Originally posted November 21, 2016 by Justin Sayles at TheRealDeal.com.
The California Supreme Court ruled Monday that a real estate brokerage representing both the buyer and seller in a deal owes the same fiduciary responsibilities to each party, potentially setting a significant precedent for how information is shared in so-called “dual-agency transactions.”
In a unanimous decision, the court ruled in Horiike v. Coldwell Banker that a when an agent representing a seller is working for the same firm as the agent representing the buyer, they become an “associate licensee” and must properly investigate and disclose all important information related to the transaction.
The case centers on a Chinese millionaire’s 2007 purchase of a Malibu mansion and the manner in which the property’s size was listed. The buyer, Hiroshi Horiike, worked through one Coldwell Banker agent, Chizuko Namba, to purchase the home. The seller was represented by another Coldwell Banker associate — celebrity realtor Chris Cortazzo, who is being sued for$3.3 million in a separate case.
After his $12.25 million purchase, Horiike raised issue with the way Cortazzo advertised the property’s square footage, alleging he misrepresented its size by thousands of feet. Horiike eventually sued, losing in a lower court in 2012. However, he emerged victorious in 2014 when the California Second District Court of Appeals ruled that under the state’s Civil Code, Coldwell Banker was operating as a dual agent and owed fiduciary responsibility to Horiike through both of its agents — a decision appealed by the brokerage firm.
Monday’s decision affirms the appeals court’s ruling, creating a “very significant and substantial but not onerous” responsibility for dual-agency brokerages, said attorney Fred Cohen, who represented Horiike before the Supreme Court.
“This case makes clear the [selling agent] has to take that duty serious and make sure the buyer goes into the transaction with his or her eyes open,” Cohen said.
The dual-agent law and the case’s potential impact
The laws the case took into consideration, covered in California Civil Code Section 2079, spell out the responsibility each agent has to the buyer and seller in a transaction.
While a seller’s agent — Cortazzo in this case — owes “[a] fiduciary duty of utmost care, integrity, honesty, and loyalty in dealings with the seller,” that agent has no fiduciary responsibility to the buyer and must be only “honest and fair” in its dealings with that side. A selling agent must also disclose any issues “known … materially affecting the value or desirability of the property that are not known to, or within the diligent attention and observation of, the parties.”
The buying agent, in this case Coldwell Banker’s Namba, has a similar fiduciary as it relates to her client, and the same “honest and fair” standard to meet in dealing with the seller.
The Horiike v. Coldwell Banker ruling has the potential to alter the requirements of a company’s fiduciary responsibility when its agents are representing both sides. Coldwell Banker’s attorney in the case, Edward Xanders, admitted as much when he said a ruling against his client would create a “whole new ballgame” for agencies, possibly forcing them to disclose damaging information. It would also apply to commercial brokerages that have dual agent transactions, such as Cushman & Wakefield and CBRE.
That potential far-reaching impact drew the attention of the industry — several trade organizations with competing interests at stake in the decision filed briefs with the court.
The California Association of Realtors, a trade group that represents more than 175,000 licensed real estate agents in the state, argued in an amicus brief that a ruling limiting dual-broker transactions would limit a consumer’s choices. Because a buyer working with a broker doesn’t know what property they will ultimately purchase, there’s no way to anticipate whether the seller will be represented by the same firm.
“[B]uyers will be restricted in the properties they can explore, and sellers will have a limited pool of buyers,” the association said in a statement. “Allowing all parties to explore buying or selling more properties on the market, not fewer, benefits the consumer.”
It’s a view shared by Michael Nourmand, president of Beverly Hills agency Nourmand and Associates, who said in an interview with TRD before the decision was issued that dual agent limitations would be “excessive.”
“You’re an agent and you’ve been running around with a buyer for nine months, and then the company gets a listing, and [they] have to go to a different agent? That’s pretty crazy,” Nourmand said.
Additionally, Nourmand said he thinks it’s unreasonable to expect a seller’s agent to give information to a buyer’s agent that they wouldn’t if they worked for a different company. He worries that it could also leave a selling agent open to lawsuits from their clients for over-disclosure.
Those concerns were immaterial to the National Association of Exclusive Buyer Agents, which also filed an amicus brief in the case. The organization, which represents buyer-only agents nationwide, said that because Cortazzo was working for the same company as the buyer’s agent, he owed the same fiduciary responsibility to Horiike as Namba did. The NAEBA said accepting Coldwell Banker’s argument that it upheld its fiduciary responsibility to Horiike would have created a dangerous precedent.
