Sandler v. Sanchez: Designated Broker Not Liable for Salesperson's Alleged Fraud

A California appellate court has considered whether a corporation's designated broker could be personally liable for the actions taken by one of the corporation's salespeople, absent a showing of special circumstances.

The Bernard Sandler and Linda Marie Sandler Revocable Intervivos Family Trust ("Trust") filed a lawsuit against 765 South Windsor, LLC, Gold Coast Financial (a California real estate corporation) ("Brokerage"), and Carlos Sanchez ("Broker"), Gold Coast's designated officer/broker.

The Trust alleged in the lawsuit that Keith Dresser ("Salesperson"), who was a real estate salesperson as well as the president and sole shareholder of the Brokerage, had fraudulently induced the Trust to invest $600,000 in repairs on 765 South Windsor. In reality, the property needed more money to fund the repairs and the lender with the first lien on the property was preparing to foreclose, leaving the Trust's note unsecured. Allegedly, the Salesperson also used $300,000 of the proceeds for personal expenses. The Salesperson died in 2009 and so was not part of the lawsuit filed by the Trust. In addition, the Brokerage was insolvent at the time of the lawsuit.

The lawsuit alleged that the Broker owed a fiduciary duty to the Trust because the Broker had a statutory duty to supervise the Brokerage's employees. California law allows corporations to act as a licensed real estate broker, so long as the corporation has a licensed broker as the entity's designated officer. The Trust claimed that if the Broker had exercised his duty to supervise the Salesperson, he would have known of the Salesperson's misrepresentations.

The Broker sought to have the lawsuit dismissed on the ground that he owed no duty to the Trust. The Broker claimed to have no knowledge of the Salesperson's interactions with the Trust and the duty to supervise was owed to the Brokerage (or, the corporation), not the Trust. The trial court ruled that the Broker did not owe a duty to the Trust and dismissed the lawsuit. The Trust appealed.

The California Court of Appeal, Second Appellate District, affirmed the trial court. In California, a corporation's officer can only be liable to a third party for breach of a duty if the officer breached a duty owed specifically to the third party; an officer isn't liable to third parties for breach of duties owed to the corporation.

The court ruled the Broker did not owe a fiduciary duty to the Trust. Looking at the statutory history of corporate brokerage statute, the court found that it was clear that the intent of the legislature was to make licensed real estate brokerage corporations operate under the same rules as other corporations. Therefore, the corporation's designated officer did not owe any general duties to clients of the firm, unless special circumstances existed. Since the Broker's statutory duty to supervise the Salesperson was a duty owed to the Brokerage (corporation) and the Broker otherwise had no contact with the Trust, the Broker did not owe any duty to the Trust. Therefore, the court affirmed the trial court's decision to dismiss the lawsuit.

Sandler v. Sanchez, 142 Cal. Rptr. 3d 771 (Cal. Ct. App. 2012).

Editor's note: The California Association of REALTORS® filed an amicus curiae brief in support of the Broker.

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