Opinion
Business and Professions Code section 10159.2
The designated officer’s duty to supervise codified in section 10159.2 is owed to the corporation, not to third parties. Accordingly, breach of that statute is grounds for administrative discipline against the designated officer by the licensing entity and perhaps an action by the corporation for indemnification, but not an action by third parties. Moreover, whether or not a designated officer may be, under traditional agency principles, vicariously liable for the tortious conduct of the employees he or she supervises in an appropriate circumstance, those circumstances are not, and cannot, be alleged
FACTUAL AND PROCEDURAL BACKGROUND
1. The Complaint
Bernard Sandler and Linda Marie Sandler, as trustees of the Bernard Sandler and Linda Marie Sandler Revocable Intervivos Family Trust dated September 13, 1991, their adult daughter, Stacy Sandler, and Steven K. Ridgeway (collectively the Sandler parties), sued 765 South Windsor, LLC (South Windsor), Gold Coast Financial (Gold Coast), a real estate brokerage corporation, and Carlos Sanchez, Gold Coast’s designated officer/broker. According to the allegations in the operative third amended complaint, Keith Desser, a real estate salesman, president and sole shareholder of Gold Coast and a principal of South Windsor, solicited the Sandler parties to loan $600,000 to South Windsor to finance improvements to an eight-unit apartment building for the purpose of converting the units to condominiums. Desser represented that, once the improvements were made and the condominium conversion completed, the property would be worth in excess of $5.5 million, more than enough, even with a first deed of trust of $2.75 million held by another lender, to secure the Sandler parties’ loan.' Desser, however, did not reveal $600,000 was woefully insufficient to finance the necessary repairs for the condominium conversion; the property did not have sufficient equity to provide collateral for a second trust deed securing the note; and the primary lender had refused to extend the first note, which was imminently due, resulting in foreclosure by the holder of the first trust deed and leaving the Sandler parties’ note unsecured. In addition, Desser used $300,000 of the loan proceeds, which he obtained by amending the escrоw instructions, for his personal expenses.
The complaint asserts a cause of action for breach of fiduciary duty against Sanchez.
2. Sanchez’s Demurrer and the Trial Court’s Ruling
Sanchez demurred to the third amended complaint, arguing he owed no duty, as a fiduciary or otherwise, to the Sandler parties.
DISCUSSION
1. Standard of Review
On appeal from an order dismissing an action after the sustaining of a demurrer, we independently review the pleading to determine whether the facts alleged state a cause of action under any possible legal theory. (McCall v. PacifiCare of Cal., Inc. (2001)
“ ‘Where the complaint is defective, “[i]n the furtherance of justice great liberality should be exercised in permitting a plaintiff to amend his [or her] complaint (Aubry v. Tri-City Hospital Dist., supra, 2 Cal.4th at
2. Governing Law on Real Estate Brokers
California defines a real estate broker as a person who, for a compensation or in expectation of a compensation, assists people in certain statutorily defined licensed activity, including soliciting borrowers or lenders or performing services for borrowers or lenders in connection with loans secured by real property. (§ 10131, subds. (a), (d).) A licensed broker can be an individual or a corporation. To operate as a corporate broker, however, the corporation must designate a licensed individual broker as the entity’s designated officer. (§ 10211; see Cal. Code Regs., tit. 10, § 2740 [“[n]o acts for which a real estate license is required may be performed for, or in the name of, a corporation when there is no officer of the corporation . . .” licensed under § 10211].)
Section 10159.2, subdivision (a), makes the officer designated by a corporate broker licensee pursuant to section 10211 “responsible for the supervision and control of the activities conducted on behalf of the corporation by its officers and employees as necessary to secure full compliance with the provisions of this division, including the supervision of salespersons licensed to the corporation in the performance of acts for which a real estate license is required.” Failure to exercise reasonable supervision as required by section 10159.2 is grounds for the Real Estate Commissioner to suspend or revoke the designated officer’s real estate license. (§ 10177, subd. (h).)
