DUAL AGENCY = Duty to Learn And Disclose

Is a real estate agent required to check public records and permits?  Does a Listing Agent owe a fiduciary duty to the prospective purchaser?  Many real estate agents quickly respond in the negative to these questions, citing the standard CAR disclosure forms, e.g., AVID.  They point to the section on the AVID that states, in part, that “California law does not require the Agent to inspect the following:  … Public records or permits.”  This confusing and misleading form, and the general confusion over the issue generally, has been brought into sharp focus by the California Supreme Court in the long-awaited decision in the matter of Horiike v. Coldwell Banker Residential Brokerage Company, S218734, handed down November 21, 2016.

For those who have not been tracking this case, the plaintiff sought to purchase a luxury home in the Malibu area, and was represented by a real estate salesperson working for Coldwell Banker.  The salesperson arranged for Mr. Horiike to see the property.  A previous attempt to sell the property had fallen through, and the listing agent, who worked for another office under Coldwell Banker, provided some information, including a flyer showing the property to be approximately 15,000 sq. ft. of living space.  The listing agent knew that the square footage of the living area was represented to be as low as 9,224 sq. ft. on permit records, and approximately 9,434 sq. ft. on tax records, yet forwarded the flyer with the 15,000 sq. ft. representation.  A couple of years later, in or around 2009, the plaintiff started doing some work and discovered the discrepancy.  Following a trial, the jury returned a special verdict in favor of Coldwell Banker, and Mr. Horiike appealed.  The Court of Appeal reversed and remanded on the issue of the fiduciary duty owed as a result of the fact that both the Selling Agent and the Listing Agent worked for Coldwell Banker, establishing a Dual Agency situation.  Coldwell Banker petitioned the Supreme Court for review, and after two years plus of briefs and oral argument, the ruling today affirmed the Appellate decision.

The single, narrow issue before the Supreme Court was whether the associate licensee owed to the buyer a duty to “learn and disclose” all information materially affecting the value or desirability of the property, including the discrepancy between the square footage of the living area as advertised and as reflected in publicly recorded documents.  The Court determined that it was undisputed that Coldwell Banker, as the broker owed this duty to the buyer, and concluded that the associate licensee, who functioned on behalf of Coldwell Banker in the transaction, owed to the buyer an “equivalent” duty of disclosure under Civil Code section 2079.13(b).

The several amicus briefs filed on behalf of the Respondent, including CAR, attempted to argue that Dual Agency was legal, and had been disclosed, but that imposing a fiduciary duty on the agent equivalent to that of the Broker would undermine the duty of “undivided loyalty” of agents to their principals.  The Court reviewed the actual and legislative history of the practice of dual agency, noting that it was more or less adopted only recently – 1986, and later by some accounts.  Up to that point, agents generally all represented the Seller.  California’s approach was to require disclosure as a basis for permitting it.  (2o79.14, .16, .17), and requiring consent, which was obtained by providing the buyer and seller with yet another CAR form.

The Court further noted that in this particular situation, the listing agent’s duty to disclose this material fact existed even in the absence of a fiduciary duty, inasmuch as the Listing Agent owed a duty to disclose all facts materially affecting the value or desirability of the property, as well as all known facts not known to or reasonably discoverable by the buyer, citing 2079.16 and Lingsch v. Savage (1963) 213 CA2d 729.

The Court went on to emphasize that Brokers are required to supervise the activities of their salespersons, and emphasized that an associate licensee has no power to act except as a representative of his or her broker. (CC section 2338).  Moreover, the Court pointed out that the broker is presumed to be aware of the facts known to its salespersons.  Here, Coldwell Banker was presumed to be aware of the square footage discrepancy, but failed to disclose this material fact from the buyer.

