Can a Dual Agency Result in a Claim of Breach of Fiduciary Duty?
As discussed in the recent California appellate decision in Urban Sunrise LLC v. Vogt, David Vogt, a real estate broker doing business as Tahoe Investment Properties, and Ryan Smith, a real estate agent, were dual agents for the buyer and sellers in unsuccessful commercial real estate transactions involving five properties.
The transactions were unsuccessful because the buyer, Urban Sunrise, LLC (Urban Sunrise or buyer), did not secure loans for the properties due to the cost of fire insurance.
As a result of canceling the transactions, Urban Sunrise forfeited over $1.1 million to the sellers and lost the benefit of a tax-deferred exchange under Internal Revenue Code section 1031 (1031 exchange) (26 U.S.C. § 1031).
Urban Sunrise and its managing member, Susan Kerr (collectively, plaintiffs), sued Vogt and Smith (collectively, defendants) for breach of fiduciary duty, professional negligence, constructive fraud, and rescission.
The causes of action were grounded in allegations that defendants had breached their fiduciary duties to plaintiffs in six ways.
All of plaintiffs’ causes of action against defendants are based on the allegations that defendants breached their fiduciary duties to plaintiffs by:
(1) failing to disclose Vogt’s relationship with Charles prior to confirming the dual agency relationship for the purchase of the properties;
(2) recommending and encouraging plaintiffs to enter into the third addenda;
(3) Vogt acting as an attorney in the preparation of the third addenda, which constituted an unwaivable conflict of interest because he did so “on behalf of both sides to the transactions”;
(4) Smith engaging in the unauthorized practice of law in drafting the third addenda;
(5) failing to investigate material facts concerning the availability and cost of fire insurance for the properties; and
(6) providing plaintiffs with historical financial information for the properties without advising that certain information contained therein would likely change and should not be used to estimate costs and expenses for the properties in the future.
Defendants successfully moved for summary judgment on plaintiffs’ complaint and Vogt thereafter also successfully moved for summary judgment on his cross-complaint against plaintiffs for payment of the commission owed to him.
Plaintiffs appealed.
Plaintiffs challenged both summary judgment rulings on the grounds that there are triable issues of fact pertaining to four of the six alleged breaches of fiduciary duties against defendants.
In December 2020, Kerr met with Smith to discuss business opportunities, including Urban Sunrise’s interest in buying property in South Lake Tahoe. Kerr had previously invested in commercial properties and told Smith that she had a “team” assisting her in real estate transactions, including a mortgage broker, insurance broker, accountant, and an attorney. Smith told Kerr that Vogt had a client who might be willing to sell property in South Lake Tahoe that was not publicly listed for sale.
In January 2021, Urban Sunrise signed two exclusive buyer representation agreements (representation agreements) with Tahoe Investment Properties, as broker.
In both representation agreements, Urban Sunrise granted Tahoe Investment Properties the exclusive and irrevocable right to represent Urban Sunrise in acquiring real property within a 50-mile radius of South Lake Tahoe for six months. Smith signed the representation agreements as an agent on behalf of Tahoe Investment Properties.
Each of the representation agreements provided, in part: “Depending on the circumstances, it may be necessary or appropriate for Broker to act as an agent for both Buyer and a seller, exchange party, or one or more additional parties (‘Seller’). Broker shall, as soon as practicable, disclose to Buyer any election to act as a dual agent representing both Buyer and Seller. If Buyer is shown property listed with Broker, Buyer consents to Broker becoming a dual agent representing both Buyer and Seller with respect to those properties.”
The representation agreements further described the broker’s duties and stated that such duties were limited by the terms of the agreement.
In the representation agreement signed by plaintiffs on January 2, 2021, the parties agreed that Urban Sunrise would compensate Tahoe Investment Properties three percent of the acquisition price or six percent “for non-MLS properties” if Urban Sunrise entered into an agreement to acquire property on terms acceptable to it, “provided Seller completes the transaction or is prevented from doing so by Buyer.”
