principal, and the nature of the property and the terms of sale. The broker must place himself in the position of the principal and ask himself the type of information required for the principal to make a well-informed decision. This obligation requires investigation of facts not known to the agent and disclosure of all material facts that might reasonably be discovered.39

Readings of Salahudtin, Field, and other cases underscore the notion that the Horiike Court did not introduce a new standard or even modify an existing standard. The Court focused on the existing law concerning the obligation of an associate licensee as compared to the obligation of the associate licensee’s broker, and concluded there was no difference: it was the same duty because the acts and omissions of the associate licensee are imputed to the broker and vice versa.

In the day-to-day challenges to brokers, associate licensees, and their attorneys, the Horiike case did not change any well-established rules or practices. Though it might be interesting for the purposes of an academic exercise to ponder why the Court even took the case and why it did not address certain issues, these discussions are inherently speculative. The Court made it clear from the outset it was only addressing the issue of the associate licensee’s duties to a buyer in a dual agency scenario when the associate licensee was working with the seller. The Court even went so far as to address whether the fiduciary duty could be addressed through the obligation of the associate licensee working with the buyer (who was not named in this litigation for whatever reason):

It is true, as defendants observe, that Namba owed Horiike a fiduciary duty to learn and disclose mate rial information. But defendants do not explain how Namba’s purported failure to discharge her fiduciary duty would excuse Coldwell Banker from its duty to disclose material information that may have been known only to Cortazzo, who was also its agent in the transaction. A broker cannot discharge a duty to disclose information known only to its associate licensee except through the licensee himself.40

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The Court did not address the issue of how much disclosure is required in order to meet the disclosure requirement. In this case, Horiike was provided with disclaimers, a topic the Court did not touch upon in its opinion. Real estate professionals customarily provide disclaimers to their clients and parties to a transaction. This topic may be a matter for a future decision or legislation, but it is important to understand the decision did not address this issue.

III. CONCLUSION

Despite all of the anticipation, the Horiike case was nothing but a reiteration of existing law. Dual agency is safe—for now. Associate licensees, as the Court chose to address agents, are still tied to the broker by an umbilical cord that prevents the associate licensee from acting independently from the broker. The obligations of disclosure have not changed, and the statutory obligations of non-disclosure for dual agency remain in place.

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Notes:

1. 1 Cal. 5th 1024 (2016).

2. Are You My Broker? The Evolving Legal Status of the Real Estate Salesperson, Broker, Real Estate Newsalert (Miller & Starr), January 2016.

3. Rafael Chodos, Horiike v. Coldwell Banker: Pinning Down One Aspect of Fiduciary Duty, 35 Cal. Real Prop. J., no. 1, 2017, at 45.

4. Id. at 48.

5. Id.

6. Id. at 51.

7. Agency and Broker Liability: Listing Salesperson Owed Fiduciary Duties to Purchaser of Residence Sold by Another Sales Associate Employed by the Same Broker, Real Estate Newsalert (Miller & Starr), January 2017.

8. Horiike, at 1028-29.

9. Id. at 1032.

10. Id.

11. Id.

12. Id.

13. Id.

14. Horiike v. Coldwell Banker Residential Brokerage Co., 1 Cal. 5th 1024, 1028-29 (2016).

15. Id.

16. Id.

17. Id.

18. Id.

19. Id. at 1032-33.

20. Horiike v. Coldwell Banker Residential Brokerage Co., 1 Cal. 5th 1024, 1033 (2016).

21. Id. at 1033-34.

22. Id. at 1034.

23. Id.

24. Id.

25. Id. at 1029.

26. Cal. Civ. Code § 20179.13(b), in pertinent part.

27. Horiike v. Coldwell Banker Residential Brokerage Co., 1 Cal.5th 1024, 1035 (2016).

28. Id. at 1036-37.

29. Cal. Code Regs., tit. 10, § 2725.

30. Horiike, 1 Cal. 5th at 1037.

31. Id. at 1038-39.

32. Id. at 1040 (internal citations omitted).

33. Id.

34. Id. at 1042.

35. Id. at 1039-40.

36. 24 Cal. App. 4th 555 (1994).

37. Id. at 562-63 (footnotes omitted).

38. 63 Cal. App. 4th 18, 25-26 (1998).

39. Id.; see also Easton v. Strassburger, 152 Cal. App. 3d 90 (1998).

40. Horiike v. Coldwell Banker Residential Brokerage Co, 1 Cal. 5th 1024, 1039 (2016).