Looking further at the Legislative history of 2079.13, the Court noted, with some irony, that the legislation had been sponsored by CAR, and opposed by DRE until it was amended to impose the stricter, fiduciary duty standard.  (AB 3449 (1985-1986).  The language of the bill was amended to clarify that “the fiduciary duties of real estate broker agents to buyers and sellers also apply to real estate salespersons.”  In conclusion the Court declared that “as presently written, the statute (2079.13) provides no basis for distinguishing between a broker’s duty to learn of and disclose all facts materially affecting the value or desirability of the property and its associate licensee’s duty to do the same.”  (Opinion by J. Kruger; w/ full concurrence).

This uber-briefed and argued case has been watched closely by the real estate industry, and the implications are being sorted out.  Clearly, the current disclosure forms promulgated by CAR are no longer adequate, and the practice of double-ending a deal, while legal with consent and full disclosure, now carries heightened risk for all brokers, especially the larger brokerage houses with thousands of independent agents operating out of multiple offices under the single shingle.  One would imagine that brokers with multiple associate licensees are scrambling to figure out a way to protect themselves, while CAR has posted a brief summary on its website, basically urging all members to be sure to disclose all material facts.  We would anticipate a new set of supplemental disclosure forms shortly.  However, I think that CAR has yet to acknowledge the duty to “learn and disclose” imposed by today’s decision.  This will be a work in progress.

Arbitration: Be Careful What You Ask For

In the past I’ve written about the importance of reading and understanding the Arbitration Clause in your contracts, and warned you not to sign until you fully understood the consequences. I also noted that the U.S. Supreme Court had granted certiorari to hear arguments in a case that raised the question whether the arbitrator had interpreted the parties” contract in determining that the parties had authorized a class action.  The case, Oxford Health Plans LLC v. Sutter, 675 F.3d 215, was affirmed on June 10 by the U.S. Supreme Court.

Dr. Sutton is a pediatrician who provided medical services under contract with Oxford Health Plan.  The contract included a binding arbitration clause for any contractual disputes. Alleging that Oxford had failed to fully and promptly pay him and other physicians with similar contracts, Dr. Sutton filed a proposed class action.  Oxford moved to compel arbitration, and the court granted the motion. The parties agreed that the arbitrator should decide whether or not the contract authorized class arbitration, and the arbitrator concluded that it did. Oxford then filed a motion to vacate the arbitrator”s decision, claiming he had exceeded his powers under Section 10(a)(4) of the Federal Arbitration Act.

While the case was pending, the U.S. Supreme Court issued a ruling in the case of Stolt-Nielson S.A. v. AnimalFeeds Int”l Corp., 559 U.S. 662 (2010), which held that an arbitrator may employ class procedures only if the parties have authorized them.  In Stolt-Nielson, the parties stipulated they had never reached an agreement on class arbitration, so the arbitrator”s decision approving the class action in the Stolt-Nielson case was held casino online to be in excess of his powers.  Based on the ruling in Stolt-Nielson, Oxford asked the arbitrator to reconsider his decision. The arbitrator issued a new opinion saying that Stolt-Nielson did not apply; in the Oxford case the parties disputed whether the contractual language authorized class actions, whereas in Stolt-Nielson, the parties agreed they had not established intent.  The arbitrator in the Oxford case reaffirmed his conclusion that class arbitration was permitted based on the intent of the parties.

The key lesson of Oxford is the extremely limited scope of judicial review available to vacate arbitration rulings. Under the Federal Arbitration Act (FAA), courts may vacate the arbitrator”s decision “only in very unusual circumstances.” The Court goes on to note that FAA Section 10(a)(4) authorizes a federal court to set aside an arbitration award where the arbitrator exceeded his powers, but declares that a party seeking relief bears “a heavy burden.” “It is not enough … to show that the arbitrator committed an error–or even a serious error.”  The Oxford Court went on to declare that “the sole question … is whether the arbitrator (even arguably) interpreted the parties” contract, not whether he got its meaning right or wrong.” (Oxford; emphasis added.)  In other words, The arbitrator”s decision, even if he committed a serious error or got it wrong, will withstand a legal challenge to vacate unless the aggrieved party can show that arbitrator”s actions were outside the scope of his contractually delegated authority.

