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California real estate broker “self-dealing” defined

Nov 25th, 2014 | By | Category: Real Estate Broker Law

Real Estate Broker Essentials – Breach of Fiduciary Duty and Self Dealing Litigation.

California real estate lawyer

Introduction

Real estate brokers should spend their time out on the streets MAKING money, not in Court SPENDING money on real estate lawyers.  This blog helps identify various legal issues (particularly the prohibition against self-dealing) that can get a broker into a legal wrangle with courts, ethics boards, and even with the California Bureau of Real Estate (“BRE”) in the form of a licensing dispute, cite and fine case, or real estate accusation.

What are the fiduciary duties California real estate brokers owe their clients?

Most brokers are aware of the duties they owe their clients when they are engaged in an agency relationship (express, implied, or ostensible agency), these duties are commonly described by California Courts as:

The duty to counsel and advise

In Field v. Century 21 Klowden-Forness Realty, 63 Cal. App. 4th 18, 25-26, 73 Cal. Rptr. 2d 784, 789 (1998), as modified (Apr. 17, 1998) the Califonia Appellate Court discussed the duty to counsel and advise:

“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 Court continued:
“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.”
 
As you can probably tell, this creates an obligation on the real estate broker or agent to put themselves into the client’s position and think about things they would want to know in making their decisions.  In other words, you have to DO SOME WORK and PROVIDE SOME VALUE in the real estate transaction.

What is real estate broker “SELF DEALING” under California law?

In general, a real estate broker in California must avoid self-dealing and seeking seeking profits at the expense of his client.  California case law has discussed this legal principle:

1.  The real estate broker is brought by his calling into a relation of trust and confidence. Constant are the opportunities by concealment and collusion to extract illicit gains. See Richards Realty Co. v. Real Estate Com’r, 144 Cal. App. 2d 357, 362, 300 P.2d 893, 897 (1956).
2.  An agent is under a duty not to compete with his principal on matters connected with the agency and a contract of agency may be implied from the parties’ conduct. See Pollack v. Lytle (1981) 120 Cal.App.3d 931, 940, 175 Cal.Rptr. 81.
3.   An agent is charged with the duty of fullest disclosure of all material facts concerning the transaction that might upset the principal’s decision. See Buckley v. Savage (1960) 184 Cal.App.2d 18, 27, 7 Cal.Rptr. 328.
4.  A real estate agent has the same obligation of undivided service and loyalty that is imposed on a trustee in favor of his beneficiary.  See Gann v. Williams Bros. Realty, Inc., 231 Cal. App. 3d 1698, 1705, 283 Cal. Rptr. 128, 133 (Ct. App. 1991).

As these cases suggest, a real estate broker has to be very careful to make sure they do not compete with their clients.  This can be tough when sometimes the real estate broker sees a great deal (ex. a great fix and flip opportunity, or an ability to buy a property and try to assign the contract for a profit).  If you are involved in a real estate dispute involving the duty to avoid self dealing and secret profits, contact a CA real estate law firm by filling out the form below.

What is the difference between breach of fiduciary duty and professional negligence?

The elements of a cause of action for breach of fiduciary duty are the existence of a fiduciary relationship, its breach, and damage proximately caused by that breach.” See City of Atascadero v. Merrill Lynch, Pierce, Fenner & Smith, Inc. (1998) 68 Cal.App.4th 445, 483, 80 Cal.Rptr.2d 329.) The elements of a cause of action for professional negligence are failure to use the skill and care that a reasonably careful professional operating in the field would have used in similar circumstances, which failure proximately causes damage to plaintiff.  See Thomson v. Canyon, 198 Cal. App. 4th 594, 604, 129 Cal. Rptr. 3d 525, 532-33 (2011).

What about Negligent Misrepresentation?

Another common cause of action against real estate brokers is “intentional” and “negligent misrepresentation.”

“Negligent misrepresentation by a licensed professional such as a real estate broker may have aspects of negligence or fraud. whether a breach of that duty constitutes negligence or fraud depends on the particular circumstances of each case. Consequently, there is no clear line establishing when a fiduciary’s breach of the duty of care will be merely negligent and when it may be characterized as constructive fraud. However, a breach of a fiduciary duty usually constitutes constructive fraud.”  See William L. Lyon & Associates, Inc. v. Superior Court, 204 Cal. App. 4th 1294, 1313, 139 Cal. Rptr. 3d 670, 684 (2012), as modified on denial of reh’g (May 11, 2012), review denied (July 25, 2012).
These are some of the types of claims you can expect to see in a broker lawsuit.

