Court Opinion

ID: 9551587
Source: CourtListenerOpinion
Date Created: 2023-08-07 18:55:58.518772+00
Date Added: 2024-06-11T15:24:14.827658
License: Public Domain

Utter, J.
John Cogan, executor of the estate of Joseph C. Banchero, alleges defendant/petitioner Kidder, Mathews & Segner, Inc. (Kidder, Mathews) breached its fiduciary duty to him in failing to disclose numerous material facts. We hold Kidder, Mathews violated its fiduciary duty by *660failing to disclose its dual agency relationship.
On April 6, 1976, John Cogan agreed to list for sale a 10-acre parcel of real estate located in Tukwila, Washington, with Kidder, Mathews, an industrial real estate brokerage firm. Two brokers from the firm, Russell Segner and Jerome Mathews, showed the property to prospective purchasers, including Paul Ginn. In June 1976, Ginn signed and submitted an earnest money agreement on the property for $280,000 cash. The named offeror of the agreement was "Paul Ginn and/or assigns". Cogan also signed the agreement, but first modified it by inserting language which provided the commission of $19,000 to Kidder, Mathews would be payable only if and when the sale closed. The closing was subject to several conditions including the condition that the purchaser be able to obtain necessary permits and easements, and that closing occur within 120 days of court approval.
On September 24, 1976, Ginn told Kidder, Mathews that he would be willing to sell his interest in the property if he could obtain a $20,000 profit, net of commissions. Kidder, Mathews then undertook the role of Ginn's agent and offered the Tukwila property to Allied Body Works, Inc. for $320,000, $40,000 over the original sale price. Allied accepted on November 8. 1976. Since March 1976, Mathews of Kidder, Mathews had acted as an exclusive purchasing agent for Allied and had shown Allied the Banchero property prior to its purchase by Ginn. Allied had rejected the property at that time.
Allied wrote Cogan in December 1976 informing him it was the assignee of Ginn's interest in the earnest money agreement and that the conditions of the earnest money agreement were now deemed satisfied. Allied's letter disclosed its purchase price was $40,000 over Ginn's original purchase price. On January 10, 1977, 12 days before the closing deadline of the earnest money agreement between Cogan and Allied, Kidder, Mathews called Cogan requesting a 30-day extension of the closing deadline. Cogan was told the request was related to Allied's financing of the *661purchase. The additional time was actually needed to effect an additional assignment to accommodate the desires of the owners of Allied who wished to arrange financing to purchase the Tukwila property as individuals rather than through the corporate entity. Kidder, Mathews not only failed to fully disclose the reasons for the extension, it also failed to inform Cogan that Ginn had agreed to pay Kidder, Mathews a $20,000 commission for its work and that the realtors were the exclusive purchasing agents for Allied. Cogan agreed to the extension, and, as a result of the delay in closing the Banchero estate, incurred an additional $660 in interest obligations on unpaid succession taxes.
When Cogan discovered that Kidder, Mathews was the agent of Allied and that it received a commission of $20,000 from Ginn for the assignment of the earnest money agreement, he instructed the closing officer to withhold payment of the $19,000 commission held in escrow, the $20,000 "secret commission", the $660 in additional interest obligations, and the $5,000 earnest money deposit.
The trial court found the agency relationship between Cogan and Kidder, Mathews revived when the stockholders of Allied requested an extension of the closing date. It found Kidder, Mathews had no duty to disclose to Cogan its commission from Ginn and its agency relationship with Allied. The trial court limited damages to $660 in additional interest obligations incurred by the estate as a result of the 30-day extension of the closing date with Allied.
The Court of Appeals reversed all but the trial court's award of $660 to Cogan. It held Kidder, Mathews had breached its fiduciary duty to Cogan by failing to disclose certain material facts, including Kidder, Mathews' representation of Ginn in the subsequent sale of the land, its receipt of a $20,000 commission from Ginn, its position as exclusive purchasing agent for Allied and its failure to fully apprise Cogan of the reasons for Allied's request for a 30-day extension of the closing.
The Court of Appeals directed the trial court to enter judgment against Kidder, Mathews forfeiting not only the *662$660, but also its $19,000 commission from Cogan and its $20,000 commission from Ginn. Cogan v. Kidder, Mathews & Segner, Inc., 24 Wn. App. 232, 600 P.2d 655 (1979).
On review, we agree in part with the Court of Appeals and modify its order accordingly.
I
In Mersky v. Multiple Listing Bur. of Olympia, Inc., 73 Wn.2d 225, 437 P.2d 897 (1968), we held a real estate agent breached her fiduciary duties by failing to disclose to her principal that the purchaser of the principal's property was the realtor's sister. In Mersky, at page 229, we set out the duties a realtor owes his or her principal:
[T]here flows from this agency relationship and its accompanying obligation of utmost fidelity and good faith, the legal, ethical, and moral responsibility on the part of the listing broker, as well as his subagents, to exercise reasonable care, skill, and judgment in securing for the principal the best bargain possible; to scrupulously avoid representing any interest antagonistic to that of the principal in transactions involving the principal's listed property, or otherwise self-dealing with that property, without the explicit and fully informed consent of the principal; and to make, in all instances, a full, fair, and timely disclosure to the principal of all facts within the knowledge or coming to the attention of the broker or his subagents which are, or may be, material in connection with the matter for which the broker is employed, and which might affect the principal's rights and interests or influence his actions.
(Citations omitted.) Where an agent has dual responsibilities or is serving an interest adverse to the principal, disclosure of such a conflict is always required. Thus,
It is of no consequence, in this regard, that the broker may be able to show that the breach of his duty of full disclosure and undivided loyalty did not involve intentional or deliberate fraud, or did not result in injury to the principal, or did not materially affect the principal's ultimate decision in the transaction.
Mersky, at 231.
The policy underlying this duty of disclosure is obvious; *663it is both to insure the undivided loyalty of the agent and "to assure the principal that he may have and rely upon the impartial and unreserved fidelity of his agent throughout the course of the transaction for which the agent was employed." Mersky, at 230.
The Restatement (Second) of Agency § 381 (1958) imposes the same duty of disclosure. An agent has the general duty to use "reasonable efforts to give his principal information which is relevant to affairs entrusted to him", which "the principal would desire to have". Comment d to section 381 states if an "agent has, or if he represents another who has, interests adverse to the principal as to matters within the scope of the agency ... he is under a duty to the principal to reveal such facts in accordance with the rules stated in Sections 389-392." Section 391 states:
Unless otherwise agreed, an agent is subject to a duty to his principal not to act on behalf of an adverse party in a transaction connected with his agency without the principal's knowledge.
The disclosure rule of Mersky and section 391 reflects a prophylactic concern for maintaining unmitigated loyalty in the principal-agent relationship. It guards against the possibility of compromising an agent's absolute duty to his principal. See Restatement (Second) of Agency § 387 (1958). As Justice Brandéis once wrote: "Sunlight is said to be the best of disinfectants, electric light the most efficient policeman." L. Brandéis, Other People's Money, ch. 15 (1914).
Such a duty of disclosure existed in this case. Kidder, Mathews argues its agency relationship with Cogan ended with the signing of the earnest money agreement, and that Cogan was legally obligated to comply with the terms of the earnest money agreement. We agree with Kidder, Mathews that one of its primary responsibilities in its agency relationship was to find a purchaser of the Tukwila property. We disagree with Kidder, Mathews' contention the signing of the earnest money agreement ended its agency relationship. Cogan included language in the earnest *664money agreement which conditioned Kidder, Mathews' commission on "if and when the sale closes." To the extent Kidder, Mathews continued to work toward closing, it continued as agent of Cogan. The trial court and the Court of Appeals found the principal-agent relationship between Cogan and Kidder, Mathews existed at the time Kidder, Mathews asked Cogan for an extension of the closing date, and we concur in their findings.
What then, was Kidder, Mathews obliged to disclose to Cogan at the time it made the request for the extension? Since the offeror of the earnest money agreement was "Paul Ginn and/or assigns", Ginn was certainly within his rights assigning his interest to Allied for $40,000. Since Cogan would have been legally obligated to comply with the terms of the assignment if the conditions of the earnest money agreement were met, Kidder, Mathews did not violate any fiduciary duties to Cogan by serving as Ginn's agent with respect to that transaction. Nor do we feel its commission from Ginn with respect to that transaction was a factor that should have been disclosed as part of its agency responsibilities to Cogan. Cogan acknowledged his legal obligation to comply with the assignment under the earnest money agreement, and Kidder, Mathews' commission from Ginn was irrelevant to that legal obligation.1
Kidder, Mathews was not only Ginn's agent with respect to the assignment; it also served as the exclusive purchasing agent of Allied. When Kidder, Mathews requested the extension from Cogan, it made that request as the agent of Allied. It was not foreclosed from making the request, but it could do so only by making full disclosure to Cogan of its other responsibilities. Brandt v. Koep*665nick, 2 Wn. App., 671, 674, 469 P.2d 189 (1970). Cogan was justified in assuming the request was being made by his agent who was acting in his best interests with undivided loyalty. Cogan's $19,000 commission to Kidder, Mathews represented his interest in Kidder, Mathews' unmitigated loyalty.
Here, the rule of disclosure has not only preventive justification, but also addresses the problems that may arise when an agent acts with less than unequivocal loyalty to its principal, as exhibited by Kidder, Mathews.
Acting on behalf of Allied, Kidder, Mathews asked Cogan to extend the closing date and offered only a general explanation of the reasons for the extension. This extension was beneficial to Allied and was detrimental to Cogan in that the estate suffered additional interest obligations of $660, and more importantly, lost the opportunity to exact additional consideration for granting the extension.
While Cogan could have refused the extension unless he received additional consideration, he did not. If he had been told of Kidder, Mathews' conflicting relationships his response might well have been different. While Cogan had a good faith obligation to proceed to completion of the earnest money agreement, Weaver v. Fairbanks, 10 Wn. App. 688, 519 P.2d 1403 (1974), that duty did not obviate Kidder, Mathews' duty to inform its principal of all the options available to him in pursuit of his own interests.
Since Cogan justifiably expected that Kidder, Mathews was serving as his agent, its request for the extension was not a neutral act. By making the request without qualification, Kidder, Mathews encouraged Cogan to accept it. In effect, it represented acceptance of the request as in Cogan's best interests, and it is of little surprise that he complied.
The possibility that Cogan could have refused the extension yet still have been legally obligated to close the sale if Allied chose to comply with the existing closing date does not dispose of Kidder, Mathews' duty to disclose its conflicting interests to Cogan.
*666Under the legal standards set forth above, Kidder, Mathews should have revealed its dual agency regardless of any loss incurred or gain foregone by such nondisclosure. While such losses and gains are often the products of fiduciary nondisclosure, they do not define the scope of the fiduciary's duty. We do not mean to prohibit agents from dealing with several principals in related transactions. Nor is a dual agency per se unlawful. Brandt v. Koepnick, supra. All we require is the full disclosure of these various relationships. See Investment Exch. Realty, Inc. v. Hillcrest Bowl, Inc., 82 Wn.2d 714, 513 P.2d 282 (1973).
The trial court did make conclusions of law that when Allied requested Kidder, Mathews to ask for an extension, Kidder, Mathews' agency relationship with Cogan "revived" (conclusion of law 6), and that when Kidder, Mathews made the request it had a "duty to disclose material facts concerning that request for extension of time" (conclusion of law 7). The trial court erred, however, in failing to find Kidder, Mathews had a fiduciary duty to disclose its dual agency. Plaintiff's proposed conclusions of law 7, 8. Assignment of error 5.
In conclusion, we agree with the trial court that Kidder, Mathews violated its fiduciary duty by failing to fully disclose the reasons for Allied's requested extension, but it erred in declining to hold that such fiduciary duty was violated by Kidder, Mathews' failure to disclose its dual agency role.
II
The question of the appropriate measure of damages for such breach remains. Not only does harm not define the scope of fiduciary duty, it also is not determinative of damages. The trial court's conclusion of law 8 was. that Cogan was "damaged in the sum of $660 which is the additional interest penalty incurred during the extension period", and that he "should recover such damage." The Court of Appeals held that Kidder, Mathews must pay to Cogan its $20,000 commission from Ginn as well as forfeiting its *667$19,000 commission from Cogan. We hold Cogan is entitled to the $660 award and should recover his commission to Kidder, Mathews of $19,000.
There is little difficulty in sustaining the trial court's award of $660. An agent is subject to any losses incurred from his breach of duty. Meerdink v. Krieger, 15 Wn. App. 540, 545, 550 P.2d 42 (1976); Koller v. Belote, 12 Wn. App. 194, 528 P.2d 1000 (1974); Restatement (Second) of Agency § 401 (1958).
Because Kidder, Mathews violated its fiduciary duty to Cogan by failing to disclose its dual agency role, it should also forfeit its commission of $19,000.
The Restatement (Second) of Agency § 469 (1958) provides: "An agent is entitled to no compensation for conduct which is disobedient or which is a breach of his duty of loyalty". In Williams v. Queen Fisheries, Inc., 2 Wn. App. 691, 469 P.2d 583 (1970), the Court of Appeals interpreted section 469 as flexible and held the denial of compensation "generally rests with the discretion of the court". Williams, at 698. We adopt this interpretation.
Kidder, Mathews, while having obtained Ginn as a purchaser of the Tukwila property, had no right to the $19,000 commission until the sale closed. See Ralph Hochman & Co. v. Fort Stanwix Mfg. Co., 284 F. Supp. 995 (N.D.N.Y. 1967); Donaldson v. LeNore, 112 Ariz. 199, 540 P.2d 671 (1975); Casey v. Jones, 275 Md. 203, 339 A.2d 33 (1975); Graves v. Pelican Downs, Inc., 292 So. 2d 297 (La. Ct. App. 1974); Wahl v. Hutto, 249 S.C. 500, 155 S.E.2d 1 (1967).
By failing to disclose its dual agency before its agency responsibilities to Cogan were complete, Kidder, Mathews lost a right to compensation as Cogan's agent. Our cases hold failure to disclose a dual agency warrants forfeiture of the commission. See Investment Exch. Realty, Inc. v. Hillcrest Bowl, Inc., supra; Ramsey v. Sedlar, 75 Wn.2d 901, 454 P.2d 416 (1969); Meerdink v. Krieger, supra; Koller v. Belote, supra. See also Ross v. Perelli, 13 Wn. App. 944, 538 P.2d 834 (1975). Other jurisdictions concur in requiring forfeiture of a commission for failure to disclose a dual *668agency. See, e.g., Anderson v. Anderson, 293 Minn. 209, 197 N.W.2d 720 (1972); Allied Sec., Inc. v. Clocker, 185 Neb. 524, 176 N.W.2d 914 (1970).
While the rule might seem harsh, strong public policy reasons justify it. If damages were measured solely by the loss to the principal often there would be little disincentive to the agent for assuming conflicting responsibilities without disclosure. If the commission itself is subject to forfeiture, however, agents will be disinclined to blithely assume conflicting responsibilities without disclosure to and consent of both principals.
Furthermore, the rule is designed to prevent agents from assuming conflicting responsibilities unless the principal consents upon full disclosure. A principal may never discover his agent's conflicting responsibilities; in this case, Cogan discovered Kidder, Mathews' breach of duty only accidentally. Agents must be given a structural disincentive to assuming dual agencies without disclosure and consent. That disincentive is the risk of forfeiting compensation.
A constructive trust in favor of Cogan will be imposed on the $19,000 commission which represented Cogan's interest in Kidder, Mathews' undivided loyalty. Kidder, Mathews may retain its $20,000 commission from Ginn.
We remand to the trial court for entry of judgment in accordance with this opinion.
Rosellini, Stafford, Williams, Dimmick, and Pearson, JJ., and Cunningham, J. Pro Tern., concur.

We disagree with the Court of Appeals characterization of the earnest money agreement as an "option to purchase1'. If the conditions of the agreement had been met, Cogan would have been legally obligated to close under it. Furthermore, there is no evidence Kidder, Mathews failed in its agency responsibilities to Cogan by neglecting to obtain Allied as the initial offeror at the higher price and seeking to obtain two commissions with respect to the sale of the Tukwila property at the expense of Cogan.