Fiduciary Duty Is Not Expendable Like a Hat

A Tennessee broker learned the hard way that you can't just easily take off your "broker" hat and put on your "buyer" hat.

September 17, 2014

At the height of the economic downturn a few years ago, a Tennessee broker talked her client into selling her troubled properties for $10 to a firm the broker owned. Today, the broker is barred from practicing real estate, her license permanently revoked. The broker’s wrongdoing? She thought she could take her broker hat off and replace it with her buyer hat whenever she wanted. A Tennessee appellate court said she couldn’t do that.

In 2007, broker Donna Bobo represented Shalah Smith in Smith’s $60,000 purchase of a string of rental properties. Soon thereafter, Smith faced foreclosure on the properties and came to Bobo for guidance. Bobo advised Smith of three options: allow the foreclosure, enter a short sale, or, in order to avoid impacting her credit record, quitclaim the property to Global Investment Services, a limited liability partnership that Bobo owned, for $10.

Smith chose the last option, and signed the properties over to Global. In their written agreement, Global agreed to collect rent, maintain the property, and pay the mortgages on time. If it failed to do so, Global would convey the properties back to Smith within 30 to 60 days. The mortgages and related liabilities remained in Smith’s name.

Global failed to pay the mortgages in a timely fashion, and Smith received notice that the properties were in default. Once again facing foreclosure proceedings, Smith demanded that Bobo return the properties, per their agreement. But Bobo refused, and Smith filed a complaint with the Tennessee Real Estate Commission. A Tennessee broker learned the hard way that you can't just easily switch roles between buyer and broker. A Tennessee broker learned the hard way that you can't just easily switch roles between buyer and broker.

In proceedings, Bobo argued that, although she was both a real estate broker and a property manager for Smith at various times, her actions were not subject to the state’s Real Estate Broker Act. That’s because, when Smith quitclaimed the properties to Bobo’s company, Bobo was acting as a purchaser, not as Smith’s real estate representative.

The commission rejected this argument, saying “equity will not tolerate such a deal,” and permanently revoked Bobo’s real estate license. The commission found Bobo had made false representations to her client, induced her client to enter into an unconscionable contract, and manipulated her client for her own gain.

A relationship of trust between broker and client, the court said in its ruling, “once assumed, continues until discharged either by operation of law, by order of a tribunal, or pursuant to a valid agreement of the parties.” In other words, brokers cannot avoid their fiduciary duties simply by claiming to have switched from the broker hat to the purchaser hat.

The Tennessee Court of Appeals affirmed the decision.

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