Fiduciary Law – Summary of Basic Principles
Note: We have not provided specific case law on the below principles because this law largely resides in state common law and is voluminous and varies state-by-state. However, a great starting point for research in this area is the Restatement of Agency 2d or 3rd.
Fiduciary Analysis – Lawyers Start Your Broker Liability Cases Here
In the residential real estate, the fiduciary law is perhaps the most misunderstood, underutilized and possibly the most potent source of liability. Below we will be discussing the importance of fiduciary legal analysis for attorneys who are considering or have actions against real estate brokers. Whether your real estate case involves mortgage foreclosure defense, self-dealing, fraud, anti-competitive conduct or licensing violations, all lawyers (including regulatory lawyers) should consider fiduciary laws before bringing a case. Realtors are usually considered fiduciaries and that makes them particularly vulnerable to many kinds of liability.
Of all the fiduciary duties, a breach of the duty of loyalty carries the most severe consequences for fiduciaries and provides the best remedies to clients. In breach of loyalty cases, it is often unnecessary to prove damages and automatic fee forfeiture often applies. A serious breach of loyalty case is often equated to criminal conduct. For example, in the fiduciary world, self-dealing is considered to be theft by swindle and commands additional damages, including punitive damages. The undisclosed dual agency is fraud. In addition, for this type of “criminal” misconduct, the standard of proof is far easier to meet. Once you prove a prima facie case for self-dealing or undisclosed dual agency, the burden of proof often shifts to the defendant. Lawyers should also consider the longer statute of limitations and burden shifting precedent that often accompany these types of cases.
Finally, there are seven other fiduciary duties that will provide immense advantages to almost any broker liability case. Those should be analyzed as well.
Two Important Types of Misconduct Involving Duty of Loyalty
Much brokerage misconduct and market manipulation revolve around self-dealing. The brokerage industry has become complacent about routinely engaging in self-dealing and few lawyers have exploited this legal theory in favor of their consumer clients. For example, although it may be legal for a non-fiduciary to financially benefit from an affiliated business arrangement, it likely constitutes self-dealing for a fiduciary to exploit their clients’ trust and reliance to refer clients to conflict-ridden services that are better left impartial. Most large brokerage firms routinely steer their clients into affiliated business placing their own interests ahead of their clients. Although federally mandated disclosures may exonerate brokers from RESPA violations, those disclosures do not pass muster for the requisite disclosures and informed consent necessary in fiduciary law.
Another breach of loyalty involves many real estate brokers’ insatiable addiction to collecting double commissions. In order to collect both the listing broker’s and buyer broker’s fee, brokers routinely engage in conduct that increases the client’s exposure to the dual agency and the immense risks associated with that impossible relationship. Real estate licensing laws are designed to abrogate the common law of agency and exonerate brokers from liability for most common law dual agency disclosure infractions. However, once brokers violate the dual agency licensing laws (and most of them do), they lose the licensing law protections and their conduct is once again governed by common law. This latter situation has been untouched by lawyers in the representation of their clients.
In examining breaches of loyalty, keep in mind that more than one loyalty breach may be involved. For example, if a brokerage firm engages in conduct that increases the frequency of dual agency, the liability may exist for the undisclosed dual agency as well as self-dealing for intentionally manipulating the clients’ risk in order to profit from a double commission. The duties to provide an accounting, act with due diligence and with sufficient expertise are just a few of the other, less severe violations that are also actionable.