consultants are sandburs

Monday, October 15, 2012

There are some good Minnesota cases on the competence and loyalty duty an agent owes his principal. However, there also is a duty a principal owes itself.

An agent's duty.
White v. Boucher, 322 NW 2d 560, 564-66 (Minn. 1982) teaches:

In its answer to special verdict question number 6, the jury found that Christy had not breached its duties of good faith, loyalty and care. The trial court adopted the jury's answer as a finding of fact. Appellants now argue that uncontroverted evidence shows Christy violated its fiduciary responsibility in two respects: 1) Christy agents failed to disclose certain financial information concerning the Whites that reflected upon the White's ability to perform the contract, [...]

Upon the execution of a listing agreement, a broker becomes the agent of the seller and is subject to the general rules governing the principal-agent relationship. [citations omitted] It is the broker's duty to communicate to the seller "all facts of which he has knowledge which might affect the principal's rights or interests." [citations omitted]

In Hare v. Bauer, 233 Minn. 285, 26 N.W.2d 359 (1947), Hare, the seller's real estate agent, failed to disclose to Bauer, his principal, the fact that the prospective purchaser, Hapka, had been ill, was unemployed and was heavily in debt. When Hapka was unable to perform under the terms of the earnest money agreement he had executed, Bauer agreed to release him from the contract. The court held that because Hare had failed to disclose to Bauer the financial condition of the buyer, the agent had forfeited his commission:

The agent must have dealt fairly with his principal, and if he presents a person known to be incapable of performance and fails to disclose this or other pertinent facts to his principal, he is guilty of fraud and bad faith and forfeits his right to compensation. When such circumstances are present, the principal may show the prospective purchaser's lack of financial worth; his inability or failure to perform the contract; and, where a contract has been executed prior to discovery of such information, that it would not have been executed had the true facts been known and was cancelled by consent of the parties thereto immediately upon discovery thereof. No liability for the agent's commission arises when such facts are established.

Id. at 291, 26 N.W.2d at 362 [citations omitted]. In a very similar case, Fulsom v. Egner, 248 Minn. 156, 79 N.W.2d 25 (1956), the broker failed to disclose to his principal the fact that the purchaser's ability to make a $4,300 payment on the real estate contract was contingent upon the outcome of a pending lawsuit. The court held that by failing to disclose pertinent information the broker had forfeited his right to compensation:

Accepting the facts most favorable to the verdict, Egner did not make a full disclosure to the Fulsoms and they executed the earnest money contract without knowledge of pertinent facts. There is further evidence in the record that they would not have done so had they known Mrs. Hanson's ability to raise the $4,300 was dependent upon her receiving money from a lawsuit in which she was involved * * *.

Id. at 160, 79 N.W.2d at 30. In Wold v. Patterson, 229 Minn. 361, 39 N.W.2d 162 (1949) a real estate broker failed to disclose to his principal the fact that an earnest money check tendered by a prospective buyer was drawn on a bank in which the drawer had no money on deposit. Again, this court held that the failure to disclose constituted a breach of the agent's duty to his principal and that the agent therefore had forfeited all right to compensation under the parties' real estate listing agreement.

In the present case, Christy argues that it had no duty to disclose to the Bouchers the financial information provided by the Whites. Christy argues that in a contract for deed, the ability of the buyers to make monthly payments is irrelevant; the security of the seller lies in the fact that he receives a large down payment and can repossess the property in the event of a default. In fact, Christy maintains that "the best thing that could have happened to the Bouchers would have been to take the Whites $10,000 down payment and then recover the property following a default." It appears to be standard practice within the real estate profession to treat the buyer's finances as relatively unimportant in the case of a contract for deed sale.

It would seem, however, that Christy ignores the scope of a realtor's duty to his principal. The agent is bound to disclose to the seller all facts of which he has knowledge which might reasonably affect the principal's rights and interests. What might be "the best thing" for the seller must ultimately be the seller's decision, not the agent's. Surely many reasonable sellers rely not only upon down payments, but upon timely monthly payments as well. Furthermore, a seller may not wish to become embroiled in a law suit in the event of the buyer's default. In the present case, the Whites were not wealthy buyers, nor were their financial obligations insignificant.

