BROKER FAILS TO PEDDLE DEFENSE UNDER REAL ESTATE LICENSE ACT

July 18, 2003

By Steven P. Garmisa
Hoey Farina & Downes 
sgarmisa@felahfd.com

A classic breach-of-fiduciary duty case -- a real estate broker who buys property he was asked to help acquire for a principal -- takes a new twist under the Illinois Real Estate License Act of 2000.

In a replay of the classic case, a broker recently argued that she didn't owe a fiduciary duty to someone who inquired about buying a parcel, and that she was permitted to buy the property for herself, because she performed only "ministerial acts" under the IRELA.

The broker, however, failed to sell this defense in court. Bhayani v. Sood, 2003 Bankr. LEXIS 552 (N.D. Ill., June 5).

The bankruptcy court had "related" jurisdiction because the plaintiff, Dipak Bhayani, was a Chapter 13 debtor, and any recovery would affect the assets available for distribution to his debtors.

Bhayani testified that he contacted Sue Sood, a licensed real estate broker, and asked her to help him negotiate the purchase of a parcel called the Albany property in suburban Markham. Sood, who wasn't the listing broker for the property, wound up buying it for herself, Bhayani alleged.

Bhayani's claim for a constructive trust was preempted by the IRELA. As Bankruptcy Judge Jack B. Schmetterer explained (with some omissions):

"Under Illinois common-law principles, the relationship between a would be purchaser of realty and a real estate broker was that of principal-agent. All that was required to create such a relationship was for a buyer to request a broker's assistance for purchase of a particular piece of property. However, the Real Estate License Act of 2000 abrogated common-law rules governing the relationship between a broker and his or her client."

The act provides: "This Article 15 is enacted to govern the relationships between consumers of real estate brokerage services and real estate brokers.... This article applies to the exclusion of the common-law concepts of principal and agent and to the fiduciary duties, which have been applied to real estate brokers, salespersons and real estate brokerage services." 225 ILCS 454/15- 5(a).

"Constructive trusts arise in cases of actual or constructive fraud or where there has been a breach of a fiduciary duty," Schmetterer continued. "Bhayani has not averred fraud, so the only basis for the constructive trust he seeks would be a common-law claim for breach of fiduciary duty, which was abrogated by the act. Therefore, Bhayani's claim for constructive trust must yield to the legislature's clearly expressed intent for claims against brokers to be brought only for remedies permitted under the act. Therefore, he may not recover on a constructive trust theory."

However, damages were available under the IRELA.

"Licensed brokers are deemed to be agents of any interested buyer ('consumer') with whom they are working unless the parties have a written agreement stating that there is no agency relationship, or the broker has been engaged to perform only 'ministerial acts.' 225 ILCS 454/15-10(1)-(2).

"Ministerial acts are defined in the act: ' "Ministerial acts" means those acts that a licensee may perform for a consumer that are informative or clerical in nature and do not rise to the level of active representation on behalf of a consumer. Examples of those acts include without limitation (i) responding to phone inquiries by consumers as to the availability or pricing of brokerage services, (ii) responding to phone inquiries from a customer concerning the price or location of property, (iii) attending an open house and responding to questions about the property from a consumer, (iv) setting an appointment to view property, (v) responding to questions of consumers walking into a licensee's office concerning brokerage services offered or particular properties, accompanying an appraiser, inspector, contractor or similar third party on a visit to a property, (vii) describing a property or a property's condition in response to a consumer's inquiry, (vii) completing business or factual information for a consumer on an offer or contract to purchase on behalf of a client, (ix) showing a client through a property being sold by an owner on his own behalf, or (x) referral to another broker or service provider.' 225 ILCS 454/1-10.

"Sood argues that she only performed ministerial acts for Bhayani and that there was never any discussion of an agency relationship between her and Bhayani.

"But there is nothing in the act that requires an agreement, written or otherwise, to establish an agency relationship. The only requirement to form an agency relationship between a broker and his or her client is an act by the broker and consent by the principal.
"Consent may be oral, written or implied from the conduct of the parties. An agency relationship may be established by circumstantial evidence, including the situation of the parties, their acts and other relevant circumstances.

"Both parties agree that there was no written agreement between them disavowing an agency relationship. Indeed, Sood testified that she never used written contracts. Thus, it is left to the court to determine if evidence adduced at trial supports Sood's assertion that she only performed ministerial acts.

"Clearly, if taken in isolation, parts of Sood's conduct on behalf of Bhayani could be considered as ministerial (such as her faxing a copy of the listing in response to his telephone inquiry regarding the property, or her contacting the owner to schedule a viewing of the property). But we must look to the dealings of Sood with plaintiff as a whole to discern whether the parties formed an agency relationship.

"Bhayani testified that he told Sood that he wanted her to represent him for the purchase of the home when he first spoke to her on the telephone. Sood contradicted this testimony; she stated that Bhayani was only interested in the market price of lots in his subdivision. But if that was the case, why would she schedule a showing of the Albany property for the very next day after she spoke to Bhayani. It would make no sense for Sood to show the property to Bhayani unless he had expressed an interest in purchasing it. Thus, Sood's version of the initial conversation is unbelievable.

"Sood's credibility is further damaged by her claim that during the showing, Bhayani told her he did not want to buy the home because it needed too much work. Yet, a few days later when Bhayani contacted her to inquire about the contract 'addendum.' She faxed a copy of the addendum to him. She had no reason to send that document unless she knew Bhayani wanted to buy the property."

Schmetterer said it was "clear" that "Bhayani engaged Sood as an agent for the purchase of the Albany property. Therefore, Sood owed Bhayani the duties that the act imposes on a licensed broker.

"A broker owes a duty of loyalty and honesty to his or her client, 225 ILCS 454/15-15(2)(F), 454/15-25(a), and must not put personal interests ahead of those of a client. Brokers must disclose all material facts related to a transaction, of which they have actual knowledge. 225 ILCS 455/15- 15(2)(C). The relationship between a client and broker is not determined by whether there has been a payment or the promise of payment for the broker's services. 225 ILCS 454/15-40.

"The evidence adduced at trial shows that Sood breached her duty to Bhayani. Specifically, she put her own interests ahead of those of Bhayani."

Schmetterer therefore recommended that the District Court enter judgment against Sood.

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