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Overview of California Broker Breach of Fiduciary Duty

Dec 26th, 2014 | By | Category: Real Estate Broker Law

Real Estate Breach of Fiduciary Duty Law Firm

fiduciary duty lawyer California

Introduction

When a real estate client hires a licensed real estate professional to act as their agent in a transaction (ex. purchase of a home 0r commercial building, origination of a mortgage, sale of a business, or to act as property manager for a property), a “fiduciary duty” is created.  This it the highest relationship that can be created in the eyes of the law, and the breach of this relationship can lead to serious legal liability and monetary damages.  This blog post helps define breach of fiduciary duty and explain what the various duties are.

What is a fiduciary duty?

As set forth above, a fiduciary duty is the highest duty created by operation of law when a principle retains and hires an agent.

An agent owes fiduciary duties to the principal. An agency establishes a fiduciary relationship, and as a fiduciary the agent has the same obligations of diligence and faithful service as a trustee. Fiduciary duties are imposed on agents because the principal has reposed trust and confidence in the agent’s integrity and fidelity. Under the common law, a fiduciary owes to its principal a duty of the highest good faith and undivided service and loyalty.
A mortgage loan broker is customarily retained by a borrower to act as the Borrower’s agent in negotiating an acceptable loan. All persons engaged in this business in California are required to obtain real estate licenses. (Bus. & Prof.Code, ss 10130 and 10131, subd. (d).) Thus, general principles of agency (Civ.Code, ss 2228 and 2322, subd. 3) combine with statutory duties created by the Real Estate Law (see Bus. & Prof.Code, s 10176, subds. (a), (i)) to impose upon mortgage loan brokers an obligation to make a full and accurate disclosure of the terms of a loan to borrowers and to act always in the utmost good faith toward their principals. “The law imposes on a real estate agent ‘the same obligation of undivided service and loyalty that it imposes on a trustee in favor of his beneficiary.
This relationship not only imposes upon him the duty of acting in the highest good faith toward his principal but precludes the agent from obtaining any advantage over the principal in any transaction had by virtue of his agency.  A real estate licensee is “charged with the duty of fullest disclosure of all material facts concerning the transaction that might affect the principal’s decision.  See Wyatt v. Union Mortgage Co., 24 Cal. 3d 773, 782, 598 P.2d 45, 50 (1979).

Duty of care

This distinction between the limited duty imposed by section 2079 and the broader fiduciary duty is also apparent by examining the disclosure form requirements mandated by section 2079.16, which defines brokers’ duties to their own clients as a “fiduciary duty of utmost care, integrity, honesty, and loyalty.…” In contrast, section 2079.16 defines the duty brokers owe to persons who are not their clients in non-fiduciary terms as the diligent exercise of reasonable skill and care”, “honest and fair dealing and good faith”, and “duty to disclose all facts known to the agent materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of the parties” Thus, section 2079 confirms the common law recognition of fiduciary duties brokers owe their own clients, which in context may require more than the cursory type of visual inspection required of sellers’ brokers to benefit non-client buyers.  See Field v. Century 21 Klowden-Forness Realty, 63 Cal. App. 4th 18, 26-27, 73 Cal. Rptr. 2d 784, 790 (1998), as modified (Apr. 17, 1998).
broker is obligated to exercise reasonable skill and care in the performance of his or her duties. Holding themselves out as professionals with superior knowledge in real estate transactions, brokers are subject to the standard of care that would be exercised by a reasonably prudent real estate broker or salesperson acting in a similar capacity.

Duty of skill and competence

(familiarity with standards and practices of the real estate industry, mortgage industry, property management industry, commercial real estate industry etc.).  Also, being familiar with laws concerning:

  • Agency
  • Licensing
  • Contracts
  • Fair Housing
  • Employment
  • Landlord/tenant law (for property managers)

Duty of due diligence

A broker is obligated to exercise reasonable skill and care in the performance of his or her duties. Holding themselves out as professionals with superior knowledge in real estate transactions, brokers are subject to the standard of care that would be exercised by a reasonably prudent real estate broker or salesperson acting in a similar capacity. See Wilson v. Hisey (1957) 147 CA2d 433, 438, 305 P2d 686, 690].