In the representation agreement signed by plaintiffs on January 10, 2021, the parties modified the compensation to six percent of the acquisition price.
A multiple listing service (MLS) is a facility of cooperation of agents and appraisers, operating through an intermediary that does not itself act as an agent or appraiser, through which agents establish express or implied contracts for compensation between agents that are MLS participants in accordance with its MLS rules with respect to listed properties in a listing agreement, or that may be used by agents and appraisers, pursuant to the rules of the service, to prepare market evaluations and appraisals of real property. (Civ. Code, § 1087.)
A listing may not be placed in a multiple listing service unless authorized or directed by the seller in the listing. (Civ. Code, § 1088, subd. (a).)
In April 2021, Kerr signed five purchase agreements and other documents on behalf of Urban Sunrise to buy commercial properties in South Lake Tahoe. Charles G. (Charles) signed the purchase agreements on behalf of each seller as its managing member. Urban Sunrise entered into the purchase agreements with the intent to purchase the properties as part of a 1031 exchange. At the time of entering into the purchase agreements, Kerr was aware that all the properties, except one, were not listed for sale with any real estate company.
Each of the purchase agreements identified Tahoe Investment Properties as both the seller’s and buyer’s brokerage firm and as a dual agent, and Vogt and Smith as dual agents.
Kerr signed five real estate agency relationship disclosure forms (agency disclosures) on behalf of Urban Sunrise. The disclosures explained that a real estate agent can legally be the agent of both the seller and buyer in a transaction if the seller and buyer have knowledge of and consent to such dual representation; however, any such agency would be identified in the purchase agreement or another document. The forms cautioned that the duties of a dual agent “do not relieve a Seller or Buyer from the responsibility to protect his or her own interests” and recommended to “carefully read all agreements to assure that they adequately express your understanding of the transaction.”
When it entered into the purchase agreements, Urban Sunrise knew that it had to obtain fire insurance to finance the properties. Urban Sunrise consulted with an insurance broker in Arizona to investigate the availability and cost of insurance.
On May 5, 2021, Urban Sunrise removed all contingencies, except the loan and appraisal contingencies. Approximately a week later, Smith sent an e-mail to Kerr, her assistant, and plaintiffs’ mortgage broker stating that an extension of the close of escrow date was inevitable because Smith still had not received any lender commitment letters.
Urban Sunrise agreed because its lender needed additional time to process the acquisition financing and requested an extension of the close of escrow date.
A week after executing the third addenda, Urban Sunrise signed the title company’s supplemental escrow instructions to release funds prior to the close of escrow.
On May 21, 2021, Urban Sunrise authorized the release of $1 million from the escrow account to the sellers. Plaintiffs were unable to close on the properties due to difficulties in obtaining fire insurance.
Plaintiffs alleged that they were damaged in the amount of $1,184,000, which were the amounts deposited and released to sellers, and because the 1031 exchange failed. They further sought incidental and consequential damages, and rescission of the operative representation agreement.
Vogt filed a cross-complaint against Urban Sunrise for breach of contract, breach of the covenant of good faith and fair dealing, and the common count of quantum meruit for services rendered pursuant to contract. Vogt sought, among other things, payment of the commission set forth in the operative representation agreement.
Defendants moved for summary judgment as to plaintiffs’ complaint on the grounds that there was no triable issue of fact that they had properly performed their duties to plaintiffs.
The trial court granted the motion for summary judgment, finding there was no triable issues of material fact that defendants did not breach their fiduciary duties.
Following that ruling, Vogt moved for summary judgment as to his cross- complaint against plaintiffs. The trial court granted and denied the motion in part, ordering Urban Sunrise to pay Vogt $492,800 in commission plus interest, attorney fees, and costs.
Plaintiffs alleged that defendants breached their fiduciary duties to plaintiffs in six ways. The trial court found in favor of defendants as to each alleged breach of fiduciary duty.
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.
Real estate brokers and agents are subject to two sets of duties: those imposed by regulatory statutes, and those arising from the general law of agency.
