Daily Development for Monday, July 26, 2004
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin Kansas City, Missouri dirt@umkc.edu

Today’s DD was contributed by Roger Bernhardt of the Golden Gate University Law School in San Francisco


BROKERS; TORTIOUS INTERFERENCE; SPOUSAL LIABILITY: In suit by broker
against seller's husband, who managed seller's property, for tortious
interference with seller's performance of land sale contract, husband is
entitled to assert defense of "manager's privilege."

Huynh v Vu, 4 CR3d 595 (Cal. App. 2003)

In 1998, Buyer requested Broker's help in buying a commercial property in
Oakland. Broker contacted Husband, who he thought was the owner of the
property. But actually, Wife (Seller) was the sole owner of the property,
which Husband managed. Husband indicated his interest in selling, and
requested a written offer. Broker sent Husband, at the office address
shared by Husband and Seller, a standard form real estate purchase offer,
signed by Buyer, offering to purchase the property for $1.1 million. The
offer also provided for Broker to receive a commission of 6 percent.

Broker then learned that Seller was the true owner of the property, and
that Husband did not have a power of attorney or any other written
authority from Seller to act on her behalf in connection with the sale of
the Property. When Broker contacted Seller about the transaction, however,
she often referred him to Husband, and Broker's communications with Seller
generally went through Husband.

Seller's counteroffer increased the price to $1.3 million, and reduced
Broker's commission to 3 percent. The counteroffer also added the following
condition:
"Escrow to close 90 days from Seller's acceptance. . .

Contract extension, if any, after the expiration date have [sic] to be
agreed by Seller in writing, or contract to be null & void at Seller [sic]
choice."

Buyer accepted the counteroffer on November 16, 1998, and Broker opened an
escrow the following day. The 90-day period was thus set to expire either
in mid-February 1999, as Broker understood it, or on March 5, 1999,
according to Seller's testimony. From mid-November 1998 to mid-February
1999, Broker unsuccessfully requested that Seller and Husband provide (1)
documentation about the income and expenses associated with the property,
which was necessary for Buyer to obtain financing, and (2) tenant estoppel
certificates.

On March 4, 1999, Buyer closed escrow on his sale of a commercial property
in San Francisco, planning to shelter his capital gain on that sale from
federal income tax liability by designating the property he was purchasing
from Seller as replacement property in a tax-free exchange under IRC §1031.
When Broker told Husband of the need to close the escrow, Husband responded
that he and Seller needed additional time to coordinate the sale of
Seller's property with a separate §1031 exchange that Seller was planning.
Husband requested an extension. On March 5, Broker took an extension letter
to Husband, who filled in the blank with the number 45 to indicate the
number of days the escrow was to be extended, and signed both his own and
Seller's name.

Buyer continued to make efforts to close the transaction, because April 19
was the deadline by which he had to make a final designation of the
replacement property for his §1031 exchange. Even after April 19 came and
went without escrow having closed, Buyer continued to believe that the
contract remained in effect, and still wanted to close escrow. On April 27,
Seller communicated her intent to exercise her right to cancel the
agreement, based on the provision in the counteroffer requiring that escrow
close within 90 days. Seller then presented Buyer a "take-it-or-leave-it"
offer to sell for $1.425 million with no provision for a commission to
Broker. Buyer reluctantly accepted because of his §1031 situation.

Broker sued Seller for his commission on the sale, and also sued Husband
for intentional interference with Seller's performance of the contract. The
jury awarded Broker $42,750 against Seller, $15,000 in compensatory
damages, plus $173,250 in punitive damages against Husband. Husband
appealed, claiming that the trial court had erred in refusing to instruct
the jury on his "manager's privilege" defense.