“Buyers and sellers will find themselves ‘represented’ by brokers and associates working both sides of the fence to their own advantage, without owing their clients any duties commensurate with that advantage,” the association said in its brief.
In an email exchange that occurred before the ruling, San Francisco–based attorney Lee Stimmel told TRD he thinks dual-agency brokering is “an inherently impossible situation.” He said disclosure requirements aren’t enough, because they often amount to just one of many arcane documents signed in a real estate transaction. He said they should be done away with altogether.
Stimmel likened the brokers to attorneys: How can one law firm represent both sides and be expected to uphold its fiduciary responsibility to both clients?
In the case of real estate brokers, the issue is further complicated by commissions and the potential for a seller to suppress pertinent information for the sake earning a greater profit, he said.
“Realistically, expert honest advice is precisely what the average person seeks in a real estate broker,” Stimmel said. “The broker does not own the house usually, so why is he/she even part of the deal? For the expertise and honest advice you seek.”
The case, which Cohen said must now return to a trial court to determine whether the fiduciary responsibility Horiike is owed was in fact breached, dates back to 2006, when Coldwell Banker’s Cortazzo listed the Malibu home for sale.
According to court documents, public records list the property at 11,050 square feet with 9,434 square feet of living area. But Cortazzo prepared a flier stating the home offers “approximately 15,000 square feet of living areas,” a figure that reflects a total cited by the building’s architect and accounts for the city of Malibu’s inclusion of some outdoor living areas in determining square footage.
In 2007, an unnamed couple made an offer on the property, but their request for an extension of the timeframe in which to inspect the property was denied, causing the deal to fall apart. That July, Cortazzo amended the property’s MLS listing to state that its approximate square footage was “0/O.T.,” meaning zero square feet and other comments.
Enter Horiike. An international businessman who spoke little English, he had been working with Coldwell Banker salesperson Chizuko Namba to find residential property in Southern California. Namba, who works in the agency’s Beverly Hills office and had limited interaction with Malibu-based Cortazzo, came across the listing for the property and arranged for Horiike to meet the selling agent in November 2007.
When they met, Cortazzo gave Horiike a copy of the flier stating the property had 15,000 square feet of living area. Horiike agreed to purchase the home and opened escrow later that month, at which point he received a copy of the building permit and other documents.
Horiike began preparation for work on the property in 2009, at which time he said he discovered the property had less than 12,000 square feet of living area — thousands less than he thought he purchased. (According to court documents, Coldwell Banker’s experts testified the home’s living areas totaled 14,186 square feet.)
In 2010, Horiike filed suit against Cortazzo and Coldwell Banker for intentional and negligent misrepresentation, breach of fiduciary duty, unfair business practices and false advertising. In 2012, a jury decided that Cortazzo did not intentionally fail to disclose important information that Horiike did not know and could not reasonably have discovered. It also found that Coldwell Banker, acting as the broker for both the seller and the buyer, did not breach its fiduciary duty to Horiike.
That decision, however, was ultimately reversed by the appeals court, which ruled in April 2014 that Cortazzo, as an associate of Coldwell Banker, owed a fiduciary duty to Horiike equivalent to the fiduciary duty owed to buyer by the firm itself.
During oral arguments before the Supreme Court last month, Xanders argued that Horiike should instead be suing Namba for breach of fiduciary responsibility. While Xanders said the company has that duty at agency level, Cortazzo, despite working as an employee of the company, does not.
However, the court’s justices pushed Xanders on his argument, stating the language in the civil code was unambiguous when it comes to a seller agent’s fiduciary responsibility.
“[The Civil Code] doesn’t say that Coldwell Banker only bears responsibility for Namba with respect to Mr. Horiike and only with Cortazzo with respect to the seller, it says the agent bears responsibility for the associate licensees — both of them — who perform as agents of the agents,” Justice Goodwin Liu said at a Sept. 7 hearing.
David Macey, a Florida-based attorney who represented Horiike in the appellate case, said in an interview with The Real Deal that companies have a responsibility to both parties in dual-agency transactions. He said beyond the legal impact of the court decision, Horiike v. Coldwell Banker could cause buyers to exercise more caution in the future.
“[Buyers] hopefully will have some protections as a result of this case being affirmed by the Supreme Court, or maybe they will be more wary with a brokerage house that has both sides of the transaction,” he said.