Horiike vs. Coldwell Banker: Pinning Down One Aspect of Fiduciary Duty

• Publication year: 2017
• Author: Rafael Chodos

Horiike vs. Coldwell Banker: Pinning Down One Aspect of Fiduciary Duty

Rafael Chodos

Rafael Chodos has been an attorney in private practice in Los Angeles for over 38 years. His treatise, The Law of Fiduciary Duties (2000, Blackthorne Legal Press) has been cited by several California courts of appeal, and by the California Supreme Court.

I. INTRODUCTION

On November 21, 2016, the California Supreme Court (the "Supreme Court") handed down its opinion in Horiike v. Coldwell Banker Residential Brokerage Company.¹ The case involves a real estate transaction in which both the selling agent and the buyer's agent were associate licensees of Coldwell Banker, which acted as "dual agent" in the transaction. The Supreme Court articulated the narrow issue it was going to address, and its resolution of that issue, as follows:

As this case comes to us, it presents a single, narrow question concerning the associate licensee's duties to the buyer in the transaction: 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 residence's living area as advertised and as reflected in publicly recorded documents. It is undisputed that Coldwell Banker owed such a duty to the buyer. We now conclude that the associate licensee, who functioned on Coldwell Banker's behalf in the real property transaction, owed to the buyer an "equivalent" duty of disclosure under Civil Code section 2079.13, subdivision (b). We accordingly affirm the judgment of the Court of Appeal.²

California Civil Code section 2079.13 reads in relevant part as follows:

The agent in the real property transaction bears responsibility for his or her associate licensees who perform as agents of the agent. When an associate licensee owes a duty to any principal, or to any buyer or seller who is not a principal, in a real property transaction, that duty is equivalent to the duty owed to that party by the broker for whom the associate licensee functions.

This all seems perfectly straightforward and we might wonder why the case has attracted as much attention as it has.

Ofcourse, we recognize that the ruling makes life a little more difficult for large brokerage firms like Coldwell Banker. Under the Supreme Court's ruling, dual agency situations become harder to handle, because duties run from listing agents on the seller's side towards the buyer as well as towards the seller. This is, no doubt, the reason so many parties filed amicus briefs: three for the plaintiff, and four for the defendants.

But aside from this point, additional questions arise about this case when we read both the Supreme Court's opinion, and the preceding appellate opinion as to which review was granted.³ The analysis of the issues by the Supreme Court and the lower courts in the Horiike litigation is deep and complex, and the courts have worked hard to pin down this one aspect of real estate brokers' and agents' fiduciary duty in real estate transactions.

Sometimes the experience of reading an opinion of the Supreme Court is similar to the experience of listening to a temple bell high in the Himalayas: we hear the note but we also hear resonances, and sometimes we hear discordant notes. Let us listen now to the sound of that bell:

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II. FACTUAL BACKGROUND OF THE LITIGATION

The case involves a real estate transaction gone awry. The buyer, Horiike, thought he had purchased a home in Malibu with 15,000 square feet of living space; but to his chagrin, two years after escrow closed he discovered that the home had only 12,000 square feet.⁴ Horiike sued the listing agent, Cortazzo, and Coldwell Banker, under whose broker's license Cortazzo worked. Cortazzo had previously listed the house and created a marketing flyer indicating that the home had 15,000 square feet.⁵ However, in connection with a previous escrow opened on a sale of the property that failed to close, Cortazzo became aware that the building permit allowed only a 11,050 square foot residence at the property, and that the building on the property measured only 9,434 square feet.⁶

Horiike hired another Coldwell Banker agent, Namba, to assist him in procuring a property.⁷ Cortazzo gave Namba a copy of the initial marketing flyer showing that the residence was 15,000 square feet, and did not mention the information that had come to light in the earlier failed escrow.⁸ However, before escrow closed, Cortazzo did send a copy of the building permit to Namba, who provided it to Horiike. Horiike's escrow opened in November 2007 and closed in due course.⁹ It was only in 2009, when preparing to do work on the property, that Horiike asked Cortazzo to confirm that the property had 15,000 square feet of living area. It was at this time that Horiike claimed he first learned that the actual square footage was much less.¹⁰