Thus, if a duty is not imposed by statute or implementing regulation, the plaintiff must derive the defendant’s duty from agency case law and the agreement between the principal and agent.
At common law, generally, a broker 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 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.
A broker’s duties may, however, be limited by contract.
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.
Where a duty is found to exist, a real estate agent must fulfill it by exhibiting the degree of care and skill ordinarily exhibited by professionals in the industry.
The degree of care and skill required to fulfill a professional duty ordinarily is a question of fact and may require testimony by professionals in the field if the matter is within the knowledge of experts only.
However, expert testimony is incompetent on the predicate question whether the duty exists and the scope of that duty because it is a question of law for the court alone
Plaintiffs alleged that defendants breached their fiduciary duties by failing to disclose Vogt’s “extensive prior relationship” with Charles because Vogt represent Charles “in as many as 12-15 previous real estate transactions.
A real estate broker and agent have, among other duties, the duty to refrain from dual representation in a sale transaction without full disclosure to both principals (i.e., buyer and seller) and their knowledge and consent.
The dual representation disclosure requirements arise from statute and common law.
Statutorily, a dual agent must provide the buyer and seller with the disclosure form set forth in Civil Code section 2079.16 at the times specified in Civil Code section 162079.14. The disclosure form details a dual agent’s fiduciary duties to the buyer and the seller but cautions that the duties of a dual agent do not relieve the buyer or the seller from “the responsibility to protect their own interests.” (Civ. Code, § 2079.16.)
It is undisputed that defendants provided and plaintiffs signed the dual agency disclosure form in section 2079.16 of the Civil Code.
In addition to the statutory disclosure requirements, common law provides that a dual agent is bound to disclose to each principal all facts which he knows or should know would reasonably affect the judgment of each in permitting such dual agency.
The foregoing quoted language originates from section 392 in the Restatement Second of Agency: An agent who, to the knowledge of two principals, acts for both of them in a transaction between them, has a duty to act with fairness to each and to disclose to each all facts which he knows or should know would reasonably affect the judgment of each in permitting such dual agency, except as to a principal who has manifested that he knows such facts or does not care to know them.
Comment b to section 392 of the Restatement Second of Agency states, in pertinent part: The agent’s disclosure must include not only the fact that he is acting on behalf of the other party, but also all facts which are relevant in enabling the principal to make an intelligent determination, such as the prior relations between the agent and the other party, and the knowledge or lack of knowledge by the other party that the agent is acting for the principal. The agent, however, is under no duty to disclose, and has a duty not to disclose to one principal, confidential information given to him by the other, such as the price he is willing to pay.”
A fact is relevant (i.e., material) if it is one that the agent should realize would likely affect the judgment of the principal in giving their consent in a particular transaction.
Plaintiffs asserted that defendants breached their common law duty by failing to disclose the material fact of Vogt’s prior business transactions with Charles because such information would affect a reasonably prudent buyer’s willingness to agree to a dual agency with Vogt.
Defendants disagreed, arguing Kerr knew, prior to signing the purchase agreements on Urban Sunrise’s behalf, that Charles was Vogt’s client and the properties that Urban Sunrise was purchasing from sellers, except one, were not listed for sale with any real estate company.
They assert the details of Vogt’s and Charles’s transactions would merely have been an elaboration of the facts already known, i.e., that Vogt had represented Charles in previous real estate transactions.
Whether defendants’ duty of dual agency disclosure included the duty to sua sponte disclose the specifics of Vogt and Charles’s former business transactions prior to obtaining plaintiffs’ agreement to dual agency is a question of law to be determined based on the facts and circumstances of the case.
The duty is viewed from the perspective of what defendants knew or should have known would reasonably affect plaintiffs’ judgment in permitting dual agency.
Here, Kerr, an experienced real estate investor with a team of advisers, including an attorney, signed the representation agreements after Smith disclosed to Kerr that Vogt had a client who owned commercial properties that were not on the market, but who was potentially willing to sell them. The representation agreements accordingly included a six percent commission provision for the purchase of off-market properties. The term client indicated an existing business relationship between Vogt and Charles, such that Vogt had information about Charles’s real estate portfolio.
