Read the full decision: Auer v. Paliath, 17 N.E.3d 561 (Ohio 2014).
The Supreme Court of Ohio has considered whether a broker could be liable for the actions of a salesperson simply because the broker received a commission from a transaction involving the salesperson.
Torri Auer (“Buyer”), a California resident, contacted Ohio real estate salesperson Jamie Paliath (“Salesperson”) about her interest in a duplex. The Buyer told the Salesperson that she was interested in buying investment property in Ohio and planned to use the rent payments as an income stream.
The Salesperson was associated with Home Town Realty of Vandalia, LLC d/b/a Keller Williams Home Town Realty (“Brokerage”). The agreement with the Brokerage stated that the Salesperson was an independent contractor, and the Salesperson was responsible for paying her own costs and recruiting clients. The agreement also specified how commissions would be divided between the parties.
In September 2007, the Salesperson took the Buyer to the property, as well as several other properties. The Buyer saw part of one interior of the properties, but otherwise didn’t go inside the other properties. The Salesperson told the Buyer that extensive work had been done to the interiors of the properties.
The Buyer purchased a total of 27 units through the Salesperson, based on alleged representations that the properties were undervalued or rented out. One of the properties was purchased by a company created by the Salesperson shortly before she sold it to the Buyer for four times what her company had paid. The Buyer also contracted with a property management company created by the Salesperson, as well as entering into an agreement with a construction company created by the Salesperson to perform work on some of the units. The Brokerage received commissions from each of the sales.
The Buyer received no income from the properties, and only one unit was rented in August 2008. In October 2008, the Buyer visited the properties with another licensee and a contractor. She discovered that all of the properties needed extensive work during her visit.
The Buyer filed a lawsuit against the Salesperson and the Brokerage, alleging fraud in the inducement in the sale of the properties. During the trial, the Brokerage argued that it did not breach its fiduciary duty to the Buyer and it had adequately supervised the Salesperson. The trial court submitted the case to the jury, and the jury found for the Buyer and against the Salesperson and the Brokerage, awarding the Buyer $135,200. The award was affirmed on appeal, as the appellate court ruled that the Brokerage’s receipt of a commission in the transactions made it responsible for the actions of the Salesperson.
The Supreme Court of Ohio reversed the lower courts, finding that the jury instructions did not set forth the proper standard and so the case was sent back to the trial court for further proceedings. The court stated that in order for the Brokerage to be liable under a theory of respondeat superior, the jury would need to find that the Salesperson was acting within the scope of her duties for the Brokerage.
The court ruled that the jury instruction misled the jury about when the Brokerage would be liable for the salesperson’s action. The trial court had started its instruction by stating that the Brokerage would only be liable if the Salesperson was acting within the scope of her responsibilities to the Brokerage but then the instruction went on to state that if the Salesperson committed fraud in the sale of the properties to the Buyer, then the Brokerage was liable for the Salesperson’s fraud. The court found that this instruction was defective because it did not require the jury to find that the Salesperson was acting within the scope of her duties when the fraud was committed. Instead, the instruction required the jury to find against the Brokerage if the Salesperson committed fraud.
The court sent the case back to the trial court for further proceedings. On remand, the court stated that the jury should be properly instructed that the Brokerage is vicariously liable for the actions of the Salesperson only if the jury determines that the Salesperson is acting within the scope of her agency when the fraudulent acts occurred. The court also stated that the appellate court’s ruling that the receipt of a commission by the Brokerage made it liable for the Salesperson’s actions was erroneous, as that is not a determinative factor in deciding whether the Salesperson was acting within the scope of her agency. Therefore, the court reversed the lower courts and sent the case back to the trial court.
Auer v. Paliath, 17 N.E.3d 561 (Ohio 2014).
Editor’s Note: The Ohio Association of REALTORS® and NAR filed separate amicus curiae briefs in support of the Brokerage.