Last week we discussed various aspects of the decision by California's 4th Appellate District Court of Appeal in the case of Holmes v. Summer. Phil and Jenille Holmes (Buyers) had entered into a purchase contract with the client of listing agent Summer and her broker, Beneficial Services, Inc. (Brokers).

The purchase price was $749,000; the length of escrow was to be 30 days. "According to the buyers, after they signed the deal with the seller, they sold their existing home in order to enable them to complete the purchase of the seller's property. Only then did they learn that the seller could not convey clear title because the property was overencumbered."

The property was subject to a first trust deed of $695,000, a second of $196,000, and a third of $250,000, for a total of $1,141,000. At the purchase price, it was underwater by $392,000. The seller was unable to deliver title, so the buyers sued for damages.

The buyers sued not the seller, but the brokers. Upon a motion by the brokers, the trial judge dismissed the case saying to the buyer's counsel, "…you're searching around for a deep pocket. The deep pocket is the brokerage. But the brokerage appears … under the circumstances to have done nothing that breached any duty to your client [the buyers]…" Subsequently, the court of appeal reversed the dismissal, ruling that the brokers did owe the buyers a duty to disclose the financial situation regarding the property.

Even if one likes the outcome of the appellate decision (that the brokers should have disclosed the financial situation), it is still worrisome. In its reasoning the decision appears both to create new duties for brokers and to extend established principles beyond their original scope.

Fairness: The court correctly observed that in California (both by reason of legislation and of court decisions) listing brokers have a duty of fairness to buyers. But "fairness" is not some free-for-all, wild-card concept that can just be applied to any idea that makes someone feel good. The appellate court wrote "Surely a sense of rudimentary fairness would dictate that buyers in a case such as this should be informed before they open escrow and position themselves to consummate the same that there is a substantial risk that title cannot be conveyed to them." Three pages later, it affirms its own opinion writing, "At a minimum, the brokers did not act fairly towards these residential buyers… fairness under the circumstances dictated disclosing that either lender approval or a substantial seller payment was required to close escrow…"

But this is simply sloppy thinking. (Good fortune for the court that it was not submitting a term paper.) Fairness has to do with treating others according to the rules – treating them equally. It requires not favoring one party over another – with respect to the application of a particular rule – nor to disfavor one at the expense of another. It has nothing to do with looking out for someone's welfare or trying to prevent them from harm. It may be a nice thing to look out for the welfare of another; and sometimes it may even be a moral duty. But it has nothing to do with being fair.

Timeliness: The brokers also argued that requiring them to disclose the financial situation prior to contract formation was inappropriate "…because the liens were disclosed during escrow and because the buyers failed to protect themselves." The court disagreed, saying that "Disclosing the liens only after the buyers had entered into the escrow failed to protect them in this context."

In doing this, the court showed its ignorance of, or chose to ignore, the customs and practice of hundreds of thousands of California real estate agents in hundreds of thousands of transactions every year. Typically – assuming a standard contract without alterations is being used (as was the case here) – a buyer of residential property in California is given what many have called "a free look period" of seventeen days. During this time, required disclosures are given (including a preliminary title report) and inspections are made by the seller. If anything is unsatisfactory, a buyer can withdraw from the deal.

It would be somewhere between reckless and stupid for a buyer to undertake some radical action – such as selling his or her house – without having first received the disclosures, conducted the inspections, and read the reports (such as the preliminary title report). But these buyers – according to their own allegations – did just that. And does the court admonish them? No. Rather, it opines that -- contrary to standard practices throughout the state -- disclosure should have been made even before the inspection and disclosure period began. Presumably, this is a measure to help to keep foolish people from harming themselves. So much for a new age of accountability.

There are other points of concern in the Holmes v. Summer decision, but discussing them is beyond the reasonable limits of space here.

The immediate effect of the Appellate Court ruling is that the case will now be heard by a jury. And it very well may turn out that the brokers will prevail at trial. Whatever the result, real estate brokers and agents will have to hope that the reasoning of this decision will not stand as precedent setting.

Published: November 2, 2010

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Bob Hunt is a former director of the National Association of Realtors and is author of the recently published book, "Real Estate the Ethical Way." A graduate of Princeton with a master's degree from UCLA in philosophy, Hunt has served as a U.S. Marine, Realtor association president in South Orange County, and director of the California Association of Realtors, and is an award-winning Realtor. Contact Bob at .