No. 12818 

IN THE SUPREME COURT OF THE STATE OF MONTANA 

LOUIS FLAHERTY, d/b/a FLAHERTY 

AGENCY, and BRYON L. FLAHERTY, 

Individually , 

Plaintiffs and Appellants, 

RILEY H. HENSLEY and LARO B. 

HENSLEY, husband and wife, 

Defendants and Respondents. 

Appeal from: District Court of the Eighth Judicial District, 

Honorable Truman G. Bradford, Judge presiding. 

Counsel of Record: 

For Appellants : 

John McCarvel argued, Great Falls, Montana 

Hartelius and Lewin, Great Falls, Montana 

For Respondent: 

E. W. Gianotti argued, Great Falls, Montana 

- 

Submitted: November 18, 1974 

Decided : ~Ec 8 3 

Filed : ?EC 2 3 lad' 
Mr. Chief Justice James T. Harrison delivered the Opinion of 

the Court. 

This is an appeal from the judgment of the district 

court, Cascade County, holding that defendants Riley H. Hensley 

and Laro B. Hensley did not owe a real estate broker's commission 

of $4,200 to plaintiff Louis Flaherty. 

The facts are: Sometime prior to March 12, 1973, the 

Hensleys leased certain ranch property in Teton County, Montana 

to one Stewart Schwartz. This lease was in writing and contained 

a provision granting Schwartz an option to purchase the property 

during the term at a prearranged price. On March 12, 1973, the 

Hensleys entered into a real estate broker's employment contract 

with Flaherty. The contract provided for an "open" listing. At 

this time Flaherty and his agents were aware of the lease between 

the Hensleys and Schwartz, although it is sharply disputed whether 

they knew of Schwartzls option. Subsequently Flaherty negotiated 

with a prospective buyer, and on March 30, 1973, the parties 

entered into a "Stevens-Ness" form receipt and agreement to sell 

and purchase. This instrument specifically called attention to 

Schwartzls option. However, before the sale was consummated, 

Schwartz elected to exercise his option and purchased the property. 

Whether Flaherty had notice, actual or constructive, 

of Schwartzls option is the crucial element in this case. Flaherty 

contends the Hensleys never informed him of it until the agreement 

to sell and purchase was executed, and therefore they breached 

the broker's employment contract and acted in bad faith. The 

district court, however, rejected this contention by finding 

Flaherty himself negligent for not ascertaining the existence of 

the option earlier, as set forth in finding of fact 111: 

"That at the time of entering into the real estate 

brokers employment contract, plaintiff's agents 

were aware of the written lease between defendant 

and Schwartz. That plaintiff and his agents were 
negligent in not determining the option provisions 

contained in said written lease before offering 

the said property for sale." 

We think this finding is supported by substantial credible evidence and ought to stand. Donald Blumfield, president of the 

Great Falls Board of Realtors, was called as a witness by the 

Hensleys and testified as follows: 

"Q. Would you consider a seller that came to 

your office and listed property for sale with 

you and had not told you there was outstanding 

options, that that person would be acting in 

bad faith. A. (no response) 

"Q. Wouldn't you feel he would have an obligation to make a full disclosure to any options 

outstanding? A. I think so. Of course I think 

this would--if a listing was properly taken you 

would know this at the time. 

"Q. How would you know it? A. You would ask. 

"Q. If he didn't tell you? A. Particularly on 

farm property you would ask. Number one, I 

would want to see the lease. If there was a 

lease on the property I would want to see that 

so I would know when possession could be affected 

by the purchaser, what price the summer fallow 

might have to be paid to the lessor. 

"Q. That wouldn't affect the sale, would it? 

A. Oh, yes, it would definitely. 

"Q. It wouldn't preclude the sale, but not all 

leases contain an option to purchase, do they? 

A. No, they don't. But I would still want to 

see the lease. " (Emphasis added) . 

In other words, a reasonable, prudent man in Flaherty's shoes 

would have obtained a copy of the lease immediately and discovered all the facts. 

This is the prevailing majority rule in such cases. See 

Best v Kelly, 22 Wash.2d 257, 155 P.2d 794, 801, 156 ALR 1387, 

perhaps the leading case on the subject and frequently cited 

with approval. in other jurisdictions. The Court in - Best placed 

an affirmative duty upon the broker: 

" * * * the burden of inquiring into the terms [of 

the lease] rested upon [the broker], and even a 

cursory examination of the lease would have disclosed 
the paragraph referred to." (Bracketed words 

added) . 

We are unable to distinguish the instant case from Best. 

How can Flaherty--a licensed real estate broker for 21 years-- 

now be heard to disclaim knowledge of Schwartz's option when 

he admits he knew of the lease from the start? 

Applying the rule in Best - resolves the controversy, for 

the dispositive issue is whether Flaherty is entitled to a commission where he had prior notice of the defect which subsequently prevented consummation of the sale. The Annotation at 156 

ALR 1398, 1399 provides the answer: 

"If a broker, at the time he makes a contract 

with the owner for the sale of the latter's 

property, knows of defects in his employer's 

title or knows facts sufficient to put a reasonably prudent person on inquiry, which, if followed 

with reasonable diligence, would bring to him 

such knowledge, he is not entitled to recover 

commissions where the sale fails because of such 

defects. 

The Hensleys are entitled to attorney fees by virtue of 

section 93-8601.1, R.C.M. 1947, which provides: 

"Contractual right to attorney fees to be 

reciprocal. Whenever by virtue of the provisions 

of any contract or obligation in the nature of a 

contract, made and entered into at any time after 

the effective date of this act, one party to such 

contract or obligation has an express right to 

recover attorney fees from any other party to 

the contract or obligation in the event the party 

having that right shall bring an action upon the 

contract or obligation, then in any action on 

such contract or obligation all parties to the 

contract or obligation shall be deemed to have 

the same right to recover attorney fees, and 

the prevailing party in any such action, whether 

by virtue of the express contractual right, or 

by virtue of this act, shall be entitled to recover his reasonable attorney fees from the losing 

party or parties." 

The judgment of the district court on the issue of the 

Hensleyts liability to Flaherty is affirmed; the cause is remanded 

with directions to fix attorney fees in accordance with the statute. 

................................ Chief Justice 

-4- 
We concur: