Buyer’s Agent Beware: Balancing
the Liability of Selling Agents
with Listing Agents
by Timothy F. O’Leary

Several years ago the author wrote that courts overstated the “fiduciary fraud” exception to the out-of-pocket measure of damages when they applied the more liberal “benefit-of-the-bargain” measure of damages to “garden variety” negligence claims based on a failure to disclose material defects in the sale of residential, real property. See O’Leary, “Limiting the Fiduciary Duty Exception to the Out-Of-Pocket Rule” (Continuing Education of the Bar April 1993) Real Property L.Rep., 145-147 (hereinafter the “Article”). The Article was cited soon thereafter by the Court of Appeal in Salahutdin v. Valley of California, Inc. (1994) 24 Cal.App.4th 555, 566, & n.9, when that court held that a selling (i.e., buyer’s) agent was liable based on the “benefit-of-the-bargain” measure of damages when the agent negligently misrepresented the square footage of a property sold to the buyer.

Since Salahutdin, Courts of Appeal throughout the state have expanded the fiduciary duty liability of selling agents, while simultaneously limiting the responsibilities of listing agents, in such areas as the statute of limitations, measure of damages, and substantive liability. These decisions, the author suggests, impose an unrealistic and expanded duty of liability on the buyer’s agent. The author suggests that despite some unfortunate dicta from these decisions, they can be reconciled to bring the selling agent’s fiduciary duties more in line with the more narrow responsibilities of the listing agents, and the statutory disclosure laws embodied in Civil Code §§ 2079, et seq. The author suggests that courts can achieve these results by applying the distinction between fiduciary duty claims and “garden variety” or statutory claims based on an agent’s negligent failure to investigate or disclose material defects in the property. The benefits from applying this approach would be to ensure more consistency in trial and appellate decisions, and strike a balance between the potentially far-flung liability of the selling agent and the limited liability of the listing agent.

1. MEASURE OF DAMAGES

The current judicial trend of expanding the liability of agents to their clients, while narrowing the liability of agents to their non-clients, creates the potential for abuse and inconsistency in appellate and trial court decisions. In Salahutdin, for example, the selling agent misrepresented the size of the parcel sold to his client, the buyers. The court held that this negligent misrepresentation constituted “constructive fraud,” and thus exposed the agent to the more liberal benefit-of-the-bargain measure of damages based on the “fiduciary fraud” exception.[1]

The irony and potential source of abuse from the Salahutdin decision is that even though the listing agent originated the misrepresentation,[2] the listing agent was not exposed to the greater benefit of the bargain measure of damages. Only the selling agent owed fiduciary duties to the buyer, and thus even though the listing agent initiated the misrepresentation, the listing agent’s liability would be limited to the more restrictive “out-of-pocket” measure of damage.

Such a distinction is at best bewildering to a jury, whose members would have to decide the liabilities of the two agents applying distinct measures of damage. Limiting the listing agent’s liability to less than the selling agent’s is seemingly unjust because the listing agent initiated the misrepresentation—and thus should be exposed to greater, rather than less liability—than the selling agent, who transmitted the information based on the assumption that if the listing agent represented the parcel’s size, it must be correct.

2. STATUTE OF LIMITATIONS

Courts also have increased the exposure of agents to their clients, and narrowed their liability to non-clients by virtue of their decisions on statute of limitations issues. In Loken v. Century 21-Award Properties (1995) 36 Cal.App.4th 263, 273, the Court of Appeal held that a listing agent was protected by the two-year statute of limitations found in Civil Code §2079.4 from claims based on negligence and negligent misrepresentation, to the extent both claims were premised on the “duty to inspect and disclose under section 2079 [of the Civil Code].” The decision was encouraging for agents because it extended the statutory protections (at least as to listing agents) embodied in Civil Code §§ 2079 et seq., to include causes of action not specifically delineated therein, including negligent misrepresentation claims.

This same division of the Fourth District Court of Appeal later held that the two-year limitations period found in Civil Code §2079.4 did not protect a selling agent from claims for breach of fiduciary duty. Field v. Century 21 Klowden-Forness Realty (1998) 63 Cal.App.4th 18, 27. Field came to the court on appeal from a judgment in favor of plaintiffs-buyers who had sued for negligence, negligent misrepresentation, and breach of fiduciary duty. Appellants were the buyers’ agents, and argued on appeal that the buyers’ claims were time-barred under Civil Code §2079.4.

