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Menzel v. Morse: Iowa High Court Uses National Association of REALTORS® Code of Ethics as Standard for Determining Broker Negligence

In Menzel v. Morse, the Supreme Court of Iowa addressed the issues of negligence and breach of fiduciary duty. The court found that the Code of Ethics of the NATIONAL ASSOCIATION OF REALTORS® (NAR) was the standard for determining a broker's negligence. Further, the court held that conduct between the parties can constitute an implied agency relationship with attendant fiduciary duties.

The Menzels (buyers) were relocating to Fort Dodge, and were sought out by Morse, a sales associate for Jones, a broker who belonged to the local MLS. Morse testified he hoped to make the Menzels his customers. The Menzels testified Morse said he wished to be their broker and find them a house. Morse never told them they were not his clients, nor did he tell them he was an agent for any seller. Morse showed them an MLS-listed house that was under construction, and the Menzels made a full-price offer which was rejected. Later, in the absence of the Menzels, Morse drafted a new offer and signed it "By agent Morse" for the Menzels. The sellers signed the contract which stated that all necessary work was to be completed by the closing date.

On the closing date, the Menzels were given only fifteen minutes to inspect the house. The Menzels, who had no experience with construction or new homes, found so many obvious defects they refused to close. The Menzels testified that Morse told them that if they failed to close they would lose their down payment and would be sued for breach of contract. Morse also advised them they did not need an attorney. Mr. Menzel testified that he felt he had no choice but to go through with the closing. When the closing took place, $1,500 was placed in escrow to cure the defects. Upon moving into the home, the Menzels found serious defects. They sued the contractor, who then claimed bankruptcy. They sued Morse and Jones for negligence and breach of fiduciary duty. The trial court found for the defendants and the Menzels appealed.

The court first addressed the negligence issue. The court stated that the general rule requires a plaintiff to produce evidence to show the standards of conduct and practices that establish the requisite skill and knowledge of members in good standing in the defendant's trade or profession. The court found that the applicable standard for real estate brokers was the NAR Code of Ethics (Code). The court added that it was immaterial as to whether the broker is an NAR member if it is definitely established that the Code has been adopted and is applicable to those in the real estate profession in the state. The court noted the defendants' admissions that the Code was the accepted standard in Iowa. The court then remanded the negligence issue.

Turning to the fiduciary duty issue, the court found that an agency relationship between the parties was a requirement for such a claim. The court stated that an agency relationship may be by express agreement between the parties, or by implication from the words and conduct of the parties. The court found overwhelming evidence that Morse was an agent for the Menzels, beginning with his seeking them out and soliciting them as customers. Further, the court found no substantial evidence that he represented the sellers. The court stated that, on remand, Morse's activities must be viewed in light of the agency relationship between him and the Menzels.

Menzel v. Morse, 362 N.W.2d 465 (Iowa 1985).