Horiike v. Coldwell Banker Residential Brokerage Co.

Citations: 1 Cal. 5th 1024; 383 P.3d 1094; 210 Cal. Rptr. 3d 1; 2016 Cal. LEXIS 9428Docket: S218734

Court: California Supreme Court; November 21, 2016; California; State Supreme Court

Original Court Document: View Document

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In the case before the Supreme Court of California involving Hiroshi Horiike and Coldwell Banker Residential Brokerage Company, the court addressed the responsibilities of real estate brokers acting as dual agents. Under California Civil Code sections 2079.14 and 2079.16, a broker can represent both the seller and buyer if both parties provide consent after full disclosure. Brokers must inform the parties of their dual agency status and the fiduciary duties owed to both sides. The statute also states that an associate licensee, who operates under the broker's supervision, owes equivalent duties to those owed by the broker.

In this matter, Coldwell Banker was retained by a seller to list a luxury property. When the buyer, also represented by Coldwell Banker, made an offer, the brokerage acted as a dual agent. Following the sale, the buyer noticed a significant discrepancy in the property's square footage, leading to a lawsuit against Coldwell Banker and the associate licensee for breach of fiduciary duty. The trial court dismissed claims against the associate licensee, stating they had no fiduciary duty to the buyer and instructed the jury to find Coldwell Banker liable only if another agent had breached their duty. The jury ruled in favor of Coldwell Banker.

However, the Court of Appeal reversed this decision, focusing on whether the associate licensee had a duty to disclose material information affecting the property's value. The court affirmed that the associate licensee, acting on Coldwell Banker’s behalf, indeed owed the buyer a duty of disclosure equivalent to that of Coldwell Banker under Civil Code section 2079.13, subdivision (b). This ruling clarifies the responsibilities of associate licensees in dual agency situations, particularly regarding the obligation to disclose pertinent property information.

Until the early 1990s, standard Multiple Listing Service (MLS) agreements designated cooperating agents as subagents of sellers, with associate licensees acting as agents for listing brokers and cooperating brokers. Judicial precedent established that real estate agents owed sellers a duty of undivided loyalty akin to that of a trustee to a beneficiary. However, buyers were often unaware that these brokers were acting exclusively for the seller, leading courts to recognize listing agents and cooperating brokers as undisclosed dual agents with fiduciary responsibilities to both parties. This recognition allowed for rescission of transactions due to undisclosed dual agency, even without buyer injury, affecting the finality of sales.

By the early 1980s, the complexities of agency relationships in real estate transactions garnered national attention. In 1986, California pioneered legislation addressing dual agency, establishing that dual agency is permissible if agents disclose their relationships to clients and obtain consent. The statute mandates that listing agents inform clients if they are acting solely for the seller or as dual agents, and similarly requires selling agents to disclose their role. Additionally, agents must provide clients with a statutory form detailing the nature of the real estate agency relationship, affirming that an agent can represent both parties only with their knowledge and consent.

In a dual agency scenario, the agent is obligated to a fiduciary duty of utmost care, integrity, honesty, and loyalty to both the Seller and Buyer. Conversely, an exclusive agent representing only one party does not owe fiduciary duties to the other but must exercise reasonable skill, care, and engage in honest and fair dealings with both parties. The law imposes specific restrictions on dual agents, prohibiting them from disclosing a seller's willingness to accept a lower price or a buyer's willingness to pay more than the listing price without explicit written consent from the respective parties. However, these restrictions do not affect the dual agent's responsibility regarding other confidential information.

The term "agent" is defined to include licensed real estate brokers, who are the only individuals permitted to act as agents in real property transactions. Agents can also function as dual agents either directly or through an associate licensee, who is defined as a licensed broker or salesperson working under a broker's supervision. The primary agent is responsible for the actions of associate licensees, who owe equivalent duties to the principals as the broker does.

This case involves the sale of a luxury residence in Malibu by a family trust, which hired Chris Cortazzo from Coldwell Banker to sell the property. During the listing process, Cortazzo gathered public records indicating the property’s square footage. However, when he listed the property in September 2006, he inaccurately advertised it as having approximately 15,000 square feet of living area. Later, while preparing disclosures for prospective buyers, he noted that Coldwell Banker did not guarantee the accuracy of the square footage and recommended that buyers hire a qualified specialist to verify it.

