Designated brokers of California Real Estate Corporations have reason to feel somewhat uneasy in the light of a recent ruling by the United States Court of Appeals for the Ninth Circuit. The cause for their discomfort arises from the court finding that such individuals have a good deal more personal liability than many had previously thought.

The case, known at different stages as both Holley v. Meyer and Holley v. Crank, arises out of a distasteful situation that occurred in the fall of 1996. At that time the Holleys, one of whom is Afro-American, were seeking to purchase a home in Twenty-nine Palms. In a nutshell, their offer to purchase a home listed by Triad Realty, who also represented the Holleys, was rendered unsuccessful as a result of alleged discriminatory acts engaged in by one of Triad's agents, Grove Crank. Ultimately, a fair-housing case was filed against Triad by both the Holleys and the builder-seller of the home, Brooks Bauer.

There really has been no dispute regarding violations of the Fair Housing Act. Rather, the legal wrangling has been over questions of liability. Triad, like many California real estate companies, is a corporation. David Meyer, its sole owner, was also the designated broker for the corporation. He, personally, was named in the suit. (Although it is not a part of the official record, it is reasonable to surmise that Meyer was included because the corporation itself lacked significant assets.) At the district court level, however, Meyer was dismissed from the suit on the grounds that liability for Crank's actions could be attributed only to the corporation, not to one of its officers.

There is not space here to describe the hows and whys of the various steps that followed. Suffice it to note that the case was appealed to the Ninth Circuit appellate court, which reversed the district court ruling. But then the Supreme Court reversed the Ninth Circuit ruling, sending the case back for consideration on other grounds. Today we have the results of that further consideration.

Under general corporate law, it is the corporation, not its officers or shareholders, which is held responsible for the acts of employees in the conduct of business. Applying that principle here, Triad, but not David Meyer, would be responsible for Crank's behavior. However, in the recent ruling the Ninth Circuit Court (actually, a three-judge panel of the full court) found that California real estate law governing corporate brokerages is an exception in this regard. "…California law makes the designated real estate broker of a real estate company personally responsible for the supervision of the corporation's salespersons."

California Business and Professions Code allows a corporation to hold a real estate license, but only if the corporation designates an officer who is a broker to serve as officer/broker of the corporation. According to the code, that person "shall be responsible for the supervision and control of the activities conducted on behalf of the corporation by its officers and employees…"

The Ninth Circuit court drew heavily on the legislative history that resulted in the enactment of the relevant section (10159.2) of the Business and Professions Code. It was clear that the intent of the California scheme was that there be a real, live, flesh-and-blood person who would be accountable for the acts of the employees of a real estate brokerage corporation.

It has long been known that corporate brokers bore personal responsibility in the sense that their own licenses could be affected (placed on probation, suspended, or even revoked) for infractions such as failing to provide proper supervision, but the recent Holley ruling raises the idea of personal responsibility to a new level. The personal liability of the corporate broker in a case like this is not just an abstraction, it may involve tangibles such as money and other personal property.

Errors and Omissions ("E&O") insurance is not available for Fair Housing violations. But fair housing cases, such as Holley, often have real economic consequences for the plaintiffs, not to mention penalties for violators. If insurance funds are unavailable, and the corporation is out of the picture, guess whose assets are on the line? The designated broker's will be; and that is why such folks now have some cause for unease.