Key Decisions

July 2012 – Duties Of Real Estate Brokerage’s Designated Officer Run To Corporation

(filed under: Key Decisions Archive | August 16, 2012)

The Duties Of A Real Estate Brokerage’s Designated Officer Run To The Corporation, Not Third Parties

Sandler v. Sanchez
(Cal. Ct. of App., 2d Dist.), filed June 18, 2012 

KEY FACTS

Keith Desser was a real estate salesman, president and sole shareholder of Gold Coast Financial, a real estate brokerage. He was also a principal of 765 South Windsor LLC. Desser solicited the Sandler parties to loan $600,000 to South Windsor to finance improvements to an eight-unit apartment building for the purpose of converting the units to condominiums. Desser represented that, once the improvements were made and the condominium conversion was completed, the property would be worth in excess of $5.5 million, more than enough, even with a first deed of trust of $2.75 million held by another lender, to secure the Sandler parties’ loan.

Desser, however, did not reveal that $600,000 was woefully insufficient to finance the necessary repairs for the condominium conversion; the property did not have sufficient equity to provide collateral for a second trust deed securing the note; and the primary lender had refused to extend the first note, which was imminently due. As a result, the holder of the first deed of trust foreclosed and left the Sandler parties’ note unsecured. In addition, Desser used $300,000 of the loan proceeds, which he obtained by amending the escrow instructions, for his personal expenses.

The Sandler parties sued 765 South Windsor, Gold Coast Financial, and Carlos Sanchez. They sued Sanchez because he was Gold Coast’s designated officer/broker. Although the complaint did not allege Sanchez played any role in the transaction, or even knew of it, the Sandler parties alleged he, as Gold Coast’s designated officer, owed them a duty in accordance with Business & Professions Code section 10159.2 to supervise Gold Coast’s employees, including Desser.

Sanchez challenged the legal sufficiency of the claims against him. He argued that he owed no duty, as a fiduciary or otherwise, to the Sandler parties. He acknowledged that a claim for breach of fiduciary duty would lie against Gold Coast and Desser. However, he argued that there could be no liability against him as a matter of law, absent allegations he authorized or personally participated in the wrongful conduct. He also argued he was not Desser’s principal and, therefore, could not be held vicariously liable for Desser’s misconduct. The trial court agreed and dismissed Sandler’s action against Sanchez.

HOLDING & REASONING

The Court of Appeal affirmed. It ruled that section 10159.2 imposed a duty on the designated officer to supervise the corporate broker’s employees. However, it ruled that the duty is owed to the corporation, not to third parties. As to third parties, absent special circumstances, officers and owners of a corporation are not responsible to third persons for negligence amounting merely to nonfeasance.

The court reasoned that Gold Coast Financial could be liable to the Sandler parties as Desser’s employer. And, Gold Coast Financial could seek indemnity from Sanchez for his failure to supervise Desser. However, Sanchez’s position did not expose him to liability to the Sandler parties.

ANALYSIS

The legislative history of section 10159.2 seems to support the conclusion that the requirement of a designated officer is for the benefit of the corporation, not third parties.