Driving home the point, the Court ruled that Oxford chose arbitration, and “it must now live with that choice.” Even if the arbitrator made a “grave error,” it would not be sufficient to vacate the award. “The potential for those mistakes is the price of agreeing to arbitration.” Agreeing to submit a dispute to arbitration is a bargained-for risk.

In other words – be careful what you ask for!

STOP! Don’t Sign that Arbitration Clause! (Until you’ve considered the consequences!)

UPDATE:  Earlier this week, the United States Supreme Court granted Certiorari to consider whether or not an arbitrator acts within his powers under the Federal Arbitration Act or in excess of those powers by determining that the parties had affirmatively agreed to authorize class arbitration simply on the basis of broad contractual language that required arbitration of any dispute arising under the contract as a precondition to litigation.  Oxford Health Plans LLC v. John Ivan Sutter M.D.  This development is further evidence of the need to carefully consider the consequences when signing arbitration clauses without considering the range of consequences!

Most contracts nowadays contain an “Arbitration Clause,” which the parties often unwittingly sign without considering the consequences. After all, if a dispute arises under the contract, would it not be better to resolve the dispute in an efficient manner that is faster and more cost-effective than going to court?  It could take years for a case to get to trial, and then there”s post-trial motions, appeals, and on and on. With arbitration, the matter could be submitted, argued, and decided by a experienced judge or lawyer with specialized knowledge of the subject area and selected by the parties themselves! What could go wrong?

Ever since Calvin Coolidge signed the Federal Arbitration Act (FAA) in 1925, parties to a dispute could utilize arbitration as a method of “alternative dispute resolution” or “ADR” as these types of proceedings are often called. Designed to allow the parties to resolve their disputes without the usual delays – and costs – of a lengthy trial, the arbitration process steadily grew more popular over the years. According to a recent article in the California Real Property Journal (Vol 30, No 3 2012), authors Paal, Block and Roland note that by the late 20th Century, all 50 states had adopted arbitration statutes.  They note that concerns over court congestion and runaway jury verdicts raised interest in arbitration.

However, Paal, Block and Roland note that arbitration procedures have become more formal and “judicialized,” but lacking the court”s procedural and evidentiary rules, the arbitration process has become as “uncertain, costly, and time consuming as ever.” (Citing Thomas J. Stipanowich, “Arbitration: The “New Litigation.”” 2010 U. Ill. L. Rev.1). The Journal article goes on to note that at the 2009 National Summit of Business-to-Business, “seven out of ten participants believed that arbitration [fell]short of expectations in terms of efficiency and economy at least 50% of the time.”

There are several practical reasons that individuals considering contracts in real estate transactions should not agree to mandatory arbitration. For example, the judicial relief afforded by a Lis Pendens – a Notice of Pending Action – is online casino not available under an arbitration clause. Neither is injunctive relief.  Or an action in Unlawful Detainer – which affords a landlord a relatively prompt, judicial process to evict a defaulting tenant.  In some instances, arbitration actually could take longer and end up costing much more than if the matter had simply proceeded through the litigation process.  It should be noted that almost all State and Federal Courts require that parties to litigation attempt one Det har gjort att manga svenska casinon anvander spel enbart fran Net Entertainment. or more of several alternative dispute methods as part of the litigation process, ranging from Early Neutral Evaluations to Mediation and both binding and non-binding Arbitration – all under the  jurisdiction and time limitations imposed by the Court.

For better and worse, the Courts have upheld the enforceability of the contractual provisions of an arbitration clause, even if the applicable statutory law would yield a different result if tried in Court. In a recent decision by the United States Supreme Court, the noncompetition provison in a contract with an arbitration clause had been ruled invalid by a State Court, but the high Court ruled that subject to the terms of the contract, only the arbitrator could make the determination,  not the State court. (Nitro-Lift Technologies LLC v. Howard).  The Court noted that the Federal Arbitration Act “declare[s] a national policy favoring arbitration,” and provides that a “written provision in … a contract [providing for arbitration] shall be valid, irrevocable, and enforceable.”  In other words, if the contract declares that an issue in that contract is subject to arbitration, the parties must resolve the issue through arbitration.

