In a light of an opinion of the Supreme Court of the United States, the United States Court of Appeals for the Ninth Circuit has considered once again whether a broker can be liable for violations of the Fair Housing Act (“Act”) based on the actions of his salespeople. Click here to read a summary of the earlier decisions in this case.
To briefly summarize the facts, Mary Ellen and David Holley ("Buyers"), a mixed race couple, were looking to purchase property in Twenty-Nine Palms, California. The Buyers visited Triad, Inc., d/b/a Triad Realtor ("Brokerage") to help them with their search and spoke with Grove Crank, a Triad representative. The Brokerage was a corporation whose sole shareholder was David Meyer ("Broker"), who was also the president of Triad and also the designated officer/broker for the Brokerage. The Broker had turned the day-to-day operation of the Brokerage over to Crank. During the Buyers' home search, Crank allegedly prevented the Buyers from purchasing a home for racially discriminatory reasons. The Buyers eventually built their own house in the town, and the home they intended to bid on sold for less than the Buyers' proposed offering price.
The Buyers filed lawsuits against both the Brokerage and the Broker personally, alleging violations of the Act. Because Crank's license was held by the Brokerage, rather than the Broker, the trial court dismissed the allegations made against the Broker in his capacity as a corporate officer of the Brokerage. The court also entered judgment in favor of the Broker individually on the other alleged violations of the Act, ruling that Crank's actions could not be attributed to the Broker individually, only the Brokerage, because the Brokerage was a corporation.
The appellate court reversed the trial court's ruling, determining that the Broker had potential liability in his capacity as owner, president, or designated officer/broker for Crank's actions because the Broker's duty to conform with the Act was non-delegable. The Broker appealed this ruling, and the Supreme Court of the United States unanimously reversed the appellate court. The Court determined that the Act did not vary the traditional rules of vicarious liability (or, when an owner can be liable for the actions of its employees) and so directed the appellate court to consider the allegations against the Broker under the traditional principles of vicarious liability.
On remand, the United States Court of Appeals for the Ninth Circuit found that the Broker could be personally liable for the actions of Crank and sent the case back to the trial court for further proceedings. The court first considered whether under a traditional brokerage relationship the Broker could be liable for the actions of his salespeople. Under the general principles of corporate law, a corporation is liable for the actions of its employees. However, the court found that a real estate corporation was different, as a corporation’s designated real estate broker in California is legally responsible for the actions of the corporation’s salespeople. So, the court found that a designated officer/broker in a California real estate corporation can be held personally liable for the actions of the corporation’s salespeople. Therefore, the court ruled the Broker could be individually liable for the violations of the Act by his salespeople.
The court also considered whether the Broker was individually liable for the actions of Crank because the parties were in an agency relationship. Since the Broker had delegated the operation of the Brokerage to Crank, an agency relationship existed between the two and Crank had a responsibility to assure that the Brokerage was in compliance with the Act as well as state housing laws. Due to the agency relationship between the parties, the Broker could be individually liable for the actions of Crank.
Next, the court considered whether the Broker was liable for negligent supervision because of his failure to properly supervise Crank. To be liable for negligent supervision, a party must show that the principle was negligent in either the orders it gave to the agent or negligently failed to supervise the agent’s actions. Since a jury could conclude that the Broker was negligent in delegating his responsibilities to Crank, the court sent these allegations back to the trial court for further consideration.
Finally, the court considered whether the Buyers had alleged sufficient facts to pierce the corporate veil. These allegations had been dismissed by the trial court and the Buyers sought to reinstate these allegations. “Piercing the corporate veil” is a legal doctrine which removes the “corporate shield” and makes an individual personally liable for the corporation’s debts. This can occur when a single individual so controls all aspects of a corporation that it becomes the “alter ego” of that individual. A variety of factors are considered by courts when making this determination, such as observance of corporate formalities, capitalization of corporation, and percentage of corporate ownership.
Here, the Broker was the sole owner of the Brokerage, had paid the Brokerage’s taxes using his personal social security number, and there was a failure to follow corporate formalities (such as shifting control of Brokerage to Crank). The court also found that fairness and equity allowed the disregarding of the corporate shield, as the Brokerage had few assets to pay a judgment in favor of the Buyers and also did not have insurance coverage for such a judgment. Thus, the court ruled the Buyers could refile the “piercing the corporate veil” allegations and these allegations would be considered again by the trial court.
Holley v. Meyer, No. 99-56611, 2004 WL 2382118 (9th Cir. Oct 26, 2004). [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].
Click here to access the opinion on the Ninth Circuit’s website.