Robert C. COOK, et al., Cross-Complainants and Respondents, v. Frank V. WESTERSUND, et al., Cross-Defendants and Appellants.
At the crux of this case is the question of whether evidence that a licensed real estate broker bargained for a commission of three percent upon offering to purchase the property for himself is sufficient to support the trial court's finding that the broker thereby acted as the seller's agent. In this case the trial court found that an agency relationship arose and therefore the broker owed the seller a fiduciary duty to reveal all facts material to the transaction, and that the broker breached such duty. In so finding the trial court granted relief to the seller by invoking its equity jurisdiction and ordering the property sales agreement rescinded and title retransferred. A review of the pertinent facts follows.
Appellant, Frank V. Westersund, is a licensed real estate broker doing business as “Development Properties.” On May 7, 1976, while on a real estate scouting expedition to Sacramento he noticed a “for sale” sign on a certain piece of undeveloped real property. He immediately contacted the listing broker, Artz and Cook, to discuss the purchase of that property, which consists of 25 acres master planned primarily for commercial use.1 An agent at Artz and Cook, Bob Cook, met appellant at the property.2
Westersund introduced himself as a licensed real estate broker and offered to purchase the property. He asked Bob Cook about splitting the commission, and Cook agreed to an equal split of his six percent commission. Thus, pursuant to appellant's request, one-half of the broker's commission was to go to Development Properties. Appellant offered $70,000 for the property, and Bob Cook wrote the offer on a form “Deposit Receipt.”3 The buyer was described as Frank Westersund, a licensed real estate broker.
Inserted into the “Deposit Receipt” was a provision that the seller agrees to pay the broker “as commission 6%-1/2 to Artz and Cook and 1/2 to Development Properties-percent of the purchase price.”
On that same day, Bob Cook presented the offer to Robert C. Cook, the seller, who rejected it because it was too low and he did not wish to carry any financing as proposed by appellant. Robert C. Cook read the offer contained in the Deposit Receipt but made no mention of the commission split, nor did he ask about Development Properties. Robert C. Cook testified that upon reading the document he became aware there would be two agents involved; that both Artz & Cook and Development Properties were acting as his agents in the sale of his property; and that Development Properties was to assist in obtaining financing to close the sale. He also testified he did not learn that Development Properties was the fictitious business name of Frank V. Westersund until informed of such by the Real Estate Commissioner's Office, sometime during the summer of 1978, while preparing for the present litigation. The trial court made a finding to that effect, but also found that Bob Cook and Artz & Cook knew that Westersund was associated in some manner with “Development Properties.”
On May 10, 1976, Bob Cook called Westersund at Westersund's office (Development Properties) in San Jose with a counter-offer approved by Robert C. Cook. The counter-offer specified a price of $75,000 and provided for the close of the purchase escrow on or before June 1, 1976, and deleted portions of the original offer regarding seller financing. The next day Westersund drove to Sacramento and signed the counter-offer. Escrow closed on May 27, 1976.
In August or September 1976, Westersund hired Robert Hayes to prepare a rezoning application for the property, which was filed October 8, 1976. It was approved in December 1978.
In 1977, Western Title Insurance Company filed a complaint against Robert C. Cook, et al., and Frank V. Westersund, with respect to payment of certain previously undisclosed delinquencies on assessment liens. On May 26, 1977, respondents filed a cross-complaint against appellants seeking to rescind the sale on the grounds of mutual mistake of fact regarding the delinquencies. An amended cross-complaint was filed on November 3, 1978, alleging Frank V. Westersund was doing business as Development Properties and in that capacity received a three percent commission “for acting in the fiduciary capacity as agent for cross-complainant COOK in the sale of (the subject) real property ....” and that Westersund “failed to reveal and suppressed the fact that the imminent development of nearby properties had increased the value of said property ....” causing the seller, Cook, to convey the property to Westersund for a price far below that which Westersund knew to be its true value.
The trial court ordered the original action of Western Title Co. severed from the cross-complaint and entered its judgment in favor of cross-complainants after finding that Westersund was acting as an agent of the seller and breached his fiduciary duty as the seller's agent to disclose material facts concerning the present and future value of the property.
