Benjamin Funk and Betty Lou Funk v. Ward Tifft D/B/A the Tifft Agency and Pendor-Idaho Corporation

515 F.2d 23

• Court: Court of Appeals for the Ninth Circuit
• Decided: May 28, 1975
• Docket: 73-1785
• Status: Published

Opinions

OPINION

LUMBARD, Circuit Judge:

Plaintiffs Benjamin and Betty Lou Funk appeal from a judgment of the-District Court of Idaho entered on November 10, 1972, by J. Blaine Anderson, J., dismissing their complaint. The principal issue presented by this diversity of citizenship case is whether a licensed real estate broker in Idaho owes a fiduciary duty to a prospective buyer not to purchase a tract of land for himself while his prospective buyer’s offer to buy that land is outstanding. The district court found that there had been no breach of duty and refused to impose a constructive trust in favor of plaintiffs. We reverse.

In 1968, defendant Ward Tifft was a licensed real estate broker doing business as the Tifft Agency in Sandpoint, Idaho. On August 22, 1968, the plaintiffs, Benjamin and Betty Lou Funk, who were residents of California, came into the Tifft Agency and asked to see some property. Salesman Ron Fillion showed them the Godfrey property, which is the subject matter of this suit. The following day the Funks made out a check for $100 to the Tifft Agency as an earnest money deposit and signed an agreement to purchase the property for $30,000, with $1,000 to be paid upon acceptance of the offer followed by payments of $100 per month for fifteen months, followed by a lump sum payment of $5,000 and payments of $150 per month thereafter.

On August 26th, Tifft mailed the Funk offer to Mrs. Carlock, the daughter of the owner. Mrs. Carlock, who lived in Florida, had a power of attorney from her father which authorized her to act with respect to the property. Two days later and before Mrs. Carlock received the Funk offer, Tifft called Mrs. Carlock and advised her that he, Fillion and a Mr. Kahn were mailing her ah offer for $30,000, with $6,000 down and payments of $300 per month.

A month later, in response to a telephone call from the Funks, Tifft returned their $100 and informed them that their offer had been rejected. He did not tell them that he, Fillion, and Kahn had purchased the property.

Kahn, Fillion, and Tifft formed the Pendor-Idaho Corporation on October 23, 1968. Kahn received 51% of the stock, and Tifft and Fillion split the remaining 49%. Tifft was a director and president of the corporation. The deed to the Godfrey property was granted to the corporation.

When the Funks returned to Idaho in 1970, they learned who had purchased the property, and they sued to have Pen-dor-Idaho declared a constructive trustee and to obtain other relief. The district court found for the defendants and asked their counsel to prepare findings of fact and conclusions of law.

While it is agreed that Idaho law governs, the Idaho Supreme Court has never ruled on the duty that a realtor owes a prospective buyer. Consequently we must distill from the decisions of other jurisdictions the principles which we believe the Idaho courts would apply.

Most modern cases dealing with the relationship of a broker and a buyer impose a duty of fairness and honesty on the broker. One of the leading cases, Quinn v. Phipps, 93 Fla. 805, 113 So. 419 (1927), held that when a person undertakes to act as an intermediary between the seller and a prospective buyer of a parcel of land, he becomes a constructive trustee for the benefit of the prospective buyer if he purchases the land from the seller for himself without advising the prospective buyer of his actions. See also Mitchell v. Allison, 51 N.M. 315, 183 P.2d 847 (1947), 54 N.M. 56, 213 P.2d 231 (1949); Stephenson v. Golden, 279 Mich. 710, 276 N.W. 849 (1973). Cf. Ward v. Taggart, 51 Cal.2d 736, 336 P.2d 534 (1959).

These cases are consistent with the testimony of two Idaho real estate brokers who stated at trial that a realtor who acts as an intermediary between a seller and a prospective buyer has a duty not to compete secretly with and outbid the prospective buyer when that buyer has made an offer on a piece of property and signed an earnest money purchase agreement. The trial judge found that Tifft did not breach his duty to the Funks when he outbid them without their knowledge.¹ However, the legal conclusions of the district court are not binding upon us. Stevenot v. Norberg, 210 F.2d 615, 619 (9th Cir. 1954). We think that it is clear on the facts outlined above that Tifft did breach the fiduciary duties he owed the Funks. When a real estate broker acts as an intermediary between a seller and a prospective buyer, he is under a duty to deal fairly and honestly with the prospective buyer. That duty is breached when the real estate agent outbids the prospective buyer without notice to him before the seller has acted on his offer. Our holding obviously benefits the prospective buyer, but it is important to note that the seller is also better served by this rule. If the real estate agent sends his own offer to a seller without notifying the prospective buyer, the seller is deprived of the possibility that the prospective buyer might better the agent’s offer.²

The district court refused to impose liability on the defendants because it felt that Kahn, not Tifft, was the principal offeror in the second offer and because it found no “malice or legal wrongdoing” involved in Tifft’s actions. We do not agree. Tifft was director and a 24.5% stockholder of the corporation that bought the land. The lack of malice is irrelevant; there is sufficient “legal wrongdoing” in Tifft’s breach of his fiduciary duty.³ Suffice it to say that Tifft’s involvement tainted the actions of his fellow stockholder and those of the corporation.