Stating language which, in the author’s view, was unnecessary to the determination of the appeal, the court stated that the statutory scheme embodied in Civil Code §§ 2079 et seq., should not apply because of appellants’ fiduciary duties. “Thus, we cannot properly interpret §2079.4 as applying to a buyer’s broker.” Field, supra, 63 Cal.App.4th at 27.

The author submits that this language contradicts the legislative scheme and was unnecessary to affirm the trial court judgment, and thus should not be adopted in subsequent decisions. Sections 2079 et seq. refer to, and contemplate, that they apply to both listing and selling agents. The duty of investigation described in section 2079 does not distinguish between listing and selling agents. Joint references to the duties of selling and listing agents in multiple statutes throughout the statutory scheme (see, e.g., Sections 2079.14, 2079.16) contradict the Court of Appeal’s decision in Field that none of the protections within that statutory scheme, including but not limited to the statute of limitations embodied in section 2079.4, should apply to selling agents (i.e., fiduciaries).

The suggestion from Field that Civil Code Sections 2079 et seq. did not apply to buyer’s brokers is not necessary to the decision. Appellants did not challenge the trial court finding that they had breached their fiduciary duties. To affirm the judgment, the Court of Appeal could simply have found that a common law claim for breach of fiduciary duties is not contemplated by, and should not be limited by, the statutory scheme embodied in Civil Code §§ 2079 et seq. Thus, the remaining language-- to the effect that none of the protections found in Sections 2079 et seq. apply to a buyer’s broker, even when the theories consist of negligence and negligent misrepresentation claims premised on the failure to conduct a reasonably competent investigation—is unnecessary to the decision.

The author suggests that this interpretation of the Field decision is consistent with the author’s interpretation of the “fiduciary fraud” exception measure of damages found in the Salahutdin decision. Namely, claims for breach of fiduciary duty are distinct from the sort of “garden variety” negligence claims which are addressed by Civil Code §§ 2079 et seq. Those claims, whether entitled negligence or negligent misrepresentation, to the extent they are premised on the statutory duties of disclosure and investigation, are still covered by the statutory scheme, including the two-year limitations period found in Civil Code §2079.4.

Dicta from the Field decision suggests that buyers can premise claims against their agents on the duties found in Civil Code Section 2079, without allowing the agents to benefit from any of the protections of that statutory scheme. This interpretation would provide buyers with all the benefits, and none of the disadvantages of the statute. The author suggests that a more reasoned, and reconcilable interpretation of Field is that only breach of fiduciary claims, because they are distinct from “garden variety” negligence claims, are not subject to the statutory scheme, and are premised instead on the common law, and should not be subject to the statutory protections, including the two-year limitations period found in Civil Code §2079.4.

3. SUBSTANTIVE LIABILITY

The more troublesome aspect of the Field decision is not its application to statute of limitations cases, but how practitioners are seeking to misuse the dicta and apply it to impose broad responsibilities on selling agents. As noted above, the Field court suggested that none of the protections embodied by the statutory scheme should apply to exonerate selling agents. Field, supra, 63 Cal.App.4th at 26, 27 (where the court notes that a selling agent’s fiduciary duties “may include a duty to inspect public records or permits” [in contradiction to Section 2079.3] and “may require more than the cursory type of visual inspection required of seller’s brokers to benefit non-client buyers.”)

If this language is adopted by subsequent courts to apply to claims against selling agents, selling agents will be unable to benefit from whatever progress listing agents have made in the past years. Thus, the holding in Wilson, supra, 15 Cal.App.4th 298, at 308, that an agent does not owe a duty to inspect “inaccessible” areas (citing Civil Code §2079.3) arguably would not apply to a selling agent, who owes “more than the cursory type of visual inspection required of seller’s brokers to benefit non-client buyers.” Clearly, the selling agent cannot take advantage of the holding in Robinson v. Grossman (1997) 57 Cal.App.4th 634, 644, that “once the sellers and their agent make the required disclosures, it is incumbent upon the potential purchasers to investigate and make an informed decision based thereon. In making the required disclosures, the sellers’ agent is required only to act in good faith and not convey the seller’s representations without a reasonable basis for believing them to be true.

