Few courts have addressed the fiduciary duties of a buyer's broker. However, the Arizona Supreme Court has been asked to review this issue in Lombardo v. Albu, 299 Ariz. Adv. Rep. 13 (filed July 13, 1999). In addition, the Court has been asked to determine whether Arizona Real Estate Department rules should impose civil liability upon real estate licensees.

The Factual Background of the Case

A lender noticed a trustee's sale on a second position deed of trust encumbering the sellers' property for November 3, 1993. As a result, the sellers and the lender entered into a loan workout agreement in which the sellers agreed to list the property by February 1, 1994 and pay the loan by April 1, 1994. Three months later, on the last day they had been given to do so pursuant to the loan work-out agreement, the sellers listed the property for sale. However, the sellers did not disclose the trustee's sale or the loan workout agreement to their listing broker.

The buyers were represented by a buyer's broker. At some point, the buyers conveyed to the buyer's broker that the husband was a sole proprietor and had some financial problems. However, the buyers believed they could obtain financing and planned to submit the offer in the wife's name only. The buyer's broker did not disclose the buyer's financial situation to the sellers.

In April 1994, the sellers entered into a purchase contract with the buyer wife, which was contingent upon financing. The purchase contract set a close of escrow for June 30, 1994 and the sellers obtained an extension on the loan workout agreement to July 5, 1994.

HUD agreed to allow the buyers to assume the sellers' first mortgage, a HUD loan. However, the buyers were unable to obtain the necessary funds to close escrow on the agreed upon date. Therefore, the close of escrow date and trustee's sale were extended, in exchange for the payment of the buyer's $4,000 earnest money to the foreclosing lender. Unfortunately, the sellers then defaulted on their HUD loan and the buyer was no longer allowed to assume it. Ultimately, the buyers failed to close escrow and on September 1, 1994, the second lien holder foreclosed on the property.

The Lawsuit

The sellers sued various parties involved in the transaction, including their listing broker and the buyer's broker. The trial court ruled in favor of both the listing broker and the buyer's broker, dismissing the sellers' claims. The Court of Appeals affirmed the dismissals as to both brokers, except for a limited issue involving an allegation that the listing broker failed to deliver a disclosure statement to the buyers.

The sellers essentially conceded that under the common law of agency, a buyer's broker is not required to, and may be barred from, disclosing the buyer's financial position to the sellers. However, the sellers argued that an ADRE Commissioner's Rule entitled “Duties to Client” created a duty, the violation of which makes the buyer's broker civilly liable for damages to the seller. The Commissioner's Rule stated that a licensee: Shall disclose to all other parties to the transaction . . . any information that the buyer . . . is, or may be, unable to perform due to insolvency or otherwise.

Thus, the seller argued that the Commissioner's Rules were not only rules by which the ADRE regulates real estate licensees, but were rules that the public could use as the basis for lawsuits against real estate licensees. The Court of Appeals rejected the sellers' argument. The Court decided that although the ADRE could enforce its Rules by revoking or suspending a license, a seller could not sue a broker in court for the same act.

The Court recognized that a buyer's broker owes a fiduciary duty of loyalty to the buyer. The Commissioner's Rule requiring a buyer's broker to disclose confidential financial information about the buyer to the seller violates that fiduciary duty of loyalty. Therefore, between the Commissioner's Rule and a broker's common law fiduciary duty, the common law fiduciary duty was controlling in a civil suit

The Court also expressed concern that imposing a duty to disclose to non-clients potentially places a broker in a conflict between the fiduciary duty to the client and a duty to a non-client. However, no conflict arises if the broker owes the same disclosure duty to the other party as the client owes to the other party. Therefore, the Court held that generally a broker has the same disclosure obligations as the broker's client (regardless of whether the client is the buyer or the seller).

The Court did not hold that real estate brokers have no duties whatsoever to non-clients. The Court recognized that information critical to the transaction, but not accessible, must be disclosed. However, as a matter of policy, the Court expressed that the parties should be allowed to decide what information is to be exchanged in a transaction. A seller can require the buyer's credit report, financial statement, or approved financing as a condition to entering into the contract. If the seller requests such information and the buyer or buyer's broker misleads the seller, the buyer or buyer's broker would be liable for misrepresentation.

Conclusion

It is now up to the Arizona Supreme Court to decide the issue. If the Supreme Court affirms the Court of Appeals decision, a broker's disclosure obligations will match the client's and a buyer's broker's fiduciary duties will be clarified. Further the Commissioner's Rules will not serve as the basis for civil liability in the future.

Notably, when this Commissioner's Rule, which is entitled “Duties to client,” was adopted in 1980, sub-agency was the practice in Arizona. At that time, the seller was the only client because the broker working with the buyer was a sub-agent of the seller. A seller's agent was, and is, obligated to disclose to the seller any adverse financial information about the buyer. However, today, buyer's brokerage is the norm and sub-agency is a rarity. Fortunately, the ADRE has agreed with AAR that once the Supreme Court makes a final decision in this case, if a conflict remains, the two groups will work together to resolve the dilemma.

Finally, despite the concerns of some in the industry, the Court of Appeals decision will not result in injustice. Buyer's brokers are already motivated to represent buyers with reasonable prospects of obtaining financing. A buyer's broker who would represent a buyer who could not obtain financing would not stay in business long. Likewise, listing brokers routinely request financial information about a buyer. The buyer and the buyer's broker are legally obligated to respond to such requests completely and honestly regardless of the outcome of the Lombardo case.

Published: March 20, 2000

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