I’ll be honest. I didn’t know about this critical case on dual agency in real estate, originally filed in 2014. The case is Horiike v. Coldwell Banker and in all likelihood, most of you already know about it being the Best Informed Readers in Real Estate. But a reader sent the case to me along with the note that oral arguments in this case in the Supreme Court of California has been scheduled for September 7th. Apparently, it’ll be live-streamed so if you’re really bored or something, I guess you can tune in….
Thing is, if I didn’t know about this, I’m willing to bet that at least a few of you didn’t either. I guess possibly it’s because everyone was waiting for the Supreme Court to rule before really talking about it.
So let’s talk about it, including a related-yet-separate complaint by buyer agents contained in an amicus brief from NAEBA (National Association of Exclusive Buyer Agents). And then, like we do here, let’s go on a fantastic (meaning, based on fantasy, rather than reality) journey into the future!
For the TL;DR folks:
- Fiduciary duty is at the broker level, not the agent level.
- There is also a transparency problem, according to NAEBA.
- That could change a whole lot of practices currently widespread in the industry, such as the agent team.
OK, let’s get into it.
Summary of Horiike v. Coldwell Banker
The facts of the case are as follows:
- In 2006, Chris Cortazzo, an agent for Coldwell Banker Residential Brokerage Company (“CB”) in California, listed a property for sale in Malibu.
- The building permit has the total square footage as 11,050 sq. ft.
- The MLS provided Cortazzo, the listing agent, with the public record, which stated that the living area was 9,434 sq. ft.
- Cortazzo’s original listing for the property, however, stated that the property has “approximately
15,000 square feet of living areas.” The flier for the property also cited the 15,000 sq. ft. of living area phrase.
- In 2007, an unnamed couple made an offer. They asked Cortazzo for verification of the 15,000 sq. ft. living area. He provided a letter from the architect stating the size of the house under a current Malibu building department ordinance was approximately 15,000 square feet.
- Cortazzo also suggested the couple hire a qualified specialist to verify the square footage.
- The couple requested the certificate of occupancy and the architectural plans, but no architectural plans were available.
- In the real estate transfer disclosure statement, Cortazzo repeated his advice for the buyer to get their own expert to verify the square footage of the home, stating that the broker did
not guarantee or warrant the square footage.
- That deal fell apart because the couple wanted an extension to verify the square footage; the seller refused, so no deal.
- Enter Hiroshi Horiike, a wealthy international businessman, who was working with one Chizuko Namba as a buyer agent. Namba was also a CB agent. Namba showed Cortazzo’s listing to her buyer, with the flier that showed “15,000 sq. ft.” Cortazzo sent a copy of the building permit and other documents, but critically, failed to provide either Horiike or Namba with the handwritten note advising them to hire their own expert to verify the square footage.
- Horiike lives in Hong Kong, only speaks Chinese and Japanese, and had been working with Namba for four years for a luxury property in Southern California.
- Namba was with the Beverly Hills office of Coldwell Banker, and Cortazzo was with the Malibu office. The two had never met before this transaction, when they met each other at the showing.
- During the house tour, Cortazzo handed Horiike the buyer the flier and the MLS listing printout. That and the very brief “conversation” (which was probably more like “Hi, how are you?” and that’s it, since Horiike didn’t speak English and Cortazzo didn’t speak Japanese or Chinese) are the full extent of contact between Cortazzo and Horiike.
- Horiike bought the house, closed escrow, decided to do some home improvement work, started reviewing the permit, documents, etc. and… obviously ran into the fact that the house wasn’t 15,000 sq. ft. of living space. It was more like 11,000 sq. ft. according to his expert witness.
Horiike signed the agency disclosure form required under California law. And California law allows for three kinds of real estate agency:
- Seller’s agent under a listing agreement;
- Buyer’s agent acting for the buyer only; and
- Dual agent, representing both the seller and the buyer. This is obviously the kind of relationship we’re talking about here.
Cortazzo, the listing agent, always signed the disclosure form as the “listing agent” and Namba, the buyer agent, always signed it as the “selling agent”.
At the Trial Court
The trial court had ruled for the defendants, under the prevailing theory of agency that is commonplace in the real estate industry:
After the presentation of Horiike’s case to the jury, Cortazzo moved for nonsuit on the cause of action for breach of fiduciary duty against him. The trial court granted the motion on the ground that Cortazzo had no fiduciary duty to Horiike. Horiike stipulated that he was not seeking recovery for breach of fiduciary duty based on any action by Namba. Therefore, the court instructed the jury that in order to find CB liable for breach of fiduciary duty, the jury had to find some agent of CB other than Namba or Cortazzo had breached a fiduciary duty to Horiike. The court granted Horiike’s request to submit an additional cause of action to the jury for intentional concealment against both defendants. [Emphasis added]
In plain English, the listing agent Cortazzo said, “Hey, I’m the listing agent; I owe a fiduciary duty to the seller, not to you, Mr. Buyer”. The trial court agreed. Then, since Horiike hadn’t claimed any breach of fiduciary duty by his own buyer agent (Namba), the court told the jury that they had to find somebody other than Cortazzo (who owed no duty to the buyer) and Namba (who Horiike hadn’t sued) who worked for CB to find CB liable for breach.
The semi-amusing thing here is that the jury came back with conflicting findings:
The jury returned a special verdict in favor of Cortazzo and CB. The jury found Cortazzo did not make a false representation of a material fact to Horiike, so there was no intentional misrepresentation. However, the jury made a contrary finding in considering the claim for negligent misrepresentation, finding that Cortazzo had made a false representation of material fact to Horiike. There was no liability for negligent misrepresentation, because the jury found Cortazzo honestly believed, and had reasonable grounds for believing, the representation was true when he made it. The jury found no concealment, because Cortazzo did not intentionally fail to disclose an important or material fact that Horiike did not know and could not reasonably have discovered. Lastly, the jury found that CB did not breach its fiduciary duty to Horiike.
So, on the one hand, jury says Cortazzo didn’t lie to Horiike. But the jury also says that Cortazzo did unintentionally “make a false representation of material fact” to Horiike. Then again, since Cortazzo honestly believed the false material fact, no liability for negligent misrepresentation, and no intentional concealment. And of course, CB breached nothing because the jury didn’t find anyone other than Cortazzo (the listing agent) and Namba (the buyer agent) who worked with Horiike.
I know, confusing as hell, right? It’s OK, because none of those end up being all that important.
The Court of Appeals Says, Nyet!
In its brief opinion, the Court of Appeals pretty much nullifies that whole line of reasoning, because it announces/clarifies/enunciates an interpretation of dual agency that goes completely against the real estate industry’s commonplace understanding of agency. (And according to CB’s lawyers, goes completely against statutory intent and rules of statutory construction, but… that’s legal geekery beyond the scope of my blog.)
The Court held:
Horiike contends that Cortazzo, as an associate licensee of CB, owed a fiduciary duty to him equivalent to the fiduciary duty owed by CB. We agree.
The duties of brokers and salespersons in real property transactions are regulated by a comprehensive statutory scheme. (Civ.Code, § 2079 et seq.) Under this scheme, an “agent” is a licensed real estate broker “under whose license a listing is executed or an offer to purchase is obtained.” (Id., § 2079.13, subd. (a).) An “associate licensee” is a licensed real estate broker or salesperson “who is either licensed under a broker or has entered into a written contract with a broker to act as the broker’s agent in connection with acts requiring a real estate license and to function under the broker’s supervision in the capacity of an associate licensee.” (Id., subd. (b).) “ ‘Dual agent’ means an agent acting, either directly or through an associate licensee, as agent for both the seller and the buyer in a real property transaction.” (Id., subd.(d).)
“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.” (Civ.Code, § 2079.13, subd. (b).) [Emphasis added]
The Court therefore concludes that the agent here is Coldwell Banker, and the two listing and buyer agents are “associate licensees”. Ergo, the Court concludes:
The duty that Cortazzo owed to any principal, or to any buyer who was not a principal, was equivalent to the duty owed to that party by CB. CB owed a fiduciary duty to Horiike, and therefore, Cortazzo owed a fiduciary duty to Horiike.
Obviously, the defendants have appealed that decision to the highest court in California, and we’ll have oral arguments on the 7th, and a decision in the next few months. We’ll talk about consequences below, but first…
Here Comes NAEBA
One of the more interesting related issues comes from the amicus brief filed by NAEBA. To say that NAEBA has a vested interest in this case is to suggest that perhaps public unions have a vested interest in voting. In any event, NAEBA attacks the lack of transparency in the industry:
What is really at stake here is transparency, which is far too often lacking in the real estate industry. Even when agents comply with statutory disclosure rules, most buyers and sellers remain unaware they are dealing with agents who have dual loyalties. Most people think that “their” “agent” – the associate helping them find a home – represents them exclusively. That is rarely the case.
