Broker Lender Has No Special Duty
A Wisconsin court has considered whether a broker owed a client a fiduciary duty when he was evaluating whether to approve a short sale for a property owned by the client where the broker held a mortgage.
Westwind Holdings, LLC (“Owner”) borrowed $300,000 from Stephen Mills (“Broker”), with the loans secured against a commercial property owned by the LLC as well as a residential property owned by the LLC’s sole member. The loan was made through a bank (“Bank”) where the Broker had his retirement accounts. The Broker also held a broker’s license and was part owner of Bear Realty (“Brokerage”).
The Owner decided to sell the commercial property and listed it for sale with the Brokerage. At the time, the Broker told the Owner he would not consider a short sale for the property and that he would foreclose on the properties if the payments were not made. A salesperson who had arranged for the Owner and Broker to originally meet served as the listing agent for the transaction.
The Owner failed to make payments and so the Bank began foreclosure proceedings. The Bank received a foreclosure judgment. Thereafter, Jon Lin (“Buyer”) made an offer to purchase the property via a short sale. The offer was contingent on the approval of all lienholders. The Broker refused to approve the short sale. When he learned that the Owner had stopped paying the insurance for the property, the Broker began making the payments and planned to buy the property at the sheriff’s sale.
The Buyer made the winning bid at the first sheriff’s sale, but failed to make the required deposit. A second sale was held and the Broker made the winning bid of $1000, but the court refused to confirm the sale and set a minimum bid amount of $240,000. The Owner abandoned his attempts to purchase the property. Thereafter, another broker testified that she inquired about the property prior to the expiration of the listing agreement but was told by an unidentified male that the property was “unavailable”.
The Owner filed a lawsuit against the Broker and the Brokerage, alleging breach of contract and breach of fiduciary duty. The Owner claimed that the Broker thwarted the possible short sale in order to buy the property for himself. The trial court ruled that the Broker had not violated the terms of the contract and there was no breach of fiduciary duty. The Owner appealed.
The Wisconsin Court of Appeals, District II, affirmed the trial court rulings. The court first looked at the breach of contract claim. The Owner argued that the covenant of good faith and fair dealing implied in every contract was breached when the Broker allegedly rejected the short sale in order to buy the property for himself. The court rejected this argument, finding that there was no duty for the Broker to modify or extend the loan in the contract and the covenant of fair dealing did not impose this duty. Indeed, the Broker had stated at the outset that he would not accept a short sale for the property.
Next, the court looked at the breach of fiduciary duty allegations. The Broker did hold a real estate license; however, he was acting as a lender in this matter and not as a real estate broker. A licensee only owes its client a fiduciary duty when it is providing licensed services to the client. Since the Broker was not acting within the scope of his license, the court ruled that he did not have a fiduciary duty to the Owner in regards to the short sale. The court also rejected the allegations that the Brokerage misled another broker who expressed an interest in the property, determining that there was not duty to continue marketing the property following the expiration of the listing agreement. Thus, the court affirmed the trial court.
Williamson v. Mills, No. 2012AP2349, 2013 WL 4081280 (Wis. Ct. App. Aug. 14, 2013). [This is a citation to a Westlaw document. Westlaw is a subscription, online legal research service. If an official reporter citation should become available for this case, the citation will be updated to reflect this information].