The existing business relationship presented a potential benefit to plaintiffs given the possibility that Urban Sunrise could purchase off-market properties for which there would likely be no competing offers. Vogt’s client was in fact willing to sell some off-market properties and Urban Sunrise made offers to purchase those properties—in other words, plaintiffs got the benefit from the existing business relationship between Vogt and Charles that was previously disclosed to them. Plaintiffs were then given and signed five purchase agreements identifying defendants’ dual agency relationship and Charles’s identity, and agency disclosures detailing defendants’ duties and stating that, notwithstanding those duties, plaintiffs had the responsibility to protect their own interests.
These facts met defendants’ initial burden of demonstrating that the breach of fiduciary duty allegation lacked merit. Defendants disclosed the prior relationship between Vogt and Charles—a relationship that benefited plaintiffs.
The burden then shifted to plaintiffs to introduce a triable issue of fact that defendants knew or had reason to know that disclosure of Vogt and Charles’s 12 or so transactions over 3 or 4 years would be material to plaintiffs’ decision to agree to dual agency in the 5 transactions at issue.12
Plaintiffs did not meet that burden. Plaintiffs merely assert that the information would be material to a reasonably prudent buyer, which is not the standard for assessing a dual agent’s duty of disclosure.
Plaintiffs introduced no evidence that defendants knew or had reason to know that the extent of the business relationship between Vogt and Charles was material to plaintiffs and why.
Plaintiffs alleged that defendants breached their fiduciary duties by failing to investigate material facts concerning the availability and cost of fire insurance for the properties.
They argued defendants had a duty to provide insurance information specific to each of the properties because the broker must put himself in the principal’s position and provide the type of information required for the principal to make a well-informed decision.
Plaintiffs relied on statements by their consultant that defendants had a duty to disclose what they knew or should have known regarding the impact of wildfires on the availability and cost of fire insurance coverage.
The appellate court found no merit in this argument.
When plaintiffs entered into the purchase agreements, plaintiffs knew that Urban Sunrise would need to obtain fire insurance to finance the properties. Kerr held herself out as an experienced investor with a “team” assisting her in the purchases, which included an insurance broker. Plaintiffs consulted with an insurance broker in Arizona to investigate the availability and cost of insurance for the properties.
Soon after entering into the purchase agreements, sellers disclosed that insurance for the properties were “much higher” than the year prior due to the most recent fire season and provided the name and contact information for sellers’ insurance agent pertaining to the properties.
Plaintiffs also received contract documents indicating that the properties were in a very high fire hazard severity zone and a wildfire disaster advisory specifically stating that the cost and availability of insurance could be impacted because the properties were in or around areas affected by wildfire.
As to the location of the properties within a very high fire hazard severity zone, the buyer’s inspection advisory for each property further stated that such fact “may affect the availability and need for certain types of insurance.” Plaintiffs received these disclosures early in the transaction.
There was no triable dispute that plaintiffs were advised about potential issues with obtaining insurance for the properties and that plaintiffs indicated to defendants that they had an insurance broker to investigate the availability and cost of insurance.
Moreover, defendants limited their duty to plaintiffs regarding insurance investigation through their agreements. The representation agreement and purchase agreements stated that plaintiffs
agreed to seek insurance assistance from appropriate professionals. The wildfire disaster advisory also explained that real estate agents and brokers do not have the “authority or expertise” to provide guidance on insurance availability and recommended that plaintiffs determine the availability of insurance early in the transaction.
Under these undisputed facts, there was no triable dispute that plaintiffs had the information necessary to make a well-informed decision regarding the purchase of the properties based on potential insurance issues related to those properties.
Plaintiffs contractually agreed to assume the responsibility for investigating the availability and cost of insurance and led defendants to believe that they had an insurance broker as part of the “team.” Plaintiffs cannot avoid the plain language of their signed contracts.