On appeal appellant contends a licensed real estate broker does not become an agent of the seller merely because he receives a portion of the commission, and that in this case there is no evidence of an agency relationship under any other theory of agency; and assuming, arguendo, he may be deemed an agent of the seller, he did not have knowledge of any facts which were unknown to the seller at the time of the transaction.
In urging “(t)he evidence is more than sufficient to support the finding that appellant Westersund was respondents' agent” respondents rely primarily upon the fact that Development Properties was paid a commission in accordance with terms inserted into the deposit receipt, which respondent characterizes as a written contract of employment of Westersund as respondents' agent.
Respondents assert the case of Alhino v. Starr (1980) 112 Cal.App.3d 158, 169 Cal.Rptr. 136, “held that the Contract of Employment in the Deposit Receipt is substantial evidence of agency.” The assertion is inaccurate. In the Alhino case “(t)he deposit receipt stated that the Alhinos (the sellers) had employed (Robert) Senjo and agreed to pay the $10,000 commission.” (P. 165, 169 Cal.Rptr. 136.) Alhino believed that Senjo was their agent. The Alhino opinion does not disclose the specific terms by which such employment was established. However, it is apparent that Senjo was an employee of the Mason-McDuffie firm who was hired by the seller, Alhino, to sell the Alhino property. Senjo contacted a person to whom he had sold other properties on previous occasions in an attempt to sell the Alhino property. Unlike this case, Senjo was not the purchaser of the property, but an employee of the real estate agency hired to broker the property. Moreover, in Alhino, the jury had returned a special finding indicating that Senjo was Alhino's agent and on appeal the “real estate defendants (did) not question the evidentiary support for this finding, but focus(ed) on Senjo's acts and Mason-McDuffied's (sic) ratification.” (P. 171, 169 Cal.Rptr. 136.)
Similarly, respondents' reliance on Wilson v. Lewis (1980) 106 Cal.App.3d 802, 165 Cal.Rptr. 396, is misplaced. In that case the court explained that “according to all parties' theory of the case in the trial court, Century 21 and (their employee-salesman, Steven) Anny were also the agents of defendant Lewis (the seller) who according to plaintiffs' attorney had agreed to ‘pay a three percent commission if (Anny) brought in a ready, willing and able buyer.’ According to Anny, ‘I was acting on seller's behalf, on buyer's behalf; seller was paying me’; ‘I ... would consider it ... a dual fiduciary relationship.’ ” (Id., at p. 806, 165 Cal.Rptr. 396.) An admission of dual agency is lacking in the instant case.
It has been said that “(t)he relation between a broker and his customer ordinarily is that of principal and agent, the broker being a special agent.” (Rhode v. Bartholomew (1949) 94 Cal.App.2d 272, 278, 210 P.2d 768; see also, Sierra Pacific Industries v. Carter (1980) 104 Cal.App.3d 579, 581-582, 163 Cal.Rptr. 764.) “Whether a person acted as a broker in a given transaction depends upon the nature of the services performed.... Employment as a broker is clearly established where an owner of property lists it with another and the latter acts in pursuance of his request to find a buyer willing to purchase upon his terms. (Citations.) Where a property owner, in response to an inquiry by a person with reference to the former's property and the price thereof, gives the price of the property, the terms of sale, and the commission allowable, and the latter immediately seeks to find a purchaser, he is deemed to become the broker of the owner.” (Rhode v. Bartholomew, supra, 94 Cal.App.2d at p. 278, 210 P.2d 768.)
The existence of an agency relationship is a question of fact. (Skopp v. Weaver (1976) 16 Cal.3d 432, 437, 128 Cal.Rptr. 19, 546 P.2d 307; Hale v. Wolfsen (1969) 276 Cal.App.2d 285, 290, 81 Cal.Rptr. 23; Trane Co. v. Gilbert (1968) 267 Cal.App.2d 720, 726, 73 Cal.Rptr. 279.) Accordingly, the focus of our inquiry in this case is whether the court's finding of a fiduciary relationship between the seller and appellant is supported by substantial evidence. In that context we necessarily “ ‘... accept as true all evidence tending to establish the correctness of the finding as made, taking into account, as well, all inferences which might reasonably have been thought by the trial court to lead to the same conclusion.’ (Citations.)” (Board of Education v. Jack M. (1977) 19 Cal.3d 691, 697, 139 Cal.Rptr. 700, 566 P.2d 602.)
