Haldiman v. Gosnell Development Corp.

748 P.2d 1209, 155 Ariz. 585, 1987 Ariz. App. LEXIS 562

• Court: Court of Appeals of Arizona
• Decided: October 20, 1987
• Docket: 1 CA-CIV 8804
• Status: Published

Opinions

OPINION

GREER, Judge.

The primary issue presented in this appeal is whether a real estate agent who is an employee of the seller owes a duty of full and frank disclosure to the buyer in a real estate transaction. A secondary issue is whether an award of attorneys’ fees pursuant to A.R.S. § 12-341.01 was proper.

Since this is an appeal from a summary judgment, we view the facts most favorably to the appellant. The appellant, Meredith Haldiman, entered into a contract on August 5, 1982, to purchase a townhome, which was to be constructed by appellee Gosnell Development Corporation (Gosnell). The purchase contract, entitled an “Agreement to Purchase” (purchase agreement), was prepared by appellee Gael Boden, an employee of Gosnell and a licensed real estate salesman. Haldiman was not represented by her own real estate agent, nor did she obtain outside legal advice.

Boden prepared the purchase agreement on a Gosnell form, by typing in the blanks, including the purchaser’s name, the development, the home site, the plan, options and price. The total purchase agreement consisted of two pages. It provided, inter alia:

5. If Purchaser fails to comply in timely fashion with all terms and conditions of this Agreement or otherwise should fail to complete the Purchase, GDC [Gosnell Development Corporation] may elect to (a) terminate this Agreement by delivery of written notice to Purchaser and may retain any monies received and/or collect monies due, including but not limited to earnest monies and amounts due for options incorporated into the Residence, as liquidated and agreed damages, or (b) seek specific performance, and/or (c) pursue any other right or remedy provided by law.

8. This Agreement and any subsequent executed agreements constitute the Agreement between the parties hereto and neither shall be bound by any understanding, negotiation, discussion, agreement, promise or representation expressed or implied, which is not set forth herein or in subsequent agreements executed by both parties.

12. Purchaser acknowledges having read and understood each of foregoing terms and conditions. Purchaser should not execute this Agreement if any of the provisions are unclear or objectionable to Purchaser.

Pursuant to the agreement, Haldiman paid a $2,000 earnest money deposit.

Boden subsequently prepared an additional agreement, an “Option/Change Order Agreement” (option agreement) which was executed on August 27, 1982. This second agreement set forth the options that Haldiman chose for her new home and their prices. Pursuant to that agreement, she paid a deposit of $1,300 for the options.

Boden signed both agreements as a “marketing representative” of Gosnell. Haldiman was provided copies of the two agreements. Boden apparently made no explanation of the terms of the purchase agreement at the time of execution. He did not, for example, explain that pursuant to its terms, Haldiman’s deposit would not be refunded if she was unable to close escrow because she did not qualify for financing or was unable to sell her former home. Neither did he suggest that the purchase agreement be conditioned upon Haldiman’s ability to obtain reasonable financing or to sell her existing home.

Close of escrow was set for January, 1983, when it was anticipated that construction of the unit would be completed. Gosnell was ready and able to close escrow at that time, but Haldiman was unable to secure financing because she had not yet sold her former home. Gosnell extended her a four and one-half month grace period within which to sell her home. By May, 1983, she still had not sold her home and was unable to close escrow. On May 6, 1983, Gosnell notified Haldiman by letter that it was terminating the purchase agreement because of Haldiman’s failure to comply with the terms and conditions of the agreement and close escrow in a timely fashion. She was given a final deadline of May 16, 1983. Haldiman failed to close escrow, and pursuant to the purchase agreement, Gosnell terminated the agreement and retained both the $2,000 earnest money deposit and $1,300 option deposit Haldiman had paid.

Haldiman filed a complaint against Gosnell and Gael Boden alleging that Gosnell wrongfully retained the total of $3,300 she had deposited with Gosnell (Count I) and that Gael Boden represented her in the transaction and had breached his duty to give her full and frank advice and to treat her fairly (Count II). Count II was resolved in favor of Gosnell and Boden upon their motion for summary judgment, and Count I was resolved by arbitration in Gosnell’s favor. On appeal, Haldiman claims that the trial court improperly granted the defendants’ motion for summary judgment and that the court should have held, as a matter of law, that Boden owed Haldiman a duty of full and frank disclosure.

Haldiman also claims that the trial court improperly awarded the appellees attorneys’ fees pursuant to A.R.S. § 12-341.01. She argues that Count II of the complaint did not arise from a contract, and therefore attorneys’ fees pursuant to that statutory provision were improper. The appellees argue on cross appeal that the trial court improperly reduced the amount of attorneys’ fees awarded. We affirm the trial court’s granting of summary judgment and reverse its award of attorney fees.

