The Dangers of Stepping Outside Your Specialty

As most brokers work their way through commercial transactions, they take a certain comfort in knowing that other professionals will review various data and financial statements. In fact, most brokers rely on this follow-up procedure, usually perceiving their own role in this aspect of the transaction as nothing more than a conduit for the transferred information. However, in their zeal to see that buyers and sellers have a meeting of the minds, brokers sometimes become too involved. An interesting 1981 case decided by the Court of Appeals of Oregon (Lunden v. Smith, 632 P.2d 1344) discussed this pitfall, and it remains valid today.

In February 1979, Geraldine and LeRoy Smith listed their business for sale with Zalph Wilson, of Wilson Realty. As a result, they and the plaintiffs (also clients of Wilson, who had properly disclosed the dual agency) entered into an agreement that was subject, among other conditions, to the Smiths providing income information for the buyers' review. Wilson asked Geraldine Smith for a profit-and-loss statement that he could furnish to the buyers, but she informed him that none existed; financial information concerning the business was in the possession of a California accountant. However, she indicated she could generate the information based on the check register of the business. When she prepared these statements, she asked Wilson to come to her house to assist her. Neither Geraldine Smith nor Wilson questioned the accounting method she used to arrive at the monthly gross and net profit figures.

The statements she and Wilson prepared basically identified the cash flow of the business as its income. Wilson transmitted the statements to the plaintiffs, informing them, as Geraldine Smith had informed him, that the "statements were incomplete, as all expenses properly attributed to [the] business may not have been listed." The plaintiffs then consulted with their banker and possibly their accountant about the statements and other aspects of the purchase of the business.

In March 1979, the plaintiffs agreed that the furnishing of this information-which showed the business' net profit to be in excess of $35,000-satisfied the conditions of the agreement. However, the following month, the Smiths received their 1978 tax returns from their accountant, showing the actual net profit for the business to be slightly less than $8,000. Geraldine Smith was the only person aware of this large discrepancy, and she did not tell anyone-not even Wilson.

The trial court found that Wilson was negligent in performing his duties as a broker and ordered that he return his commission to the Smiths. On appeal, Wilson argued that he was being held to an incorrect standard, and, more important, that he should be absolved of all liability because he had taken reasonable steps to assure that the buyers' accounting and banking advisers would review the information provided by Geraldine Smith.

Wilson's position was superficially compelling. However, looking a bit deeper, the court found the real question was whether or not Wilson, as a broker, had a duty to know, or be in a position to know, that the method used to obtain the information was inaccurate. The court apparently was swayed by the fact that Wilson had volunteered to participate in preparing the information that, with due diligence, he could have ascertained was faulty; he had prepared and transmitted information that, according to his own testimony, he did not understand. The court also concluded that no expert testimony was required to show that his conduct failed to meet the applicable standard of care.

Wilson argued that a broker's role is not to evaluate accounting methodology, but to ensure that buyers and sellers obtain suitable advice from other sources on the financial data furnished in connection with a sale. He asserted that he did ensure that such advice was obtained. However, the court found that the problem was that he did more. He participated in preparing and transmitting data that he contended the plaintiffs' banker and accountant-and not he-should have evaluated for accuracy.

He further argued that given the fact that both the buyer and seller consulted with their financial advisers concerning this transaction, the court should not have found Wilson, as a real estate broker, responsible for determining whether the accounting method used by Geraldine Smith was correct. If the buyers' experts did not perceive the accounting error, the court should not have expected Wilson to perceive it.

The court was not persuaded by this argument. The fact that the financial advisers failed to find the errors in the statements does not mean that Wilson's involvement in creating those errors was not negligent.

The result of this case may be disturbing to many brokers. However, the critical issue that swayed the court was the broker's participation in the preparation of the financial statements; it was not the simple transmission of the information. When involved in transactions that require the preparation and review of financial material, brokers should take care not to encroach upon an area that should be reserved for other professional advice. Regardless of how helpful they think their actions are, such conduct may return to haunt them. Finally, brokers should document their involvement with a paper trail that later can be followed easily if and when things begin to go wrong.

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.