3. Section 10159.2’s Duty of Supervision Is Owed to the Corporation, Not to Third Parties
The Sandler parties and Sanchez agree section 10159.2 imposes a duty on the designated officer to supervise the corporate broker’s employees. The question in this case is to whom is that duty owed? Absent special circumstances, officers of a corporation “are not responsible to third persons for negligence amounting merely to nonfeasance, to a breach of duty owing to the corporation alone; the act must also constitute a breach of duty owed to the third person.” (United States Liab. Ins. Co. v. Haidinger-Hayes, Inc. (1970)
Here, although section 10159.2 imposes a duty of supervision on the designated officer of the corporate broker, it does not, on its face, expressly state to whom that duty is owed. In light of this ambiguity, we look to extrinsic aids such as historical context and legislative history to determine the Legislature’s intent. (Day v. City of Fontana, supra,
a. The designated officer’s duty prior to enactment of section 10159.2
An appellate court first considered whether a designated officer of a corporate broker could be liable to a third party for breaching a duty to supervise the corporate broker’s sales employees in Walters v. Marler (1978)
The Court of Appeal affirmed, concluding Proulx could not be held personally liable, either directly for negligence or vicariously for negligent
The Walters court also rejected the notion Leseman was Proulx’s agent, making Proulx vicariously liable for Leseman’s misconduct: “In the instаnt case Leseman was undeniably an agent for both Walters and Lampliter; however, he was not an agent for Proulx. Any action by the qualifying broker, Proulx, must be regarded as an action by the corporation and not by the broker as an individual.” (Walters, supra,
b. Section 10159.2 effectively codifies Walters
In March 1979, a little less than a year after the decision in Walters, the Department of Real Estate sponsored legislation (Assem. Bill No. 985 (1979-1980 Reg. Sess.) § 1) to add section 10159.2 to the Business and Professions Code, making the designated officer of a corporate broker statutorily responsible for supervising the corporate broker’s employees. The same legislation also amended section 10177, subdivision (h), to subjеct the designated officer’s real estate license to discipline if that duty of supervision was breached.
Although the legislative history does not mention Walters directly, it reveals an unmistakable intent to make express what the Walters court found to be an implied duty of supervision, and to make the breach of section 10159.2 subject to a regulatory sanction. According to Senator Thomas Hannigan, the bill’s author, the legislation was necessary to cure a gap in the real estate laws that had subjected the corporate broker’s real estate license to suspension or revocation as discipline for a salesperson’s misconduct, but not the individual license of the designated officer himself or herself: “Under the [existing] law there [are] provisions for the issuance of a broker’s license to corporations, entitling them to engage in all the activities permitted to a
One committee report on the proposed legislation explained its goal of encouraging direct involvement by the licensed individual to ensure the corporate licensee and its other employees perform competently: “The only way that the active participation of the licensed individual can be insured is by ‘piercing thе corporate veil’ and making the individual licensee vulnerable to action on account of corporate misdeeds, or on account of failure to fulfill corporate responsibilities.” (Assem. Com. on Labor, Employment & Consumer Affairs, Rep. on Assem. Bill No. 985 (1979-1980 Reg. Sess.) prepared for hearing Apr. 24, 1979, par. I.)
When read in context, however, it is apparent the April 24, 1979 report’s description of section 10159.2 as making the licensee “vulnerable to action” by “piercing the corporate veil” does not refer to creating a right of action for
Our conclusion sections 10159.2 and 10177, subdivision (h), were intended to codify the implied duty to the corporation recognized in Walters, as well as to create a regulatory sanction against the qualified officer’s real estate license, is reinforced by reference to section 7068.1, which imposes a similar duty of supervision on the responsible managing employee of a licensed construction contractor. (See People v. Woodhead (1987)
In Swickheimer the plaintiff sued both the construction company with whom he had contracted to make improvements to real property and the company’s responsible managing licensee, Lewis King. The plaintiff acknowledged King had not participated in the deficient construction; in fact, he had been ill and incapacitated and did not know of the contract, much less the construction work undertaken by the company’s employees. However, he argued King’s breach of his duty of supervision codified in section 7068.1 resulted in deficient work by the contractor’s employees and damaged the plaintiff. The Court of Appeal rejected the claim against King, concluding section 7068.1 was regulatory and disciplinary in nature. It did not create a
The Legislature was well aware of the Swickheimer court’s construction of section 7068.1 when it enacted section 10159.2. (See People v. Overstreet (1986)
4. Sanchez Cannot Be Held Vicariously Liable for Breach of Fiduciary Duty Under an Agency Theory Based Solely on His Failure to Supervise Desser
Corporate employers may be held vicariously liable for the tortious acts of their agents committed within the scope of the agency or employment. (Perez v. Van Groningen & Sons, Inc. (1986)
The Sandler parties advance a different agency theory in an attempt to hold Sanchez vicariously liable for Desser’s misconduct. Although Sanchez was not Desser’s employer, he was, they argue, Desser’s principal, making him liable for Desser’s torts committed within the scope of that agency. In support of this position they rely largely on Holley v. Crank (9th Cir. 2004)
In the Holley cases an interracial couple sued their corporate real estate broker, Triad, and Triad’s designated officer, David Meyer, alleging Triad’s real estate salеsperson, Grove Crank, violated racial discrimination prohibitions in the federal Fair Housing Act (42 U.S.C. §§ 3604(b), 3605(a)). The complaint sought to hold Meyer, who was also the owner and president of Triad, and Triad itself vicariously responsible for Crank’s violation.
