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Broker Liability Litigation for Civil and Enforcement Lawyers

The level of anti-consumer and anti-competitive residential real estate practices is at an all-time high. Real estate licensing laws that got their start in consumer protection have mutated into laws that protect the industry that they were designed to regulate. Abound are laws that legalize previously illegal conduct, laws that prevent consumer class action lawsuits, and laws that seem to encourage deceptive and unfair business practices. These so-called licensing laws have provided Realtors with a false sense of immunity from lawsuits and may have created a trail of liability that exceeds those protections.

As an example, a remedy often available in undisclosed dual agency cases (common law fraud) is a rescission. Imagine the potential a rescission remedy might have for a foreclosure defense lawyer whose client was a victim of the undisclosed dual agency. If the lawyer could prove that the client was subjected to the undisclosed dual agency, the liability could be shifted away from the client and on to the real estate brokerage that sold him the house.  By third partying the brokerage into the case, the lawyer could provide his client with a treasure trove of client remedies.

All lawyers who have a cause of action against a real estate brokerage should first do a fiduciary analysis to determine if advantages exist such as the extension of the statute of limitations, burden of proof shifting, fee forfeiture, rescission, criminal prosecution or punitive damages.

1. 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.

2. Lawsuits and Causes of Action that Need to be Litigated

Affiliated Business Arrangements
  • Real estate brokers and firms that abuse supervisory duties and their duties to clients in order to steer clients to affiliated business arrangements. Brokers often provide incentives to managers based upon the capture rate of the agents they supervise.
Dual Agency
  • Real estate brokers and firms that abuse supervisory duties in order to increase the frequency of dual agency transactions.
  • Real estate brokers that increase client exposure to dual agency transactions through the use of market manipulations such as:
    • Pocket Listings – brokers abuse their position of trust and reliance and persuade clients to limit market exposure of property only to in-house buyers. This severely limits market demand and assures broker will collect excess in commissions.
    • Financial incentives to in-house agents or disincentives to cooperating brokerage firms
    • Intentionally pulling listing data from free redistributors of data in order to reduce market exposure of listings.
    • Claiming copyrights on client data in order to limit market exposure of listings to the company website.

Designated Agency

  • Broker “designates” an already conflicted agent as a client representative (i.e., a manager).
  • Broker improperly supervises “designated agents” because the broker is a dual agent and conflicted.
  • Presumption of undisclosed dual agency is not overcome by designated agency forms. Although “disclosure” of risks may be statutorily satisfied, conduct inconsistent with fiduciary duties is not exempted and presumptions of breach of duty still exist in a dual agency situation (brokers are still dual agents).

Interference with Fiduciary Relationships – Conspiracy to Commit Bribery

  • Listing brokers and agents representing sellers routinely offer secret compensation (often termed “bonuses”) to buyer brokers without the buyer’s knowledge or informed consent. The Realtor Associations in each region that own MLS’s typically facilitate this practice by providing hidden fields that only agents can see.
  • Commercial bribery statutes typically define the term to include corruptly offers, gives, or agrees to give, directly or indirectly, any benefit, consideration, compensation, or reward to any fiduciary of a person with the intent to influence the person’s performance of duties as a fiduciary in relation to the person’s employer’s or principal’s business.
Self-dealing and Interference with Agency Relationships
  • Real estate brokers who meet in private (at Realtor Association forms committees) and alter standard form purchase agreements in such a way that causes an increase in fees for their affiliated business arrangements.
  • Real estate broker groups like the MLS and Realtor Associations that facilitate commission fixing through limitations on data.
  • Brokers who avoid negotiating their fee by telling buyer clients that they work for free because the seller is paying their fee.