Full newsletter available here.
NEW APPELLATE COURT DECISION: CALIFORNIA CORPORATE BROKERS NOT LIABLE TO THIRD PARTIES
BY: TAMAR GABRIEL,ATTORNEY AT LAW
A recent case decided by the California Court of Appeal will have an effect on how the scope of a California Corporate Broker’s liability is defined. In Sandler v. Sanchez, the appellate court’s ruling limited liability of a designated officer (sometimes referred to as “corporate brokers” or “brokers of record”) to the corporation, not to third parties.
In this case, the Sandlers, along with another party, sued 765 South Windsor, LLC, Gold Coast Financial, a real estate brokerage corporation, and Carlos Sanchez, Gold Coast’s designated officer/broker. According to the allegations in the operative third amended complaint, Keith Desser, a real estate salesman, president, and sole shareholder of Gold Coast and a principal of South Windsor, solicited the Sandlers 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, however, failed to reveal $600,000 was not enough money to do the improvements and that there was not enough equity in the property to secure their loan, which was a junior loan. When the primary lender refused to extend the first note, which was imminently due, the property was foreclosed by the holder of the first trust deed, which left the Sandler’s note unsecured. In addition, Desser used the $300,000 of the loan proceeds, which he obtained by amending the escrow instructions, for his personal expenses.
The Sandler’s third amended complaint asserted a cause of action for breach of fiduciary duty against Sanchez. Although the complaint did not allege Sanchez played any role in the transaction, or even knew of it, the Sandlers alleged that Sanchez, as Gold Coast’s designated officer, owed them a duty to supervise Gold Coast’s employees, including Desser, in accordance with California Business and Professions Code Section 10159.2. The Sandlers alleged that had Sanchez fulfilled his duty to supervise, he would have learned about Desser’s material misrepresentations and either disclosed them to the parties or cancelled the loan transaction. The Sandler’s complaint also alleged Desser was Sanchez’s agent and Sanchez, as Desser’s principal, is liable for Desser’s tortuous acts committed within the scope of that agency.
Sanchez demurred to the third amended complaint, arguing he owed no duty, as a fiduciary or otherwise, to the Sandler parties. Sanchez argued that while a claim for breach of fiduciary duty would lie against Gold Coast and Desser, 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 with Sanchez and sustained his demurrer to the third amended complaint without leave to amend. The court thereafter signed an Order dismissing the action against Sanchez. On appeal from an order dismissing an action after the sustaining of the demurrer, the appellate court independently reviewed the case and ultimately agreed with the trial court’s decision.
Gold Coast Financial is a corporation. In California, a corporation can be a licensed real estate broker. In order to form such an entity, the corporation must designate a licensed individual broker as the entity’s designated officer. Sanchez was the designated officer of Gold Coast Financial. As such, pursuant to California Business and Professions Code Section 10159.2, he was “responsible for the supervision and control of the activities conducted on behalf of the corporation by its officers and employees…including the supervision of salespersons licensed to the corporation…” Therefore, Sanchez was responsible for supervising Desser (even though salesperson Desser also happened to be the sole shareholder of Gold Coast). The court reviewed the governing law. It noted that Section 10159.2 imposes a duty on the designated officer to supervise the corporate broker’s employees. However, the main issue in this case was to whom is that duty owed? 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 tat duty is owed. After reviewing other cases as well as legislative history that brought this sction into being, the court concluded that smilar to a section governing contractors, the rlevant code section was “regulatory and disciplinary in nature. It did not create a duty to tird parties and therefore could not be a basis fr the broker’s personal liability.”
On the question of whether Sanchez was vicariously liable, as a corporate employer, for te tortious acts of the agents committed within te scope of the agency or employment, the court ruled that absent special circumstances, it i the corporation, not its owner or officer, that is te principal or employer and thus subject to vicarious liability for torts committed by its employees or agents. Accordingly, the Court held that under traditional agency principles, it is Gold Coast, as Desser’s employer, not Sanchez, who may be held liable for Desser’s torts committed within the scope of his employment. The Court ruled that the right to control is insufficient by itself, under traditional agency principles, to establish a principal/agent or employer/employee relationship. For an agency relationship to exist there must be an affirmative manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other to so act. Mere inaction or malfeasance would not create such a relationship between two employees.
The significance of this appellate decision for real estate agents and brokers is that the failure to supervise could lead to discipline from the Department of Real Estate, and could even be grounds for action by the corporation against the designated officer. However, unless the broker had participated in the bad behavior there can be no liability imposed by an injured third party.