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A Colorado federal district court has interpreted the duties that the state's "transaction-broker" statute imposes upon a licensee serving in that role.
Dr. Robert and Shirley Sussman ("Sellers") decided to sell the 230 acres of land they owned in Larimer County, Colorado. The Sellers also owned 68 shares of water ("Water Shares") from the North Poudre Irrigation Company. The Sellers listed their property for sale with Harold Johnson ("Listing Broker"). At the time of listing, the Sellers informed the Listing Broker that they wanted to retain 28 of the Water Shares.
Jay Stoner ("Transaction Broker") was employed by The Group, Inc., Real Estate Associates and he was also a real estate developer and principal in Stoner and Company ("Buyer"). Prior to the listing of the property, the Transaction Broker sent the Listing Broker an offer from the Buyer to purchase the property and all of the Water Shares. The offer included a provision requiring the Sellers to pay the Transaction Broker a 3% commission. The Sellers rejected the offer, objecting to the commission amount and also stating their desire to retain 28 of the Water Shares. Following the listing of the property for sale, the Transaction Broker submitted another offer, increasing the amount of the offer but including the 3% commission provision and also the purchasing of all Water Shares. The second offer also contained a contingency provision allowing the Buyers a period in which to determine whether or not the property was suitable for development and to nullify the purchase if they determined it was not. The Sellers submitted a counteroffer that simply reduced the time of the contingency period, but did not change any of the other provisions to which they had previously objected. The Buyer accepted the counteroffer.
Following the Buyer's acceptance, the value of the Water Shares rose dramatically, from an estimated $17,000 per share at the time of the initial offer to an estimated $42,000 per share at the time of closing. The Listing Broker had told the Sellers the Water Shares were worth $14,000 per share at the time of listing. Eventually, the Sellers filed a multicount lawsuit, which included three counts directed at the Transaction Broker. The Transaction Broker filed a motion to dismiss the allegations made against him.
The United States District Court, District of Colorado, granted the Transaction Broker's motion to dismiss. For purposes of the motion to dismiss, the court accepted (without deciding) the Sellers' allegation that the Transaction Broker was serving as a "transaction-broker," within the meaning of Colorado's "Act Concerning Brokerage Relationships in Real Estate Transactions" ("Act"). The Act made Colorado the first state to create non-agency real estate brokerage relationships, which are brokerage relationships defined by the Act and not by the common law of agency. The Act defines a "transaction-broker" as a broker who is not an agent for either party but instead a broker who assists one or more of the parties with the transaction and does not act as an advocate for any of the parties. The Act sets forth all of the duties a transaction broker owes to its client(s).
Following its review of the Act, the court considered the Sellers' allegations. The Sellers first alleged that the Transaction Broker breached his statutory duty to them by failing to inform them about the dramatic rise in the value of the Water Shares. Looking at the Act, the court ruled that no such duty existed for a Transaction Broker in the Act and dismissed this allegation. The Act provides that the Transaction Broker is not an advocate for any party to the transaction and thus had no duty to transmit this information to the Sellers.
Next, the Sellers alleged that the Transaction Broker fraudulently concealed from them the rise in the price of the Water Shares. While the court agreed that the Sellers had plead the necessary elements of a fraudulent concealment action (which include concealment of material fact which should be disclosed; knowledge that the fact is being concealed; other party's ignorance of the material fact; intent that the other party act on the concealed fact; and concealment causing damage to the other party), the court ruled that the Transaction Broker had no duty under the Act to disclose this information to the Sellers and so could not be liable for fraud. Thus, the court dismissed this allegation as well.
Finally, the court considered the Sellers' allegations of professional negligence. A professional may be liable for professional negligence if he fails to conform to the standard of care ordinarily possessed and exercised by members of the same profession. The court ruled that the Transaction Broker did not have a duty to disclose information about the value of the Water Shares to the Sellers under the Act, and so did not commit professional negligence. Thus, the court dismissed this allegation as well.
Sussman v. Stoner, 143 F. Supp. 2d 1232 (D. Col. 2001).
Editor's Note: To read more about statutory non-agency relationships, visit the Legal Connection on ORP. Click here to read a summary of these statutes and a summary of NAR's position on non-agency relationships. Click here to read a law review article on the subject.