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HORIIKE V. COLDWELL BANKER

HORIIKE V. COLDWELL BANKER-WHAT DOES IT MEAN FOR THE FUTURE OF DUAL AGENCY?

On November 21, 2016 the California Supreme Court announced the long awaited decision in Horiike v. Coldwell Banker. Though there was grave concern the Court might use the opportunity to seriously impair California's dual agency law allowing brokers to represent both buyers and sellers in real estate transactions, the decision was decided on the narrow issue of whether an associate agent working for the seller owes the same fiduciary duty to the buyer that a broker owes to both parties. The court held the associate agent owes the same fiduciary duty to the buyer as the broker owes to the buyer even though the associate agent is representing only the seller in the transaction.

This case arises from the sale of a property in Malibu, California. The property was originally listed by Chris Cortazzo, a salesperson in the Malibu West office of Coldwell Banker. As Cortazzo prepared to list the property, he obtained public record information from the tax assessor's office, which stated that the property's living area was 9,434 square feet, and a copy of the residence's building permit, which described 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. When Cortazzo listed the property on the MLS in September 2006, however, the listing stated that the property "offers approximately 15,000 square feet of living areas." Cortazzo also prepared and distributed a flyer making the same representation about the property's square footage.

In early 2007, a couple working with another Coldwell Banker salesperson made an offer to purchase the property. By a handwritten note in the disclosures he prepared, Cortazzo informed the couple that Coldwell Banker did not "guarantee or warrant" the square footage of the residence, and he advised them "to hire a qualified specialist to verify the square footage." When the couple requested documentation of the square footage, Cortazzo gave them, through the salesperson, a letter from the architect of the residence stating that "[t]he size of the house, as defined by the current Malibu building department ordinance is approximately 15,000 square feet." In a cover note, however, Cortazzo again cautioned them that they should "hire a qualified specialist to verify the square footage." The couple requested an extension of time to inspect the property, which the trust refused to grant. In March, the couple canceled the transaction.

Meanwhile, plaintiff Hiroshi Horiike, a resident of Hong Kong, had been working for several years with Chizuko Namba, a salesperson in Coldwell Banker's Beverly Hills office, to find a residential property to buy. In November 2007, Namba arranged for Cortazzo to show the Malibu property to Horiike and accompanied Horiike to the showing. At the showing, Cortazzo gave Horiike the marketing flyer stating the property offered "approximately 15,000 sq. ft. of living areas," and an MLS listing printout that did not specify the square footage and contained a small-print advisement that "Broker/Agent does not guarantee the accuracy of the square footage." After viewing the property, Horiike decided to make an offer to purchase it. Namba sent Horiike's offer to Cortazzo. Horiike and the trust eventually agreed on a sale price.
Before completing the purchase, Horiike signed the two agency disclosure forms required by California law. The first form, entitled "Confirmation Real Estate Agency Relationships," specified that Coldwell Banker was both the "listing agent" and the "selling agent," and indicated that Coldwell Banker was "the agent of both the Buyer and Seller." The second form, entitled "Disclosure Regarding Real Estate Agency Relationships," contained the statutorily required explanation that "real estate agent, either acting directly or through one or more associate licensees, can legally be the agent of both the Seller and the Buyer in a transaction," in which case, the agent owes "fiduciary duty of utmost care, integrity, honesty and loyalty in the dealings with either the Seller or the Buyer." Cortazzo signed both forms on behalf of Coldwell Banker. Horiike also signed a third disclosure form, entitled "Disclosure and Consent for Representation of More Than One Buyer or Seller".

In 2009, when preparing to do work on the property, Horiike reviewed the building permit and noticed that it appeared to contradict Cortazzo's representation that the property offered approximately 15,000 square feet of living space. Horiike filed suit against Cortazzo and Coldwell Banker, alleging, among other things, that both defendants had breached their fiduciary duties toward Horiike by "either deliberately misrepresenting the square footage of the living area of the [residence] and failing to act with the utmost care, integrity and honesty as to Horiike and or simply failing to determine the accuracy of the representations they were making as to the living area square footage."

The California Supreme Court considered the sole question 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: specifically, to investigate and disclose all facts materially affecting the residence's value or desirability, regardless of whether such facts could also have been discovered by Horiike or Namba through the exercise of diligent attention and observation.

The court decided that when "Coldwell Banker agreed to act as a dual agent for both Horiike and the trust in the transaction for the sale of the Malibu residence, Cortazzo, as an associate licensee of Coldwell Banker in the transaction, assumed equivalent duties to Horiike."

