A federal bankruptcy court has considered whether a real estate broker breached her fiduciary duty to a buyer when she purchased a property her client had expressed an interest in purchasing.
Dipak Bhayani ("Debtor") asked his next door neighbors whether they were interested in selling their property to him ("Property"). At that time, the neighbors told him they were not interested in selling. However, a few months later, the Debtor noticed a "for sale" sign on the property. The Debtor telephoned a real estate professional, Sue Sood ("Broker"), that he knew in order to arrange a showing of the Property.
The Broker arranged for a showing of the Property, learning that the prior owner's lender had foreclosed on the Property. The Broker and the Debtor visited the Property, following which the Debtor commented that he thought the listing price was too high.
A couple of days later, the Broker entered into an agreement to purchase the Property. The Broker did not disclose this fact to the Debtor when he called two days later seeking a "Seller's Addendum" form, which the Broker faxed to the Debtor.
In the interim, the Debtor had conversations with a developer about selling his home as well as the Property for the building of a fast food restaurant. The Debtor told the developer he was attempting to purchase the Property. Shortly thereafter, the Debtor called the Broker and left her a message stating that he wanted to purchase the Property. The Broker never responded to the Debtor's message. Eventually, the fast food restaurant chain and the Debtor signed a letter of intent, memorializing the restaurant's agreement to purchase both properties from the Debtor for a price more than 7 times value of the properties individually. Around this time, the Debtor learned that the Broker had purchased the Property. When the restaurant chain learned that the Debtor did not own the Property, it ended its dealings with the Debtor.
The Debtor filed a Chapter 13 bankruptcy. A Chapter 13 bankruptcy allows debtors to repay their debts through a plan, where the debtors make monthly debt payments for three to five years and the bankruptcy trustee distributes the money to creditors. As part of the Chapter 13 bankruptcy, the Debtor brought an action against the Broker to capture additional funds to repay his creditors. The Debtor alleged that the Broker had violated various sections of the Illinois license law by purchasing property that her client was interested in purchasing. The Debtor sought to recapture the Property as well as damages from the Broker.
The United States Bankruptcy Court, Northern District of Illinois, Eastern Division, awarded the Debtor $288,000 in damages. The court considered the Debtor's request that the court place a constructive trust on the property. At common law (or, judge-made law), it was presumed that a real estate licensee and client were in a principal /agent relationship. Under common law, constructive trusts were imposed on property when the agent either breached her fiduciary duty to her client or in cases of fraud. The court found that the Illinois legislature had abolished the common law principles of agency in 2000. Thus, the Debtor could only seek the statutory remedies available for a breach of fiduciary duty, not the common law remedies, and so the court dismissed the Debtor's request for the imposition of a constructive trust.
Next, the court considered whether the Debtor was entitled to statutory damages for breach of fiduciary duty. Under Illinois law, a broker is deemed to be the agent of an interested buyer unless there is a written agreement between the parties stating that there is no agency relationship or the broker has been hired to only perform "ministerial acts". There was no written agreement between the parties. The Broker argued she was hired only to perform ministerial acts and was not the Debtor's representative. The court found that the evidence did not support the Broker's argument, as the Broker had visited the Property with the Debtor and faxed to the Debtor a purchase contract addendum. Based on all of this, the court found that the Debtor had retained the Broker to serve as his representative during the purchase of the Property.
Next, the court considered whether the Broker breached her fiduciary duty owed to the Debtor. The court found that the Broker put her own self-interest above that of her client by purchasing the Property, and so breached her fiduciary duty to the Debtor. The Broker's self-dealing as well as her failure to disclose to the Debtor that she had made an offer on the Property demonstrated her fiduciary duty breach. Thus, the court awarded the Debtor $288,000 in compensatory damages, computed by subtracting the difference between what the Debtor would have received from the fast food restaurant chain and the value of the Debtor's property, minus what the Broker paid for the Property.
Bhayani v. Sood (In re Bhayani), 293 B.R. 911 (Bankr. N.D. Ill. 2003).