Court Confirms Real Estate Brokers Are Not Personally Liable for Acts of Corporation

By Randy Sullivan

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California Real Estate Brokers can breathe a little easier now that the courts have reaffirmed that if they have properly incorporated, ordinarily they will not be personally liable for the acts committed by corporate employees or agents.

Most of us understand that by forming a corporation the directors, officers, and managers are not personally liable for the acts committed by the employees or agents. Instead, it is the corporation that is liable1.

Similarly, most real estate brokers selling real estate or originating loans have understood that they are shielded from personal liability by incorporating a business and having the license held by the corporation while remaining as the broker of record. Likewise, most California defense attorneys have shared this opinion, and the leading California Real Property treatise also shared this viewpoint.

However, the issue of the scope of a designated real estate broker’s liability for the actions of the corporation had been called into question by a Ninth Circuit opinion, Holley v. Crank, (9th Cir. 2005) 400 F.3d 667. In the opinion of this author, Holley case the Ninth Circuit aggressively read the legislative history of Business and Professions Code, section 10159.2 in an attempt to reach an equitable result.

The specific portion of the pertinent statute at issue was:

[t]he officer designated by a corporate broker licensee pursuant to Section 10211 shall be responsible for the supervision and control of the activities conducted on behalf of the corporation by its officers and employees as necessary to secure full compliance with the provisions of this division, including the supervision of salespersons licensed to the corporation in performance of acts for which a real estate license is required.

Ultimately the Ninth Circuit held that the purpose of the statute was to “insure licensed supervision of real estate corporation activity by holding designated officers personally responsible for that supervision.” Id. at 672. As stated above, the Ninth Circuit appears to have done this in order to arrive at an equitable result. Notably, the underlying claim involved a borrower having been racially discriminated against in violation of the Fair Housing Act. In addition to the discriminatory acts, the case allegedly involved a situation where the qualifying broker turned over all operations of the brokerage company to a non-licensed person.

While these were significant distinguishing facts, in many cases Plaintiffs had relied on the case to support claims against the qualified broker. The potential confusion caused by Holley now has been largely resolved in the California opinion in Sandler v. Sanchez (2012) 206 Cal.App.4th 1431.

The Sandler decision
The Court in Sandler first addressed the interpretation of Bus. & Prof. Code S. 10159.2. The Court held that the duties do not extend to third parties. Id. at 1438-1440. Rather, the qualified broker owes the duty to the corporation and that it is the Department of Real Estate that can hold the qualified broker accountable. The Court decided that the intent of the statute was to make express that the qualified broker did have a duty to supervise. The Court further found that the purpose of the statute was to create a regulatory sanction, but not a duty to third parties.

Second, the Court found it persuasive that in other similar statutory schemes the qualifying licensed person does not have a duty to third parties. The Court cited the statutory scheme for licensed construction contractors. Id. 1441. The Court also noted that the language is substantially similar and yet there is no duty to third parties by the company’s responsible managing licensee. Id.

Third, the Court directly addressed Holley. The Court honed in on one critical fact in that Ninth Circuit case, which was that the qualified broker had sold the business to the person that allegedly conducted the racial discrimination, and that he would remain the designated officer/broker until the bad actor received his broker’s license. Id. at 1444. The Court ruled that there was not an implied delegation of responsibility in Holley, but instead an actual agreement that the bad actor “would assume the responsibilities imposed on the designed officer/broker by section 101059.2.” Id. at 1445.

In closing, the Court stated that it will not express an opinion on whether it agreed with the Ninth Circuit about whether “a designated officer and real estate salesperson can ever create principal-agent relationship.” Id. The statement alone casts doubt on the decision itself in Holley. More importantly, within the context of that statement, the Court ruled that mere inaction would not suffice to create personal liability.

Based on these rulings, the Court held that the Plaintiff’s underlying claim failed where the allegation was that the designated broker did not supervise the salesperson managing the transaction, and that if he had then he would have learned about material misrepresentations and disclosed them to Plaintiff or cancelled the deal. Plaintiff’s claims were proper against the corporation but not the qualified broker.

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1This discussion excludes claims where a party is attempting to pierce the corporate veil by way of alter ego allegations.

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Randy Sullivan, a partner at Patton & Sullivan, specializes in business and real estate litigation. For questions or comments he can be reached at randy@pattonsullivan.com.

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