Legal Update

REAL ESTATE AGENTS SHOULD NOT GET FINANCIALLY INVOLVED WITH THEIR CLIENTS

  • December 6th, 2006
  • Print

SUMMARY: The California Court of Appeal for the Second District on September 21, 2006 confirmed a judgment against a real estate broker who originally helped a client with bad credit qualify for a loan to purchase a condominium but subsequently took over ownership of the property when the client did not make the monthly payments. Warren v. Merrill 49 Cal Rptr 3d 122 (2006).

FACTS: A real estate agent in Southern California named Hilda Merrill, who called herself the “condo queen” agreed to represent both the buyer and the seller in the sale of a condominium she had listed in Woodland Hills. The buyer was a young man who unfortunately suffered from Tourette’s syndrome and related neurological disorder which affected his short term memory and cognitive abilities. His small business was not doing well and his wife was divorcing him. His name was John Warren, whose grandfather just happened to be the former Chief Justice of the United States, Earl Warren.

Warren wanted to buy the condo but had bad credit and a very low FICO score. Merrill offered to help by arranging for a co-borrower with a good credit rating to sign the mortgage and go on title. Merrill said her own daughter, Charmaine, would be the co-borrower, provided the buyer paid Charmaine $10,000 for her assistance. Then after escrow closed Charmaine would quit claim her interest in the property back to Warren. Merrill further agreed to defer a portion of her commission as a loan to the buyer so he would have the 20% cash down payment necessary to purchase the property. This agreement was never put in writing. Merrill submitted a loan application for Charmaine, but none for Warren. Since the transaction could not close with different people on title than had applied for the loan, Charmaine ended up as the sole owner and borrower, which Merrill explained to Warren was “just a formality”. Warren at least moved into the condo for awhile and made some of the monthly payments but then developed substance abuse problems and stopped paying. Merrill filed an unlawful detainer action against Warren and had him evicted. Merrill never let Warren return to the condo and never put him on title.

After months of sleeping in his car, or in the park, Warren sued to recover the condo. Merrill defended saying Warren had breached an equity sharing agreement by failing to make the monthly payments and had thereby forfeited his interest in the property. Warren admitted he would have lost the property in foreclosure if Merrill hadn’t made the payments. Merrill saw no conflict of interest in simultaneously representing the buyer, the seller, and her own daughter in the same transaction. The trial judge did, along with finding breach of fiduciary duty and fraud. Warren was awarded a judgment quieting title to the condo in his name, plus $15,000 in damages, plus $50,000 punitive damages, plus attorney fees.

DECISION: The Court of Appeal affirmed the judgment. Merrill argued on appeal that: Warren had no title to the property; Warren had “unclean hands” which should deny his recovery because he was involved in an illegal scheme to defraud the lender; Warren’s alleged contract to gain title to the property was never put in writing and therefore barred by the statute of frauds; and Warren sustained no actual damage because he defaulted on the mortgage, lived rent free in the condo and would have lost the condo by foreclosure anyway. The Court rejected each argument stating there should be no dispute that Merrill owed a fiduciary duty to Warren which required her to place his interests above her own in the real estate transaction. The Court ruled the evidence in this case was more than sufficient to show an egregious violation of the duties of loyalty and undivided interest by a fiduciary toward her principal, as well as a deliberate plan to defraud him out of his down payment and the property.

ANALYSIS: The real estate agent involved in this case might have originally intended to help her down and out client, but ended up swindling him so the judgment was justified. However, honest real estate agents with a client like Warren who desperately needs help, must be very careful in lending a hand. Arranging for a co-borrower, lending the commission to help with the down payment, getting unusually creative with financing, or becoming a principle in the transaction may seem like generosity but is instead an invitation to liability. Resist the temptation to cross over the line in helping a client. Stick with the basics of putting buyer together with seller and documenting the transaction. Then repeat.