Typical types of legal violations that land real estate brokers in hot legal water?

 Self-dealing in real estate transactions is something to be very concerned about.   For example, let’s say you are representing a commercial real estate investor and you show an office or industrial building.  The client has you place an offer on the property and the offers are rejected without counteroffer.  Then, you wait a couple weeks then go make an offer yourself and as real estate agent (acting as principle in the transaction) you acquire the property at the same price the client tried to purchase the property for.  This could potentially raise self-dealing issues.  This is not to say it is per se illegal, but instead just something to think about.  This type of scenario could lead you into a lawsuit where breach of fiduciary duty, and broker self dealing is alleged.

What are the measure of damages in a breach of fiducicary duty real estate lawsuit?

California law is committed to the view that the fraudulent breach of fiduciary duty is a tort, and the faithless fiduciary is obligated to make good the full amount of the loss of which his breach of faith is a cause…….where, as here, the defrauding party stands in a fiduciary relationship to the victim of fraud, the damages must be measured pursuant to the broad provisions of sections Cal. civ. code 3333 and Cal. Civ. Code 1709…..the cases amplify that the measure of damages provided by the foregoing sections is substantially the same as that for breach of contract prescribed by section 3300; i.e., it tends to give the injured party the benefit of his bargain and insofar as possible to place him in the same position he would have been had the promisor performed the contract.  See Pepitone v. Russo, 64 Cal. App. 3d 685, 688, 134 Cal. Rptr. 709, 711 (Ct. App. 1976).

Will my insurance company pick up my defense?

Yes, but they may “reserve their rights” (called a reservation of rights).  One of the most important things about defending yourself in these types of cases is to make sure you have good records of all your real estate transactions.  All your calls, letters, emails and contracts should be well documented and kept in a file.  A real estate broker self-audit can be very important (especially in regard to your trust account for property managers), and we offer these services to our real estate clients.  You also want to make sure the real estate law firm that is appointed to represent you in your case understands real estate law, and the type of transaction at issue.  For example, if your case involves mortgage law or loan modification having a law firm experienced in those areas would be best to pick up your defense.  Foreclosure and short sale cases can also present special problems that require a qualified real estate attorney.  Certain commercial real estate transactions (ex. industrial, apartment, or multi-family deals) can also require special expertise.

It is very important to make sure your law firm has the skill and experience to represent you. If not, you have the right to pay for your own counsel in most cases.  Fill out the contact form below to have us evaluate your case.

Will my real estate license be lost if I am sued for breach of fiduciary duty?

There is always a strong possibility that when someone sues you they will also file a complaint with the Department of Real Estate (now the Bureau of Real Estate).  This can result in an investigation by the Bureau and can lead to an accusation being filed.  The prudent thing to do when your real estate license may be on the line is to contact a real estate lawyer to ensure that your due process rights are enforced.

If I am in property management, and a property owner files a civil complaint will that trigger an investigation by the BRE?

Again, this is a possibility.  The BRE normally investigates property managers in random audits, and having a complaint filed against you (at least in my opinion) will increase your chances of being audited and investigated.

California Broker Fiduciary Duty Resources

1.  Disclosing agency relationships

2.  Broker’s statutory defense rejected  (National Association of Realtors)

3.  California Jury instruction benefit of the bargain rule (CACI 1924)

4.  California civil code section 2322

5.  10 most common violations found in BRE audits

Contact a California real estate broker lawyer

Attorney Steve Vondran is not only a lawyer licensed to practice law in California and Arizona, he has also earned real estate broker licenses in both states and has experience in mortgage lending, residential and commercial real estate transactions.  If you need an experienced real estate lawyer to help you assert or defend a broker fiduciary duty or self dealing case, contact us at (877) 276-5084.

Likewise, if you have broker’s E&O insurance (errors and omissions), and they deny your defense (ex. say you are sued for intentional fraud and they determine that they do not have to represent you, contact us for representation quotes.  We offer low and affordable legal fees.

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