The court of appeal reversed, holding that Husband was entitled to assert
the common law manager's privilege as a defense to Broker's tortious
interference claim, since the evidence at trial could support the
conclusion Husband's advice to Seller was primarily intended to further
Seller's interest and not his own. The court stated that the manager's
privilege to induce an otherwise apparently tortious breach of contract is
extended to a manager with impersonal or disinterested motives to counsel
the principal to breach a contract with a third party that the manager
reasonably believes to be harmful to the principal's best interests. After
rejecting Broker's argument that the privilege applied only to managers of
business entities and not to a manager acting on behalf of a natural
person, the court determined the scope of the privilege (111 CA4th at 1198):
[ “W]hen a manager stood to reap a tangible personal benefit from the
principal's breach of contract, so that it is at least reasonably possible
that the manager acted out of self-interest rather than in the interest of
the principal, the manager should not enjoy the protection of the manager's
privilege unless the trier of fact concludes that the manager's predominant
motive was to benefit the principal. Thus, in a case such as the instant
one, where the manager had a material, albeit indirect, personal financial
interest in the transaction, we are of the opinion that the predominant
motive test should be applied.”

Thus, in applying the "predominant motive" test, the court ruled that the
trial court erred in refusing the requested instruction because it was
reasonably probable that Husband would have been exonerated under the
manager's privilege if the jury had been instructed to consider it.

Reporter’s Comment 1: This is a puzzling decision. From the court's
description, these were a pair of rapacious sellers who were doing all they
could to hold up closing a sales transaction in order to extort a higher
price from their buyer, who had an IRC §1031 deadline hanging over his
head. At the same time, they were trying to avoid paying their broker the
already reduced commission they had promised him. The jury's award of
$173,250 in punitive damages to the broker on a $42,750 commission
certainly seems to support the court's jaundiced view of the sellers' behavior.

The broker's difficulty, as far as I can tell, was that he could not expect
to get punitive damages under a simple breach-of-contract claim, so he
sought to overcome that obstacle by seeking his contract damages from the
wife, who held title to the property, and claiming the tort damages from
the husband, who seemed to make all the real decisions about the property.

That was a neat strategy, and had it worked it might well have served to
deter future married owners from holding title in one spouse's name while
the other one runs the show: If you're the decision-making spouse, that
arrangement does keep the property from being reached by your own
creditors, but the protection against title-based liability might well be
outweighed by your exposure to your mate's creditors for liability in tort.
That risk is enhanced by the court's adoption of the "predominant motive"
test as the standard to apply: A decision-making husband is immune only if
his predominant motive in telling his title-holding wife to breach was to
benefit her rather than himself. If his advice to breach was based as much
on his own interest as hers, he has failed that standard and can be liable
for inducement of the breach.

But—and here is where the puzzlement starts—what good does that restrictive
standard do in a community property situation, where all benefits are
legally shared by both spouses? The court's declaration that there was
ample evidence that the husband did clear this high standard is all
speculation that could apply to every marriage. The court stated that, even
if the husband was trying to "enhance whatever community property interest
he had in the proceeds, . . . that motive was fully congruent with the
interests of Seller as the other member of the marital community" (111
CA4th at 1200); but that view appears to revert to an absolute immunity in
all marital cases. If the property was community property, the wife clearly
would benefit as much as the husband, making his motive equal but not
predominant. If it was her separate property, he doesn't benefit at all,
making his motive of protecting her per se predominant. Only if the
property was his separate property, held in her name f or convenience only,
might he fail the "predominant motive" test—but then, as the true principal
in the transaction, he should be liable for breaching the contract rather
than for inducing her breach of the contract. All of which leaves me
wondering why the court bothered to erect the high "predominant motive"
standard if it intended to convert it into a de facto absolute privilege
standard in marital cases?

Reporter's Comment 2: My final puzzlement is why the judgment was only
reversed and not remanded. If the error is that the case was sent to the
jury without instructions on the manager's privilege, should not the remedy
have been to send it back to them with a proper instruction? The appellate
court seems to be saying that a properly instructed jury would have found
that the manager's privilege applied—so why bother going through those
motions a second time? That tends to confirm the suspicion I raised in the
previous paragraph that the manager's privilege now appears to be an
absolute privilege in marital situations.






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