WAS A DUTY OWED?

Real estate salemen and brokers owe a duty of good faith and loyalty to their principal. Vivian Arnold Realty Co. v. McCormick, 19 Ariz.App. 289, 293, 506 P.2d 1074 (1973). They must exercise reasonable due care and diligence to effect a sale to the principal’s best advantage. Id.; Haymes v. Rogers, 70 Ariz. 257, 219 P.2d 339 (1950). They must also disclose to their clients information they possess pertaining to the transaction involved. Jennings v. Lee, 105 Ariz. 167, 461 P.2d 161 (1969).

In Morley v. J. Pagel Realty & Insurance, 27 Ariz.App. 62, 550 P.2d 1104 (1976), Division Two of this court extended this duty one step further. The question before the court was the extent of a real estate broker’s duty to his client and specifically, whether the broker should have advised his clients, the sellers, to require security for the buyer’s performance. The court stated:

In the case at bench, appellants [the sellers] seek to hold appellees [the real estate broker] liable for failing to inform them that the Haydens' offer contemplated no security and that a mortgage should be required. Although this information might be beyond the average person, it is common knowledge in the real estate business. We think that as part of appellees’ duty to effect a sale for appellants on the best terms possible and to disclose to them all the information they possess that pertained to the prospective transaction, appellees were bound to inform appellants that they should require security for the Haydens’ performance.

Id. at 65, 550 P.2d at 1107. The court specifically stated, however, that its holding was a narrow one and should not be extended beyond the facts before it. Id. at 65-66, 550 P.2d at 1107-08. The court then stated:

It [the holding] is reinforced by Art. 26, § 1 of the Arizona Constitution. Having achieved, by virtue of this provision, the right to prepare any and all instruments incidental to the sale of real property, including promissory notes, real estate brokers and salesmen also bear the responsibility and duty of explaining to the persons involved the implications of these documents.

Id. at 66, 550 P.2d at 1108 (emphasis added). Haldiman argues that this last phrase suggests that the court was opening the door to an increased duty of salesmen to persons other than their principal or client. She urges this court to adopt a broad interpretation of Morley. For the reasons stated below, however, we decline to do so.

We first point out that the Morley court specifically stated that its holding was narrow and should not be extended beyond the facts before it. From this very clear statement, we can only conclude that the court meant just that. Its subsequent statement is dicta at best, and therefore not controlling as precedent. Town of Chino Valley v. City of Prescott, 131 Ariz. 78, 638 P.2d 1324 (1981), appeal dismissed, 457 U.S. 1101, 102 S.Ct. 2897, 73 L.Ed.2d 1310, rehearing denied, 459 U.S. 899, 103 S.Ct. 199, 74 L.Ed.2d 160 (1982).

The Arizona Supreme Court, when subsequently presented with a similar question to that in Morley, refused to impose a duty of disclosure on a real estate agent who was not working for the seller. Buffington v. Haas, 124 Ariz. 36, 601 P.2d 1320 (1979). That court concluded:

there was not an agency relationship between appellant Haas [the real estate salesman] and appellee Buffington. Haas had no obligation to inform the appellee that under the contract she did not retain a security interest in her property. Morley v. J. Pagel Realty & Ins., 27 Ariz.App. 62, 550 P.2d 1104 (1976). He also had no obligation to inform her as to the contents of the escrow instructions.

Id. at 38; 601 P.2d at 1322 (emphasis added); see also, Warren v. Mangels Realty, 23 Ariz.App. 318, 533 P.2d 78 (1975). A broker has none of the fiduciary obligations outlined in Vivian Arnold Realty v. McCormick, in the absence of a broker-principal relationship. Id.; see also Norville v. Palant, 25 Ariz.App. 606, 545 P.2d 454 (App.1976).

Haldiman nevertheless suggests that this court should impose a duty on real estate agents to explain the implication of real estate documents even in the absence of an agency relationship. She suggests that this duty would be in the public’s best interest, and that the court could ensure that all parties to a real estate transaction were informed, thereby reducing litigation involving mistake, misrepresentation and misunderstanding in real estate transactions. Although certainly a laudable goal, this court cannot simply create a legal duty because it might reduce litigation in the future. Haldiman does not expressly argue that Boden was her agent, although she does state in her affidavit that Boden represented her in connection with the real estate transaction and gave her real estate advice. As a matter of law, however, Boden could not have been Halidman’s agent.

