Does a broker breach fiduciary duty by not informing potential buyer of termination of another pending contract?
An Illinois appellate court held that the eventual buyer of a house could not pursue claims against a listing broker and its agent for failing to disclose to the buyer's agent that another buyer's pending offer had terminated. The listing broker listed an owner's house for sale. An offer was procured and accepted by the seller. Because the buyer could not secure financing, the contract eventually terminated.
Shortly before the contract actually terminated, the plaintiffs' agent heard a rumor that the contract was on the verge of collapse. She immediately contacted the plaintiffs who told her to call the listing agent and tell that agent that if they receive notice that the pending contract has in fact terminated, they will then submit their offer to purchase the seller's property. The plaintiffs' agent relayed this message to the listing agent.
Later that day, the pending contract did collapse. Without notifying the plaintiffs' agent, the listing agent presented an offer from another buyer with whom she had been working. That offer was accepted. The plaintiffs' agent later called the listing agent to inquire about the status of the contract that had since collapsed. During this conversation, the listing agent told the plaintiffs' agent that the prior contract did collapse, but that another offer had already been presented and accepted. The listing agent told the plaintiffs' agent that she could still present her clients' offer because the period for the seller's attorney to review the contract had not yet expired.
The plaintiffs' agent did present an offer from her clients to the seller, but the seller chose not to cancel the pending contract. That contract also later collapsed because the buyer could not qualify for financing. The plaintiffs ultimately purchased the property when the second contract collapsed. But when the other buyer attempted to revive his contract, the plaintiffs had to pay $20,000 more for the property than their first offer.
The plaintiffs then sued the listing broker and agent for common law fraud, a violation of the Illinois Consumer Fraud Act, and breach of fiduciary duty. The plaintiffs claimed that the defendants breached a legal duty to give them notice of the termination of the original contract. According to the plaintiffs, if they had received such notice, the seller would have accepted their offer instead of the one she did accept, and the plaintiffs would have bought the property sooner for $20,000 less than they eventually paid.
The plaintiffs claimed that the listing agent made an intentional misrepresentation when she failed to inform their agent that the original contract had terminated, and that the listing broker deliberately withheld such notice so that she could present an offer from a different buyer that she had found, and, therefore, earn a larger commission. The plaintiffs also claimed that because of "an industry custom and practice" in which purchase offers are submitted through listing brokers, the listing broker and agent owed the plaintiffs a fiduciary duty to disclose to them the termination of the original offer so that they could present their offer.
The trial court dismissed the plaintiffs' complaint for failure to state a cause of action, and the appellate court affirmed. The appellate court determined, first, that a fiduciary duty did not arise between the plaintiffs and the listing broker. The plaintiffs admitted that they were represented by their own agent. The appellate court also declined to draw any inference of a fiduciary duty from so–called "industry custom and practice" relating to the submission of purchase offers.
The appellate court next rejected the plaintiffs' common law and statutory fraud claims. The court noted that the listing agent, at most, made a commitment to perform an act in the future. Under Illinois law, promises of future action cannot, as a matter of law, support the element of reliance necessary to prove fraud. The court noted that the plaintiffs only asked to be notified of the termination of the original offer. The plaintiffs did not make any binding commitment of their own to submit an actual offer.
This case makes clear that courts, at least in Illinois, are unwilling to extend a listing broker's duty to disclose to buyers "material facts" about a property to also include a duty to disclose facts about the status of pending contract negotiations. A duty to disclose this type of information arises only if there is a bona fide fiduciary relationship between the broker and the person claiming entitlement to the disclosure. The Illinois appellate court refused to imply the existence of such a fiduciary duty from some ambiguous notion of "industry custom and practice." Ill.App.Ct., Case No. 1–97–0077 (filed February 9, 1998).
This article was taken from the April 1998 issue of the Risk Management Reporter.
Please note that the comments and opinions contained herein are not to be construed to be legal advice by the author, Victor O. Schinnerer & Company, Inc., or the errors and omissions insurance program.
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