Is a Designated Broker/Officer Liable to Third Parties?

In the decision in Sandler v. Sanchez, the California Court of Appeal held that a designated broker/officer could not be held vicariously liable for material misrepresentations made by his employees based on an implied delegation of his statutory duty to supervise under § 10159.2.

Business and Professions Code section 10159.2  makes a licensed individual real estate broker who is the designated officer of a corporate broker “responsible for the supervision and control” of the corporate broker's employees.

Can a designated officer's failure to supervise a corporate employee, without more, subject the officer to direct personal liability to third parties for harm caused by his or her failure to supervise?

Apart from the officer's direct liability, can the designated officer be held vicariously liable under traditional agency principles for the tortious conduct of the corporate employees he or she is responsible for supervising? 

The designated officer's duty to supervise codified in section 10159.2 is owed to the corporation, not to third parties.

Accordingly, breach of that statute is grounds for administrative discipline against the designated officer by the licensing entity and perhaps an action by the corporation for indemnification, but not an action by third parties.

Moreover, whether or not a designated officer may be, under traditional agency principles, vicariously liable for the tortious conduct of the employees he or she supervises in an appropriate circumstance, those circumstances were not alleged in the Sadler case.

Accordingly, the trial court's dismissal of the action against the designated officer of a real estate brokerage corporation after the trial court sustained without leave to amend his demurrer to the complaint was affirmed.

Bernard Sandler and Linda Marie Sandler, as trustees of the Bernard Sandler and Linda Marie Sandler Revocable Intervivos Family Trust dated September 13, 1991, their adult daughter, Stacy Sandler, and Steven K. Ridgeway (collectively the Sandler parties), sued 765 South Windsor, LLC (South Windsor), Gold Coast Financial (Gold Coast), a real estate brokerage corporation, and Carlos Sanchez, Gold Coast's designated officer/broker.

According to the third amended complaint, Keith Desser, a real estate salesman, president and sole shareholder of Gold Coast and a principal of South Windsor, solicited the Sandler parties to loan $600,000 to South Windsor to finance improvements to an eight-unit apartment building for the purpose of converting the units to condominiums.

Desser represented that, once the improvements were made and the condominium conversion completed, the property would be worth in excess of $5.5 million, more than enough, even with a first deed of trust of $2.75 million held by another lender, to secure the Sandler parties' loan.

Desser, however, did not reveal $600,000 was woefully insufficient to finance the necessary repairs for the condominium conversion; the property did not have sufficient equity to provide collateral for a second trust deed securing the note; and the primary lender had refused to extend the first note, which was imminently due, resulting in foreclosure by the holder of the first trust deed and leaving the Sandler parties' note unsecured.

In addition, Desser used $300,000 of the loan proceeds, which he obtained by amending the escrow instructions, for his personal expenses. 

The complaint asserted a cause of action for breach of fiduciary duty against Sanchez. Although the complaint does not allege Sanchez played any role in the transaction, or even knew of it, the Sandler parties allege he, as Gold Coast's designated officer, owed them a duty in accordance with section 10159.2 to supervise Gold Coast's employees, including Desser.

Had Sanchez fulfilled his duty to supervise, he would have learned about Desser's material misrepresentations and either disclosed them to the Sandler parties or cancelled the loan transaction. Finally, the complaint alleges Desser was Sanchez's agent and Sanchez, as Desser's principal, is liable for Desser's tortious acts committed within the scope of that agency. 

The complaint also asserted causes of action for breach of contract and fraud against Gold Coast and South Windsor. Desser, who was not named as a defendant in the complaint, died in 2009. His estate was insolvent, as was Gold Coast and South Windsor. The Sandler parties obtained default judgments against both Gold Coast and South Windsor. Sanchez is the only party to this appeal.

Sanchez demurred to the third amended complaint, arguing he owed no duty, as a fiduciary or otherwise, to the Sandler parties. 

While a claim for breach of fiduciary duty would lie against Gold Coast and Desser, he asserted, there can be no liability against him as a matter of law absent allegations he authorized or personally participated in the wrongful conduct.

He also argued he was not Desser's principal and, therefore, could not be held vicariously liable for Desser's misconduct.

The trial court agreed and sustained Sanchez's demurrer to the third amended complaint without leave to amend. The court thereafter signed an order dismissing the action against Sanchez.

California defines a real estate broker as a person who, for a compensation or in expectation of a compensation, assists people in certain statutorily defined licensed activity, including soliciting borrowers or lenders or performing services for borrowers or lenders in connection with loans secured by real property. (§ 10131, subds.(a), (d).)

A licensed broker can be an individual or a corporation. To operate as a corporate broker, however, the corporation must designate a licensed individual broker as the entity's designated officer. (§ 10211.)

No acts for which a real estate license is required may be performed for or in the name of, a corporation when there is no officer of the corporation licensed under § 10211.

Section 10159.2, subdivision (a), makes the officer designated by a corporate broker licensee pursuant to section 10211 responsible for the supervision and control of the activities conducted on behalf of the corporation by its officers and employees as necessary to secure full compliance with the provisions of this division, including the supervision of salespersons licensed to the corporation in the performance of acts for which a real estate license is required.

Failure to exercise reasonable supervision as required by section 10159.2 is grounds for the Real Estate Commissioner to suspend or revoke the designated officer's real estate license. (§ 10177, subd. (h).) 

The Sandler parties and Sanchez agreed section 10159.2 imposes a duty on the designated officer to supervise the corporate broker's employees. The question in this case is to whom is that duty owed?

Absent special circumstances, officers of a corporation are not responsible to third persons for negligence amounting merely to nonfeasance, to a breach of duty owing to the corporation alone; the act must also constitute a breach of a duty owed to the third person.

Here, although section 10159.2 imposes a duty of supervision on the designated officer of the corporate broker, it does not, on its face, expressly state to whom that duty is owed.

In 1979, the Department of Real Estate sponsored legislation to add section 10159.2 to the Business and Professions Code, making the designated officer of a corporate broker statutorily responsible for supervising the corporate broker's employees.

The same legislation also amended section 10177, subdivision (h), to subject the designated officer's real estate license to discipline if that duty of supervision was breached.

Corporate employers may be held vicariously liable for the tortious acts of their agents committed within the scope of the agency or employment.

However, absent special circumstances, it is the corporation, not its owner or officer, that is the principal or employer and thus subject to vicarious liability for torts committed by its employees or agents.

LESSONS:

1.         Each cause of action in a complaint must be carefully considered to determine if it attempts to impose liability on persons who are not subject to the basis of the cause of action.

2.         Supervision of salespersons is essential because the failure to exercise reasonable supervision is grounds for the Real Estate Commissioner to suspend or revoke the designated officer's real estate license.

3.         A designated officer may be, under traditional agency principles, vicariously liable for the tortious conduct of the employees he or she supervises in an appropriate circumstance.