Horiike Decision Brings A Sigh Of Relief

A collective sigh of relief by concerned real estate interests was brought on last week by the California Supreme Court’s decision in the case of Horiike v. Coldwell Banker et al. (California Supreme Court, November 21, 2016). The case centered around dual agency, and more than a few in the real estate community feared that the Court might issue a far-reaching opinion that could effectively render dual agency impossible, even if not illegal. But that was not the case. Instead, the Court focused its analysis narrowly on the facts of the case and issued an opinion that few found either questionable or overreaching.

Dual agency is treated differently in different states. I render no opinion as to which one is best. In California, dual agency is legal provided that it is properly disclosed and consented to.

Disclosure is accomplished by provision of a statutory form (Disclosure Regarding Real Estate Agency Relationship). The form spells out the duties of a buyer’s agent, a seller’s agent, and a dual agent. In the latter case it says the dual agent has “a fiduciary duty of utmost care, integrity, honesty and loyalty in the dealings with either the Seller or the Buyer.”

It also spells out that, “In representing both Seller and Buyer, the agent may not, without the express permission of the respective party, disclose to the other party that the Seller will accept a price less than the listing price or that the Buyer will pay a price greater than the price offered.”

We note, then, that the legislation that created this scheme (Civil Code 2079 et seq.) “carved out” behavior which, if engaged in by a single agent, would be deemed perfectly acceptable. Hence, in a typical non-dual agent setting, if a buyer’s agent learned from a third party that the seller was willing to accept an offer considerably below the listed price, he could certainly communicate that to the buyer. But he couldn’t if he were the agent of both parties.

In the Horiike case, the agency duty had to do with disclosure about the property. Horiike, the buyer, had been working with a Coldwell Banker (CB) agent (Namba) from the CB office in Beverly Hills. In the course of their property search, he and his agent saw a property listed by an agent (Cortazzo) from the CB office in Malibu. Horiike purchased the property ($12.25 million) with CB acting as a dual agent. All was properly disclosed and consented to.

Subsequently, Horiike discovered substantial discrepancies between the square footage represented in marketing materials and as it was indicated on the building permit. He sued CB and the listing agent, Cortazzo, for, among other things, breach of fiduciary duty. He did not sue Namba, the agent who had worked with him in the buying process. Apparently, he liked her.

According to the court record, Cortazzo had provided Horiike, through Namba, “a copy of the residence’s building permit and a form advisory stating: ‘only an appraiser… can reliably confirm square footage… Representations … in a Multiple Listing Service, advertisements, and from property tax assessor records are often approximations, or based on inaccurate or incomplete records… Brokers have not verified any such representations. Brokers do not have expertise in this area. If Buyer wants information about the exact square footage… Broker recommends that Buyer hire an appraiser or licensed surveyor…'”

The jury found that both Cortazzo, the listing agent, and CB were not liable for intentional or negligent misrepresentation or intentional concealment. As to the breach of fiduciary duty, the trial court granted non-suit regarding Cortazzo, “ruling that Cortazzo exclusively represented the seller in the transaction and therefore did not owe a fiduciary duty to Horiike.” It also “instructed the jury that, in order to find Coldwell Banker liable for breach of fiduciary duty, the jury had to find that an agent of Coldwell Banker other than Cortazzo or Namba [who had been excluded from the suit] had breached a fiduciary duty to Horiike.” Of course there were no other such agents, so CB was exonerated.

Naturally, Horiike appealed; and the Appellate Court reversed on the issue of Cortazzo’s fiduciary duty to Horiike. It ruled 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.” It 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.'”

CB and Cortazzo then appealed to the California Supreme Court which took the case, framing the issue in this way: “The sole question before us is whether Cortazzo, as an associate licensee representing Coldwell Banker in the sale of the Malibu residence, owed a duty to Horiike to take certain measures to inform him about the residence’s square footage.”

That this could have been an issue arises from the fact that, under California law, it is the broker — in this case, CB — and not the individual licensee who is the agent of the principal. The individuals (here Cortazzo and Namba) are “associate licensees” and they are agents of the broker. However, the Supreme Court found ample reason to support the view that “An associate licensee owes a duty to each party in a real property transaction which is equivalent to the duty owed each party by the broker under whom the associate licensee is licensed.”

In this particular case, though, the Court noted that “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.” Moreover, “…the critical point is only that to disclose such information, or to alert Horiike that his representations [of square footage] were unverified, would not have required Cortazzo to reveal any confidential information he had obtained from the [seller]”

The Court was sensitive to the concerns expressed by the real estate community and in amicus briefs that a ruling finding at the agent level — not just at that of the company — fiduciary duties to both parties could lead to untenable situations where an agent could have a duty to divulge confidential information about one party to the other.

In this regard the Court acknowledged the issue and practically invited organized real estate (such as the California Association of REALTORS^®) to seek a legislative fix — as it had done before with respect to revealing the price points of buyer and seller.

Thus it wrote, “To the extent there is any uncertainty about the scope of a dual agent’s fiduciary duties in other contexts [i.e. other than disclosure of property conditions], the Legislature certainly could enact defendants’ preferred solution to the problem by, for example, adopting legislation to uncouple associate licensees’ duties from the brokers they represent.”

The Horiike case will now go back to trial on the issue of whether or not Cortazzo breached his disclosure duty. The real estate industry, having breathed it sigh of relief, can now get busy seeking legislation that will address the concerns about confidentiality.

Bob Hunt is a director of the California Association of Realtors^®. He is the author of Real Estate the Ethical Way. His email address is scbhunt@aol.com.