Part of Boden’s job was to write purchase contracts for potential Gosnell home purchasers, which is exactly what he did for Haldiman. This brief relationship now forms the basis of Haldiman’s claim that he represented her and gave her real estate advice in the transaction. Haldiman’s belief that Boden represented her, or was in essence her agent, does not, however, make him her agent. See, e.g., Warren v. Mangels Realty, 23 Ariz.App. 318, 321, 533 P.2d 78, 81 (1975) (“Warren’s mental characterization of Mangels as his ‘agent’ could not by some magical process convert Mangels into one”). The facts are clear, despite Haldiman’s belief and claim, that Boden was an employee of Gosnell and represented Gosnell only. An agent may not, in the absence of the principal’s consent, act on behalf of an adverse party. Valley Nat’l Bank v. Milmoe, 74 Ariz. 290, 296, 248 P.2d 740, 744 (1952). Haldiman has not presented any evidence, or even alleged, that Gosnell gave Boden permission to represent Haldiman in the transaction. Boden, on the other hand, claims he worked exclusively for Gosnell and at no time represented or worked for Haldiman. Accordingly, Boden only represented Gosnell and could not have been Haldiman’s agent.

Haldiman also argues that Boden is liable because he was negligent for failing to adhere to the standards of his profession, citing Darner Motor Sales, Inc. v. Universal Underwriters Insur. Co., 140 Ariz. 383, 682 P.2d 388 (1984). Darner, however, involved an insurance agent who failed to explain the implications of an insurance policy to his client. The Darner court phrased the issue precisely: “What duty does a licensed insurance agent owe to a client or customer?” 140 Ariz. at 397, 682 P.2d at 402 (emphasis added). Other cases, both prior to and subsequent to Darner have similarly involved professionals who failed to adhere to the standards of their profession when dealing with their clients. In Rossell v. Volkswagen of America, 147 Ariz. 160, 166, 709 P.2d 517, 523 (1985), the Arizona Supreme Court summarized these cases and the nature of the duty they imposed:

Volkswagen argues that case law already recognizes that in negligent design cases a manufacturer is not liable absent a showing that he failed to conform to the standard of care in design followed by other manufacturers. We do not agree. Darner Motor Sales, Inc. v. Universal Underwriters Insurance Co., 140 Ariz. 383, 682 P.2d 388 (1984); Boyce v. Brown, 51 Ariz. 416, 77 P.2d 455 (1938); and Riedisser v. Nelson, 111 Ariz. 542, 534 P.2d 1052 (1975), are, for instance, cases involving professionals (insurance broker and physicians) sued by their clients or patients. National Housing Industries, Inc. v. E.L. Jones Development Co., 118 Ariz. 374, 576 P.2d 1374 (App.1978) involves the liability of a professional engineer to the assignee of its client, a developer____ They do involve, instead, the liability of professionals who generally work in close relationship with their clients or patients. (Emphasis added).

In light of the foregoing, Boden did not have a broker/client relationship with Haldiman, and thus did not breach a duty to uphold real estate professional standards. Cf. Darner, supra. Haldiman has no cause of action for Boden’s failure to suggest that the purchase contract be conditioned upon financing and selling her home, or his failure to explain that she could not recover her deposits if she failed to close escrow for any reason.

ATTORNEYS’ FEES

Haldiman claims that the trial court improperly awarded appellees their attorneys’ fees pursuant to A.R.S. § 12-341.01(A). That section grants to the trial court discretion to award attorneys’ fees to the prevailing party in an action “arising out of a contract.” Although Haldiman concedes that a contract was involved, she contends that the essence of her claim is real estate malpractice, a tort action. Boden claims the action arose out of the contract with Gosnell. We agree with Haldiman and hold that the trial court improperly awarded attorney’s fees.

In Sparks v. Republic Nat’l Life Ins. Co., 132 Ariz. 529, 647 P.2d 1127 (1982), the Arizona Supreme Court decided one of the leading cases addressing the attorneys’ fees issue. Sparks involved a successful claim of breach of contract and bad faith (tort) against an insurer. The court first noted:

The fact that the two legal theories are intertwined does not preclude recovery of attorneys’ fees under § 12-341.01(A) as long as the cause of action in tort could not exist but for the breach of the contract.

Id. at 543, 647 P.2d at 1141 (emphasis in original).

The court then turned its attention to the question of whether the torts of bad faith and misrepresentation arose out of a contract. Quoting Noble v. National American Life Ins. Co., 128 Ariz. 188, 190, 624 P.2d 866, 868 (1981), the court pointed out that a legal duty was implied in an insurance contract, requiring insurance companies to act in good faith in resolving insureds’ claims. The Sparks court concluded:

Clearly, the tort of bad faith cannot be committed absent the existence of an insurance contract and a breach thereof. Because the existence of the tort is intrinsically related to the contract, we conclude that an action alleging insurer’s bad faith is one ‘arising out of a contract’ within the meaning of § 12-341.01(A).