In fact, until the 1980’s, it was never the case, because the associate “helping” the buyer did not represent the buyer at all. He or she represented the seller under a system known as “subagency.” While subagency is no longer common (although it remains legal in California), it has yet to be replaced with a system that in line with consumer expectations.
NAEBA goes on to say that the agency disclosure forms do nothing to help consumers understand what’s going on and what dual agency means and who owes them what duty:
In sum, the consent form serves to protect the broker rather than educate the consumer. Real estate “disclosure statements are bewildering, ignored or overlooked” during the often emotional and confusing process of buying a home.
They quote from a law review article which says:
They are usually written in small print, buried among voluminous pages of form papers describing the property, often called the ‘disclosure package,’ and consumers are usually not trained to read the fine print. … [E]ven trained consumers will have paper fatigue in reading every single page of the disclosure package, especially after an exhausting and possibly whirlwind home search. If a consumer asks the agent to explain the disclosure statement, the agent may be (1) similarly bewildered; (2) or wary of losing a client if the explanation is too clear.
Pretty damning, if true. And I think it’s pretty close to the truth. I mean, who the hell reads every single word of every single form in a real estate transaction, especially in a place like California that has a bewildering amount of paperwork.
As to the chaos that would result? NAEBA’s position is that that’s just too bad for those brokerages who practice dual agency, quite unlike its members, who only practice buyer agency:
Any practical difficulties are the price of dual agency, a practice that brokers seek to protect because it is extremely lucrative for them; indeed, brokers who are dual agents reap a double commission from the sale of every individual home (because each associate owes his broker a portion of his commission), to say nothing of the additional double commissions they obtain from affiliated title and escrow officers.
Well… you kinda have to admit the NAEBA folks have a point, no? Not sure I’m getting on their train but I can see where it’s going….
Let’s suppose that the California Supreme Court upholds the ruling of the Court of Appeals. What happens then?
- Consumers could “lose” the exclusive representation they thought they were getting “midstream” because the agent on the other side happens to be from the same brokerage.
- Agents would be forced to disclose sensitive information to the other side, because they owe a fiduciary duty to both the buyer and the seller. For example, the listing agent would have to tell the buyer (and the buyer’s agent) that the seller is desperate to sell, or the buyer agent disclosing to the seller that the buyer has completely fallen in love with that property and doesn’t want any other.
- Agents would be forced into dual agency just because the agent on the other side happens to work for the same brokerage, and face the possibility of getting sued no matter what.
There are some other nightmare scenarios, and the Briefs touch on one with the lightest of touches:
The chaos that would exist under the Court of Appeal’s construction would trigger an explosion in litigation and liability exposure, and concomitant increases in insurance premiums. Transaction costs would rise, harming consumers. And some brokerage firms might forsake intra-firm transactions altogether, further harming consumers. Reducing the availability of intra-firm transactions would mean “buyers are limited in their market choices because they have fewer homes to choose from, and sellers are limited in their market exposure because their home is shown to fewer buyers, which translates into lower selling prices” (Agency/Disclosure Act, supra, 48 Ala. L.Rev at p. 295.)
Let’s dismiss as legal advocacy the language about buyers and sellers becoming more limited in their market choices and market exposure because Large Brokerage Firms decide to prohibit intra-firm transactions. Something like 85%+ of Participant Brokerages in any given MLS is a 5-agents or fewer “mom-n-pop” shop. It ain’t like buyers and sellers are going to have any trouble finding or selling homes.
But the impact on brokerages would be… catastrophic.
Death of Large Brokerages
I say the above is the lightest of touches because, well, what will not be happening is some brokerage firms forsaking intra-firm transactions. No, what would really happen is that large brokerage firms would cease to exist in California. And by “large” I mean any company over… say 50 agents? If you have 50 agents, are you so sure that none of them will ever bring a buyer to a listing held by one of your own?
Furthermore, if the CA Supreme Court sides with the Court of Appeals, the obvious thing for any listing agent to do is to leave the large brokerage and either (a) join a tiny brokerage that specializes only in listings, or (b) become a broker herself. Keep in mind that the person who got sued here is not the buyer agent, but the listing agent, by a guy whom he met once very briefly, whose language he doesn’t speak.
