### 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 83 Filed:

## ?EC2

## 3

## lad'Mr. Chief JusticeJames T. Harrison delivered the Opinion of the Court. This 

### isan appeal from thejudgment of the district court, Cascade County, holding that defendants Riley H. Hensley and Laro B. Hensley did not owe a 

### real estatebroker's commission of $4,200 toplaintiff Louis Flaherty. The facts are: Sometime prior toMarch 12, 1973, the Hensleys leased certainranch property inTeton County, Montana toone Stewart Schwartz. This lease was inwriting and contained



### a provision granting Schwartz an option topurchase the property during the term ata 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

### timeFlaherty 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 salewas consummated, Schwartz elected toexercise his option and purchased the property. Whether Flaherty had notice, actual orconstructive, of Schwartzlsoption 

### is the crucial element inthis 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 inbad faith. The district court, however, rejected this contention by finding Flaherty himself negligent for not ascertaining the existence of the option earlier, as setforth infinding of fact 111: "That atthe 

### timeof entering intothe real estate brokers employment contract, plaintiff's agents were aware of the written lease between defendant and Schwartz. That plaintiff and his agents werenegligent innot determining the option provisions contained in said written leasebefore 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 asa witness by the Hensleys and testified as follows: "Q. Would you consider a seller that came to your office and listed property for salewith you and had not told you there was outstanding options, that thatperson would be acting in bad faith. A. (noresponse) 

### "Q. Wouldn't you feel he would have an obligation tomake a fulldisclosure toany options outstanding? A. I think so. Of course I think this would--if a listingwas properly taken you would know this atthe time. "Q. How would you know it? A. You would ask. "Q. If he didn't tellyou? 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 tobe paid tothe lessor. 

### "Q. That wouldn't affect the sale, would it? A. Oh, yes, it would definitely. "Q. Itwouldn't preclude the sale, but not all leases contain an option topurchase, 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 inFlaherty's shoes would have obtained a copy of the lease immediately and discovered allthe facts. This 

### isthe 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. inother jurisdictions. The Court in Best 

# -placed

an affirmativeduty upon the broker: 

## " 

## * * * the burden of inquiring into the terms [of the lease] rested upon [thebroker], and even a cursory examination of the lease would have disclosedthe paragraph referred to." (Bracketed words added)

# . We areunable todistinguish the instant case from Best. How can Flaherty--a licensed real estate broker for 21 years--

now be heard todisclaim 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 iswhether Flaherty is entitled to a commission where he had prior notice of the defect which subsequentlyprevented consummation of the sale. The Annotation at 156 ALR 1398, 1399 provides the answer: "If a broker, atthe time he makes a contract with the owner for the sale of the latter's property, knows of defects inhis employer's title or knows facts sufficient toput a reasonably prudent person on inquiry, which, if followed with reasonable diligence, would bring tohim such knowledge, he is not entitled torecover commissions where the sale failsbecause of such defects. The Hensleys areentitled toattorney fees by virtue of section 93-8601.1, R.C.M. 1947, which provides: "Contractual right to attorney fees tobe reciprocal. Whenever by virtue of the provisions of any contract or obligation inthe nature of a contract, made and entered into atany time after the effective date of this act, one party to such contract or obligationhas an express right to recover attorney fees from any other party to the contract or obligation inthe event the party having that right shallbring an action upon the contract or obligation, then inany action on such contract or obligation allparties tothe contract or obligation shall be deemed tohave the same right torecover attorney fees, and the prevailing party inany 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 districtcourt on the issue of the Hensleyts liability toFlaherty is affirmed; the cause isremanded with directions to fixattorney fees inaccordance with the statute.



## ................................ Chief Justice -4-We concur: