Part 2 – California real estate broker who is designated officer of corporation does not owe third parties a duty to supervise employees, neither under statutory law nor agency principals; Something more is needed for liability.

In my last post I discussed how a designed officer / broker, who places their real estate license with a corporation, is not liable to third parties for failing to supervise the corporations employees as required under the Business and Professions Code. Another argument used by experienced Sacramento and Yolo real estate litigation attorneys is to claim that the broker is liable under traditional agency law. In this case, however, something more is needed.

In Sandler v Sanchez the plaintiff was trying to make the corporation’s designated officer – broker liable for misrepresentations of a salesman. The plaintiff also argued that the designated officer/broker could be held vicariously liable, under principal -agent law, for failure to supervise the salesman. Generally, a corporate employee acts on behalf of the corporation, and not its owner or officer. But here the plaintiff argued that, though the salesman was not the broker’s employee, he was his agent, and on that basis there could be liability. The plaintiff directed the court to federal court decisions (which the state court does not need to follow), saying that a right to directly control the salesman allows liability to third parties. However, the U.S. Supreme Court has held that aright to control, by itself, does not create a principal – agent relationship that would make the principal (here, the designated officer) vicariously liable for the salesman’s conduct. There need to be additional factors to create this liability.

The federal court case involved a designated officer/broker and the offending salesman. There was evidence in that decision that decision that the broker intended to turn the real estate business over to the salesman so the broker could pursue another career, and “it was agreed” that the broker would remain the designated officer/broker until the salesman got his own broker’s license. Although the broker understood that he remained personally responsible to supervise the real estate salespeople, he agreed to delegate that duty to the salesman so that the salesman could continue to run the corporation as a real estate brokerage. Also, the evidence established that the salesperson agreed to this arrangement. This is much more that the broker’s simply abandoning the statutory duty to supervise.

Back to our case in state court, there was no finding of any agreement between the designated officer/broker and the salesperson. As the plaintiff conceded that they could claim no additional facts to support the claim of a principal – agent relationship, their claim failed.

This bodes well for licensed real estate brokers, but is bad for parties who felt they were swindled in the real estate boom in the last decade. Under these rules, a real estate licensee who is the designated officer / broker of a corporation can abandon their duty to control the employees but avoid liability to third parties. They could face discipline from the Department of Real Estate. But, in many instances, if they did not control the corporations, the corporation has essentially disappeared, and has no assets. The corporation will not hold the broker liable for anything.

photo: http://www.flickr.com/photos/strawberrysingh/4488631266/sizes/s/in/photostream/