September 2012 Legal Case Studies


September 2012 | D.R. Legal News

Legal Case Studies

Managing broker is not personally liable for misconduct of a sales agent. Sandler v. Sanchez, 142 Cal.Rptr.3d 771 (June 18, 2012). In this case from California, a sales agent of a real estate brokerage corporation misled and defrauded investors in a condominium conversion project. The sales agent raised $600,000 in contributions from investors but did not disclose that this amount of money was not enough to complete the conversion and did not disclose that there was already a first mortgage of $2.75 million on the property. The sales agent used $300,000 of the $600,000 contribution for his own purposes and when the first mortgagee foreclosed on the property, this left the investors without any equity or property to convert to condominiums. The investors sued the sales person as well as the brokerage company and the Designated Agent (California’s equivalent to Illinois’ “Managing Broker” of the brokerage company). At issue in this case was whether the managing broker of the brokerage company was personally liable for the salesperson’s misconduct. The plaintiffs proceeded against the designated agent, individually, under two theories:  (1) Under the statutory language governing real estate brokers which stated that a managing broker or brokerage company was “responsible for the supervision and control of the activities conducted on behalf of the corporation by its officers and employees as necessary to secure full compliance with the provisions of this division, including supervision of salespersons licensed to the corporation and the performance of acts for which a real estate license is required,” and (2) Common law theory of agency which states that a principal is liable for acts of the agents. The court held in favor of the Designated Agent under both theories and stated that the Designated Agent (i.e. Managing Broker) was not personally liable for acts of a salesperson. The court held that the statutory language regarding a Designated Agent’s duties are duties that the Designated Agent owes to the brokerage company and is not a duty that is owed to third parties. Therefore, the plaintiffs could not use the statute as a basis for suing the managing broker. Additionally, under the common law theory that a principal (in this case the managing broker) is responsible for the activities of his agent (in this case the salesperson) the court found in favor of the Designated Agent. The court stated that generally a company such as the brokerage could be held vicariously liable for the acts of their agents committed within the scope of their agency or employment, but absent special circumstances, there is no piercing the corporate veil which would hold other agents or the Designated Agent (i.e. managing broker) of the corporation personally liable for act of others. Therefore, while the brokerage company itself may be responsible for the agent’s activities under common law, the Designated Agent of the brokerage company was not personally liable. Although there is no way to be certain, if this case were under Illinois law, a similar result would is likely. Under California law the designated broker is equivalent to “Managing Broker” under Illinois Real Estate License Act. As in California, the Illinois statute regarding the duties of a Managing Broker appear to be duties that the Managing Broker owes to the corporation and the sponsoring broker, rather than a duty that is owed to third party buyers and sellers. Therefore, an Illinois court might agree with this case if the same circumstances arose.

Severe depression is not in itself enough to establish that a person lacked capacity to enter into a real estate contract. Cullinane v. Estate of Holly Vene (unpublished case from Court of Appeals of Michigan), 2012 WL 2362 441 (June 21, 2012). In this case, the Seller of a vacation residence located in Michigan was diagnosed as suffering from anxiety and extreme depression that was brought about and/or exacerbated by external factors such as the failure of both her and her husband’s businesses and a previous outstanding judgment against the Seller for $3.8 million which appeared to be far beyond the capacity for the Seller to pay, and other financial and family problems. The Seller entered into a contract to sell her vacation home. However, prior to closing the Seller unfortunately committed suicide. The beneficiaries of the estate of the deceased Seller tried to undo the sales contract, which had not yet closed, based upon her death and based upon the fact that they did not believe she had the mental capacity to enter into a contract. The court held that even though a seller might die after signing a contract, it can still bind the estate of that individual and the Buyers can sue for specific performance. Additionally, the court held that emotional disorders of a person alone will not establish lack of mental capacity to contract. In order to void a contract on the basis of a party’s mental capacity, it must be shown not only that the contracting party “was of unsound mind or insane” when a contract was made, “but that the unsoundness or insanity was of such a character that the person had no reasonable perception of the nature or terms of the contract.”  In this case, the facts showed that the Seller negotiated terms of the contract sale and negotiated with her creditors in order to try to pay down some of the debt owed through the use of the sale proceeds. This demonstrated to the court that the Seller was not so mentally impaired as to establish a lack of mental capacity to contract.