Although in some cases payment of a commission is evidence of the existence of an agency relationship between the broker and the one who pays him (see Lynch, Cal. Real Property Sales Transactions (Cont.Ed.Bar 1981) The Broker, s 2.24, p. 87; Angus v. London (1949) 92 Cal.App.2d 282, 285, 206 P.2d 869) such is not necessarily the case.4 (E.g. Foreman & Clark Corp. v. Fallon (1971) 3 Cal.3d 875, 92 Cal.Rptr. 162, 479 P.2d 362; Wolf v. Price (1966) 244 Cal.App.2d 165, 52 Cal.Rptr. 889; Miller v. Wood (1963) 222 Cal.App.2d 206, 35 Cal.Rptr. 49; Bonaccorso v. Kaplan (1963) 218 Cal.App.2d 63, 32 Cal.Rptr. 69; Smith v. Howard (1958) 158 Cal.App.2d 343, 322 P.2d 1034.)
No particular formalities are required to create the agency relationship, however the parties must understand that one is to act primarily on behalf of the other and subject to the other's direction and control. Such understanding may be inferred from the acts of the parties. (Zander v. Texaco, Inc. (1968) 259 Cal.App.2d 793, 66 Cal.Rptr. 561; Vargas v. Ruggiero (1961) 197 Cal.App.2d 709, 17 Cal.Rptr. 568; see 1 Miller & Starr, pt. 2, s 4:5, pp. 11-13.)
We have carefully reviewed the record in the instant case and have unearthed no evidence reasonably susceptible to the inference that there was an understanding between the parties to create a fiduciary relation by which appellant would be subject to the direction or control of the seller or his listing broker to act on the seller's account.
As explained in comment a, to section 1 of the Restatement Second of Agency: “The relation of agency is created as the result of conduct by two parties manifesting that one of them is willing for the other to act for him subject to his control, and that the other consents so to act. The principal must in some manner indicate that the agent is to act for him, and the agent must act or agree to act on the principal's behalf and subject to his control.” As comment c further explains, an agency relation may arise even if the parties did not so intend, and conversely an agency relation does not necessarily arise even if the parties believe such to be the case. For example, the Restatement Second of Agency, section 14 J states: “One who receives goods from another for resale to a third person is not thereby the other's agent in the transaction: whether he is an agent for this purpose or is himself a buyer depends upon whether the parties agree that his duty is to act primarily for the benefit of the one delivering the goods to him or is to act primarily for his own benefit.”
In the instant case the purported agency relationship arose at the same time Westersund offered to purchase the property. By that initial transaction Westersund clearly demonstrated his intention and understanding that he was acting primarily for the benefit of himself to obtain title and control of the subject property.5
Section 10131 of the Business and Professions Code defines a broker as follows: “A real estate broker within the meaning of this part is a person who, for a compensation or in expectation of a compensation, does or negotiates to do one or more of the following acts for another or others: (P) (a) Sells or offers to sell, buys or offers to buy, solicits prospective sellers or purchasers of, solicits or obtains listings of, or negotiates the purchase, sale or exchange of real property or a business opportunity.”6
In Robinson v. Murphy (1979) 96 Cal.App.3d 763, 158 Cal.Rptr. 246, a licensed broker, Murphy, paid a six percent broker's commission to his own business, Tim Murphy Realty, upon the sale of his own property. The court reasoned that a licensee who acts as a principal in buying or selling property is not acting as a broker within the definition of section 10131 since he is not acting “for another or others”. Further, section 101337 expressly excludes from the definition of “broker” one who “performs any of the acts within the scope of this chapter with reference to his own property ....” Thus, the court concluded Murphy was not precluded by his status as a licensed broker from acting as a principal in the sale of his own property. (Id., at p. 768, 158 Cal.Rptr. 246.)
