Thomas Pyper is partner at Pyper & Nordstrom LLC, in Dayton, Ohio. Contact him at firstname.lastname@example.org.
The Fallout From Fraud
When an agent undertakes rogue activities, could a broker be deemed a responsible party?
November 2, 2014
It’s a concern all brokers have. An agent gets in trouble while acting outside the scope of his or her duties, and the broker gets dragged into a lawsuit as a responsible party.
A recent decision by the Ohio Supreme Court addressed this issue in a case involving a fraud allegation against an agent, who maintained a property management company and a remodeling operation without the broker’s knowledge.
In a situation like this, it’s critical that the broker be able to say whether or not he knew about the agent’s actions, because if the broker didn’t and couldn’t know what was going on, then he at least has a defensible position that he should not share in the liability for the agent’s actions. But what if the broker is precluded from even arguing that he had no knowledge of what was going on?
That’s exactly the situation brokers in Ohio were facing when a state appellate court ruled last year that a broker, by having participated in the agent’s commissions on the transaction, wasn’t allowed to make the case to a jury that he didn’t know about what was happening and that the agent was acting outside the scope of her duties. The Ohio Supreme Court in August reversed the appellate court ruling, and now the liability issue is once again consistent with the law in other states.
NAR and the Ohio Association of REALTORS® played key roles in the victory. NAR filed a friend-of-the-court brief that made it clear the Ohio appellate court decision was restrictive to a degree not seen in neighboring states and possibly the rest of the country. An OAR analysis showed how deeply at odds the decision was with related laws and decisions in the state.
At the heart of the issue is the broker’s participation in the commissions. The appellate court ruling made the broker sharing in the commissions tantamount to having responsibility over the agent’s actions, regardless of whether the actions were within the agent’s scope of duties. But the Supreme Court—rightly—made it clear that participation in commissions is not in and of itself sufficient to make the broker liable for actions he doesn’t even know about and shouldn’t necessarily even know about, since the actions weren’t within the agent’s duties.
In this case, the agent helped a client buy several properties for rentals and, as part of their arrangement, the agent also agreed to use her remodeling operation to fix up the properties and her management operations to oversee the rentals. After the properties were acquired, the agent did few if any repairs and otherwise failed to perform as promised. When the properties generated no income, the owner sued the agent for fraud and included the broker for failing to exercise oversight of the agent. But the broker had no knowledge of the agent’s rogue activities. In fact, the owner’s attorney never even made a claim to the contrary, and there was some evidence that the agent tried to conceal her actions from the broker.
While the decision by the Ohio Supreme Court affects only cases in Ohio, had the appellate court ruling stood, the implications could have been much broader. Simply by taking up the case, the Ohio Supreme Court was signaling the importance of the issue. As similar liability claims are made elsewhere, it’s likely the courts in other states would consider the legal rationale applied by the appellate court, and that legal reasoning could find its way into other decisions.
Ohio brokers not involved in the case have said, had the ruling stood, they would have left the business. Why? Because the ruling opened the possibility of potentially ruinous legal exposure and adverse publicity from actions taken independently by their agents. To make matters worse, they would have no ability to show that an agent wasn’t acting on their behalf. No one can run a business with those sorts of limitations. But with help from OAR and NAR, the Supreme Court reversed this troubling ruling.