Horiike sued both Cortazzo and Coldwell Banker, but he did not sue his own listing agent, Namba.¹¹ The complaint included causes of action for fraud ("You told me the square footage was 15,000 but you knew it was only 12,000, and you told me the lie in order to induce me to purchase."); negligent misrepresentation ("Maybe it wasn't a deliberate fraud but it was untrue and you should have told me the truth."); breach of fiduciary duty ("You were my fiduciary! I had a right to trust you! You should have found out the true square footage and told me."); intentional concealment ("You knew the allegation to be untrue but you concealed it from me deliberately.") and unfair business practices ("We can't have people running around saying they have 15,000-foot houses for sale when all they really have is 12,000-foot houses.").¹²

At the close of the presentation of Horiike's evidence, Cortazzo moved for judgment on the breach of fiduciary duty action against him, arguing that as the listing agent he worked for the seller and owed no fiduciary duty to the buyer. The trial court agreed and granted the motion.¹³

III. THE JURY VERDICT

The trial court submitted the causes of action for fraud, misrepresentation, concealment, and the remaining cause for breach of fiduciary duty to a jury, which returned a special verdict—very special.¹⁴ On the first cause of action, for fraud, the jury found that the listing agent had not committed fraud because he had made no false statement.¹⁵ Yet the jury also found, as to the second cause of action for negligent misrepresentation, that although Cortazzo made a false statement about the square footage, he believed the statement to be true, so the jury delivered a defense verdict.¹⁶ These findings were inconsistent—a point that gave the reviewing courts some pause.¹⁷ Similarly, as to the intentional concealment claim, the jury found that Cortazzo had not concealed any material fact that the buyer might not have discovered for himself.¹⁸

As for the breach of fiduciary duty, the jury found that Coldwell Banker (as distinct from Cortazzo himself) had not breached any fiduciary duty towards Horiike.¹⁹ The parties had agreed ahead of time that the causes of action for unfair competition and unfair business practices could be resolved by the judge. After the jury's verdict, the judge rendered judgment for Cortazzo and Coldwell Banker on all causes of action.²⁰

IV. THE COURT OF APPEAL REVERSES ON BREACH OF FIDUCIARY DUTY

Horiike appealed, and the Court of Appeal reversed the trial court's judgment on the breach of fiduciary duty claim, then remanded the case for further proceedings.²¹ The court's reasoning revolved around two points.

First, the Court of Appeal noted that the statutory scheme embodied in Civil Code sections 2079 through 2079.24, governing the duties of brokers and salespersons involved in real property transactions, imposes a fiduciary duty on Cortazzo, as a salesperson, towards Horiike as the buyer. This duty exists even though Cortazzo acted as seller's agent, because Coldwell Banker served as a "dual agent" in the transaction under Civil Code section 2079.13(d).²² Under Civil Code section 2079.13(b), Cortazzo owed the very same fiduciary duty to Horiike that Coldwell Banker and Namba did.²³ This Civil Code section imposes the duties of each licensed broker on each associate of that broker. Both Cortazzo and Namba were "associate licensees" of Coldwell Banker.²⁴

Second, the Court of Appeal held that Cortazzo's fiduciary duty to Horiike included an affirmative duty to inspect the property and discover defects for Horiike's benefit.²⁵ The Supreme Court focused on this point. Even if Cortazzo did not intend to commit fraud, and even if any misrepresentations he might have made were merely negligent, the Supreme Court held that Cortazzo had an affirmative duty to seek out certain information and disclose it to Horiike.²⁶ His fiduciary duty required him to perform more affirmative actions than merely the duties of disclosure itemized in Civil Code sections 2079, 2079.2, 2079.14, and 2079.16.²⁷ For this proposition, the appellate court relied upon Assilzadeh v. California Federal Bank²⁸ and Field v. Century 21 Klowden-Forness Realty.²⁹

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In Assilzadeh, the plaintiff purchased a unit in a building that California Federal had purchased from her homeowners association. Before escrow closed, the seller informed the plaintiff that the Association had sued the developer for construction defects and that the suit had been settled for over five million dollars. After purchasing, the plaintiff learned that she could not lay down marble flooring in her bathroom because the building was not strong enough to support it. She sued the seller and the brokers, but lost. The court held that the brokers had a duty of disclosure, but also held that by disclosing the existence of the lawsuit, the brokers had discharged their duty of disclosure.³⁰

In Field, the plaintiffs purchased a rural residence and learned, after the purchase, that the brokers had misrepresented both the physical...