Are Real Estate Brokers Vicariously Liable for the Fraud of their Agents?

Supreme Court of Ohio Agrees to Review Auer v. Paliath.

The Ohio Supreme Court recently agreed to review the Montgomery County Court of Appeals decision of Auer v. Paliath, 2013-Ohio -391.

 

Facts: The Montgomery County Court of Appeals basically upheld the trial court’s decision to award the plaintiff damages in the amount of $135,000 for fraud by Jamie Paliath (salesperson for Keller Williams Home Town Realty; “Broker”). While Defendant Paliath was found responsible for other damages, the court found Broker-Defendant Home Town Realty liable for the 135K, based on the Broker’s vicarious liability for Paliath’s actions in connection with Auer’s purchase of several properties listed by the Broker. (“Vicarious liability” is the legal doctrine that imposes responsibility upon one person for the acts of another with whom the person has a special relationship such as parent and child, or employer and employee”). It seems that unbeknownst to the Broker, Mr. Paliath convinced the plaintiff to send him thousands of dollars for the management and rehab of several properties that the plaintiff just purchased through Mr. Paliath/Home Town Realty. Mr. Paliath then absconded with the funds, without rehabbing or managing anything but his expensive lifestyle.

 

Key issue: The “key issue” to be faced by the Ohio Supreme Court is whether or not a real estate broker should be held liable for acts committed by its agent, regardless of whether or not: 1) the broker had any knowledge of the agent’s conduct; or 2) the agent was acting contrary to the broker’s policies and directives.

 

Discussion: The Broker; and the Ohio Association of Realtors (“OAR”), which filed an amicus curiae (“friend of the court”) brief with the court of appeals asserted that Paliath was an independent contractor, as a matter of law, and that the trial court should never have instructed the jury on vicarious liability, which would apply in employer-employee situations. To provide some background, most real estate brokers in Ohio and elsewhere consider their sales agents to be independent contractors, rather than employees. Under Ohio law, however, all aspects of the broker/agent relationship must be considered in order to make that determination, most importantly, the degree of control that the broker has over its agents. Generally, if a broker has the right to control the day-to-day activities of the sales agent, then the sales agent is likely to be classified as an employee. On the other hand, if the broker is merely concerned with the listing and the ultimate sale of real property, and lets the sales agent take care of the day-to-day details regarding how to make the sale…, then, most likely the agent would be classified as an independent contractor. The Montgomery County Court of Appeals basically dismissed the employee vs. independent contractor argument as academic, because the Auer situation involved allegations of fraudulent misrepresentations by a real estate salesperson (Paliath), to a third party (Auer). Under such circumstances, the court reasoned that the liability of the broker should be governed by prior decisions regarding intentional torts committed against third parties (concerning real estate transactions), and not decisions involving contractual disputes between the real estate broker and real estate salesperson (where the employee vs. independent contractor discussion would be central to the dispute). The court specifically stated: “We need not decide whether Paliath was an independent contractor with respect to her relationship with Home Town Realty, as that issue is irrelevant to whether Home Town Realty was properly held vicariously liable for Paliath’s tortuous conduct in the sale of the properties to Auer”. The OAR, however also argued in the alternative, claiming that, “even assuming that Paliath was not an independent contractor, the trial court erred in failing to instruct the jury that it had to find that Paliath was acting within the scope of her employment before determining whether Home Town Realty was vicariously liable”. The OAR claimed that Paliath “went rogue”, acting outside of the broker’s knowledge, and thus not within the scope of employment (a key factor in vicarious liability cases). Using its decision in Zell v.Ohio Superintendent of Real Estate (1992), 79 Ohio App.3d 297, 607 N.E.2d as precedence, the court in Auer held that a real estate broker should be held vicariously liable for intentional torts committed by salesmen acting within the scope of their authority (vs. scope of their employment). The court reasoned that “[b]ecause a real estate salesperson is required to be under the supervision of a licensed real estate broker in all of his or her activities related to real estate transactions, we have held that a real estate broker cannot insulate him or herself from liability for intentional torts committed within a real estate salesperson’s scope of employment”.

 

Conclusion: According to the OAR, and many worried brokers, the holding in Auer basically translates to whenever an agent uses a broker’s name, and the broker collects a commission (in other words, a scope of authority is established), the broker will always be vicariously liable for the agent’s conduct, even if that conduct constitutes fraud, and even if the broker had no knowledge of the agent’s fraudulent conduct and the agent’s acts were contrary to the broker’s policies and instructions. Many, including this author are pleased that the Supreme Court of Ohio has agreed to review the Auer decision. Hopefully it will issue, within the scope of its authority a logical and just decision.