In Lombardo v. Albu, Elaine Albu (the "Buyer Representative") represented buyers of a home owned by Joseph and Jacqueline Lombardo (the "Sellers"). After making an offer to the Sellers, the buyers told the Buyer Representative that they anticipated having difficulty obtaining financing. The Sellers did not inquire about the buyers' financial condition, and the Buyer Representative did not disclose their financial situation.
The buyers failed to close and the Sellers' home ended up being sold at a trustee's sale after their mortgage company foreclosed on the home due to lack of payment. The Sellers sued the Buyer Representative for failing to disclose the buyers' financial difficulties to them. They also sued their listing broker and their mortgage company. The Buyer Representative moved for summary judgment, arguing that as the agent of the buyers, she did not owe a duty to the Sellers to disclose this information about the buyers. The trial court agreed and ruled for the Buyer Representative.
On appeal to the Court of Appeals of Arizona, the Sellers argued that the Buyer Representative either had a statutory or a common law duty to disclose the buyers’ financial condition. They first pointed to a section of the Arizona statute providing that the state real estate commission (the "Commission") may suspend, revoke or deny a license if the licensee "disregards or violates" any rules adopted by the Commission.
The Sellers contended that the Buyer Representative violated portions of the Arizona Administrative Code, relevant parts of which, provide that: "A licensee owes a fiduciary duty to his client and shall protect and promote the interests of the client. The licensee shall also deal fairly with all other parties to a transaction." And, "Each licensee participating in a real estate transaction shall disclose to all other parties to the transaction any information which the licensee possesses which materially and adversely affects the consideration to be paid by any party to the transaction, including, but not limited to, the following matters... (2) Any information that the buyer or lessee is, or may be, unable to perform due to insolvency or otherwise." The Sellers argued that the statute and these regulations define the duty and standard of care of an Arizona licensee.
The court stated that the Sellers were confusing a duty and a standard of care; that the concepts are separate and should not be confused. It further stated that the statute itself does not create a duty to disclose, nor is it clear that the intent of the legislation was to authorize the Commission to create such a duty. Rather, the purpose of the statute was to authorize the regulation of licensee conduct. While the regulations suggest that the Commission may require a licensee to disclose a buyer's inability to perform, the court found that the existence of an administrative rule such as this, which provides for discipline, “does not necessarily mean that a duty exists that, if breached, gives rise to liability in tort."
The court determined that both Arizona common law (case law) and the regulations "require faithful performance by an agent to her principal. [The Buyer Representative] owed fiduciary duties of loyalty to her own clients...That is the primary responsibility of an agent: to serve her principal." It reasoned that to recognize duties of licensees to other parties to the transaction would undercut the duty to the principal, to the extent the parties’ interests are different. The court noted that recognizing duties to third parties potentially could place a licensee in a conflict between the duty to her principal and the duty to the third party.
The Lombardo court emphasized that the Sellers could have taken measures to protect themselves, including such things as asking for a credit report or requiring that the buyers be approved for financing. It found no reason to impose a duty on buyers or their representatives, "to disclose adverse financial information when no request is made for them to do so."
Lombardo v. Albu, 197 Ariz. 340, 4 P.3d 395, (Ariz. Ct. App. 1999), rev'd 1999 Ariz. 97, 14 P.3d 288 (2000). To read this decision click here.
Notes: As with all state court decisions, the Lombardo decision only is binding in Arizona; other states, even with similar legislation or regulations, may require disclosure of such information. Also, the Lombardo decision is subject to further appellate review. Motions for reconsideration or petition to the Arizona Supreme Court may be pending. Counsel is cautioned to make an independent determination of the status of this case before relying on it.
UPDATE- Supreme Court of Arizona Reverses Lombardo Decision
The Supreme Court of Arizona has reversed the rulings of the lower courts in Lombardo v. Albu, a decision previously summarized in The Letter of the Law- click here to read the earlier summary and a more thorough discussion of the facts.
To summarize, the issue before the court was whether Elaine Albu, a buyer's representative ("Buyer's Representative"), had a duty to disclose to Joseph and Jacqueline Lombardo, the property sellers ("Sellers"), the fact that the buyers were in dire financial straits. The Buyer's Representative had successfully argued to the lower courts that the buyer's financial condition was confidential information which the Buyer's Representative was prohibited from disclosing to the Sellers. Thus, the lower courts had ruled that the Buyer's Representative owed no legal duty to the Sellers. The Sellers appealed these rulings.
The Supreme Court of Arizona reversed the lower courts, ruling that the Buyer's Representative did have a duty to disclose the financial condition of the buyers when this condition may make it unlikely that the buyer will be able to complete the transaction. The Sellers argued to the court that an Arizona Department of Real Estate Regulation ("Regulation") established the standard of care owed by the Buyer's Representative. The regulation provides: "Each licensee participating in a real estate transaction shall disclose to all other parties to the transaction any information which the licensee possesses which materially and adversely affects the consideration to be paid by any party to the transaction, including, but not limited to, the following matters... (2) Any information that the buyer or lessee is, or may be, unable to perform due to insolvency or otherwise." Alternatively, the Sellers argued that the Regulation would provide them with a private cause of action.
The court first considered the duties a buyer and a seller owe to each other, based on their contractual relationship. Some of the implied duties that parties in a contractual relationship owe to each other are the duties of good faith and fair dealing, as well as the duty to disclose facts which are "material," or important, to the transaction. The court stated that a buyer cannot present himself as a "ready, willing, and able buyer" if he knows that his financial condition may make it unlikely that he will be unable to complete the transaction, since failure to disclose would violate the buyer's duty of good faith and fair dealing.
Next, the court addressed the disclosure duties of a buyer representative to the seller. Since it determined that information about a buyer's potential financial inability to perform is not confidential and must be disclosed to the seller, it also ruled that a buyer representative must disclose this information to the seller. Citing the Restatement of Agency, it determined that an agent has a duty to disclose the truth to third parties when making representations to third parties on behalf of his principal.
Applying these principles to these facts, the court ruled that the Buyer's Representative would have a duty to disclose to the Sellers that the Buyers' financial condition may make it impossible for them to complete the transaction. The court stated that the lower courts erroneously ruled that the Buyer's Representative's fiduciary duty to the Buyers prohibited her from disclosing this information. Since the Buyers had a duty to disclose this information to the Sellers, so too did the Buyer's Representative. The court ruled that the Regulation merely codified the common, or judge-made, law of agency, and so the Buyer's Representative did have to disclose the possibility that the Buyer may be unable to perform the transaction. Therefore, the court reversed the rulings of the lower court and sent this case back to the trial court for further proceedings.
Lombardo v. Albu, 199 Ariz. 97, 14 P.3d 288 (2000).
Editor's Notes: NAR's Legal Action Committee contributed financial support to the attempt by the Arizona Association of REALTORS® to have the lower court decisions affirmed. Also, Legal Affairs would like to thank Diane Scherer, CEO of the Phoenix Association of REALTORS®, for immediately alerting us to the release of this decision.
It is important to note that, as with all state court decisions, the Lombardo decision only is binding in Arizona. If you are unsure of the disclosure requirements within your jurisdiction, consult with your state association's legal hotline and/or an attorney licensed in your jurisdiction.