Cortazzo provided a letter from the residence's architect stating the house's size was approximately 15,000 square feet, as per Malibu's building department ordinance, but advised the couple to hire a qualified specialist to verify this measurement. The couple requested more time to inspect the property, which the trust denied, leading them to cancel the transaction. Meanwhile, Hiroshi Horiike, seeking a property through Coldwell Banker’s Chizuko Namba, was shown the Malibu property by Cortazzo, who also provided marketing materials stating the property offered “approximately 15,000 sq. ft. of living area” and an MLS listing with disclaimers about square footage accuracy. After viewing the property, Horiike made an offer, which was accepted by the trust. Horiike signed the required agency disclosure forms indicating Coldwell Banker acted as both the listing and selling agent, detailing the dual agency nature and the fiduciary duties owed to both parties. Additionally, Horiike signed a form acknowledging that a broker may represent multiple buyers or sellers, which outlined the broker’s disclosure duties in dual agency situations. Unlike the earlier transaction, Cortazzo did not provide Horiike with a note advising him to verify the property's square footage.

Cortazzo provided Horiike, through Namba, a building permit and an advisory indicating that only an appraiser could accurately determine square footage, highlighting that information from various sources like Multiple Listing Services and tax assessor records might be approximations and unverified. Horiike signed an advisory acknowledging that the broker would not be responsible for verifying square footage and proceeded to purchase the property without further investigation. In 2009, upon reviewing the building permit, Horiike found discrepancies with Cortazzo's claim of approximately 15,000 square feet of living space and subsequently filed a lawsuit against Cortazzo and Coldwell Banker for breach of fiduciary duty, alleging misrepresentation and a lack of due diligence.

During the trial, the court granted Cortazzo's motion for nonsuit, ruling he did not owe a fiduciary duty to Horiike since he represented the seller. The jury was instructed that Coldwell Banker could only be held liable if another agent breached a fiduciary duty. The jury found in favor of Coldwell Banker. However, the Court of Appeal reversed this decision, asserting that Cortazzo, as an associate of Coldwell Banker, owed Horiike a duty equivalent to that of Coldwell Banker. The court noted that Coldwell Banker acted as a dual agent and thus had a fiduciary duty to both parties. It concluded that a properly instructed jury could find Cortazzo breached his duty by failing to disclose material information about the square footage, including contradictions between his representations and public records. The case was remanded for a new trial on the breach of fiduciary duty claim. The review question focused on whether Cortazzo had a duty to inform Horiike about the residence's square footage, necessitating investigation and disclosure of material facts affecting the property's value, regardless of what Horiike or Namba might have discovered independently.

Defendants acknowledge that Coldwell Banker acted as a dual agent, thereby holding a fiduciary duty of disclosure to both Horiike and the trust. They argue that Cortazzo represented only the trust and could not breach any duty to Horiike, who they claim was solely represented by Namba. The nature of the relationship between Horiike and Cortazzo was governed by agreements aligned with the agency relationship disclosure statutes, namely Civil Code sections 2079.14, 2079.16, and 2079.17. Horiike's argument centers on Civil Code section 2079.13(b), which states that an associate licensee's duty in a real estate transaction is equivalent to that of the broker they represent. Horiike asserts this means salespeople owe the same fiduciary duties as their brokerages. Defendants counter that the "equivalent" duty language simply clarifies that the agent is responsible for the actions of their associate licensees, suggesting that duties flow from the salesperson to the brokerage, but not vice versa. The court agrees with Horiike's interpretation, indicating that when an associate licensee represents a brokerage, their duties are the same as the brokerage's. The statute emphasizes the associate licensee's obligations in relation to the brokerage, as the law permits salespeople to act only under the broker's authority. Additionally, brokers are required to supervise their salespersons and can be held liable for their conduct.

The statutory framework mandates that brokers must actively manage their brokerage operations and supervise their sales agents. Associate licensees operate solely as representatives of their brokers and do not possess independent agency relationships with clients. Consequently, they owe the same duties to parties in real estate transactions as the brokers they represent, as clarified in Civil Code section 2079.13, subdivision (b). Legislative history indicates that the initial version of the disclosure bill did not explicitly define the duties of associate licensees, leading to concerns from the Department of Real Estate that it would limit their obligations to a lower standard than that of brokers. Amendments were made to ensure that associate licensees are held to the same fiduciary duties as their employing brokers. While some legislative records suggest the law was intended only to clarify agency relationships, it does not impose specific agency obligations on sellers, buyers, or brokers, but rather maintains existing legal functions and constraints, with an emphasis on comprehensive disclosure of options and limitations. Defendants attempt to argue that traditional agency principles, which limit liability for agents regarding the conduct of their principals, apply here; however, this case focuses on the direct accountability of Cortazzo for his breach of duty to Horiike, distinguishing it from vicarious liability. Ultimately, liability arises from an agent’s own wrongful actions, not from those of the principal. Defendants’ disagreement centers on the nature of the duty Cortazzo owed to Horiike.

