Daily Development for Friday, January 14, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

BROKERS; DUTY TO DISCLOSE; "DUTY OF FAIRNESS:" Buyer's broker has no duty to seller to disclose materially adverse financial information affecting the buyer's ability to perform, even when Real Estate Commission imposes this responsibility as a professional duty.

Lombardo v. Albu, 1999 WL 527553 (Ariz. App. 7/13/99)

In the end, buyers were not able to get a loan or perform on the contract, and seller lost the house to foreclosure. Nevertheless, the court here affirms the trial court granted summary judgment for the buyer's brokers and the Arizona Court of Appels affirmed (21), with a dissent claiming that the majority was conferring on Arizona brokers a "license to deal unfairly" with the public.

The regulations of the Arizona Real Estate Commissioner provided that a licensee not only owes a fiduciary duty to its client, but "shall also deal fairly with all other parties to a transaction." The regulations go on to provide specifically a duty to disclose adverse financial information:

  "Each licensee participating in a real estate transaction shall  disclose to all other parties to the transaction any information  which the licensee possesses which materially and adversely  affects the consideration to be paid by any party to the  transaction, including, but not limited to, the following matters: . .  .

  . . . Any information that the buyer or lessee is, or may be, unable  to perform due to insolvency or otherwise."

Despite some hand wringing by the court about how difficult it is for a broker to know exactly what is relevant information that would need to be disclosed, there really seems to be no dispute about whether the information that was not disclosed in this case fit within the rule. The court assumes that it did; but the court views that fact as irrelevant to the outcome of the case. The court concludes that the real estate regulations do not create a duty that can be enforced through tort remedies by parties other than the Commissioner. As to whether the rules at least are relevant in establishing a standard of care, the court says this:

  "The Lombardos contend that the statute and regulations should  define the standard of care. This argument confuses the existence  of a duty with the standard of care. Duty and standard of care are  distinct and not to be confused."

Although the court concedes that a broker in Arizona does owe a duty of fairness to a nonparty, it nevertheless, without explaining why, fails to consider whether the regulations would be relevant in establishing the standard of care for this admitted duty of fairness. This omission is particularly surprising because the Commissioner specifically identifies the disclosure duty as part of the identified duty of fairness.

The court goes on to dissaciate itself with dicta from another panel of the same court issued only two months prior, in Aranki v. RKP Investments, Inc., 979 P. 2d 534 (Ariz. App 1999), the DIRT DD for December 20, 1999. In Aranki, the court held that the broker for the seller was not liable to the buyer for identifying defects, but suggested that the seller's broker would have a duty of fairness to disclose those defects had it known of them and knew that the buyer did not know of them.

The court concludes that there is no duty to disclose the financial information here because the broker owes a duty of loyalty to the broker's own clients which, in the court's view, would be compromised by such disclosure. The court notes that the buyers themselves had to duty to disclose the problem with their finances, and appears to conclude that the duty of loyalty requires the buyer's broker to maintain the confidence.

The court does admit that some information must be disclosed as part of the duty of fairness. It concedes that information not otherwise available to the other party that is "crucial to the transaction" ought to be disclosable. But the court does not see this case as falling into that exception, since the seller had a number of options to protect itself from problems with the buyer's economic problems, from requiring a preapproval from a loan company to running a credit check.

Comment 1: In the abstract, the editor is sympathetic with the court's concern about a broker's duty to protect the client's privacy, and might agree that readily discoverable economic information need not be disclosed to the other side where not requested. But we are not dealing with an unresolved issue here. The Arizona Real Estate Commissioner has concluded that the broker does have such a duty. The court's analysis here concludes that such disclosure would in fact breach a duty to the client. This is an absolutely untenable situation. The broker is subject to discipline from the Commissioner if it fails to disclose, and subject to a potential lawsuit for breach of loyalty from the client if it does disclose.

Comment 2: The fundamental problem with the court's opinion is that it wants to pretend that the Real Estate Commissioner either doesn't exist at all, or that, if it does, that it has no official authority to define standards of conduct that are relevant in civil actions for brokers. There certainly contexts in which standards set by an administrative body are not relevant to civil liability, but this does not appear to be one of those circumstances. The standard deals directly with the nature of the broker's duty to the parties to a transaction. That has become the public policy of the state, and the court has no business making its own determination.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

Items in the Daily Development section generally are extracted from the Quarterly Report on Developments in Real Estate Law, published by the ABA Section on Real Property, Probate & Trust Law. Subscriptions to the Quarterly Report are available to Section members only. The cost is nominal. For the last six years, these Reports have been collated, updated, indexed and bound into an Annual Survey of Developments in Real Estate Law, volumes 1‑6, published by the ABA Press. The Annual Survey volumes are available for sale to the public. For the Report or the Survey, contact Maria Tabor at the ABA. (312) 988 5590 or mtabor@staff.abanet.org

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