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April 2013

California Real Estate Broker Not Liable for Tortious Acts of Its Agents

California Business and Professions Code §10159.2, titled "Securing full compliance with provisions; Responsibility of officer," states that "the officer designated by a corporate broker licensee pursuant to Section 10211 shall be 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 the supervision of salespersons licensed to the corporation in the performance of acts for which a real estate license is required." In plain English, this statute means that a licensed real estate broker is charged with supervising and controlling the acts of its agents.

However, last year the California Court of Appeal, Second District, in Sandler v. Sanchez held that, despite this mandated supervision and control, the designated broker may not (without more incriminating facts of a nature not disclosed by the Court) be held liable for the tortious acts of its agents. The Sandler facts were as follows: The lender hires a real estate agent to assist in locating safe and secure investment for $600,000 of lender's hard earned money. Real estate agent introduces lender to condo conversion project where the lender's second deed of trust would be behind a bank's $2.75 million first deed of trust. Real estate agent has investment interest in condo project which may or may not have been disclosed to the lender. The project craters and the lender sues the real estate agent, the real estate broker and the condo project for (1) bad real estate investment advice, specifically, that the $600K loan proceeds would not have been sufficient to complete the conversion of the apartments into condominiums, that if the project failed, the lender would be behind the holder of the first deed of trust which, if foreclosed upon  by the bank, would wipe out the lender's security interest in the project and (2) the real estate agent's diversion of $300,000 of the loan proceeds for his personal use. By the time the lender gets to Court, the foreclosure occurs; the lender is suddenly without collateral; and the only solvent pocket left to sue is the agent's supervising real estate broker.

Under the common law agency and principal law and the law of vicarious liability, the misdeeds of a downstream agent are typically imputed upstream to the party who "supervises and controls" the actions of the agent. Pursuant to the above B. & P. Code statute, that party is the real estate agent's supervising broker. Despite these longstanding principles of law, the Court in Sandler held against the lender and in favor of the broker on the grounds that any duties owed by the broker  to "supervise and control" the agent ran to the corporation and not to third parties or, in other words, the public.

Given that the primary rationale for any state's real estate brokerage licensing statute is to protect the public from errant non-licensees, it seems odd that the "buck" (in the form of liability for the lender's losses) does not pass to the broker who is (1) charged by statute with the supervision and control of the allegedly tortious agent, (2) presumably the recipient of compensation for his or her role as broker and (3) in a position to spread the loss through insurance. The Sandler decision will no doubt be warmly embraced by the California Association of Realtors.

Real Estate

Real Estate