Broker Breached Fiduciary Duty With Property Purchase

Below are summaries of recent court cases affecting the real estate industry.

May 1, 2004

A federal bankruptcy court has ruled that a real estate broker breached her fiduciary duty to a buyer when she purchased a property her client had expressed an interest in buying.

Dipak Bhayani contacted Sue Sood, a real estate broker, when he saw a For Sale sign on his next-door neighbor’s property. Sood arranged a showing, after which Bhayani commented that he thought the listing price was too high.

However, Bhayani then had conversations with a developer that was interested in building a fast-food restaurant on the property occupied by Bhayani’s and his neighbor’s homes. Bhayani told the developer he was attempting to buy the next-door property.

A couple of days after the showing, Sood entered into an agreement to purchase the property. She did not disclose this fact to Bhayani when he called two days later seeking a “seller’s addendum” form, which Sood faxed to Bhayani.

Next, Bhayani left Sood a message stating that he wanted to purchase the property and signed a letter of intent with the fast-food chain to sell both properties. Sood never responded to the Bhayani's message, and Bhayani subsequently learned that Sood had already purchased the property. When the restaurant chain found out that Bhayani did not own the next-door property, it ended its dealings with him.

Bhayani filed for a Chapter 13 bankruptcy. As part of the bankruptcy proceedings, Bhayani brought an action against Sood, alleging that she had violated various sections of the Illinois license law by purchasing property that her client was interested in buying.

The U.S. Bankruptcy Court, Northern District of Illinois, Eastern Division, awarded Bhayani $288,000 in damages for a breach of fiduciary duty. The court found sufficient evidence that Bhayani had retained Sood to serve as his agent during the purchase of the property. Under Illinois law, a broker is deemed to be the agent of an interested buyer unless there is a written agreement between the parties stating that there is no agency relationship or the broker has been hired to only perform “ministerial acts.” There was no written agreement between the parties, but the court rejected Sood’s argument that she was hired only to perform ministerial acts because she had visited the property with Bhayani and faxed him a purchase-contract addendum.

The court found that Sood put her own self-interest above that of her client by purchasing the property and so had breached her fiduciary duty to Bhayani. Both Sood's self-dealing and her failure to disclose to Bhayani that she had made an offer on the property demonstrated her fiduciary duty breach, said the court.

R.I. Court Rules on Disclosure Obligations

In an ongoing case about disclosure obligations of real estate practitioners, Rhode Island's highest court has set forth its guidelines for determining when a real estate licensee may be liable for nondisclosure of a property defect.

Thomas Stebbins retained Miriam Scott, a buyer’s representative, to help him find a summer/retirement home in Little Compton, R.I. Stebbins purchased a riverfront property not far from the Atlantic Ocean. Scott had owned this property previously, having sold it to the seller.

The sales contract stated that the property was being sold “as is.” Prior to closing, Stebbins viewed the property personally and had three professional inspections performed on the property.

Upon taking possession of the property, however, Stebbins learned from the seller’s handyman that the seller had removed foliage from the property, which had increased the rate of soil erosion caused by the river. As a result, the property had experienced 10 feet of soil erosion in the past 10 years. Stebbins filed a multicount lawsuit against Scott; the seller; and Deborah Kubik of Country & Coastal Property, who represented the seller. The suit alleged violations of the state’s property condition disclosure law, fraud, breach of contract, negligence, and deceptive trade practices.

The trial court entered judgment in favor of Scott and the seller, and Stebbins appealed. The Supreme Court of Rhode Island reversed the trial court and sent the case back to the trial court to determine whether the state's property condition disclosure statute required the disclosure of the alleged erosion problem. On remand, the trial court concluded that the state's property condition disclosure statute did not apply to real estate licensees, and so the court entered judgment in favor of both Scott and Kubik. Stebbins appealed again.

The Supreme Court of Rhode Island affirmed the rulings of the trial court but again remanded the case to the trial court for further proceedings. In its ruling, the supreme court agreed with the trial court that the state’s property condition disclosure statute provided for damages of only $100 for each violation by “seller and/or his or her agent.” Therefore, the high court ruled that it was inappropriate for Stebbins to maintain a private suit for other damages against Scott and Kubik.

However, the court ruled that the trial court also should have considered Stebbins' allegations against the real estate professionals for negligence, negligent omission, and breach of fiduciary duty. The supreme court found that while the property condition disclosure law protected real estate professionals from lawsuits if they did not have knowledge of the condition of a property, it did not protect them from making an inaccurate disclosure or from failing to disclose facts when they had knowledge that would affect the buyer’s decision.

Thus, the high court stated that the trial court needed to consider whether Kubik or Scott failed to make such disclosures to Stebbins. If such a duty breach occurred, then the real estate professionals could be liable to Stebbins.

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