The conclusion which follows is that Christy failed to disclose pertinent information concerning the White's financial condition, information which reflected upon the White's ability to perform under the contract. Christy therefore breached its fiduciary duty to its principals, the Bouchers. The finding of the trial court to the effect that no duty had been breached is contrary to law.

And, while the case involved a real estate broker, in any instance where an agent brings a buyer to a seller to effectuate a sale of seller's real property one presumes like duties of loyalty apply to someone so functioning, but without a real estate brokerage license. Indeed, White v. Boucher, 322 N.W.2d at 566, endorses the common black letter law meaning of an agent-principal relationship:

A principal-agent relationship results from the manifestation of consent by one person to another that the other shall act on the first person's behalf and subject to his control; and the other must consent so to act.

White v Boucher, 322 N.W.2d at 567 clearly concludes:

In the present case, the evidence shows that Christy agents first made a preliminary determination as to what type of home the Whites could afford, and then showed the Whites several pieces of property, including the Bouchers'. When the Whites expressed an interest in the Bouchers' home, Christy agent Mary Lynn Albert helped the Whites prepare an offer. There is no evidence to suggest that Christy agents acted at the White's direction or were subject to their control. Nor is this a case such as Duffy, in which the purchaser first contacted the real estate agent with a particular parcel of property in mind. Here it was the Bouchers who first employed Christy and agreed to pay a real estate commission in exchange for the agent's services.

The decision of the trial court in ordering judgment for the Whites is affirmed. The evidence does not establish a matter of law that the Bouchers were fraudulently induced by the Whites to enter into the real estate contract, nor does the evidence show that Christy acted as a dual agent in this real estate transaction.

The record does indicate that Christy breached its fiduciary duty by failing to disclose to the Bouchers pertinent financial information concerning the Whites. The fact that a complete disclosure was not made, however, does not necessarily result in a forfeiture of Christy's commission; that is, the breach of fiduciary duty must have been a material breach. In Hare v. Bauer, the court allowed a forfeiture upon a showing that the seller would not have entered into a contract with the buyer had the true facts been known. Similar findings were made in both Fulsom v. Egner, and Wold v. Patterson. In the present case, the jury found that no breach of fiduciary duty occurred. The trier of fact therefore did not consider whether any breach of the agent's duty to disclose was actually material, i.e., whether the Bouchers would have entered into the purchase agreement with the Whites even had they known of the Whites' debts and contingent liabilities. The matter is remanded in part for the limited purpose of determining the materiality of Christy's failure to disclose financial information concerning the Whites.

Affirmed in part, reversed in part.

The White v. Boucher case link was given at the outset, and if you read the link, at the outset you will discover the type of disclosure withheld by the agent from the principal, that being seller because the appellate court declined to hold a dual agency existed under facts of White v. Boucher. Every case has its own facts, and when disputed as to what the facts were, what was material, and what the law implies should litigation arise, a licensed attorney must necessarily be consulted to review facts and legal implications, not a lay person wrongly giving legal advice; Minn. Stat. Sect. 481.02.

Don't Stiff your principal if you claim earned but unpaid commissions are due you. One of the ablest trial attorneys I have met, Rick Eskola, called my attention to Stiff v. Associated Sewing Supply Co., 436 NW 2d 777 (Minn. 1989). Facts were:

Appellant Associated Sewing Supply Company (ASSC), a Minnesota corporation solely owned by Russell J. Hamilton, in 1975 hired David Stiff as a repairman and salesperson. In the same year it initially hired as a salesman Floyd Waller, who later, in 1977 was considered also to be the manager of ASSC. Both left the company's employment in April 1982. Shortly thereafter, each commenced an action to collect alleged unpaid commissions claimed to be owed to him. Following a two and one-half week bench trial, the trial judge made comprehensive findings of fact that each employee had embezzled company funds and had conspired to dismantle ASSC's business record practices, and that each had consequently forfeited any claims to commissions allegedly owed to him.[1] The court of appeals, in an unpublished opinion [1988 WL 56380] reversed and remanded for retrial. [... W]e reverse and remand to the trial court for entry of judgment.

