'For Sale' Sign on Wrong Property Could Make Company Liable

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

September 1, 2005

A Louisiana appeals court has ruled that a real estate brokerage may be liable for a “For Sale” sign placed on the wrong property by one of its salespeople if that salesperson is an employee of the company and not an independent contractor.

In 1999, Manuel A. Lopez listed lots 54 and 55 in a subdivision for sale with Jerry Carley, a salesperson with Century 21 Millennium. Carley mistakenly placed the “For Sale” sign on lots 51 and 52, which were owned by John Gordon. In November 2001, Gunmar and Tamala Agersten purchased Lopez's lots, thinking they were buying Gordon’s lots.

Following the closing, the Agerstens had some trees removed from the property. A neighbor who saw the trees being removed called Gordon, who visited his lots and saw the “For Sale” sign still on his property. He learned that four trees were removed from his property. Gordon called Century 21 and told the brokerage owner what happened. After viewing the property, the owner of the brokerage offered to replace the trees.

Gordon filed a lawsuit against the brokerage and its owner, alleging that the company was negligent for placing the “For Sale” sign on the wrong property. The trial court granted judgment in favor of Century 21, and Gordon appealed.

The Court of Appeal of Louisiana, Third Circuit, reversed the ruling of the trial court. The court ruled that there was ample evidence that Carley (who died before the trial) had negligently placed the sign on Gordon’s property. However, the court stated that the brokerage company’s liability for Carley’s action depended upon whether Carley was an employee of the company or an independent contractor. Louisiana statutes say that the brokerage would only be liable if Carley was an employee. Louisiana courts have ruled that even though real estate brokerages commonly characterize salespeople as independent contractors, the actual relationship between the parties needs to be examined by the court. Thus, the court ruled that the trial court had improperly dismissed this lawsuit and sent it back to the trial court for a determination on whether Carley was an employee or independent contractor of Century 21.

Misrepresentation Claims Prevent Debt Discharge in Bankruptcy

A federal bankruptcy court has discharged claims for debts against a real estate salesperson made by a former client despite misrepresentations made by the practitioner.

Ally Saad, a licensed real estate professional, found out a convent was listed for sale with real estate licensee Jeff LeBlanc. Saad contacted some people he thought might be interested in purchasing the convent, including Mounir Abdel-Hak, who owned a jewelry store across the street from the convent. After visiting the convent, Abdel-Hak submitted an offer prepared by Saad that was $900 above list price and contingent upon obtaining financing for the purchase.

After the offer was submitted, Abdel-Hak didn't hear back from Saad despite his repeated calls, Eventually, Abdel-Hak called LeBlanc directly. LeBlanc told him that the convent had received other offers but would not discuss those offers with him. Abdel-Hak learned that the convent had accepted an offer for $10,000 more than the listing price and with no contingencies from Jason Saad. Jason Saad, who was allegedly not related to the Ally Saad but who worked as a real estate licensee in the same office, was represented at the closing by Ally Saad.

Ally Saad went on to file for Chapter 7 bankruptcy. Under Chapter 7 of the federal Bankruptcy Code, all of the debtor's nonexempt assets (each state provides that some assets are exempt from the federal Bankruptcy Code) are liquidated by the trustee and distributed to creditors. Any remaining debt is discharged by the bankruptcy court. However, certain debts such as unpaid taxes and student loans are generally considered nondischarable by the court and must be repaid by the debtor.

Abdel-Hak filed a complaint with the bankruptcy court, arguing that Saad owed him nondischargeable damages for his actions in the sale of the convent. Federal bankruptcy law exempts a debt from discharge if the creditor can show that the debtor obtained money through known misrepresentation that was relied on by the creditor and created a loss to that creditor. Abel-Hak argued that Saad had concealed that he was representing two buyers. Michigan law allows an agent to represent two parties provided the dual agency is disclosed. While the U.S. Bankruptcy Court for the Eastern District of Michigan agreed that Saad had failed to disclose the dual agency and intended to deceive his client, the court ruled that the practitioner’s bad reputation was such that the client could not claim to have relied on his representations. Therefore, the court found that the law did not support the debt as nondischargeable.

Next, the court considered whether the salesperson’s violation of his fiduciary obligations created a nondischargeable debt. The bankruptcy code prevents discharge of a debt that is obtained from “fraud or defalcation while acting in a fiduciary capacity… .” Since Michigan law holds that a real estate professional has a fiduciary relationship with a client, Abdel-Hak argued that this section of the code prevented the discharge of the debt.

The court disagreed, citing relevant case law that this section of the bankruptcy code only covered “express or technical trusts and does not extend to implied trusts.” An express trust is a trust that the parties set up and call a trust. An implied trust is when a court finds that a trust exists as defined by law, e.g., an attorney holding client funds. So, for example, the law did not apply to an attorney/client relationship without evidence of the attorney holding the client’s funds. While Saad may have violated his fiduciary and contractual obligations under Michigan law, said the court, Abdel-Hak’s arguments did not support the nondischargeability requirement for the federal bankruptcy code. Thus, his complaint was dismissed.

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