Washington Supreme Court says that real estate licensees could be liable to a buyer, if the licensee fails to advise the buyer to seek expert advice. Further, Washington State’s seller’s disclosure form does not bar the buyer from seeking rescission of a contract based on common law misrepresentation. Jackowski v. Vorchelt, 278 P.3d 1100 (June 14, 2012). Buyer purchased a waterfront home located on sloped ground. The Buyers entered into a contract on May 13, 2004. The Sellers gave the required disclosure form to the Buyers, referred to as “Form 17.”  On this form, the Sellers responded “no” to the following questions:  (1) has there been any settling, slippage, or sliding of the property or its improvements?  (2) Does the property contain fill material?  (3) Is there any material damage to the property from…landslides?  (4) Are there any other existing material defects about the property that the prospective buyer should know about?  A county-ordered revegetation project inspection was held. After this inspection, the Sellers amended Form 17. The Sellers’ amended Form referred to a County Department of Community Development letter dated June 11, 2003. The letter granted a permit for a block wall to be installed as part of the revegetation project, and it indicated that the property was located within a landslide hazard area. The letter also referred to a geotechnical report by the geologist in 2002 when the Sellers were contemplating an addition to the house. The report said that the slope of the property was unstable within the first 25 feet of the shoreline. Prior to this new sale, the Buyers’ broker recommended a standard home inspection; however, the broker did not recommend any further types of inspections. The sale closed on June 30, 2004. In 2006, a landslide occurred that caused damage to the house. The Buyers had to vacate the house immediately. The Buyers claimed that it was at this time that they learned from neighbors that the Sellers had concealed the fact that the addition on the north side of the house was constructed on uncompacted fill material. The Buyers also claimed that they learned after the sale had closed that the Sellers had concealed cracks in the concrete basement floor by covering the cracks with a carpet. The Buyers then sued the Sellers for fraud, fraudulent concealment, negligent misrepresentation, and breach of contract. The Buyers also sued the brokers for fraud or negligent misrepresentation in violation of the statutory duty of real estate licensees that requires a buyer’s agent to “advise the buyer to seek expert advice on matters relating to the transaction that are beyond the agent’s expertise.”  RCW 18.86.050(1)(c). The real estate licensees argued that this duty to advise the buyer to seek expert advice was intended to be interpreted as a duty to refer a client to an attorney should legal questions arise in the transaction, or refer the client to an accountant should tax questions arise, or advise the Buyer to find a mortgage advisor should there be questions involving lending, but that the statutory language should not be construed as a duty to advise a client to seek additional inspections. The court, however, disagreed with the licensees’ argument. The court said, “in our view, informing a party to seek expert advice from a geotechnical expert could fall within the ambit of this statute.”  Therefore, the court ruled that it was an error by the trial court to award summary judgment to the licensees on that issue, and instead, the court remanded the case with the instruction that the statutory duty could be read more broadly than what the trial court did. The other significant ruling from this case was that even though the seller disclosure document that is required by statute permits buyers to rescind an offer within three days of receiving the disclosure statement, this did not prevent the Buyers from seeking rescission of the contract under common law based on the Buyers discovery of negligent or intentional misrepresentations at a later date.

NAR wins trademark violation case. This information comes from the National Association of Realtors® Legal Case Summaries. In the unpublished opinion of National Association of Realtors® v. Fothergill coming out of the Federal District Court for the Northern District of Illinois (June 11, 2012), NAR was awarded the damages for trademark violations. The defendant, who was alleged to have violated NAR’s trademark rights, was, in fact, a member of the National Association of Realtors® (NAR). As a member of NAR a person has certain rights, limitations, and obligations in how the trademarks owned by NAR are used. The defendant registered to web domain names “” and “”  The website allowed a consumer to pay a flat fee and in return their listing would appear on numerous websites and on “”  The World Intellectual Property Organization ruled that the defendant registered the domain names in bad faith and ordered that those domain names be turned over to NAR. However, the broker continued to violate the trademark. The defendant offered consumers to place for sale by owner properties on for a $99 fee. This was in violation of NAR rules. NAR sued the broker in 2011 based on the theories of false designation of origin, false advertisement, trademark infringement, and cyber squatting. The defendant never responded to the suit and the court granted a preliminary injunction in favor of NAR that prohibited the defendant from infringing websites or otherwise implying his website had a connection with NAR through the use of the Realtor® trademarks. Ultimately the courts awarded $500,000 in damages along with NAR’s attorneys’ fees and the permanent injunction was entered against the defendant. Under the injunction, the broker defendant is not allowed to:  (1) using, registered or maintaining any domain names containing the Realtor® marks, including the previously URLs; (2) using any names, symbols, or designations that incorporate or are similar to the Realtor’s® marks or any other NAR trademark; (3) using any names, designations, or similar names and designations to the Realtor® marks used in code or metatags to direct internet search engines to respond to searches using the Realtor® marks or any other NAR mark; (4) otherwise infringing the Realtor® marks; (5) making representations or otherwise implying that its goods are authorized or connected to NAR; (6) any action which is likely to cause confusion about the broker is in connection with NAR’s domain names; and (7) making any representation that for sale by owner properties can be listed on 