Chapter 4 - Constitutional Authority to Regulate Business s6

LET-6e Case Problem with Sample Answer Chapter 16: Agency

16–6. Case Problem with Sample Answer

In July 2001, John Warren viewed a condominium in Woodland Hills, California, as a potential buyer. Hildegard Merrill was the agent for the seller. Because Warren’s credit rating was poor, Merrill told him he needed a co-borrower to obtain a mortgage at a reasonable rate. Merrill said that her daughter Charmaine would “go on title” until the loan and sale were complete if Warren would pay her $10,000. Merrill also offered to defer her commission on the sale as a loan to Warren so that he could make a 20 percent down payment on the property. He agreed to both plans. Merrill applied for and secured the mortgage in Charmaine’s name alone by misrepresenting her daughter’s address, business, and income. To close the sale, Merrill had Warren remove his name from the title to the property. In October, Warren moved into the condominium, repaid Merrill the amount of her deferred commission, and began paying the mortgage. Within a few months, Merrill had Warren evicted. Warren filed a suit in a California state court against Merrill and Charmaine. Who among these parties was in an agency relationship? What is the basic duty that an agent owes a principal? Was the duty breached here? Explain. [Warren v. Merrill, 143 Cal.App.4th 96, 49 Cal.Rptr.3d 122 (2 Dist. 2006)

Sample Answer:

The court ruled against Merrill and Charmaine in part on the basis of a breach of the fiduciary duty that an agent owes a principal and ordered, among other things, the title in the condominium to be transferred to Warren. Merrill appealed to a state intermediate appellate court, which affirmed the order of the lower court. The appellate court explained that “Merrill owed a fiduciary duty to Warren once she undertook to represent him in the real estate transaction.” Under this duty, “she was required to place his interests above her own in the real estate transaction.” In addition, a real estate “agent is charged with the duty of fullest disclosure of all material facts concerning the transaction that might affect the principal's decision.” Here, “Merrill breached her fiduciary duties toward Warren and committed fraud by deliberately and falsely promising him she would place his name on title to the condominium if he went along with her plan on how to structure the transaction. From the beginning of the transaction she did not intend to perform her promise of placing his name on title. . . . Through these deceptive maneuvers Merrill secured for herself an investment property in her daughter's name by lying to her principal and misappropriating his funds.” This “was more than sufficient to show an egregious violation of the duties of loyalty and undivided interest by a fiduciary toward her principal, as well as a deliberate plan to defraud him out of his down payment and the property.”