Is there an alternative to this “alternative dispute resolution” process?  Paal, Block and Roland suggest that Mediation is fast becoming more popular, and “has, for all intents and purposes, replaced arbitration as the preferred method of dispute resolution.” [Citation] Certainly, there are many advantages, not the least of which is that the proceedings are subject to confidentiality.  In Mediation, the parties are encouraged to work out their own, final resolution of the dispute, with the assistance of the Mediator. The process is conducted informally, and the process is subject to strict confidentiality. In Mediation, the parties can restructure the deal and fashion remedies that are not available through the judicial process.

Some newer contracts contain “Mediation Clauses” that provide that the parties first attempt to mediate a dispute prior to initiating litigation. Some contracts also require arbitration if the parties are unable to resolve the dispute through mediation. In some instances, especially in real estate matters, it would be prudent to carefully consider the consequences of agreeing to mandatory arbitration before signing the contract. As always, consult with an attorney before you make the commitment.

Loan Mods and Deep Breathing

Upside down on your home loan?  Real estate investment property vacant?  Don’t know what advice to follow?  Should you walk away or let it go to foreclosure? File bankruptcy?  Hire a loan mod specialist?

Homeowners and real estate investors are scrambling to cope as the economic crisis hits home — literally.  Even in California, property owners are waking up to the harsh reality that their homes and real estate investments are worth less than what they owe on their mortgages.  Add the misery of a layoff or news that an investment has gone sour, or the fact that your 401(k) has suffered a 30% drop in value, and you cannot make the payments.  What can you do?

Three steps to get out of the muck

First, CALM DOWN, don’t panic.  The threat of losing one’s home is certainly grounds for concern, but if you panic, you are more inclined to do do the wrong things.  People who panic tend to listen to bad advice, especially when it comes in the form of a promotion making ridiculous promises.  Most of this advice comes from people who are trying to make money, not people who are trying to help you.

Second, GET BUSY!  The process of working through a loan modification takes time, and requires a lot of hard work on your part.  You will need to demonstrate that you will be able to make the payments if and when the real estate loan modification is approved.  This will require you to make some tough financial decisions, get your financial records and documents in order, and probably make some adjustments to your plans.

Don’t blame yourself or others.  It only serves to waste time and energy that you will need to develop a solution.  Instead, make a Plan.  Ask yourself, “What do I want to do?”  “Where do I want to be?”  Chances are, if you are facing the prospects of a layoff, or have been unable to make mortgage payments, or are facing the prospect of foreclosure, you’ve been caught up in the chaos of the moment, and haven’t taken time to focus on the future.  Working through a loan modification process only makes sense if you have a clear idea where you want to end up.  In the end, it may make sense to short sale a property, or let it go into foreclosure, but only if it helps you to get where you want to end up.

Third, take ACTION.  Get help now!  Consult with a professional and explore your options.  I recently received a call from a distraught individual reporting she had been evicted that morning by the Sheriff from the home she had owned for 20 years.  Not an ideal time to start getting legal help!

Before you sign up with someone advertising loan modification services, find out exactly what they will do for you. Look for a real estate attorney or a specially registered real estate broker.  Pursuant California law, in many instances real estate brokers cannot charge you a fee in advance unless they have been approved by the Department of Real Estate (DRE).  Attorneys licensed to practice in California are exempt from this requirement, but make sure they are experienced in real estate law. For more information, see the Consumer Alert by the DRE: http://budurl.com/DREAlert

Fourth, reread step three and take ACTION.  Too many individuals become paralyzed by worry.  Your circumstances will not improve without action.  So, take a deep breath and pick up the phone. Contact a professional experienced in loan mods who will get started right away.  The sooner, the better.  It may cost you some money, but with the right help, you will be able to avoid even more costly mistakes.