By Glen C. Hansen

A trio of cases were reported by the California Court of Appeal in the first half of 2014 that clarified the disclosure and fiduciary duties of real estate brokers and their agents.

In Horiike v. Coldwell Banker Residential Brokerage Co. (2014) 225 Cal.App.4th 427, the Court of Appeal for the Second Appellate District held that when a broker is the dual agent of both the buyer and the seller, then salespersons employed by the broker owe fiduciary duties to both the buyer and the seller.

In Horiike, the owners of a residential property in Malibu engaged defendant Chris Cortazzo, a salesperson for defendant Coldwell Banker Residential Brokerage Company to sell their property. The building permit lists the total square footage of the property as 11,050 square feet, including a single-family residence of 9,224 square feet, a guest house of 746 square feet, a garage of 1,080 square feet, and a basement of unspecified area. Cortazzo listed the property for sale on a multiple listing service (“MLS”). The MLS provided Cortazzo with public record information for reference, which stated that the living area of the property was 9,434 square feet. The listing that Cortazzo created, however, stated the home “offers approximately 15,000 square feet of living areas,” and Cortazzo prepared a flier for the property which stated it “offers approximately 15,000 square feet of living areas.”

In March 2007, the buyer was working with CB salesperson Chizuko Namba to locate a residential property to purchase. The parties to the transaction signed a confirmation of the real estate agency relationships as required by Civil Code section 2079.17. That document explained that CB was the agent of both the buyer and the sellers. Cortazzo signed the document as an associate licensee of the listing agent CB. Namba signed the document as an associate licensee of the selling agent CB.

Cortazzo gave the buyer a copy of the flier stating the property had 15,000 square feet of living areas. Cortazzo provided a copy of the building permit to Namba, who then gave it to the buyer. The buyer asked Cortazzo for verification of the living area square footage. Cortazzo provided a letter from the architect stating the size of the house under a current Malibu building department ordinance was approximately 15,000 square feet. Cortazzo suggested that the buyer hire a qualified specialist to verify the square footage. The buyer requested the certificate of occupancy and the architectural plans, but no architectural plans were available. Cortazzo stated in the real estate transfer disclosure statement that the buyer hire a qualified specialist to verify the square footage, and that the broker did not guarantee or warrant the square footage. When the buyer learned that architectural plans were not available, they requested a six-day extension to inspect the property. The sellers refused to grant the extension and then later cancelled the transaction.

The buyer filed a lawsuit that alleged several claims against CB and Cortazzo (as the listing salesperson), including breach of fiduciary duty. The trial court granted a nonsuit on the claim for breach of fiduciary duty against Cortazzo on the ground that the salesperson who listed the property did not have a fiduciary duty to the buyer. The trial court also instructed the jury that CB, as the broker, had no liability for breach of fiduciary duty based on the salesperson’s acts. The jury returned a verdict in favor of the defense on the remaining causes of action.

The Court of Appeal for the Second Appellate District reversed the judgment and remanded for a new trial. The court held that, when a broker is the dual agent of both the buyer and the seller in a real property transaction, the salespersons acting under the broker have the same fiduciary duty to the buyer and the seller as the broker. Under Civil Code section 2079.13, subdivision (b), the duty that Cortazzo owed to the buyer was equivalent to the fiduciary duty owed to the buyer by CB. The motion for nonsuit should have been denied and the cause of action against Cortazzo for breach of fiduciary duty submitted to the jury.  The court explained: “A trier of fact could conclude that Cortazzo was aware of material information that he failed to provide [the buyer], even though he did not have a fraudulent intent. Cortazzo knew the square footage of the property had been measured and reflected differently in different documents. When a potential purchaser sought to confirm the square footage, Cortazzo gave handwritten advice to have the square footage verified by a specialist. He subsequently changed the listing for the property to reflect that the square footage required explanation. He did not explain to the buyer that contradictory square footage measurements existed. A trier of fact could conclude that although Cortazzo did not intentionally conceal the information, Cortazzo breached his fiduciary duty by failing to communicate all of the material information he knew about the square footage. The jury’s verdict did not necessarily decide the cause of action for breach of fiduciary duty based on Cortazzo’s actions.”

However, on July 16, 2014, the California Supreme Court granted review of the case, and depublished the Court of Appeal’s Opinion. The following question is being presented to the Supreme Court to review: “When the buyer and the seller in a residential real estate transaction are each independently represented by a different salesperson from the same brokerage firm, does Civil Code section 2079.13, subdivision (b), make each salesperson (without their consent) the fiduciary of both the buyer and the seller, with the duties to provide undivided loyalty, confidentiality and counseling to both their own client and the opposing side?”