Duty of loyalty / Duty of accounting

“Any real estate broker who collects an advance fee from any other person, hereinafter referred to as the ‘principal’ shall deposit any such amount in a trust account.  Such funds are trust funds and not the funds of the agent.  The commissioner may issue such rules and regulations as he deems necessary to regulate the method of accounting, and to accomplish the purpose of the provisions of this code relating to advance fees including, but not limited to, establishing forms for and determining information to be included in such accountings. Each principal shall be furnished a verified copy of such accountings at the end of each calendar quarter and when the contract has been completely performed by the licensee.  Where advance fees actually paid by or on behalf of any principal are not handled in accordance with the preceding paragraph, it shall be presumed that the agent has violated Sections 506 and 506a of the Penal Code. (i.e. embezzled funds as a fiduciary.)
The principal may recover treble damages for amounts so misapplied and shall be entitled to reasonable attorneys’ fees in any action brought to recover the same.” (Emphasis added.). Argus argues the statute was not meant to include the situation here where there was merely a failure to account and no evidence of actual diversion of funds. However, a broker is in a fiduciary relationship with his principal which demands the highest degree of loyalty and good faith. Here the evidence is undisputed that no accounting was ever made.  See Burch v. Argus Properties, Inc., 92 Cal. App. 3d 128, 131, 154 Cal. Rptr. 485, 487 (Ct. App. 1979)

Duty of good faith

Jorgensen claims Civil Code section 2228 et seq., and Business and Professions Code section 10176, subds. (a), (b) and (i) set a standard for a duty of care to be exercised by a real estate agent toward his client and that violation of such statutory duty is negligence per se.  These statutes require a fiduciary to act in good faith, establish the previously discussed requirements of disclosure in dual fiduciary situations, and prohibit a real estate agent from “(m)aking any substantial misrepresentation,” “(m)aking any false promises of a character likely to influence, persuade or induce,” or engaging in “(a)ny other conduct, whether of the same or a different character specified in this section, which constitutes fraud or dishonest dealing.” (Bus. & Prof.Code, s 10176, subds. (a), (b) and (i).) We reject the notion honesty and fair dealing is beyond the realm of “common knowledge” of lay jurors whether the honesty and fair dealing be that of hod carriers or real estate salespersons. We are convinced acts constituting “fraud,” when committed by laymen are not something less when committed by professional fiduciaries.  See Jorgensen v. Beach ‘N’ Bay Realty, Inc., 125 Cal. App. 3d 155, 163-64, 177 Cal. Rptr. 882, 887 (Ct. App. 1981)

Duty of full disclosure of all pertinent facts

The law of California imposes on the real estate agent the same obligation of undivided service and loyalty that it imposes on a trustee in favor of his [or her] beneficiary. Violation of his [or her] trust is subject to the same punitory consequences that are provided for a disloyal or recreant trustee.  Such an agent is charged with the duty of fullest disclosure of all material facts concerning the transaction that might affect the principal’s decision.  See Warren v. Merrill, 143 Cal. App. 4th 96, 109, 49 Cal. Rptr. 3d 122, 131 (2006).
Using the standard of disclosure for one acting in a dual fiduciary capacity, we hold Jorgensen made out a prima facie case of breach of fiduciary duty. The jury could have inferred from her evidence the agents should have known how a number of facts they neglected to tell Jorgensen might affect her decision to accept the offer.  When the acts of an agent have been questioned by his principal and the fiduciary relationship has been established, the burden is cast upon the agent to prove that he acted with the utmost good faith toward his principal and that he make a full disclosure prior to the transaction of all the facts relating to the transaction under attack. See Jorgensen v. Beach ‘N’ Bay Realty, Inc., 125 Cal. App. 3d 155, 162, 177 Cal. Rptr. 882, 887 (Ct. App. 1981)

Duty to Avoid Comingling (property management)

 Comingling is when the broker mixes trust funds with personal funds, or personal funds with trust funds, or fails to withdraw funds and commissions earned within 25 days.  Called the 25-day rule.  A real estate property manager owes a duty to avoid comingling.

Duty to pay taxes and insurance and help with property protection (property management)

Another type of fiduciary duty normally associated with property managers is the duty to keep the taxes and insurance paid on the property so that it does not fall into foreclosure.

Duty of confidentiality

A real estate broker has a duty of confidentiality and to keep things learned through the broker-client relationship confidential.

Duty to counsel and advise (ex. seniors over 65)

 California real estate brokers should implement policies and procedures for real estate transactions involving senior citizens over 65.  Elders are a protected class under California law, and some courts have imposed a special duty to counsel and advise seniors in real estate transactions.  This happens, for example, in reverse mortgage situations where special disclosures and educational disclosures and required so that the elder fully understands the details of the transaction.