From the trial court's extensive findings of fact, we extract and set forth only those facts we deem to be germane to the issues before us on appeal. In 1977, Waller became nominal manager of ASSC's store, and as such along with other duties, he was supposedly responsible for overseeing proper maintenance of all of ASSC's books and records. Notwithstanding Waller's nominal designation as manager, in all material respects both he and Stiff jointly or interchangeably performed the duties generally considered to be managerial, such as opening and closing the establishment, supervising other employees, ordering inventory and supplies, computing and paying commissions, banking, and fulfilling similar normal managerial duties. In the five years this arrangement prevailed — and particularly after 1980 — the two had managed to systematically dismantle all of the records of the company [...] The trial court likewise found Stiff's misconduct and participation in the mismanagement had resulted in depriving ASSC of that for which it had employed Stiff, or, to paraphrase, what commissions, if any, may have been owed to Stiff were unascertainable simply because his misconduct and misappropriations and the subsequent coverup had made it so. Therefore, the trial court concluded, he had failed to prove the commissions "earned," and, additionally, by his conduct had forfeited any right to commissions allegedly due him.

436 N.W.2d 778-79. The Stiff court then opined:

To be sure, much of the evidence was conflicting or contested. To resolve those conflicting and contested assertions as well as the often contradictory testimony, particularly of Stiff, but also of Waller, required that the trial judge make a number of essential credibility evaluations. After affording to those evaluations the deference to which they are entitled, we find more than sufficient credible evidence in the record to support each of the crucial findings made by the trial court. [...] The trial court's findings of gross misconduct clearly support its conclusion that respondent Stiff had forfeited any claim he might have had for alleged unpaid commissions. The forfeiture doctrine of the common law is one of long standing in Minnesota. [...] The court of appeals was under the misapprehension that for the forfeiture doctrine to be applicable, it is necessary that the employer prove the amount stolen by the employee is the equivalent of his forfeited wages. Clearly, that is not so. "To allow the dishonest servant to recover the value of his services, less what the master can show by direct and positive proof (often impossible) he had stolen, would neither subserve the ends of justice nor tend to promote common honesty." Id. Every employment contract encompasses implied duties of honesty and loyalty, which if breached by the employee, results in the employer owing the employee nothing. [...] Though not directly on point, Meyer v. Mason Publishing Co., 372 N.W.2d 403 (Minn.App. 1985) demonstrates that the employer's statutory liability is limited to those wages or commissions "actually earned and unpaid." In this case respondent failed to establish the amount of commissions earned and unpaid. The trial court found that Stiff had skimmed cash, appropriated the company's customers, and had participated in dismantling the company's business records. In those circumstances, he never earned his commissions during the years in question.

436 N.W.2d 779-80. Agent disloyalty is separate from incompetence, as to motive, although a harmful result to the principal can arise from either. An agent taking on a professional range of discretionary contract duties can be regarded as in breach of the basic purpose of hiring an experienced professional, namely to avoid sloppiness, inattention, material failures of due diligence, and mistake. "I could have ham-handedly screwed things up royally all by myself without the 'help'," is a practical way of regarding things concerning purchase of experienced professional services. While a professional agent cannot fob off due diligence duty owed a principal, there, however, is law that a principal, especially one advised by counsel, and presumed to have staff management competence, might be at fault for not discovering and promptly and appropriately acting on things that are arguably obvious to anyone exercising even minimal care and attention, and that inattention or vacillating can lead to a waiver. Without getting into waiver, and its nuances and uncertainties, the question of a party's own due diligence duty to itself - even absent a showing of sophistication - a duty to pay sensible, minimal attention and see the obvious, cannot be simply ignored over time and followed by blaming others; see, e.g., Rasmussen v. R & N DVORAK, INC., unpublished (Minn.App. 2008). The principle is don't be unreasonably dumb or inattentive and then blame it on somebody else, unless you have a very good case for affirmatively being misled, or disarmed of due caution by articulable circumstances. The case stands as a warning to the unwary.

Caveat to Crabgrass readers: Read the three cases in their entirety, as linked, and check a few of the cited cases, for a fullest lay person understanding. However, a lawyer should review the cases with a client, or a client's controlling people, to give a perspective beyond what you or I, as non-lawyers might think or believe. And a practicing lawyer carries errors and omissions insurance coverage, in case he/she misadvises a client, to the client's detriment, whether a breach of loyalty or simple negligence is the cause. Indeed, it might be that coverage for a willful breach of loyalty by an insured firm/individual might not qualify and instead be an exception under "errors and omissions" coverage; or might be litigated that way by a policy issuer in order to defeat or delay paying out cash.

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