An April, 1999 decision of the Pennsylvania Supreme Court, Bortz v. Noon, addressed the issue of misrepresentation in the context of a licensee acting as an innocent conduit of information from a third party.
In 1986, Albert Bortz (the “Buyer”) entered into a contract with Mr. and Mrs. Noon (the “Sellers”) to purchase their home located in Pittsburgh. A salesperson (the “Sales Associate”) affiliated with the listing broker, Coldwell Banker Real Estate (the “Listing Broker”), was the selling licensee. The Buyer’s lender required that the home’s septic system pass a dye test before the closing. The Sales Associate referred the Buyer to a contractor who performed the test. He told the Sales Associate that system failed the test, and she informed the Buyer. Under the contract, the Sellers had the option of repairing the septic system, which they elected to do. They chose another contractor to do the work. After the contractor’s work was done, an employee of the title insurance company told the Sales Associate that the system passed the dye test. She conveyed this information to the Buyer and the closing was scheduled.
After the closing, the Buyer learned that the septic system had not passed a dye test; in fact the title company had forgotten to have it tested. Testing revealed that the system could not be repaired. The property had to be connected to the public sewer system, at a cost of over $15,000. In an equity proceeding, the Buyer sued the Listing Broker, the title company and the Sellers, seeking monetary damages and recision of the sale. Finding the Listing Broker liable for the Sales Associate’s misrepresentation, the Chancellor ruled in favor of the Buyer, but declined to rescind the sale. The Sellers appealed to the Superior Court, which upheld the lower court decision. Neither of these courts specified on which theory of misrepresentation their finding of liability was based.
On appeal to the Pennsylvania Supreme Court, the issue was whether the Sales Associate had a duty to ascertain whether the septic system actually had passed a dye test and whether her failure to do so constituted a misrepresentation to the Buyer. The court reviewed Pennsylvania law regarding liability for misrepresentation in-depth, and explained the theories of intentional misrepresentation, negligent misrepresentation, and innocent misrepresentation. It found no evidence that the Sales Associate intentionally misrepresented any facts to the Buyer, nor that she intended to deceive the Buyer by not providing him with copies of the reports, when she herself did not have copies of the reports. While she made an affirmative misrepresentation with respect to the dye test, she did so not knowing the information was false.
As far as negligent misrepresentation, the Pennsylvania Supreme Court stated that it has not recognized this cause of action in connection with a real estate licensee (although lower courts in the state have). It observed that courts in many other states recognize such a cause of action and have found liability where a real estate licensee fails to use reasonable care in ascertaining the veracity of a representation. Liability sometimes is found where a real estate licensee fails to independently verify a fact that the seller represents to the buyer, and which the licensee then passes on to the buyer.
The Bortz court noted that when the events took place, in 1986, the standard of care in the real state brokerage business did not require a licensee to verify or disclose test results that were not ordered by the licensee and were not part of the sale contract. In this particular situation, the Sales Associate would not have had a reason to know that the title company failed to have the dye test performed. The court stated that the Sales Associate “was not acting as a source of information from the Sellers or other entity with whom she had an agency relationship and which might then trigger a duty to physically transfer the reports to the Buyer and verify the accuracy of statements that were material to the sale transaction.” Instead, she was acting as an “innocent conduit” of information from the title company, an apparently reliable source, to the Buyer. Nothing gave the Sales Associate notice that the information was false, and she did not have a duty to independently investigate.
The court stated that with these facts, imposing a duty on the Sales Associate to investigate the accuracy of the test would place too high a burden on real estate licensees. Therefore, it held that a real estate licensee does not have a duty to perform an independent investigation of a contractor’s report, where the licensee did not have an agency or contractual relationship with the third party. The court reversed the lower court’s decision, finding instead that the Listing Broker was not liable to the Buyer for the Sales Associate’s affirmative misrepresentations.
Bortz v. Noon, 729 A.2d 555 (Pa. 1999).