The court specifically observed that the transaction was not performed “ ‘for a compensation or in expectation of a compensation’ ” (p. 769, 158 Cal.Rptr. 246) and explained, “Although Murphy, as vendor, agreed in the purchase agreement to pay a commission to the realty company of which he was the sole owner, Murphy's testimony at the present trial established that he included this provision in the agreement only because he felt that the income tax laws required him to do so because he was a licensed real estate broker. It is undisputed that Murphy's only gain from the sale was that which is realized by any property owner who sells at a profit. The trial court so viewed the situation and stated, during its questioning of Murphy, that it could not see ‘what difference it made whether you called part of your gain commission or called it profit from sale.’ Murphy replied that he thought that because he was in fact a broker, the income tax laws required that he treat 6 percent of the sales price as a commission payable to the realty company of which he was the sole owner. It is evident that Murphy's interpretation of the income tax laws has no bearing upon the economic realities of Murphy's transaction with plaintiff. Murphy paid himself no ‘compensation,’ nor were his acts performed prior to the signing of the agreement done ‘in expectation’ of any compensation other than the realization of a profit on the sale of his property.” (Pp. 769-770, 158 Cal.Rptr. 246.)
Robinson presents a circumstance somewhat analogous to the circumstance apparent in the instant case. Appellant's proposal to split the six percent commission with the listing broker could have been characterized as a proposal that the listing broker agree with the seller to a commission of three percent and a reduction of the purchase price by three percent. Thus, although characterized differently, the result as to the seller and the listing broker and the purchaser would be identical to that of the commission-split arrangement. Either way, the purchaser would receive the benefit of a three percent reduction in the purchase price. The analogy serves only to underscore what the evidence in this case clearly establishes, i.e., that appellant's conduct was prompted by a desire to obtain the best deal for himself.
The finding that respondent-seller did not know that Development Properties was Westersund's fictitious name is of little solace to respondent with respect to the question of whether an agency relationship arose. Establishment of the agency relationship requires a mutual understanding of the parties' respective roles in the relationship. As we have explained there is no evidence that Westersund agreed to act or undertook actions to benefit anyone but himself.
Respondents point to appellant's testimony that at the time he offered to purchase the property he had another buyer in mind to substitute for himself or, alternatively, to offer the property for resale. When he signed the deposit receipt appellant's “intent and purpose” was to make the property available for a Mr. Gehan or some other third-party buyer. He contacted Mr. Gehan and told him that “whatever my cost was that would be his cost.” Appellant acknowledged that up until the date escrow instructions were filed he had been trying to find a buyer for the property so he would not have had to buy it himself. When asked if during that period of hunting for a buyer he was acting as the agent of the seller, appellant responded, “No.” Respondents note the agreement named the purchaser as Westersund or “nominee”.
However, even as appellant sought someone to substitute for himself as purchaser (to avoid having to invest his own capital) he was contractually bound to purchase the property. The seller had nothing to gain by Westersund's efforts at that point. Clearly, Westersund's actions were calculated to benefit himself, not the seller.
Robert C. Cook testified he understood that Development Properties was to assist the purchaser in obtaining financing. The trial court made no specific finding with respect to that matter, addressing its finding of agency to the general finding that Frank V. Westersund was the seller's agent “in the sale of the real property in question, ...” Nevertheless, after appellant agreed to purchase the property any attempt on his part to obtain financing was primarily for his own benefit, not the seller's.
We conclude that there is insufficient evidence appellant undertook any action reasonably susceptible to the inference that he was acting as the seller's agent and that the agreement for a commission split was nothing more than an attempt to obtain a better deal for himself in purchasing the property. It therefore follows the appellant owed the seller no fiduciary duty of disclosure.
Accordingly the judgment is reversed.
The cause is remanded to the trial court with directions to enter judgment for appellants.