Cortazzo had a nonfiduciary duty to Horiike, while Coldwell Banker, for whom he acted as an associate licensee, owed Horiike a fiduciary duty. Under Civil Code § 2079.13, an associate licensee assumes the broker's duties in a real estate transaction. When Coldwell Banker acted as a dual agent for Horiike and the trust during the sale of the Malibu residence, Cortazzo assumed equivalent duties to Horiike, including the obligation to learn and disclose all material information affecting the property's value, even if such information was only known to him.

The defendants reference a New Mexico case, Moser v. Bertram, to argue that Cortazzo owed no fiduciary duties to Horiike, asserting that fiduciary duties among salespersons in the same brokerage do not automatically transfer unless one salesperson is at fault. However, that case did not address dual agency or statutes similar to California's Civil Code § 2079.13(b). An agent is obligated to inform the principal of relevant matters, and even if an agent fails to do so, the principal is generally presumed to have notice.

While Namba, another agent, had a fiduciary duty to disclose material information to Horiike, the defendants fail to explain how her alleged failure exempts Coldwell Banker from its duty to disclose information known only to Cortazzo. A broker cannot fulfill its disclosure duties concerning information known to its associate licensee without involving that licensee. The argument that charging associate licensees with executing their brokers' fiduciary duties creates an unconsented-to dual agency is noted but lacks clarity in application, as corporations can only act through their agents.

Cortazzo and Horiike allegedly did not form an agency relationship, leading to the argument that only Namba owed fiduciary duties to Horiike. However, they did establish such a relationship, with Cortazzo acting as a salesperson under Coldwell Banker’s corporate license. As per Business and Professions Code § 10137, Cortazzo could not independently represent any party outside of his broker. Coldwell Banker opted for dual agency, representing both Horiike and the trust, as specified in Civil Code § 2079.17, subd. c. The agreement, signed by Cortazzo, indicated Coldwell Banker would act as a dual agent through various associate licensees, including Cortazzo, who was obligated to fulfill the fiduciary duty of disclosing material facts affecting the property's value or desirability.

Defendants contended that imposing such duties on associate licensees could lead to conflicts of interest. However, the court noted that the limited disclosure duty in this case did not create such conflicts. Horiike's claim against Cortazzo for breach of fiduciary duty closely resembled a non-fiduciary duty of disclosure he would have had in any case. Listing agents, regardless of dual representation, must disclose all relevant facts affecting property value or desirability that a reasonable inspection would reveal (Civ. Code § 2079). They are also required to inform buyers of known facts that are not discoverable by them (Civ. Code § 2079.16). California law mandates sellers disclose material facts known only to them that could affect a buyer's decision, supported by precedent cases illustrating various disclosure obligations in real estate transactions.

The disclosure obligations of exclusive representatives differ significantly from those of dual agents in real estate transactions. A dual agent must actively learn and disclose material facts affecting the property's price or desirability, including information potentially discoverable by the buyer. This duty was highlighted in *Assilzadeh v. California Federal Bank* and *Salahutdin v. Valley of California, Inc.*, which emphasize the obligation of a buyer’s agent to verify information provided to the buyer. In the case presented, Horiike alleges that Cortazzo, acting as a dual agent, violated his fiduciary duty by inaccurately representing the residence's square footage without confirming its truth, failing to disclose discrepancies with public records, and neglecting to advise Horiike to hire a specialist for verification, unlike advice given to prior potential buyers.

The court refrains from determining whether a breach occurred but notes that disclosing accurate information or indicating unverified claims would not compromise Cortazzo's fiduciary responsibilities to the trust. Concerns about dual agency arise when agents must balance duties to both parties without causing harm to either client. Although these conflicts are inherent in dual agency, the Legislature, while aware of these issues, chose not to directly address them in the disclosure statute, which primarily aims to inform parties about potential agency relationships and the associated duties. The law mandates that dual agents maintain utmost care, integrity, honesty, and loyalty to both the seller and buyer, yet does not clarify the extent of their fiduciary duties. Legislative changes could be made to differentiate the duties of associate licensees from their brokers, but current statutes do not provide such distinctions.

Cortazzo, as an agent of Coldwell Banker, had a fiduciary duty to Horiike to investigate and disclose all relevant facts that could impact the property's value or desirability. The trial court incorrectly granted nonsuit on Horiike's breach of fiduciary duty claim against Cortazzo and misinformed the jury that Coldwell Banker could not be held liable for Cortazzo's actions. Consequently, the Court of Appeal's judgment is affirmed. The case is titled Horiike v. Coldwell Banker Residential Brokerage Company, with the decision filed on November 21, 2016, by Judge John H. Reid in Los Angeles Superior Court. Various legal counsel and amici curiae participated in the case for both parties.