Tuesday, June 19, 2012
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C.A. Rejects Bid to Shift Liability for Broker’s Conversion of Funds
Statute Does Not Make Corporate Officer Personally Liable for Failure to Supervise, Panel Says
By a MetNews Staff WriterBy a MetNews Staff Writer
A statute making a licensed individual real estate broker who is the designated officer of a corporate broker “responsible for the supervision and control” of the corporation’s employees does not subject the individual broker to liability for misappropriation by an employee, the Court of Appeal for this district ruled yesterday.
Div. Seven affirmed a judgment in favor of Carlos Sanchez, who served as designated officer/broker of Gold Coast Financial, a now-defunct real estate brokerage corporation. Sanchez was sued, along with Gold Coast and its salesperson, Keith Desser, now deceased, by Bernard and Linda Sandler after the failure of a condominium conversion project.
Desser was the sole shareholder of Gold Coast, but Sanchez was designated to supervise the company’s employees under Business and Professions Code Sec. 10159.2. The statute subjects the supervisor to professional discipline if a corporate employee violates regulations, but does not create civil liability, Presiding Justice Dennis Perluss wrote for the appellate court.
Sanchez “effectively lent his license to the company, and, in so doing, delegated his duty to supervise to Desser,” Perluss explained, but had no actual duties regarding management of the business.
Loan Called Secured
The complaint alleged that Desser, who was also a principal of 765 South Windsor, LLC, solicited the Sandlers for a $600,000 loan, ostensibly to fix up an eight-unit apartment building so that it could be converted into condominiums. Desser said the property would be worth more than $5.5 million, double the outstanding indebtedness, making the Sandler loan secure.
What Desser failed to tell the Sandlers, they alleged, was that the building required far more than $600,000 in repairs, the lender was ready to foreclose on the first trust deed, and there was insufficient equity to secure a second trust deed. Desser also converted $300,000 of the loan proceeds, they claimed.
With Gold Coast and 765 South Windsor defaulting and insolvent, and Desser’s estate being insolvent as well, the sole remaining claim in the litigation was a breach of fiduciary duty count against Sanchez.
Los Angeles Superior Court Judge Mary Ann Murphy sustained Sanchez’s demurrer. The duty imposed on Sanchez by the statute was owed to the corporation, not to the Sandlers, the judge ruled, and Sanchez was not liable as a principal under agency law because Desser was not his agent.
Perluss said the trial judge’s analysis was correct.
Agency Theory
The statute, Perluss explained, was enacted in 1979, codifying Walters v. Marler (1978) 83 Cal.App.3d 1. The case held that a designated officer was not liable for negligent misrepresentation by a salesperson under his supervision regarding the size of a lot.
The legislation did not reference the case by name, the presiding justice said, but the bill was clearly designed to subject a designated officer to regulatory sanctions, not civil liability, for breach of the duty to supervise.
The agency theory fails, Perluss explained, because creation of an agency relationship requires more than a statutory right to control the putative agent’s activities. “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 Sanchez’s demurrer without leave to amend and dismissed the action against him,” the presiding justice wrote.
Attorneys on appeal were Steven W. Kerekes for the plaintiffs, Robert A. Lisnow for the defendant, and June Babiracki Barlow, Neil D. Kalin and Jenny Y. Li for the California Association of Realtors, amicus supporting the defendant.
The case is Sandler v. Sanchez, 12 S.O.S. 2944.
Copyright 2012, Metropolitan News Company