Breach Fiduciary Duty and Lose Your Commission

The fiduciary relationship between agent and client has long been a cornerstone of the real estate brokerage industry. This basic relationship is usually emphasized in introductory licensing classes as well as in more sophisticated analytical courses. If agents breach this fiduciary relationship, clearly they may be liable for any subsequent damages.

The Supreme Court of Colorado discussed this issue when it considered the 1990 case of Moore and Co. v. TALL, Inc., 792 P.2d 794. Two primary issues faced the court. First, does a real estate broker automatically forfeit a commission for breach of fiduciary duty when the broker withholds material information from the seller and discloses confidential information to another purchaser? Second, if a cooperating broker received part of the commission, must the shared portion of the commission also be forfeited?

TALL, a Colorado corporation, entered into an exclusive listing agreement with Moore and Co., Inc., a Colorado real estate company, through one of Moore's real estate brokers, H.L. Richison, for the sale of TALL's property-approximately 80 acres of undeveloped land in Adams County, Colorado-for $1.6 million.

On February 8, 1982, Newcomb-Weidner Co. (N-W), a Colorado real estate company, made an offer to purchase the property for $1.4 million. As presented, the offer was not acceptable, but a counterproposal by TALL was satisfactory.

A few weeks later, a second offer for the full $1.6 million came in from another prospective buyer, DG Shelter Products Co. However, the broker, Richison, did not give TALL enough information to allow the company to fully consider the DG Shelter offer, and subsequently, TALL elected not to treat it as a backup. Meanwhile, the broker discussed the DG Shelter offer with N-W, including a possible assignment of N-W's contract rights on the property to DG Shelter.

As far as the record shows, TALL's representatives were not aware of Richison's activities regarding the DG Shelter offer at this time-and did not learn the full extent of his conduct until months later. In fact, N-W did assign its rights to DG Shelter for $300,000. The closing occurred on May 25, 1982, at which time, TALL conveyed the property directly to DG Shelter, pursuant to the assignment from N-W. Moore received a commission of $70,123.37; $70,000 in additional commissions was paid to cooperating brokers.

After hearing testimony and opinions from several real estate experts, the trial court found that the DG Shelter offer was very material information that should have been fully disclosed to TALL, but was confidential and should not have been disclosed to N-W. The court also found that although the prospect of TALL's buying out N-W was doubtful, a backup contract with DG Shelter was a valuable asset to TALL. The disclosure of the DG Shelter offer to N-W and the subsequent N-W and DG Shelter meeting eliminated any chance of TALL's renegotiating the contract with N-W or of obtaining a backup contract offer from DG Shelter. The court concluded that Moore, acting through Richison, breached its fiduciary duty to TALL.

Although the trial court did not find that TALL sustained a specific monetary loss as a result of Moore's breach of fiduciary duty, it did conclude that as a result of that breach, Moore should forfeit the approximately $70,000 in commission. TALL had argued that the court erred in not assessing damages against Moore and Richison for the full commission of about $140,000.

Before the Colorado Supreme Court, Moore and Richison argued that unless the real estate broker has engaged in fraud or self-dealing, taken a secret profit, or committed misconduct resulting in a demonstrable loss to the seller, the broker should not be required to forfeit a commission simply because of a breach of fiduciary duty.

The court rejected this argument, noting that a real estate broker, as agent, has fiduciary responsibility to the seller, as principal. This fiduciary duty under an exclusive listing agreement includes the duty to act with utmost good faith and loyalty in all dealings with the seller, use reasonable care in carrying out the agency agreement, and account to the seller for all money and property received by the broker. Part and parcel of this duty is the requirement that the broker make a full and complete disclosure of all facts relative to the property listing that it may be material for the seller to know.

In short, agents who, without the acquiescence of their principals, act for their own benefit or for the benefit of others against the interests of principals are not entitled to compensation. This is true even though agents may believe their conduct does not harm-or is beneficial-to a principal.

Addressing whether the shared portion of the commission paid to the cooperating broker had to be returned, the court found that to do so would be unfair, as the cooperating broker had not participated in the conduct that breached the fiduciary duty. Accordingly, only the amount actually received by Moore and Richison had to be forfeited.

The lessons of this decision are fundamental to the principal-agency relationship. Any conduct by agents that is found to be detrimental to clients-even if specific monetary damages do not directly result-may lead to the loss of compensation. Though routinely taken for granted by the parties in any transaction, it is worth repeating and reviewing-act against the interests of clients at your peril.

Hanon W. Russell, CCIM, JD

Hanon W. Russell, CCIM, JD, is a partner in the firm of Cantor, Floman, Russell, Gross, Kelly, & Amendola, P.C., located in Orange, Connecticut. Russell can be reached by phone at (203) 795-1211 or by e-mail at hwr@chesscafe.com. The discussion of legal issues involved in this column is for informational purposes only. Results may vary depending on state laws and particular facts.