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Broker Liable for Salesperson's Fraud

An Ohio court has considered a challenge to a jury verdict that held a brokerage vicariously liable for the fraud of a salesperson.

Torri Auer (“Buyer”), a California resident, contacted Ohio real estate salesperson Jamie Paliath (“Salesperson”) about her interest in a duplex.  The Buyer told the Salesperson that she was interested in buying investment property in Ohio and planned to use the rent payments as an income stream.

The Salesperson was associated with Home Town Realty of Vandalia, LLC d/b/a Keller Williams Home Town Realty (“Brokerage”).  The agreement with the Brokerage stated that the Salesperson was an independent contractor, and the Salesperson was responsible for paying her own costs and recruiting clients.  The agreement also specified how commissions would be divided between the parties.

In September 2007, the Salesperson took the Buyer to the property, as well as several other properties.  The Buyer saw part of one interior of the properties, but otherwise didn’t go inside the other properties.  The Salesperson told the Buyer that extensive work had been done to the interiors of the properties.

The Buyer purchased a total of 27 units through the Salesperson, based on alleged representations that the properties were undervalued or rented out.  One of the properties had been purchased by a company created by the Salesperson shortly before she sold it for four times what her company had paid to the Buyer.  The Buyer also contracted with a property management company created by the Salesperson, as well as entering into an agreement with a construction company created by the Salesperson to perform work on some of the units.  The Brokerage received commissions from each of the sales.

The Buyer received no income from the properties, and only one unit was rented in August 2008.  In October 2008, the Buyer visited the properties with another licensee and a contractor.  She discovered that all of the properties needed extensive work during her visit.

The Buyer filed a lawsuit against the Salesperson and the Brokerage alleging fraud in the inducement in the sale of the properties.  During the trial, the Brokerage argued that it did not breach its fiduciary duty to the Buyer and it had adequately supervised the Salesperson.  The trial court submitted the case to the jury, and the jury found for the Buyer and against the Salesperson and the Brokerage, awarding the Buyer $135,200.  The Salesperson and the Brokerage appealed.

The Court of Appeals of Ohio, Second District, partially affirmed the jury verdict but vacated a portion of the award due to insufficient evidence.  The court first considered whether the court had properly instructed the jury on the Brokerage’s liability for the actions of the Salesperson.  The trial court had instructed the jury that if the Salesperson had committed fraud, then the Brokerage was vicariously liable for the actions of the Salesperson.

The court upheld the trial court's instructions. The Brokerage argued that the trial court should have instructed the jury that the Salesperson was required to work within the scope of her relationship with the Brokerage.

A salesperson is required to work under the supervision of a licensed broker in all of his/her real estate transactions, including the requirement that the broker collect all commissions earned from the transactions.  While a licensed salesperson can be an independent contractor in its relationship with a brokerage firm and can be treated as such in disputes between the firm and the licensee, the court found that there is a principal/agent relationship in place when the licensee is working with third parties.  Because of this duty to supervise its licensees and also because the licensees are acting in the broker’s name during their transactions, the trial court ruled that brokers are vicariously liable for intentional torts such as fraud committed by its licensees while they are performing their duties as a salesperson. 

In this case, the Brokerage’s name was listed on the Buyer’s purchase contracts and the agency disclosure forms, and the Brokerage received the commissions from the Salesperson’s transactions.  Based on these facts, the court ruled that the trial court had properly instructed the jury.

Finally, the court partially reversed the damage award made to the Buyer.  The Brokerage argued that the damage award was not supported by the evidence because the Buyer had failed to establish the value of the properties at the time the Buyer purchased them.  While there was evidence to support most of the awards, the Buyer had not introduced evidence establishing the value of one property at the time of purchase.  Therefore, the court reversed the $15,000 award for that transaction but upheld the remainder of the awards against the Salesperson and the Brokerage.

Auer v. Paliath, 2013-Ohio-391, 2013 WL 492728 (Ohio Ct. App. Feb. 8, 2013).  [This is a citation to a Westlaw document.  Westlaw is a subscription, online legal research service.  If an official reporter citation should become available for this case, the citation will be updated to reflect this information]. 

Editor’s Note: The Ohio Association of REALTORS® filed an amicus curiae brief in support of the Brokerage.