In Saffie v. Schmeling (2014) 224 Cal.App.4th 563, the Court of Appeal for the Fourth Appellate District held that a seller’s broker was not liable for damages for making a statement in an MLS posting that was true. In June 2006, a seller’s broker posted the following statement about an undeveloped commercial parcel on the MLS: “This parcel is in an earthquake study zone but has had a Fault Hazard Investigation completed and has been declared buildable by the investigating licensed geologist. Report available for serious buyers.” The Fault Hazard Investigation report that the seller’s broker cited in the MLS was completed by a “Registered Geologist,” has the date “May 20, 1982” prominently printed on its cover, finds “no evidence of an active fault” on the property, and concludes that “the secondary effects of ground fissuring and cracking and the primary effects of ground rupture and displacement on a fault are unlikely to occur on the subject property.” An engineering geologist for the Riverside County Planning Department issued a letter in 1982 granting “[f]inal approval of the report,” based on his opinion that the report “was performed in a competent manner consistent with the present ‘state-of-the-art’ and satisfies the requirements of the Alquist-Priolo Special Studies Zones Act and the associated Riverside County Ordinance No. 547.”

In 2006, plaintiff George Saffie, Jr. (buyer) sought to purchase the property through buyer’s broker with the intent of building a commercial building on the property. Buyer’s broker brought to buyer’s attention the property as it was listed in the MLS. Buyer entered into an agreement with seller to purchase the property. Prior to the close of escrow, seller’s broker gave buyer’s broker a copy of the 1982 Fault Hazard Investigation report, together with the letter from the Riverside County Planning Department approving the report. Buyer’s broker provided these documents to buyer. Though buyer’s broker testified that he told buyer to “check out” the report, the trial court found that buyer’s broker led buyer to believe that the report was current and could be relied on as an indication that the property was “ready to build.” The transaction closed without buyer or buyer’s broker performing any further investigation in relation to geological issues on the property or in the report. After the close of escrow, buyer discovered that the County did not agree that the property was “ready to build.” The County’s understanding of the “state of the art” regarding investigation of fault hazards had changed after the 1994 Northridge earthquake, and the County no longer accepted fault hazard investigation reports performed under earlier standards. The additional geological investigation that was now required by the County meant that buyer could not feasibly move forward with his plans for a commercial building on the property.

Buyer brought an action against his broker, the seller and the seller’s broker. Defendants filed cross-complaints against one another for indemnification. After a bench trial, the trial court decided that buyer should take nothing on his claims against seller and seller’s broker, but found buyer’s broker liable in the amount of $232,147.50 for breach of fiduciary duty and negligence. The court held that none of the defendants should recover anything on their cross-complaints for indemnity. Buyer appealed the trial court’s judgment only with respect to its finding of no liability as to seller’s broker. Seller’s broker cross-appeals with respect to the trial court’s ruling on his cross-complaint, seeking to revive his indemnification claims only if the trial court’s judgment that he is not liable to buyer were to be reversed. The Court of Appeal affirmed the trial court’s judgment, thereby rendering the cross-appeal moot.

The court explained that a broker’s duties with respect to any listing or other information posted to an MLS are specified in Civil Code section 1088. That statute provides, in relevant part, that the broker “shall be responsible for the truth of all representations and statements made by the agent [in an MLS] … of which that agent … had knowledge or reasonably should have had knowledge.” Section 1088 also provides a statutory negligence claim for “anyone injured” by the “falseness or inaccuracy” of such representations and statements. Here, the court found (a) that buyer failed to show that the statement in the MLS by seller’s broker was false or inaccurate; (b) that the existence of the Fault Hazard Investigation report is undisputed, and that the seller’s broker’s summary description of the conclusions of the report were not untrue or inaccurate; and (c) that seller’s broker provided a copy of the report and associated approval letter during escrow. The court also noted that seller’s broker never stated that the property was “buildable,” did not affirm that the geologist performed his investigation in accord with current County of Riverside requirements or that the report was current to 2006 standards, and did not state that all necessary approvals for building had been obtained. To the extent seller’s broker’s statement in the MLS could be interpreted to imply that the report was recent and therefore likely to have been performed under current standards, that purported inaccuracy was cured by disclosing the report itself during escrow, prior to any possible injury to buyer from lack of information regarding the date of the report. The court concluded that “[i]t was incumbent on buyer—and on buyer’s broker, in his role as a fiduciary for buyer—to determine whether the Fault Hazard Investigation report was something buyer should rely on for his particular purposes.”

In Richman v. Hartley (2014) 224 Cal.App.4th 1182, the Court of Appeal for the Second Appellate District held that, in the sale of a single parcel of real property that was improved with one commercial building and a residential duplex, the seller was required to deliver to the buyer a real estate transfer disclosure statement (TDS) pursuant to the Transfer Disclosure Law. (Civ. Code, § 1102 et seq.) The court concluded that a TDS is required in any transfer of real property “improved with or consisting of not less than one nor more than four dwelling units,” regardless of whether the property also has a commercial use. Thus, “the Transfer Disclosure Law applies to transfers of mixed-use property.”

Glen Hansen is senior counsel at Abbott & Kindermann, LLP. For questions relating to this article or any other California land use, real estate, environmental and/or planning issues contact Abbott & Kindermann, LLP at (916) 456-9595.

The information presented in this article should not be construed to be formal legal advice by Abbott & Kindermann, LLP, or the formation of a lawyer/client relationship. Because of the changing nature of this area of the law and the importance of individual facts, readers are encouraged to seek independent counsel for advice regarding their individual legal issues.