Legal Update

BROKER HAS FIDUCIARY DUTY TO DISCLOSE TO THEIR CLIENT, MATERIAL INFORMATION KNOWN TO ANY OF THE BROKER’S AGENTS

  • July 18th, 2010
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The California Court of Appeal for the Second District on November 1, 2007 ruled that a real estate broker has a fiduciary duty to disclose material information to its client, regardless of which salesperson in the broker’s office has the information.  Michel v. Palo Verdes Network Group 67 Cal.Rptr. 3d 797 (2007). FACTS: Kirkpatrick, a real estate agent with Moore & Assocs. inspected a home hoping to get the listing.  While inspecting the home, he took notes of the property’s defects including possible water leaks, cracked interior walls and damage to the pool.  He did not get the listing.  Instead, the sellers listed the property for sale with a different broker.  Another agent for Moore & Assocs. named Lagudis showed the property to a couple who decided to buy the property.  Lagudis performed a visual inspection of the property and provided a written disclosure of the defects on the TDS form.  She disclosed there were cracks in the walls that had been patched and painted, but not the other defects previously seen by Kirkpatrick.  Buyers closed escrow.  After the first winter rains, cracks emerged in the interior walls.  A soils engineer inspected the property and informed them that poor top soil caused significant soil instability and ground movement which tilted the foundation.  He recommended placing caissons under the foundation at an estimated cost of a half million dollars.   Buyers complained to Moore & Assocs. and found out about Kirkpatrick’s inspection notes which were not previously disclosed to them.

Buyers sued everyone involved in the transaction.  The listing agent settled for $50,000, the seller filed bankruptcy, and the selling agent (Moore & Assocs.) went to trial.  Buyers alleged (i) fraudulent concealment, (ii) violation of Civil Code 2079, and (iii) negligent nondisclosure.  The trial court dismissed the negligent nondisclosure cause of action.  The jury returned a verdict of no liability for the two remaining causes of action.  Buyers appealed.

DECISION: The Court of Appeal reversed.   The court ruled that the dismissal of the negligent nondisclosure cause of action was error because it involved elements which were different from the other two causes of action.  The court held that Lagudis may very well have been competent in her visual inspection of the property in preparing the TDS, and Kirkpatrick may very well have had no fraudulent intent in failing to disclose his notes and the defects he observed, but that did not mean that Kirkpatrick did not injure the buyers by not telling them about the defects.

The Court noted that Moore & Assocs. owed a fiduciary duty to its client, the buyers.  This duty applied to all agents in the Moore office, including Lagudis (selling agent) and Kirkpatrick (another agent in the same office).  “A broker’s fiduciary duty to his client requires the highest good faith and undivided service and loyalty.” The fiduciary duty is greater than the negligence standard of due care under §2079.  Thus a broker can be professionally competent under §2079 without satisfying the greater duty of a trusted fiduciary.   “The fiduciary duty owed by brokers to their own clients is substantially more extensive than the nonfiduciary duty codified in §2079.”   A fiduciary must tell its principal of all information it possesses that is material to the principal’s interests.  Failure to do so is constructive fraud i.e. negligent nondisclosure, for which Kirkpatrick may be liable even without any intention to defraud the buyers.

ANALYSIS: This decision is important for two reasons.  First, it imposes a duty of disclosure upon all agents in the same broker’s office, even those who are not directly representing the buyer.  Second, it holds that a broker’s fiduciary duty of disclosure is greater than the statutory duty imposed by §2079 to conduct a reasonably competent and diligent visual inspection.  Buyer’s cause of action for negligent nondisclosure rests, in contrast, on the broker’s fiduciary duty to disclose material information within its possession.  It was immaterial how the fiduciary obtained the information; it has a duty to disclose the information to its principal