Even more difficult to reconcile with the Field decision, however, are the cases which have exonerated agents who owed fiduciary duties to the plaintiffs. In Carleton v. Tortosa (1993) 14 Cal.App.4th at 745, the Court of Appeal affirmed summary judgment in favor of a listing agent against the seller (i.e., the agent’s client, and to whom the agent owed fiduciary duties) based on the agent’s failure to provide proper tax advice in structuring a tax-deferred exchange. Arguably, the Field court would have required that the listing agent perform more than the “cursory” work performed for the agent’s client in that decision.

Similarly, the above language from the Field decision seems difficult to reconcile with Padgett v. Phariss (1997) 54 Cal.App.4th 1270, another opinion of Division One of the Fourth District. In that case, the court held that the buyer’s agent owed no duty to disclose or investigate the existence of construction defect litigation between the homeowner’s association and the developer during the sale of a residence in the same planned unit development. The Field court attempted to distinguish Padgett by claiming that the agent in Field had “knowledge of facts giving rise to her fiduciary duty” that distinguished her from the buyer’s agent in Padgett who “was not on actual or implied notice of any fact which would trigger a duty to investigate.” Field, supra, 63 Cal.App.4th at 22, n.6. However, an examination of the record in Field does not show any facts of which the agent was aware which should have put her on notice that the easement described in Field was erroneous.

Considering these possible ramifications suggests that the Field decision should be limited to a statute of limitations holding, and not applied to describe the scope of substantive duty owed by a selling agent. Specifically, to the extent a claim is based on an agent’s breach of the statutory duties of disclosure and investigation, the protections embodied in that scheme should apply, even when the defendant is a fiduciary of the plaintiff. Only claims based on a common law breach of fiduciary duty should not be subject to the statutory scheme embodied in Civil Code §2079.

To make this distinction viable, courts should prevent plaintiffs from “dressing up” ordinary negligence claims, and calling them claims for breach of fiduciary duty to evade the protections afforded by the statutory scheme. Common law breach of fiduciary duty claims typically involve a measure of self-dealing. See, e.g., Ward v. Taggart (1959) 51 Cal.2d 736, 740 (suit to recover secret profits earned by agent in real estate sale). Also, a breach of fiduciary duty claim is considered an equitable action that does not entitle the plaintiff to a jury trial. Interactive Multimedia Artists, Inc. v. Superior Court (1998) 62 Cal.App.4th 1546, 1556. Practitioners representing defendants should ensure that plaintiffs do not obtain the more liberal measure of damage, longer statute of limitations, and additional theory of recovery based on allegations that are nothing more than claims based on a breach of the statutory duties of investigation and disclosure.

4. CONCLUSION

The judicial trend has been to broaden the exposure of selling agents to their clients and to narrow the liability of listing agents to their non-clients. The author suggests that this trend was extended inappropriately when the Fields court indicated that the comprehensive statutory scheme embodied in Civil Code §2079 should not apply to protect fiduciaries, even when the claim is based on a breach of these very statutory duties! Field, supra, 63 Cal. App. 4th 18, 27, n. 12. (noting that the limitations period found in Section 2079.4 should not apply to claims brought by buyers against their fiduciaries, “even if some of the allegations include a failure to visually inspect.”)

The author suggests instead that a more reasonable conclusion would be to exempt from the statutory scheme only claims based on the agent’s breach of fiduciary duty. Claims based on an agent’s breach of the statutory duties of disclosure and investigation should be subject to the statutory protections, even when the defendant is a fiduciary. The author suggests that this interpretation is consistent with the statutory scheme, and can be reconciled with the above-cited decisions construing these statutes, including the Field holding.

The author’s interpretation provides the additional benefit of bringing the duties of selling and listing agents into balance. Trial and appellate court decisions should be more consistent. Agents will recognize that they are burdened by, but can also benefit from, the statutory scheme. Left unchecked, the current judicial trend would modify the common law applicable to real estate purchases in California to, “Let the buyer’s agent beware.”

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[1] Had the claim against the selling agent been premised on an omission or an “implied assertion,” the agent would not have been exposed to a negligent misrepresentation claim. In a case argued by the author, and also cited by Salahutdin, supra, 24 Cal.App.4th at 562, n.3, the same division of the First District Court of Appeal that decided Salahutdin held in Wilson v. Century 21 Great Western Realty (1993) 15 Cal.App.4th 298, 306, that a claim for negligent misrepresentation cannot be premised on an “omission,” or even an “implied” misrepresentation. Instead, negligent misrepresentation claims must be premised on a “positive assertion.”

[2] The listing agent inaccurately wrote on the multiple listing card that the parcel was larger than one acre, based on information provided by the sellers.