Rathgeber v. James Hemenway, Inc.: Buyer's Representative Has No General Duty to Protect Client from Emotional Distress in Oregon

In a case previously summarized in The Letter of the Law, Oregon's highest court has considered whether a buyer could collect emotional distress damages from a real estate broker for broker's alleged breach of his fiduciary duty to his clients. Click here to read the earlier summary.

Tom and Karen Rathgeber ("Buyers") decided to move from Portland, Oregon, to a rural part of the state. The Buyers retained William Zobel ("Buyer's Representative") to help them locate a suitable property, allegedly because he told them that he was experienced in transactions involving rural property. After an extensive search, the Buyers entered into a purchase agreement for a property. The Buyers were allowed to take possession of the property prior to closing, during which time they discovered a number of problems with the house. Eventually, the Buyers froze the purchase funds that they had in escrow because of the defects, causing the sellers to file a lawsuit seeking specific performance of the purchase contract. The Buyers settled that lawsuit.

The Buyers then brought a lawsuit against the Buyer's Representative, seeking damages for violations of Oregon's Unfair Trade Practices Act ("Act") as well as damages for emotional distress. A jury returned a verdict in favor of the Buyers, awarding damages both for Act violations as well as for emotional distress and also awarded the Buyers' attorney's fees/costs. An appellate court reversed the jury verdict, and the Buyers appealed.

The Supreme Court of the State of Oregon affirmed the appellate court, although on different grounds. The court first considered whether the Buyer's Representative could be liable for violations of the Act. To recover under the Act, an individual must prove that parties made representations during the course of their business that they had qualifications that they did not possess and the person knew or should have known that the misrepresentation violated the Act. Under Oregon law, the Buyer's Representative and the Buyers were required to both execute an agency disclosure form which provides, in part, that a "buyer's agent has the affirmative obligations...[t]o the buyer: [t]he fiduciary duties of loyalty, obedience, disclosure, confidentiality, reasonable care and diligence, and accounting in dealing with the buyer." The Buyers claimed that the Buyer's Representative made a false representation in violation of the Act when the Buyer's Representative failed to meet the obligations listed in the agency disclosure form and also because the Buyer's Representative held himself out as being experienced in rural real estate transactions. The appellate court had ruled that the agency disclosure form contained nothing more than a list of duties and did not constitute a representation by the Buyer's Representative.

The court disagreed with the appellate court's interpretation of the law, finding that a plaintiff could base an Act lawsuit on a statutorily-required disclosure like the duties listed in the agency disclosure form. However, the court still affirmed the appellate court's reversal because the evidence did not support the Buyers' allegations. In order to allege a violation of the Act, the Buyers were required to show that the Buyer's Representative made a misrepresentation at the time he told them he was experienced in rural transactions. The Buyers produced no evidence showing that at the time the statement was made that the Buyer's Representative knew or should have known he was not competent to act as their representative. The only evidence produced by the Buyers tended to show that the Buyer's Representative may have been negligent in this particular transaction, but showing that the Buyer's Representative was negligent in this particular transaction was not equivalent to showing that the Buyer's Representative misrepresented his qualifications at the outset. Because the Buyers failed to prove that the Buyer's Representative made any misrepresentations to them, the court affirmed the appellate court's ruling.

Next, the court considered the emotional distress award. To recover damages for negligent infliction of emotional distress, usually the Buyers would be required to show a physical injury resulting from the Buyer's Representative's conduct. However, an exception exists when the conduct violates a legally-protected interest, even if the conduct is no more than negligent. The Buyers argued that the legally-protected interest exception applied in this case, while the Buyer's Representative argued that other Oregon cases had held other professionals were not generally responsible for protecting their clients from emotional distress absent a specific duty and so this same reasoning should apply to real estate professionals. The court agreed with the Buyer's Representative that the proper framework was whether or not the standard of care required the Buyer's Representative to protect the Buyers from emotional distress, thereby creating a specific duty. Since the Buyers had offered no evidence nor plead that the standard of care required a buyer's representative to protect its clients from emotional distress, the court affirmed the appellate court's ruling. Thus, the court affirmed the rulings in favor of the Buyer's Representative.

Rathgeber v. James Hemenway, Inc., 69 P.3d 710 (Or. 2003).

Editor's Note: The Oregon Association of REALTORS® filed an amicus curiae brief in support of the Buyer's Representative.

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