Initially, the Ninth Circuit held, although Meyer was not Crank’s employer, regulations promulgated under the Fair Housing Act had expanded the principles of vicarious liability to include those who directly control or have the right to control the conduct of the tortfeasor, even if they were not the tortfeasor’s employer and were not involved in the discrimination. (Holley v. Crank (9th Cir. 2001)
The United States Supreme Court reversed that decision, holding nothing in the Fair Housing Act suggested a congressional intent to expand traditional principles of vicarious liability. (Meyer v. Holley, supra,
On remand the Ninth Circuit considered the question left open by the Supreme Court—whether, based on the evidence presented with Meyer’s summary judgment motion, Meyer could be held vicariously liable for Crank’s discriminatory conduct under traditional agency principles. The court concluded he could. (Holley II, supra, 400 F.3d at pp. 673-674.) Although “liability in the typical employment relationship runs between the corporation and the salesperson and between the corporation and the supervisor, but not between the salesperson and the supervisor” {id. at p. 671), the court concluded the employment relationship between Meyer and Crank was “atypical because California law [(§ 10159.2)] makes the designated real estate broker of a real estate corporation personally responsible for the supervision of the corporation’s salespersons. . . . When Meyer delegated this responsibility to Crank, he created an agency relationship between himself and Crank, which made Meyer vicariously liable as the principal for the discriminatory actions of Crank as his agent.” (Holley II, at p. 671.)
In reaching this conclusion, the Holley II court acknowledged, for an agency relationship to exist, a principal must consent to the agent acting on his behalf and subject to his control, and the agent must consent to act for the principal. (Holley II, supra,
Attempting to plead facts similar to those essential to the holding in Holley II, the Sandler parties allege, like Meyer, Sanchez had no involvement in the day-to-day activities of Gold Coast. He effectively lent his license to the company and, in so doing, delegated his duty to supervise to Desser, subject to Sanchez’s ultimate supervision in accordance with California law. Accordingly, the Sandler parties argue Sanchez can be held vicariously liable for Desser’s conduct so long as it was committed within the scope of that agency.
As discussed, the United States Supreme Court in Meyer v. Holley, supra,
We need not decide whether we agree with the Ninth Circuit that, by way of аn express agreement or some other similar circumstance, a designated officer and real estate salesperson can ever create a principal-agent relationship. Even if such a relationship could exist, as the United States Supreme Court explained, more is needed to create such a unique agency relationship between two employees than the officer’s mere inaction. Because the Sandler parties acknowledged in the trial court they are unable to plead any additional facts to establish that relationship, the court properly sustained Sanchеz’s demurrer without leave to amend and dismissed the action against him.
The order of dismissal is affirmed. Sanchez is to recover his costs on appeal.
Woods, J., and Zelon, J., concurred.
Notes
Statutory references are to the Business and Professions Code unless otherwise indicated.
The complaint also asserts causes of action for breach of contract and fraud against Gold Coast and South Windsor. Desser, who was not named as a defendant in the complaint, died in 2009. His estate is insolvent, as is Gold Coast and South Windsor. The Sandler parties have obtained default judgments against both Gold Coast and South Windsor. Sanchez is the only party to this appeal.
Sanchez’s demurrers to the first and second amended complaints were sustained with leave to amend.
Prior to the 1979 amendment, former section 10177, subdivision (h), provided for the suspension of the qualifying broker’s license if the “broker licenseef] failed to exercise reasonable supervision of the activities of his salesman,” but did not address the license of the qualifying officer of the corporate broker. (See Historical and Statutory Notes, 4B West’s Ann. Bus. & Prof. Code (2008 ed.) foil. § 10177, p. 194.)
The April 24, 1979 Assembly committee report described the problem. “The licensing of corporate ‘persons’ has always been problematic: the state is confronted with the dilemma of guaranteеing the professional competence and proficiency of a legal fiction. Traditionally, the problem is resolved by requiring the direct supervisory control of the corporation’s professional actions by a licensed individual who is himself qualified. This is meant to ensure that the corporation knows how to do the job. It is difficult for the state to guarantee the active supervisory role of the licensed individual, however; while a person might be the ‘designated officer’ or the ‘responsible managing officer,’ he or she might only be lending a name and license number to the corporation. Problems in this regard have been especially acute among contractors, where individuals have even advertised their license for ‘sale’ in newspapers.” (Assem. Com. on Labor, Employment & Consumer Affairs, Rep. on Assem. Bill No. 985, prepared for hearing Apr. 24, 1979, par. 1.)
In light of our holding the Sandler parties have not, and cannot, plead facts sufficient to hold Sanchez liable for Desser’s conduct, we need not consider the policy argument of amicus curiae, the California Association of Realtors, that subjecting the designated officer to personal liability for failure to supervise would cause substantial harm to the real estate industry and the public.