Daily Development for Wednesday, September 10, 2008
by:
Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC School of
Law
Of Counsel: Husch Blackwell Sanders
Kansas City,
Missouri
dirt@umkc.edu
BROKERS; BUYER’S BROKER DISCLOSURE: Broker for
proposed lessee has no duty to disclose to lessor during negotiations any
financial difficulties faced by proposed lessee.
Blickman Turkus,
LP v MF Downtown Sunnyvale, LLC 162 CA4th 858, 76 CR3d 325
(2008)
CPS entered into a listing agreement, on commission (to be
paid one half on lease execution and one half on commencement of rent), to
obtain a lessee for buildings to be built on property owned and managed,
respectively, by MF Downtown Sunnyvale, LLC and Mozart Development Co.
(collectively, Mozart). The agreement provided that cooperating brokers would
receive half of any commission paid. In early 2001, Mozart signed written
leases with Handspring, Inc. for two buildings to be completed to Handspring's
specifications by approximately September 2002. Handspring's obligations were
secured by letters of credit. Blickman Turkus, LP, doing business as BT
Commercial Real Estate (BTC), represented Handspring in the lease
transaction.
Handspring began to have financial difficulties beginning in
October 2001. Mozart learned of Handspring's financial problems in August 2002,
when it was contacted by another agent for Handspring to negotiate a termination
of the leases. In exchange for termination of the leases, Mozart received stock,
notes, and cash, and was permitted to draw on the letters of credit for a total
consideration valued at more than $50,000,000.
BTC claimed that it was
the procuring agent and a cooperating broker under Mozart's listing agreement
with CPS and entitled to a commission. Claiming that Mozart had paid the first
half of the commission but had refused to pay the second, BTC asserted claims
for breach of contract, the covenant of good faith and fair dealing, an implied
promise to complete the lease transaction, and tortious interference with
advantageous relationship. Mozart cross-claimed, alleging that BTC had been
aware of Handspring's financial problems as early as October 2001 and had failed
to inform Mozart, which suffered damages as a result. Mozart and BTC both
successfully challenged the other's claims before trial, and the superior court
entered judgment that neither party take anything. Mozart's motions to vacate
the judgment and for attorney fees were denied. Both sides appealed. The court
of appeal affirmed the judgment.
The fatal flaw of Mozart's cross-claims
was that BTC had no duty to disclose to Mozart the information about
Handspring's financial problems - whether as agent for Handspring or,
hypothetically, for Mozart or as a result of representations made at the time
Handspring entered into the lease. Mozart never believed or rationally could
have believed that BTC represented Mozart's interests.
Further, there was
no evidence in the record of any basis for Mozart to expect that BTC would
disclose Handspring's confidential information other than as Handspring might
direct. Nor was there any duty for BTC to correct statements, made before
execution of the lease, that allegedly became incorrect
thereafter.
Mozart sought to recover for alleged harm not in entering
into the lease, but from the failure to withdraw from the lease sooner than it
did. Mozart's claims based on dual agency also failed because even if BTC were a
dual agent, its obligation, when faced with a conflict between two principals,
would be to withdraw from the representation rather than to disclose
confidential information.
Mozart's claim for attorney fees failed as
well. Even if BTC had succeeded in its claims, it would not have been entitled
to attorney fees because it was not a party to the contract (between Mozart and
CPS) containing the attorney fee provision.
Comment 1: In Lombardo v.
Albu, 14 P. 3d 288 (Ariz. 2000) (the DIRT DD for 12/14/00) the Arizona Supreme
Court found that is a general duty at common law for both a buyer in the course
of contract negotiations and the buyer’s agent to disclose adverse financial
information concerning the buyer’s ability to purchase even when that
information is available to the seller in some other way. The same rule
would apply, of course, by extension to lessees and lessee’s agents.
Although the California court here does not cite the Arizona precedent in
Lombardo, it seems to be at odds with that decision. The editor,
incidentally, criticized the Arizona decision and began uttering “Pandora’s box”
comments.
Comment 2: Not surprisingly, the NAR agreed with the
editor and in lobbying through the disclosure rules for buyer’s and lessee’s
brokers for Missouri and other states, there was included language
substantially similar to the following, protecting confidential financial
information about the client buyer or tenant:
“A licensee acting as a
buyer's or tenant's agent shall not disclose any confidential information about
the client unless disclosure is required by statute, rule, or regulation or
failure to disclose the information would constitute a misrepresentation or
unless disclosure is necessary to defend the affiliated licensee against an
action of wrongful conduct in an administrative or judicial proceeding or before
a professional committee. No cause of action for any person shall arise against
a licensee acting as a buyer's or tenant's agent for making any required or
permitted disclosure.” RMS 339.740. 2.
Similar language in Colorado
displaced earlier statutory language, contained in Colo. Rev. Stat.
Section 12-61-801 (now superceded) that would have imposed on the buyer’s or
tenant’s broker the duty to disclose to the other side “. . . all adverse
material facts actually known by the broker including but not limited to adverse
material facts concerning the buyer's . . . financial ability to perform the
terms of the transaction.” So it looks as if the U.S. is turning away from
the requirements of Lombardo and in fact requiring brokers to protect
information about the client’s adverse financial situation unless to do so would
amount to an affirmative fraud by affirming another’s statement of inaccurate
contrary information.
Readers are encouraged to respond to or
criticize this posting.
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into account in
evaluating confidentiality
issues.
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