Duty of care to less than competent principal. The obligations of a fiduciary are imposed on an agent because of the trust and confidence that necessarily is reposed in the agent by the principal. When the principal is in a vulnerable position due to age, limited capacity, or dependency, the fiduciary may owe a heightened duty of care.

Duty to avoid self-dealing and refraining from personal profits without the principle’s full knowledge and consent.

Another big problem area with real estate brokers self-dealing and seeking profits on a transaction behind the broker’s back.  When this happens, the broker or salespersons violates the broker duty of care and can be held liable for damages.

Can a real estate agent the fiduciary duties owed to their clients by contracting away certain fiduciary duties?

Yes.  Agency normally arises from contract.  As such, it is proper for the principle an agent to enter into a contract that limits the duties the broker owes to the principle.  As the California Appellate Court held in Carleton v. Tortosa, 14 Cal. App. 4th 745, 755-56, 17 Cal. Rptr. 2d 734, 740-41 (1993).

“Real estate brokers are subject to two sets of duties: those imposed by regulatory statutes, and those arising from the general law of agency. Plaintiff does not contend defendant failed to fulfill a duty imposed by statute or implementing regulation (e.g., Civ.Code, § 1102 et seq. [agent’s duty to inspect property; disclosure requirements] ). Thus, he must derive defendant’s duty from the general law of agency, i.e., from the agreement between the principal and agent.  
The Court continued:
“The existence and extent of the duties of the agent to the principal are determined by the terms of the agreement between the parties, interpreted in light of the circumstances under which it is made, except to the extent that fraud, duress, illegality, or the incapacity of one or both of the parties to the agreement modifies it or deprives it of legal effect.” (Rest.2d Agency, § 376; Anderson v. Badger, (1948) 84 Cal.App.2d 736, 741, 191 P.2d 768; 3 Cal.Jur.3d, Agency, § 87; cf. Ahern, supra, 1 Cal.App.4th at p. 43, 1 Cal.Rptr.2d 339 [insurance agent owes duties normally found in agency relationship].  Plaintiff’s agreement with defendant is contained in the listing agreements, disclosure statements and purchase contracts described above.  The listing agreements for sales of the properties at 1028 Adams and 1001 Adams told plaintiff that defendant, a real estate broker, was qualified to advise on real estate,” but informed plaintiff he should “consult an appropriate professional” if he desired legal or tax advice. The real estate agency disclosure forms advised plaintiff to “carefully read all agreements to assure that they adequately express your understanding of the transaction,” and reiterated that “a real estate agent is a person qualified to advise about real estate. If legal or tax advice is desired, consult a competent professional.” The real estate purchase contracts informed plaintiff that “a real estate broker or agent is qualified to advise on real estate. If you require legal or tax advice, consult your attorney or accountant.” Moreover, the contracts specifically advised plaintiff that “no representation or recommendations are made by the broker, agents, or employees as to the legal sufficiency, effect, or tax consequences of this document or the transaction relating thereto. These questions are for your attorney and or your accountant.”  These documents negate plaintiff’s claim of duty.

What damages can be recovered under California law when a real estate broker breaches it fiduciary duties?

 There are many different types of damages that may be recoverable when a real estate agent breaches fiduciary duties owed to the Client.  All damages may not be applicable in all situations.

a.  Loss of Right to Compensation and Real Estate Commissions

The duty of a real estate agent to faithfully represent the interests of his or her principal, and to make full disclosure of adverse interests, long antedated this statute. Breach of these duties may result in loss of the right to compensation. See Brown v. FSR Brokerage, Inc., 62 Cal. App. 4th 766, 777, 72 Cal. Rptr. 2d 828, 833 (1998).
b.  Damages
A Client who is the victim of a breach of fiduciary duty which causes damages, has a right to sue in state or in some circumstances, federal court to seek redress for the violation.

For more information contact a California / Arizona Real Estate Law Firm

When you have legal problems with a real estate transaction, your best bet is to contract a real estate law firm to assist you in addressing your rights and remedies.  We offer flexible legal fees, including potential flat rate and contingency fees in some cases.  Our law firm has a strong legal background in arbitration and litigation of real estate cases, including broker breach of fiduciary duty and financial elder abuse.  Contact us at (877) 276-5084 or fill out the contact form below to speak with one of our real estate attorneys.

We have offices in California and Arizona including San Francisco (serving bay area and silicon valley), Newport Beach (servicing orange County), Beverly Hills (serving greater Los Angeles areas), San Diego (servicing Carlsbad and Oceanside), and Phoenix, Arizona (servicing greater Maricopa County area).

 

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