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Huynh v. Vu: Award to Broker Overturned

A California court has considered whether a broker could successfully bring a lawsuit against seller’s husband for damages because of the husband’s interference in the contractual negotiations.

Bill Phua (“Buyer”) sought the assistance of licensed real estate broker Khai Huynh (“Broker”) in finding a suitable property for the Buyer to complete a tax-free exchange under section 1031 of the Internal Revenue Code. Under Internal Revenue Code 1031, if an individual exchanges business or investment property solely for business or investment property of a like-kind, no gain or loss is recognized. A taxpayer is allowed to postpone the recognition of gain on the sale of qualifying property by the acquisition of replacement real property that will be later identified and purchased within a specific period of time. To learn more about 1031 exchanges, click here.

The Broker knew that a property he believed that Cuong Tat Vu (“Husband”) owned had been on the market the previous year and the listing had expired without being purchased. The Broker contacted the Husband to inquire if the property was still available. While the Husband had originally co-owned the property with his wife in 1993, he had later transferred ownership of the entire property to her (“Seller”). Over the years, the Husband continued to manage the property on behalf of the Seller, collecting rents and maintaining the property. The Husband told the Broker that he remained interested in selling the property and asked the Broker to submit a written offer.

The Broker submitted an offer to the Husband. After some discussions with the Seller, the Broker submitted a counteroffer, lowering his commission. At this point, the Broker learned that the Seller was the true owner of the property. However, the Seller continued to direct the Broker to conduct negotiations with the Husband. In November 1998, the negotiations yielded an increased offer from the Buyer and a reduced commission for the Broker. Additionally, the purchase contract included the following: “Escrow to close 90 days from Seller’s acceptance. Contract extension, if any, after the expiration date have to be agreed by Seller in writing, or contract to be null & void at Seller choice.”

The Buyer accepted the counteroffer, and began to arrange financing for the purchase. However, between November and February, the Broker unsuccessfully requested from the Seller documents about the property’s income and expenses, which were necessary for the Buyer to secure a loan for his purchase. The Broker also requested that the Husband obtain “tenant estoppel certificates” from the current tenants, which is a document signed by the tenant confirming the terms of the lease. In the end, the escrow deadline passed without the Buyer having obtained financing, due to the failure to obtain the necessary documents to secure a loan.

The Broker prepared an extension of the escrow closing date, which the Husband signed but later claimed he signed the document in error. The parties continued negotiations, but now the Seller was asking for an increased purchase price amount. Eventually, the transaction closed, but only after the Buyer agreed to pay a higher purchase price and the purchase agreement also did not include a commission amount for the Broker. The Broker filed a lawsuit against the Seller for his commission and also against the Husband for his intentional interference with contract negotiations. The jury awarded the Broker his commission from the Seller as well as compensatory and punitive damages of over $200,000 against the Husband. The Husband appealed.

The California Court of Appeal, First District, reversed the jury’s award against the husband, which was the only issue on appeal as the parties had settled the other allegations in the lawsuit. On appeal, the Husband argued that the “manager’s privilege” protected him from the Buyer’s intentional interference allegations. The manager’s privilege is a legal doctrine which protects an agent from liability when the agent advises his/her principal to breach a contract with a third party when the agent reasonably believes such conduct is in the principal’s best interest. While the Broker argued that this doctrine only applied instances where the principal was a business entity and was not applicable to a husband/wife situation, the court found no support for such an argument.

Next, the court considered the scope of the privilege. The court found that the manager’s privilege applied when the “predominate motive” for the manager’s actions was to benefit his/her principal. Applying this doctrine to the facts of this case, the court found that the evidence supported a finding that the Husband’s predominate motive in interfering with the contract was to protect the Seller’s interests. Indeed, the court found that there was no evidence showing that the Husband had any other motivation for his actions. Therefore, the court determined that the jury should have been allowed to consider whether the Husband was protected by the “manager’s privilege”, and so the court reversed the jury award in favor of the Broker against the Husband.

Huynh v. Vu, 4 Cal. Rptr. 3d 595 (Cal. Ct. App. 2003).