Plaintiffs alleged that Vogt breached his fiduciary duties to them because he acted as an attorney in drafting the third addenda and his “performance of legal services on behalf of both sides to the transactions constituted an unwaivable conflict of interest.
Plaintiffs argued that the rendering of legal services is prima facie evidence of an attorney-client relationship.
The pertinent question is whether plaintiffs have established a triable issue of fact that Vogt acted as an attorney in drafting the third addenda, such that he had an attorney-client relationship with buyer and sellers, which created an unwaivable conflict of interest.
The appellate court concluded the answer was “no.”
Vogt declared that Charles said he would be willing to extend the close of escrow date, but because he “would lose a significant amount of money” in another real estate transaction if plaintiffs did not close escrow on time, he wanted all remaining contingencies removed, the existing earnest money passed through to sellers nonrefundable, as well as a payment of $200,000 per property that would also pass through to sellers nonrefundable. Charles put forth these terms to give him confidence that the escrows would close. Charles requested that Vogt prepare “his list of terms required to grant the extension of time” and e-mail it to him for review.
After Vogt sent Charles the list of terms, Charles called Vogt and said that “he was preparing his own specific language for the extension.” Charles sent Vogt an e-mail “with the extension language prepared exclusively” by Charles with a request for another phone call. The document that Charles sent to Vogt converted the list of terms that Vogt had previously sent into an addendum with a preamble, signature lines, and other language. Charles also modified some of the terms in the list.
Plaintiffs further failed to point to anything in the record establishing that Vogt provided legal services to plaintiffs. Vogt asserts and plaintiffs do not dispute that Vogt never had any direct communication with Kerr about the terms of the third addenda; his sole communication with Kerr was the letter in which Vogt discussed Charles’s motivations for the terms to extend the close of escrow date.
The appellate court also rejected the assertion that Vogt was acting as an attorney because the terms for the extension of the close of escrow date were drafted in separate addenda rather than a purported “available statutory form” pertaining to an increase in deposits as liquidated damages.
Plaintiffs cited no authority for any such proposition with associated reasoned argument.
Finally, plaintiffs cited no authority and provide no reasoned argument for the apparent assertions that, simply because Vogt is both a real estate broker and an attorney, his representation of a client as a real estate broker means that he also has an attorney-client relationship with that client,
To the extent that plaintiffs relied on the State Bar of California’s Formal Ethics Opinion No. 1982-69 as apparent support for this proposition, the appellate court issued no opinion.
In that opinion, the State Bar of California considered whether an attorney may engage in dual occupations as an attorney and real estate broker in the purchase of real property.
The State Bar of California stated an attorney may ethically act in both capacities in the same transactions, but, in doing so, “must at all times conform to the standards of both professions and, to the extent that those standards are in conflict, the attorney must at all times conform to the standards of the State Bar of California.”
In sum, because all of plaintiffs’ causes of action against defendants were based on the acts and omissions alleged in the breach of fiduciary duty cause of action, and there was no triable issue of fact in that regard, summary judgment was appropriate on all claims against defendants.
LESSONS:
1. 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.
2. Real estate brokers and agents are subject to two sets of duties: those imposed by regulatory statutes, and those arising from the general law of agency.
3. Thus, if a duty is not imposed by statute or implementing regulation, the plaintiff must derive the defendant’s duty from agency case law and the agreement between the principal and agent.
4. At common law, generally, a broker 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.
5. The agent’s duty to disclose material information to the principal includes the duty to disclose reasonably obtainable material information. 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.
6. The dual representation disclosure requirements arise from statute and common law.
7. Statutorily, a dual agent must provide the buyer and seller with the disclosure form set forth in Civil Code section 2079.16 at the times specified in Civil Code section 162079.14. The disclosure form details a dual agent’s fiduciary duties to the buyer and the seller but cautions that the duties of a dual agent do not relieve the buyer or the seller from “the responsibility to protect their own interests.” (Civ. Code, § 2079.16.)