To what extent may a California real estate broker who is the designated officer of a corporate brokerage licensee be held liable for the negligent acts of agents associated with the corporate licensee?
In California, corporations and individuals both may become licensed real estate brokers. In order for a corporation become a broker, an individual who holds a broker license must be appointed as the corporation’s “designated broker.” The designated broker is responsible for supervision and control of the activities of the officers and employees of the corporation. These requirements are set out in California Business & Professions Code § 10159.2. If the designated broker fails to comply with the requirements of § 10159.2, his or her real estate broker license may be suspended or revoked.
Real estate salespersons may not conduct activities under their license unless they have associated with a real estate broker. That could mean either and individual broker or a corporate broker. Once associated with a broker, the salesperson is deemed to be in an independent contractor for some purposes, such as taxes. For other purposes, and particularly when representation of third parties is involved, the salesperson is deemed to be an employee of the broker. The broker is generally responsible for whatever the salesperson does in a professional capacity.
If the salesperson is negligent, the aggrieved person may bring a lawsuit against the salesperson. Because the salesperson acts for the broker, the broker will usually also be named as a defendant. If the salesperson is found liable, the broker will likely also be found liable, under the doctrine of vicarious liability or respondeat superior. Obtaining a judgment against the broker can be important because the broker will usually have errors and omissions insurance to pay for the plaintiff’s damages.
This works as it should when the broker is an individual. But what happens if the broker is a corporation? One of the most important functions of a corporation is to protect shareholders and officers from liability for ordinary negligence of corporate employees. If a corporate broker’s assets or insurance coverage are insufficient, may the individual who is the designated broker of the corporation be held liable?
Section 10159.2 is of little help. The courts have held that the duties of the designated broker under that section are limited to ensuring the salesperson’s compliance with the administrative requirements of the Bureau of Real Estate. In other words, section 10159.2 does not create a private right of action in third parties as against real estate salespersons associated with the corporate licensee.
This general rule is applied straightforwardly in negligence cases where the designated broker didn’t participate in the transaction and wasn’t aware of the problems. Does it also apply where the broker is involved in the transaction, or is fully aware of the transaction and the negligent acts of the salesperson?
This question was recently considered in Rose v. Seamless Financial Corporation, Inc., 916 F.Supp.2d 1160 (S.D.Cal. 2013). There, the court stated that “imposition of liability on a designated broker depends on whether or not an agency relationship has been created between the designated broker and the corporate employee alleged to have committed the unlawful conduct. Mere inaction on behalf of the designated broker, or allegations of an implicit agreement is not sufficient.” The court then stated that “under traditional agency principles, a principal may be liable for the acts of his agent if the principal consents to the agent acting on his behalf and subject to his control, and the agent consents to act for the principal.”
Under Rose, then, an individual who is the designated broker of a corporate licensee may be held liable for the negligence of a salesperson associated with the corporate licensee if facts can be proven demonstrating that the designated broker consents to the sales person’s acting on his behalf and subject to his control in connection with a specific transaction, and the salesperson agrees to act for the designated broker. The mere right to control isn’t enough to result in the designated broker’s being held liable. But if the plaintiff can show actual involvement in the transaction by the designated broker, then the plaintiff may very well succeed in holding the designated broker personally liable.