132 Ariz. at 544, 647 P.2d at 1142. With respect to the misrepresentation claim, however, the court stated that the claim was “mainly in tort and its existence does not depend upon a breach of the contract of insurance.” Id. The court concluded that the tort “would not involve a breach of the actual contract; therefore, it would not be an action arising from a contract.” Id.

More recently, in Lewin v. Miller Wagner & Co., 151 Ariz. 29, 725 P.2d 736 (App.1986), this court held that attorneys’ fees could not be awarded pursuant to A.R. S. § 12-341.01 in a malpractice action brought against an accountant. The court first noted that a contract to perform accounting services was in effect between the parties. The court framed the question as follows:

Whether a contract relationship that merely gives rise to a legally imposed standard of care against which subsequent events operate, provides a sufficient nexus between the failure to meet the standard of care and the contract so that it can be said the matter arose out of the contract and thus falls within the language of A.R.S. § 12-341.01(A).

Id. at 35, 725 P.2d at 742. After an analysis of Sparks and several out of state cases discussing the nature of the professional contractual relationship the court concluded:

While a contractual relationship may give rise to a duty to perform in accordance with a certain standard of care, this legally imposed duty exists separate and apart from the contract giving rise to the duty. The failure to comply with this standard of care results in a breach of the legal duty imposed and is not an action “arising out of a contract” under A.R.S. § 12-341.01(A).

Id. at 36, 725 P.2d at 743. See also, Marcus v. Fox, 150 Ariz. 333, 723 P.2d 682 (1986); Cauble v. Osselaer, 150 Ariz. 256, 722 P.2d 983 (App.1986); Western Technologies, Inc. v. Sverdrup & Parcel, Inc., 154 Ariz. 1, 8-9, 739 P.2d 1318, 1325-26 (App.1986). The court also based its conclusion on public policy grounds that attorneys’ fees are not generally awarded in tort actions because of the chilling effects. Lewin, supra, at 36-37, 725 P.2d at 743-44. We believe that the approach adopted in Sparks (misrepresentation claim) and Lew-in is the correct one.

Haldiman alleged that Boden owed her a duty of full and frank disclosure because he was a real estate salesperson and she was the buyer. This is analagous to the duty in Western Technologies not to speak negligently, injuriously and falsely, and the tort action for accounting malpractice in Lewin. It is implicit in Haldiman’s argument that any duty owed her by Boden arose in the context of a real estate seller-buyer contractual relationship. But, the duty that Haldiman argues that Boden owed to her did not stem from the real estate contract itself. Instead, Haldiman argues that the duty of full and frank disclosure was separate from any duty that the contract between herself and Gosnell imposes. In essence, Haldiman was alleging that the law imposes a duty on real estate sales persons to fully explain to buyers the meaning and impact of the provisions of the real estate contract. Such an action sounds mainly in tort and its existence does not depend upon a breach of the contract for sale of real estate. See Sparks, supra, 132 Ariz. at 544, 647 p.2d at 1142. If we were to recognize such a tort in the situation presented to us here it would not involve a breach of the actual contract; therefore, it would not be an action arising from a contract. Id.

Our result does not hinge on whether we accept Haldiman’s argument that a duty existed. For example, a trial court could award attorneys’ fees under A.R.S. § 12-341.01(A) in a case where the plaintiff alleged breach of contract, and the court found that no contract was present.

We therefore conclude that the trial court improperly awarded attorneys’ fees. We affirm the judgment of the trial court as to the substantive issues, and we remand for a redetermination of attorneys’ fees incurred below.

CROSS-APPEAL

Since we hold that the trial court wrongly awarded attorney’s fees, the issue raised by Boden on cross-appeal is moot. Even if we were to consider it, Boden would not be successful.

Boden claims in his cross-appeal that the trial court abused its discretion when it reduced their award of attorneys’ fees by $2,000. A.R.S. § 12-341.01(B) provides that “the award need not be equal or relate to the attorneys’ fees actually paid. The award should mitigate the burden of the expense of litigation to establish a just claim or a just defense.” The trial court has broad discretion in fixing the amount of attorneys’ fees actually awarded. See Associated Indem. Corp. v. Warner, 143 Ariz. 567, 570, 694 P.2d 1181, 1184 (1985). Again, there is absolutely no indication that the trial court abused its discretion in reducing the amount of the award.

COSTS AND ATTORNEYS’ FEES ON APPEAL

Appellee Boden has requested attorneys’ fees on costs on appeal pursuant to A.R.S. § 12-342(A), and attorneys’ fees pursuant to A.R.S. § 12-341.01 and Rule 21(c), Arizona Rules of Civil Appellate Procedure. In our discretion, we decline to award attorneys’ fees on appeal.

Affirmed in part, reversed and remanded in part.

JACOBSON, P.J., concurs.