Daily Development for Monday, October 13, 2008
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of Law
Of Counsel: Husch Blackwell Sanders
Kansas City, Missouri

FIDUCIARIES; SALES; JUDICIAL CONFIRMATION: Although parties who are interested in acquiring property being sold at a fiduciary sale have no standing to demand notice and opportunity to participate in the judicial process by which the court approves the sale (in this case, to another bidder, which was also the listing broker), such competing bidders nevertheless have standing to bring a lawsuit alleging a fraudulent scheme to conceal from the court approving the sale critical information about the buyer’s status as listing broker.  In such lawsuit, the fact that the sale was approved by a court will not conclusively establish that it was a fair and reasonable sale.

Burke v. Seat Point Realtors, 400 N.J. super 389, 947 A.2d 686 (App. Dive. 2008)

A landowner had become incapacitated and a guardian, landowner’s long time friend, was appointed to look after his affairs.  Landowner owned property near the beach that apparently had not been occupied in some time and was in need of repairs, but had substantial value.

Guardian listed the property with Sea Point, a real estate brokerage company, and Sea Point got a lot of “action” on the property.  Ultimately, guardian submitted a proposal to the probate court that the property be sold to a principal of Sea Point, who was the listing broker for cash, and that another, higher, offer, contingent on financing, be rejected.  The submission to the court did not highlight the fact that the property was being sold to the listing broker, although a line in the lengthy, single spaced sale agreement did so disclose.

Three other parties who were interested in buying the property later brought suit for breach of contract and tortious interference against the guardian.  The alleged that the brokers had deliberately discouraged the bidders from actively bidding to buy the property by emphasizing problems with the property and not disclosing that they intended to buy it for themselves.  The trial court found that the bidders never had a contractual relationship with the guardian, and dismissed the breach of contract claim.  As to the tort claim, the trial court also dismissed, in part on the grounds that the bidders had no standing to participate in the Probate Court proceeding and that that court’s determination that the sale to the realtors was not a breach of the fiduciary’s responsibilities was conclusive.

The Appellate Division affirmed the finding on the contract claim, but reversed the dismissal of the tort suit, concluding that the fact that the bidders had no right to receive notice of the Probate Court proceeding didn’t mean that they couldn’t challenge the behavior of the guardian in that proceeding.  Further, the court held that the guardian’s submission to the Probate Court did not adequately disclose the fact that the buyer was the listing broker, and noted that such disclosure might have triggered greater scrutiny by the Probate Court judge, who affirmed the sale without a hearing. 

The appellate court noted that it is not uncommon to give notice of such sales to competing bidders, even though not required, specifically to avoid disputes of the nature that occurred here. 

Comment 1: The editor finds this case interesting because of how far the court goes here to honor the complaints of the competing bidders notwithstanding probate court approval of the sale, particularly when there apparently were four other offers produced.  Although there apparently was no evidence alleged to show collusion between the guardian and the brokers, other than the non-disclosure of the relationship of the buyer to the listing broker, the court noted that indicia of fraud often aren’t discovered until discovery is carried out.

Clearly, in the editor’s view, the court “smelled a rat” here.  Note that it isn’t even clear that the three bidders who brought this suit actually all submitted formal purchase offers.

Comment 2: As we move into a period in which many parties will be dealing with distressed properties in many contexts, and there will be jockeying for position on the part of scavengers, it is noteworthy how broad the New Jersey court here opens the door for challenges based upon fiduciary violations.  The same rules that apply to the guardian here conceivably could apply, for instance, to “sweetheart” deals cut between real estate companies and receivers. 

Readers are encouraged to respond to or criticize this posting.

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