California Supreme Court Rules on Dual Agency

One of the most anticipated California real estate cases in decades, Horiike v. Coldwell Banker, has been decided by the California Supreme Court. The Supreme Court considered whether a listing agent working under the same brokerage as the buyer’s agent should personally owe a fiduciary duty to the buyer through the concept of dual agency. Last week, the Supreme Court made its ruling, essentially making sales agents ‘dual agents’ in the event the brokerage is itself a dual agent and regardless of the agent’s personal relationship with the party on the other side of the transaction.

History of the Case
 
Coldwell Banker’s agents represented both the seller and buyer in the sale of a $12.25M Malibu residence. When the buyer (“Horiike”) made an offer to purchase the property, the parties acknowledged that this was a dual agency transaction. Horiike purchased the house, then discovered that the square footage was significantly less than advertised by the listing agent (“Cortazzo”). Horiike filed suit alleging breach of fiduciary duty and other counts against Coldwell Banker and Cortazzo. The trial court concluded that the listing agent owed no fiduciary duty to the buyer, granted nonsuit on the cause of action against Cortazzo, and instructed the jury that it could find Coldwell Banker liable only if the buyer’s agent had breached his or her fiduciary duty to the buyer. The jury found in favor of Coldwell Banker. The Court of Appeal reversed.

The Supreme Court’s Ruling
 
Last Monday, the Supreme Court unanimously affirmed the Appellate Court’s decision, and ruled that a listing agent who is working for the same broker as the buyer’s agent, owes a “fiduciary duty” to disclose material facts to the buyer.

The court reasoned that because Coldwell Banker acted as the dual agent of the buyer and seller in the transaction, it owed a fiduciary duty to each. Observing that the listing agent actually executed the material forms on behalf of Coldwell Banker as its associate licensee, the court held that Coldwell Banker’s fiduciary duty to the buyer was imparted to the listing agent.

Reading broadly, this ruling could potentially change our understanding of the extent of each individual agent’s fiduciary duty in common real estate practice. Coldwell Banker argued that “charging associate licensees with the same duties as their brokerages would force salespeople ‘into dual agency with buyers and sellers whose interests inherently conflict,’ requiring them to breach their clients’ confidence and harm their clients’ interests.” Indeed, there are instances in common practice where listing agents never speak directly to buyers despite the fact that the buyer is represented by the listing agent’s brokerage, and visa-versa. This is because the listing agent assumes the buyer is being represented by her own sales agent, and seeks to respect that relationship.

The Court, however, responded that “[w]hile we do not gainsay defendants’ concerns about the potential for conflicts of interest in the dual agency context, the narrow disclosure duty at issue in this case creates no such conflict. The fiduciary duty of disclosure that Horiike alleges Cortazzo breached is, in fact, strikingly similar to the nonfiduciary duty of disclosure that Cortazzo would have owed Horiike in any event.”

The court based its reasoning on California Civil Code Section 2079 [the AVID requirement], and further stated that “even in the absence of a fiduciary duty to the buyer, listing agents are required to disclose to prospective purchasers all facts materially affecting the value or desirability of a property that a reasonable visual inspection would reveal.”
 
While the Supreme Court imputes broker duties to associate licensees in a dual agency situation, the court does not outlaw dual agency with this ruling. The court made some attempt to narrow the scope of its ruling. Still, this ruling potentially increases each agent’s responsibility to cross-parties in transactions where the agent’s brokerage has a dual agency, and it could limit intra-brokerage referrals. As this ruling is digested by the industry, agents should be cognizant that they may owe a fiduciary duty to the other side if their broker has a dual agency.