Home buyers’ and sellers’ interests must be protected when the same firm represents both, state Supreme Court rules

Hiroshi Horiike decided to buy the Malibu home the day he saw it.

The wealthy, Hong Kong businessman paid $12.25 million in cash for the Tuscan-style mansion with four bedrooms, 5½ bathrooms and an infinity pool that looked out over the ocean.

Two years later, Horiike learned the house he thought was 15,000 square feet was actually recorded as having less than 10,000. He sued the seller’s agent and the brokerage firm, Coldwell Banker.

On Monday, the California Supreme Court ruled unanimously for Horiike, saying the seller’s agent had a duty to disclose relevant information about the house because both the buyer’s and seller’s agents worked for the same firm.

The case has been closely watched in the real estate industry, and some experts predicted that a ruling for Horiike would cause havoc. The industry feared the court might establish requirements that would force real estate agents to make disclosures that would hurt the clients who hired them.

But brokers and real estate experts said Monday the decision was relatively narrow, and they did not expect any upheaval. They noted that disputes over square footage are common.

USC law professor George Lefcoe said the decision will require agents to be more careful and may create more paperwork, but the industry will continue to allow such arrangements because a brokerage can collect a commission from both parties.

“It’s too lucrative,” he said.

It has long been recognized that real estate agents who represent both the seller and the buyer in a transaction owe a duty to both clients.

The court said agents who work for the same company also have dual obligations, even if they are representing different clients.

The California Assn. of Realtors had urged the court to reject Horiike’s arguments, saying the agent for the seller had a special duty only to the seller.

If the court found otherwise, the loyalty of agents would be torn, lawyers argued.

The court, in a ruling written by Justice Leondra Kruger, acknowledged the potential pitfalls and said the industry could ask the Legislature to change the law.

But the court stressed that the issues raised by Horiike did not involve confidential information the seller gave to his agent.

The seller’s agent had the same duty as the brokerage company that employed both agents — “to learn and disclose all facts materially affecting the value or desirability of the property,” Kruger wrote.

Frederic D. Cohen, who represented Horiike in the case, said the ruling would help ensure that brokerage companies “actually take their responsibility to represent both sides more seriously.”

Horiike, born poor in China and educated in Japan, earned his fortune manufacturing electronics and now makes documentaries and heads efforts to end the consumption of dog meat in Asia, a spokeswoman said.

He speaks only Chinese and Japanese, and the agent he selected out of Coldwell Banker’s Beverly Hills office communicated with him in Japanese.

Chris Cortazzo, a top-performing Coldwell agent who works out of Malibu, represented the seller. On his website, Cortazzo says he is a Malibu native who has represented “some of the biggest names in entertainment and business” with more than $1.9 billion in closings since 2000.

Horiike charged that Cortazzo and Coldwell Banker breached their fiduciary duty by failing to warn him that he should investigate the actual square footage of the property.

Cortazzo had produced a flier saying the Malibu house had about 15,000 square feet of livable space. That square footage included two garages, a habitable basement and patios and balconies, according to written arguments in the case.

Before dealing with Horiike, Cortazzo had advised another potential buyer to investigate the square footage.

Cortazzo eventually sent Horiike’s agent a copy of the original building permit, which said the house was less than 10,000 square feet.

Horiike’s agent forwarded the permit to him, but Horiike said he never read it.

A trial judge ruled that Cortazzo, as the seller’s agent, owed no specific duty to the buyer, and a jury found for Cortazzo and Coldwell Banker.

Horiike appealed, and a court of appeal decided unanimously that Cortazzo had been obligated to ensure Horiike’s interests were protected.

In upholding that decision, the California Supreme Court revived Horiike’s lawsuit, which can now go to trial again with jury instructions more favorable for Horiike.

Nick Segal, chief executive of luxury real estate brokerage Partners Trust, said the kind of relationships covered by the ruling are extremely common.

“We do that fairly often,” he said.

But he doubted the case would have far-reaching consequences, in part because agents already represent both buyer and seller in many cases and the ruling would simply expand that relationship to others.

Instead, he said the case serves as a notice to real estate agents that they will be “held accountable” for things they should have been doing anyway.

Loyola Law School professor Dan Schechter said agents won’t be required to disclose potential offers or a seller’s urgency to sell — though they must now work in the interest of both parties.

If a seller has an unpermitted kitchen, for instance, the seller’s agent would be required to disclose that to the buyer. But if the seller was simply unhappy with the quality of a contractor’s work on a kitchen, the seller’s agent probably could withhold that information if they were only working in the best interest of the seller, Schechter said.

If an agent has a fiduciary duty to both sides, he or she should tell the buyer about lingering doubts over quality, Schechter said.

“The right thing to do is just disclose and lay it all out,” Schechter said.

June Barlow, vice president and general counsel of the California Assn. of Realtors, said the group was “heartened” that the court ruled narrowly and did not bar agents or brokerage firms from representing both a buyer and a seller.

Horiike said through a spokeswoman that the house had caused him much suffering and he has considered selling it.

But he described his court victory as inspiring.

“While this house brings back a lot of unpleasant memories, now that I have won the lawsuit against Coldwell Banker, the house becomes a landmark for the victory of consumer rights,” Horiike said.

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UPDATES:

5:55 p.m.: This article was updated with additional reaction and details.

12:15 p.m.: This article was updated with reaction and additional details from the decision.

This article was originally published at 11:40 a.m.