Opinion ID: 1889510
Heading Depth: 2
Heading Rank: 1

Heading: Breach of the Principal-Agent Relationship

Text: The duties an agent owes to his or her principal are well established. An agent has a duty to his principal to act solely for the benefit of the principal in all matters connected with his agency. RESTATEMENT (SECOND) OF AGENCY § 387 (1958). We have recognized the `universal principle in the law of agency, that the powers of the agent are to be exercised for the benefit of the principal only, and not of the agent or of third parties. A power to do all acts that the principal could do, or all acts of a certain description, for and in the name of the principal, is limited to the doing of them for the use and benefit of the principal only, as much as if it were so expressed. ' (Emphasis in original). King v. Bankerd, 303 Md. 98, 108-09, 492 A.2d 608, 613 (1985)(quoting Adams' Express Co. v. Trego, 35 Md. 47, 67 (1872)). Moreover, an agent is under a strict duty to avoid any conflict between his or her self-interest and that of the principal: `It is an elementary principle that the fundamental duties of an agent are loyalty to the interest of his principal and the need to avoid any conflict between that interest and his own self-interest.' C-E-I-R, Inc. v. Computer Dynamics Corp., 229 Md. 357, 366, 183 A.2d 374, 379 (1962)(quoting Maryland Credit v. Hagerty, 216 Md. 83, 90, 139 A.2d 230, 233 (1958)). As Professor Mechem has observed: It is the duty of the agent to conduct himself with the utmost loyalty and fidelity to the interests of his principal, and not to place himself or voluntarily permit himself to be placed in a position where his own interests or those of any other person whom he has undertaken to represent may conflict with the interests of his principal. PHILIP MECHEM, MECHEM OUTLINES AGENCY § 500, at 345 (4 th ed.1952). See also RESTATEMENT (SECOND) OF AGENCY § 389 cmt. a (1958)([A]n agent who is appointed to sell or to give advice concerning sales violates his duty if, without the principal's knowledge, he sells to himself....). One of the primary obligations of an agent to his or her principal is to disclose any information the principal may reasonably want to know. See Impala Platinum v. Impala Sales, 283 Md. 296, 324, 389 A.2d 887, 903 (1978)(quoting Herring v. Offutt, 266 Md. 593, 597, 295 A.2d 876, 879 (1972))(recognizing duty of fiduciary to make full disclosure of all known information that is significant and material to the affairs of the fiduciary relationship); C-E-I-R, Inc., 229 Md. at 367, 183 A.2d at 379-80 ([T]he rule is well established that an agent is under a duty to disclose to his [principal] any information concerning the agency which the [principal] would be likely to want to know.). The obligation to disclose is strongest when a principal has a conflicting interest in a transaction connected with the agency. See RESTATEMENT (SECOND) OF AGENCY § 389 (1958) (Unless otherwise agreed, an agent is subject to a duty not to deal with his principal as an adverse party in a transaction connected with his agency without the principal's knowledge. ) (emphasis added). An agent's failure to disclose information material to the agency thus constitutes a breach of the principal-agent relationship. Where an agent breaches a duty to the principal and profits from the breach, the principal may maintain an action to recover those profits for her or himself. Nagel v. Todd, 185 Md. 512, 517, 45 A.2d 326, 328 (1946)(An agent cannot make a secret profit out of any transaction with his principal.); RESTATEMENT (SECOND) OF AGENCY § 388 (1958)([A]n agent who makes a profit in connection with transactions conducted by him on behalf of the principal is under a duty to give such profit to the principal.). An example of such an action is found in Gussin v. Shockey, 725 F.Supp. 271 (D.Md.1989), aff'd 933 F.2d 1001 (4th Cir.1991). Frederic and Paul Gussin entered into an agreement with Richard Shockey who was to assist them in buying, maintaining, breeding, and selling thoroughbred horses. The Gussins had no experience in the horse business and relied on Shockey's 20 years of experience buying and selling horses. The Gussins were to pay Shockey 5% of the net proceeds on the sale of the horses. Without the Gussins' knowledge, in arranging the purchases of various horses, Shockey received commissions from the sellers by negotiating a base price above which the seller would pay him the proceeds. For example, for one horse Shockey arranged a base price of $525,000 and a total price of $650,000. He informed the Gussins that the price was $650,000, and upon the Gussins' payment, the seller issued a check of $125,000 to Shockey as a commissionor as the Gussins called it, a kickback. Shockey never informed the Gussins about the commission arrangements he made with the various sellers. Shockey contended that although the Gussins trusted him and relied on his advice, he was not obligated to get the best price on the horses for the Gussins. Applying Maryland agency law, the court rejected Shockey's argument, finding there was an agency relationship and that Shockey had breached it: If the agent is to receive any benefit from a transaction in which he is serving his principal, the agent must fully disclose any interest he has in the transaction and receive the consent of his principal to proceed, even if the principal ultimately was to benefit from the transaction. (Citation omitted). Gussin, 725 F.Supp. at 275. The instant case resembles Gussin in a number of ways. In essence, Green alleges that H & R Block advised her to take a loan that included benefits for H & R Block that H & R Block did not disclose. Green has identified three ways in which H & R Block benefits from the RALsthe license fee paid to H & R Block by the lending institution for each RAL, ranging from $3 to $9; H & R Block's profits from the purchase of the RALs through its subsidiary H & R Block Financial; and 15% of the check cashing charge if the loan check is cashed at Sears. Just as the Gussins paid for the horses at the price they were told by Shockey, H & R Block customers were informed that the finance charge was the bank's price for providing the loan. And just as Shockey breached his duty to the Gussins by failing to disclose his benefit from the transaction, so to did H & R Block breach its duty to disclose its secret benefits, assuming that Green succeeds in convincing the jury of the existence of an agency relationship. H & R Block contends that its customers have not been harmed by the RAL program since they enter into the RAL transaction fully aware of the total finance charge which they must pay in order to obtain the loan based on their tax refund. The argument is similar to the one made by Shockey in Gussin, that since the Gussins agreed to pay the total price for the horse, the undisclosed commission received by Shockey did not result in any harm to the Gussins. Although the harm caused by H & R Block's failure to disclose may be much smaller for any individual H & R Block customer than in Gussin, the nature of the agent's alleged action is virtually identical in both cases, and there is no minimum value below which an agent may freely take undisclosed profits from his or her principal. Furthermore, Green need not prove she was harmed at all in order to maintain an action based on a breach of the principal-agent relationship. The rule against dealing with a principal as an adverse party without the principal's knowledge is not based upon the existence of harm to the principal in the particular case. It exists to prevent a conflict of opposing interests in the minds of agents whose duty it is to act solely for the benefit of their principals. The rule applies, therefore, even though the transaction between the principal and the agent is beneficial to the principal. RESTATEMENT (SECOND) OF AGENCY § 389 cmt. c (1958). See also Carey v. Safe Dep. & Tr. Co., 168 Md. 501, 513, 178 A. 242, 247(1935) (The rule is that an agent cannot represent two principals having antagonistic interests, and that he cannot make a secret profit out of any transaction with his principal. This rule applies whether or not the interest or profit of the agent causes any loss to the principal.); De Crette v. Mohler, 147 Md. 108, 115, 127 A. 639, 642 (1925)(same); PHILIP MECHEM, MECHEM OUTLINES AGENCY § 507, at 350-51 (4th ed. 1952)(It makes no difference that the principal has not been injured, or that the agent has given him as good terms as anybody would, or even perhaps better terms, or that the sale or purchase has been at the price fixed by the principal; or that there was no bad faith or intention to defraud....). In sum, H & R Block had several interests in the loan transaction by virtue of the license agreement, its purchase of loans from the banks, and its arrangement with Sears. These interests in the loan transaction posed a conflict between H & R Block's interests and those of its customers. Thus, assuming the existence of an agency relationship and viewing the facts in the light most favorable to Green, H & R Block was required to disclose those interests affecting its ability to act solely for the benefit of its customers.