The court specifically found an agent owes the same fiduciary duty as the broker in the transaction irrespective of the party the agent is serving:

It is undisputed that Coldwell Banker owed a fiduciary duty to Horiike, including a duty to learn and disclose all information materially affecting the value or desirability of the residence. That duty extended to information known only to Cortazzo, since a broker is presumed to be aware of the facts known to its salespersons.

Given this decision, the issue the real estate community must address is how the decision affects the continued state of dual agency. The Court was quite clear it was not addressing or in any manner limiting the statutes addressing dual agency. The Court went to some length to assure the reader that any change was in the province of the legislature. The Court noted that statutes specifically address the matters a broker cannot share when acting as a dual agent. The Court did not change or modify those statutory requirements. The issue the Court addressed is one of basic honesty and integrity in the manner in which associate licensees handle transactions, and placing responsibility for their actions on their employing broker. The holding in this case is complicated by the facts and the conduct alleged to have been perpetrated by Mr. Cortazzo.

The holding in this case should not be confused with the long standing premise that when buyer and seller are represented by different brokers the listing broker and its associate agents do not owe a fiduciary duty to the buyer. The listing agent and the associate agent may owe a duty to refrain from negligent or fraudulent conduct, but they do not owe a fiduciary duty.

The distinguishing feature of the Horiike case is that both buyer and seller were represented by the same broker. The broker was acting as a dual agent and had obtained consent from both parties to serve as a dual agent. The problem in the Horiike case is that the agent for the seller was attempting to cut the proverbial umbilical cord an agent has with its broker and claim the agent did not owe a fiduciary duty to the buyer. The direction the court took was to uphold the well-established law on the subject of the relationship between a broker and an agent. An agent cannot act alone in California. An agent must, by definition, work for the broker and under the direct supervision of the broker. The listing belongs to the broker and not the agent. Therefore, the step the court took in holding that if the broker owes a fiduciary duty to a party, the agent has no choice in the matter and owes the same duty as the broker. The court held that an associate licensee

stands in the shoes of the brokerage and assumes the broker's duties. Accordingly, when Coldwell Banker agreed to act as a dual agent for both Horiike and the trust in the transaction for the sale of the Malibu residence, Cortazzo, as an associate licensee of Coldwell Banker in the transaction, assumed equivalent duties to Horiike.

        Despite the anticipation and concern raised in the real estate industry, the decision should not have a major impact on the manner in which real estate transactions are consummated in California. One of the most important things to keep in mind is that the impetus for this case was a failure to correctly address the square footage issue. If Mr. Cortazzo would have handled the square footage issue correctly, his broker would not have been liable to anyone because there would not have been any liability in the transaction. What this decision clarified was the type of obligation and liability Mr. Cortazzo had to Mr. Horiike. Arguably, Mr. Cortazzo could have been liable for fraud as he is alleged to have made a representation or engaged in concealment about a material aspect of the transaction. The result would potentially be the same because proof of fraud entitled the victim to punitive damages.

The case does make clear the scope of the fiduciary duty in a real estate transaction involving separate agents but a common broker. The case did not allow the creation of an exception to well accepted premise that an agent is an extension of the broker. The case recognizes the foundational principal of real estate law that an agent cannot act independently of the broker. The proverbial umbilical cord makes it possible for the agent to be involved in the real estate transaction, but it does not provide any independence to the agent because all aspects of the transaction are being carried out on behalf of the broker. Therefore, if the broker has an obligation to the client, the agent must carry out that obligation in fulfillment of the obligation of acting for the broker in the transaction.

The decision makes it clear a broker can act as a dual agent. When acting as a dual agent the broker owes a fiduciary duty to both parties, and the agents of the broker, whether working with the seller or buyer, owe a fiduciary duty to both the seller and the buyer consistent with the dual agency provisions of the law. Mr. Cortazzo would not have been obligated to disclose to Mr. Horiike how low the sellers would go in selling the property, or any other motivations of the seller regarding their decision to sell. Mr. Cortazzo was obligated to disclose what he knew, if anything about the publications relating to square footage. Square footage issues have been a constant source of acrimony in real estate transactions and holding out any representation about square footage has long been recognized as a potential misrepresentation. Mr. Cortazzo might have been better counseled on how to address a square footage problem, but hindsight is always better than foresight.

This case should not alter the business practices of brokers acting as dual agents. It makes it clear that if the agent of one party fails to meet the fiduciary standards of the broker, the agent can also be held liable for breach of fiduciary duty to the other party. The real estate community will need to emphasize in its education the importance of understanding the duty to properly represent aspects of the transaction and to understand the repercussions of acting improperly or failing to meet the statutory requirements of disclosure.

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