“I’m an expert negotiator, and I’ll get the highest price for your home… unless the buyer is represented by another REMAX agent, in which case I’ll have to look out for their interests as well.” Can you even imagine saying that in a listing presentation? Think that’ll go well?
While large brokerages (100+ agents? 50?) would likely cease to exist, smaller boutiques would have to make a choice: specialize as listing brokers or specialize as buyer brokers, and refer out the rest.
NAEBA thinks that result is a wonderful thing, of course, since it would mean that brokerages would divide clearly between Listing Brokerages and Buyer Brokerages, and its members are Exclusive Buyer Brokerages who do not take listings. (I assume NAEBA members refer out listings?)
To be fair, that is how law firms tend to work. Every law firm, small and large, has to do a conflict check before taking on a client, and if conflict exists, they have to refer the client to another lawyer at another law firm.
In rare cases, law firms might setup a “Chinese Wall” if it’s worth the trouble and the cost. If you’re interested, take a look at something like this to see what the hell lawyers have to go through.
In real estate, I can’t see the cost or the hassle or the potential liability being worth it unless we’re talking about a rare signature property (think eight instead of seven figures) with the attendant commissions.
Death of the Agent Team
I have long posited that the real future of the industry is the Agent Team, under the Keller Williams model, of a brokerage-within-a-brokerage.
The whole economic engine that makes agent teams work is that you have a Lead Agent (or Team Owner) who is a very strong listing agent whose listings generate buyer leads, which she then refers to buyer agents on her team, for a very high split (50/50 usually).
Thing is, every one of those agents on that Team are agents under the same brokerage. Ergo, under the Court of Appeal’s holding, every single one of those would be a dual agent owing a fiduciary duty to the seller and the buyer when dealing with the team’s own listings (as well as any listing held by another agent in the same brokerage, or dealing with a buyer represented by an agent in the same brokerage).
There is no scenario I can think of under which that model of the Agent Team can survive if Horiike’s holding is upheld.
Open Houses? What the Hell For?
Similarly, there would be very little point in holding open houses. No respectable listing agent I know personally holds open houses to sell that house. Listing agents have said for years and years that a vanishingly small number of properties sell because of an open house. MLS, yes; Internet, yes; Open House? No.
No, they hold open houses to meet potential buyers, and if they’re unrepresented, to try to sign them on as buyers. The whole reason why an agent would even work an open house is that she might pick up some buyer leads which she can keep for herself, while the listing agent gets someone to do the tedious work of sitting an open house.
I suppose that in theory, I could imagine a scenario where agents from different brokerages work with each other to staff open houses…. So a KW listing would have REMAX agents working that open house, and vice versa, but have a KW agent work a KW listing and you’re signing up for dual agency and all that that implies.
Portal Advertising Changes
I also imagine that the Ten Year War against the portals would come to a complete halt. Brokers and agents get pissed off at Zillow, Realtor.com, and other portals because other agents are “buying placement on their listings”. They feel that they should get the buyer leads from their own listings without having to pay for them.
Should Horiike go the other way… why bother? You can’t do squat with those buyer leads anyhow, except refer them out to a friend at another brokerage. You certainly don’t want to bring that buyer lead to your own listing, since you’re definitely in the dual agency zone then. But sending that buyer lead to someone on your Team (see above) no longer makes much sense, and you definitely don’t want to talk to that buyer about your other listings.
In fact, the only thing that sorta makes sense is to buy placement on listings that belong to other brokerages since you can represent that buyer on that home he just inquired about. Maybe listing agents from different companies end up entering into a partnership agreeing to automatically route all leads on their own listings to each other — like, make sure all of the phone numbers and contact info on your Zillow listings are of Your Pal’s and vice versa.
Oh, and IDX ought to be fun — you’re going to want to have your IDX feed filter out all of the listings that are with your broker.
No Conclusions Yet
Because the oral arguments have not yet been heard, none of us know yet which direction this is going to go. I think Coldwell Banker and CAR and those against the Court of Appeal’s ruling have pretty strong arguments (legal geekery; if you’re interested, contact me for a separate, private convo) but then again, Horiike’s people and NAEBA and others also have decent arguments to make as well.
Plus, I want to think about this some more. There are at least a few related-yet-separate issues to be considered here. I’ll post about those in future days and weeks.
For now, since most of you will read this on Monday… Ain’t this a wonderful start to your work week? Fear, loathing and paranoia are just such bracing wake-me-ups with your morning coffee, no?
As always, your comments and thoughts are welcome.