Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—SDCal: Designated Real Estate Broker May Be Vicariously Liable Under California’s Unfair Competition Law for Misconduct of Corporate Employees, (Jan 3, 2013)

By Tobias J. Gillett, J.D., LLM.

A real estate broker can be held vicariously liable under traditional agency principles for the misconduct of corporate employees, and a mortgagee adequately pled California Unfair Competition Law (UCL) claims against the real estate broker, the federal district court in San Diego has ruled (Rose v. Seamless Financial Corp., January 2, 2013, Battaglia, A.).

The mortgagee, Marcella Rose, refinanced her mortgage through Seamless Financial Corporation, but alleged that Seamless employees misrepresented the type of loan she would receive and the interest rate she would pay. She alleged that the employees drew up a loan application that stated inaccurate income amounts for her, and forged her signature to it. After she received the loan, she became aware that it was a “Pick-a-Payment” mortgage, rather than a fixed rate mortgage as she claimed the employees had stated. The payments became unaffordable, and Rose defaulted, resulting in the sale of her property to avoid foreclosure.

Rose filed suit, alleging a variety of claims, including unfair competition claims under California’s Unfair Competition Law, based on alleged violations of the federal Truth in Lending Act (TILA), against Seamless, Wachovia Mortgage, FSB, Wells Fargo Bank, NA, a Seamless employee, and Seamless’s real estate broker, Chad Hagobian. With regard to the claims against Hagobian, the district court in a previous order dismissed all claims, but permitted Rose to amend those under the UCL. The present order addressed Hagobian’s motion to dismiss her amended UCL claims, and the parties’ cross-motions to impose sanctions pursuant to Federal Rule of Civil Procedure 11.

Real Estate Broker Vicarious Liability Under the UCL

Hagobian contended that he could not be held liable under the UCL because he did not have any direct contact with Rose, and he did not review her loan documents. Moreover, he argued that, as a designated real estate broker, he could not be held personally liable for a failure to supervise employees, and that Rose had not adequately pled an agency relationship.

The court explained, that in the 2003 decision in Holley v. Crank (537 U.S. 280), the Supreme Court had reversed a decision of the Ninth Circuit Court of Appeals, and held that a designated real estate broker’s duty to supervise employees, imposed by California Business and Professions Code § 10159.2(a), did not itself create an agency relationship between the broker and the employees. Instead, the presence or absence of an agency relationship must be determined through “traditional agency principles.” The court also cited the California Court of Appeal’s 2012 decision in Sandler v. Sanchez (206 Cal. App. 4th 1431), in which the Court of Appeal rejected an attempt to impose vicarious liability on a designated real estate broker based on an alleged implicit agreement to delegate the duty to supervise to a corporate employee.

Based on these cases, the court determined 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,” and that “[m]ere inaction on behalf of the designated broker, or allegations of an ‘implicit agreement,’ is not sufficient.” The designated broker’s “right to control” the employee would not on its own permit a finding of an agency relationship; “there must be a finding of an explicit agreement between the principal and the agent.”

Here, the court found that Rose alleged an explicit agreement between Hagobian and Seamless that Hagobian would review loan documents and other Seamless employees would supervise the employees that dealt with Rose. Therefore, even though Hagobian had no direct liability for the alleged TILA violations, Rose could proceed with her claims against him based on a vicarious liability theory.

Unfair Competition Law Claims

Rose alleged that Hagobian violated the UCL by failing to provide sufficient disclosures required by the TILA. The court explained that the UCL prohibits “any unlawful, unfair or fraudulent” business practices, establishing “three separate types of unfair competition.” Regulation Z of the Federal Reserve Board of Governors, issued pursuant to the TILA, imposes disclosure requirements on lenders in connection with certain loans, including disclosure of the possibility of negative amortization.

Under the “unlawful” prong, the court concluded that Rose had alleged a plausible violation of the TILA. The court noted that Ninth Circuit case law had found that merely stating that negative amortization was “a possibility” without disclosing that making payments according to the Truth in Lending Disclosure Statement (TILDS) would result in negative amortization was enough to violate the TILA. Moreover, allegations that a lender provided inconsistent disclosures in different loan documents would also state a TILA claim. Rose’s TILDS stated an APR of 3.376 percent, while her note stated that she would “pay interest at the yearly rate of 8.000%,” with an amount financed and monthly payments that differed slightly between the two documents. Furthermore, the court determined that the note did not “appear to provide the necessary clarity required under case law in this circuit” regarding the possibility of negative amortization.

The court also determined that Rose stated claims under the “unfair” and “fraudulent” prongs of the UCL. The court found that its determination that Rose had alleged a violation of the TILA meant that she had also alleged a violation of the “unfair” prong, since “she may be able to prove facts showing that the harm to the consumer from Defendants’ conduct outweighs the solicitation’s utility.” The court also found that she had alleged a violation of the “fraudulent” prong, applying the “reasonable consumer test” to conclude that her allegations were sufficient “to show that Defendants’ conduct, including the inconsistent disclosure statements, were misleading, and would be misleading to the reasonable consumer.”

Therefore, the court denied Hagobian’s motion to dismiss. The court also denied his motion for sanctions under Rule 11, as well as Rose’s counter-motion for sanctions, and admonished both parties to remember “the importance of professional courtesy, and the benefit of continuing discussions to facilitate settlement for the benefit of their clients.”

The case is No. 11cv00240 AJB (KSC).

Malinda Dickenson (Law Office of Malinda R. Dickenson) for Marcella M. Rose. Michael E. Schwimer (Schwimer Law) for Chad Hagobian.

Cases: StateUnfairTradePractices CaliforniaNews