Idaho has long recognized the constructive trust as the appropriate remedy when a fiduciary violates his duties and takes property for his own use. Reid v. Keator, 55 Idaho 172, 39 P.2d 926 (1934). Here the Punks established the essential elements required for imposition of a constructive trust — the existence of a fiduciary relationship, its breach, and the wrongful acquisition of the land by the breacher, 89 C.J.S. Trusts § 158 (1955). The only remaining question is whether it is appropriate to impose a constructive trust on the Pen-dor-Idaho Corporation since Tifft only has a 24.5% interest in it. However, if the corporation took title to the Godfrey property with knowledge of Tifft’s breach of his fiduciary duty, the corporation is not a bona fide purchaser and a constructive trust can be imposed in favor of the Funks. See Fenton v. King Hill Irrigation District, 67 Idaho 456, 186 P.2d 477 (1947). Since Tifft was president of Pendor-Idaho, as well as a director and owner of 24.5% of its stock, the corporation had notice of his actions.⁴ New England Natl. Bank v. Hubbell, 41 Idaho 129, 238 P. 308 (1925). Thus, the corporation was not a bona fide purchaser, and a constructive trust should be imposed against the corporation in favor of the Funks.

On remand the district court should order transfer of the Godfrey property to the Funks upon their tender to the Pendor-Idaho Corporation of the money and/or other consideration which it paid to the seller and their assumption of any obligation which Pendor-Idaho Corporation still owes to the seller.

The court will also have to take into consideration any capital improvements made to the property by Pendor-Idaho. See generally Ryan v. Plath, 18 Wash.2d 839, 140 P.2d 968 (1943). When it fashions its final order, the court should give the parties and the seller opportunity to be heard should that be necessary.⁵

Reversed and remanded.

1 . The trial judge stated from the bench in announcing his tentative findings that Tifft owed a duty of fairness and honesty to the Funks, but the findings of fact prepared by defense counsel, and reworked by the district judge, concluded that Tifft did not owe any fiduciary duties to the Funks.

2 . Pendor-Idaho in its petition for rehearing argues that our decision is contrary to public policy. We do not see how. We are merely giving force to the standards of the Idaho real estate profession. Tifft should have followed the normal and proper practice.

Tifft failed to make adequate disclosures to the Funks and such disclosures should be required. This sort of disclosure requirement finds its analogy in many areas of our law today, especially in statutory enactments designed to protect the unknowing individual from the professional. See, e. g., Truth-in-Lending Act, 15 U.S.C. §§ 1601-65; Securities Act of 1933, 15 U.S.C. §§ 77a-77aa; Interstate Land Sales Full Disclosure Act, 15 U.S.C. §§ 1701-20.

3 . The district court also stressed its belief that the Funks, could not have matched or bettered the offer made by Tifft and associates. Its findings in this regard were clearly erroneous. Funk testified that his assets at this time consisted of a small house that he rented to others which was worth $7500, a larger house worth $30-$35,000 (mortgaged for about $20,000), a ranch worth $35-$40,000 (mortgaged for about $20,000), and miscellaneous equipment, etc. worth $5000. He testified that he was willing to sell these properties in order to move to Idaho, and the fact that he had done so by the time of the trial is evidence of his sincerity. His estimated values were shown to be accurate since he sold the small house for $7500 and his two other properties for a deed of trust in his favor of $26,000. Although Funk’s financial records were available to defendants, they impeached his testimony only to the extent of showing that he owed unspecified sums to various individuals or companies.

Funk also testified he was employed at a rate of $1000 a month and that he received in addition $500 in expense money from his employer which he could use as he wished. Although this expense money was not reflected in Funk’s W-2 forms, the defendants did not attempt to show that Funk did not receive the extra $500 per month. Since they had his financial records, this omission is significant. The fact that Funk’s income tax returns show a low net taxable income is largely indicative of the fact that Funk engaged in raising cattle and maintaining rental property which permitted him to minimize his taxes.

4 . Pendor-Idaho, in its petition for rehearing, claims that we erred in imputing the knowledge of a promoter of a corporation to the corporation. This argument misinterprets our decision. Kahn, not Tifft, was the promoter of the corporation. However, as President of Pendor-Idaho and one of its three stockholders at the time at which the corporation acquired the land, Tifft was an agent of the corporation and the knowledge of an agent is attributable to the principal regardless of when it is acquired. See Restatement (Second) of Agency §§ 274, 276 (1958); 3 Fletcher Cyc. Corp. (Perm.Ed.) § 799.

Pendor-Idaho also suggests that Tifft’s knowledge cannot be imputed to the corporation because Tifft was acting adversely to the interests of the corporation. That exception to the general rule is applicable only in cases where an agent is stealing from the corporation or otherwise defrauding it. Such is not the case here. See Restatement (Second) of Agency § 282, comment c & illustration 4 at 613 (1958).

5 . Pendor-Idaho contends it is unjust to hold it accountable for Tifft’s actions, implicitly suggesting that it would be fairer for us to give to the Funks only Tifft’s 24.5% interest in the property. While perhaps “fairer” to Pendor-Idaho, such a result would not make the Funks whole.