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A Federal appellate court has considered whether a real estate broker had a duty to disclose to a client the existence of a special tax district.
Lafarge North America (“Company”) hired Discovery Group, L.L.C. (“Brokerage”) to help it locate a new headquarters. The parties entered into an exclusive listing agreement where the Broker would identify possible sites and review each to make sure that the site accomplished the Company’s objectives. One of the stated objectives for the Brokerage was to “understand local government concerns.”
The Brokerage eventually presented the Company fifteen possible locations, and the Company selected the Chapel Ridge site based on the Brokerage’s recommendation. After the selection of the site, the parties began working out the details of the purchase. One of the groups that had an ownership interest in the property sought to have the area surrounding the property designated as a special taxing district which would impose an increased sales tax on all transactions in order to fund road improvements. The Brokerage learned about the proposed taxing district prior to closing, but did not inform the Company. The transaction eventually closed.
Following the closing, the tax district was created. The Company did not believe that the increased sales tax had any impact on it, because its sales were made by a mobile sales force. However, the Company learned that this was not correct and that it did have to pay sales taxes on all of the Salespeople’s transactions. Because of this increased tax, the Company relocated its headquarters outside of the taxing district.
The Company brought a lawsuit against the Brokerage for breach of contract, fraudulent misrepresentation, negligent misrepresentation, breach of fiduciary duty, negligence, and rescission of the lease agreement. The Company argued that the Brokerage had a duty to disclose the existence of the special taxing district. The trial court ruled that the Brokerage did not have a duty to disclose the taxing district because it was not a material fact requiring disclosure nor did the contract impose a duty on the Brokerage to disclose the existence of the taxing district. The Company appealed.
The United States Court of Appeal for the Eighth Circuit reversed the trial court and sent the case back to the lower court for further proceedings. The court first looked at the breach of contract allegations to see whether the representation agreement created a duty for the Brokerage to disclose the tax district. The representation agreement contained “objectives” for the Brokerage which included investigating economic incentives and tax rates for the prospective properties, but the contract language was ambiguous about whether the Brokerage had an actual duty to undertake these tasks. Because of the ambiguity, the court ruled that this fact issue needed to be resolved by a jury and so sent the case back to the trial court.
The court next considered the misrepresentation and rescission allegations. For both sets of allegations, the Company would need to show that the existence of the special property taxing district was a material fact requiring disclosure. The trial court had ruled it was not a material fact to the Company because it had not believed it was required to pay sales tax for its sales force’s transactions. While the court agreed this was a relevant consideration, the court ruled that a jury needed to determine whether this fact was material to the Company. Thus, these allegations were also returned to the lower court.
The court next considered the negligence and breach of fiduciary duty allegations. For breach of fiduciary duty allegations, the question of whether the Brokerage had a duty to disclose the taxing question was a fact question that needed to be resolved by the jury. Similarly, the negligence allegations required a determination of whether the Brokerage exercised “reasonable care” in handling the Company’s business. Arguably, the failure to disclose the tax district was not an exercise of reasonable care. Therefore, the court returned the case to the lower for further proceedings.
Lafarge North America, Inc. v. Discovery Group L.L.C., 574 F.3d 973 (8th Cir. 2009).