1. The property lies in an area generally north of downtown Sacramento bounded by the American River on the south, Interstate 880 on the north, Interstate 5 on the west, and Northgate Boulevard on the east.
2. Robert A. Cook (hereafter, “Bob” Cook) is a principal at Artz and Cook, and is the nephew of Robert C. Cook, who is a respondent in this action and was the owner and seller of the subject property.Although Robert C. Cook once owned stock in Artz and Cook (his father founded the company) he had redeemed his shares in consideration for cash and several parcels of real property.
3. The form “Deposit Receipt” has been described as follows: “The form real estate sales contract, commonly referred to in the real estate industry as a ‘Deposit Receipt,’ is one of the most important and widely used documents in California real estate practice. When used, it is first the vehicle by which the buyer makes his offer to purchase the subject property and it then becomes the contract of sale between the parties upon the seller's acceptance of the same, or upon the buyer's acceptance of the seller's counter offer, as the case may be. It is also the seller's ‘receipt’ given by his broker-agent, for the ‘good faith deposit’ that customarily accompanies the buyer's written offer. Finally, most if not all of the various form agreements commonly in use contain a separate contract between the seller and the broker providing for the payment of the broker's commission.” (Fns. omitted.) (1 Miller & Starr, Current Law of Cal. Real Estate (Rev. ed. 1975) pt. 1, s 2:24, pp. 234-235 (referred to hereafter as “Miller & Starr”).)
4. The confusion as to which party a broker represents is altogether too common. It would behoove real estate brokers to follow the advice of various authors to provide in writing the precise nature of their relationship with the principals involved in a particular transaction. “The broker owes various fiduciary duties to the principal ..., and in some situations, the buyer's broker may be considered a subagent of the seller .... To avoid the problem of dual representation and possible discipline ... the buyer's broker should give the seller written notice of his or her position as buyer's agent. In addition, the buyer's broker might want to obtain the seller's written acknowledgment....” (Lynch, Cal. Real Property Sales Transactions (Cont.Ed.Bar 1981), The Broker, s 2.84, p. 134; see also s 2.85-3, p. 134.)It has been suggested that “express provisions in listing agreements and deposit receipts should (1) establish the cooperating broker as an independent representative of the buyer; (2) establish a single fiduciary duty of the cooperating broker to the buyer; (3) remove the subagency relationship between the cooperating broker and listing broker; and (4) remove liability of a seller for acts of the cooperating broker.” (Cal.Dept. of Real Estate, Real Estate Bulletin, Dilemma of the Cooperating Agent, Fall 1979, pp. 1, 7; citing, Realtor Report, San Francisco Board of Realtors, May 13, 1977, Vol. 5, No. 4.)
5. This is not a case in which a broker acting as the seller's agent subsequently purchases the property himself. (See Smith v. Zak (1971) 20 Cal.App.3d 785, 98 Cal.Rptr. 242.) Under such circumstances “the agent nonetheless may acquire property from his principal provided the agent makes full disclosure of all material facts concerning the transaction which might affect the principal's decision.” (Donnellan v. Rocks (1972) 22 Cal.App.3d 925, 929, 99 Cal.Rptr. 692; Rattray v. Scudder (1946) 28 Cal.2d 214, 222-223, 169 P.2d 371; Helbing v. Helbing (1948) 89 Cal.App.2d 224, 227, 200 P.2d 560; Civ.Code, s 2230; see Comment, Unprofessional Conduct by Real Estate Brokers: Conflict of Interest and Conflict in the Law (1980) 2 11 Pac.L.J. 821.) Here, from the outset appellant's status with respect to seller was that of purchaser.
6. Hereafter, references are to the Business and Professions Code.
7. Section 10133 provides in pertinent part: “The definitions of a real estate broker and a real estate salesman as set forth in Sections 10131 and 10132, do not include the following: (P) (a) Anyone who directly performs any of the acts within the scope of this chapter with reference to his own property or, in the case of a corporation which, through its regular officers receiving no special compensation therefor, performs any of the acts with reference to the corporations's own property.”
REGAN, Associate Justice.
PUGLIA, P. J., and BLEASE, J., concur.