Consequences For Breach Of Fiduciary Duties #491
S was the owner-operator of both a real estate brokerage and a mortgage company which intermingled their business enterprises. From 2002 to 2005, M worked as a REALTOR® for the real estate brokerage.
In 2004, M purchased a property and by 2007, had consolidated all the mortgages on the property into a single mortgage to S's mortgage company. In 2008, M was behind in his payments and sought to renew the mortgage at a lower rate. S did not agree and so, M decided to sell.
M listed the property with another real estate brokerage at a price that would satisfy the outstanding mortgage with money remaining. After two price reductions, the property didn't sell and the listing expired. M then met with S and tried again to renegotiate the mortgage terms.
S refused and proposed that M list the property with his real estate brokerage at a lower price to encourage a quick sale. In February 2009, M entered into a listing contract with the real estate brokerage. At the time, S knew that the mortgage company would probably commence a foreclosure action against M. S did not discuss the conflict of interest inherent in acting as M's REALTOR® when the mortgage company would be commencing a foreclosure.
During the listing, S encouraged M to reduce the listing price on more than one occasion to the point where the listing price was less than the amount owing on the mortgage. In April, the mortgage company commenced foreclosure proceedings and obtained an order for conduct of sale of the property with the real estate brokerage appointed as the listing agent. S submitted two letters on his real estate brokerage letterhead in support of the foreclosure action. The property was eventually sold with a mortgage shortfall of close to $30,000. The real estate brokerage received a commission of nearly $14,000.
After the property was sold, M complained to the Real Estate Council of BC about S's conduct. As a result, S entered into a consent order where he admitted he had committed professional misconduct by failing to disclose that he acted as M's REALTOR® while he owned the mortgage company, and that the real estate brokerage would be providing trading services to the mortgage company. Consequently, S paid a fine of $1,000. Not satisfied with the results of his complaint, M commenced a lawsuit against S seeking general and punitive damages for the breach of fiduciary duty.
The Court was not kind to S. It confirmed that the fundamental undertaking of a REALTOR® is to "act loyally and transparently, in the best interests of the client."1 The court concluded that S's ownership of the mortgage company put him in a serious conflict of interest when he agreed to act as M's REALTOR®. His loyalty was divided given the mortgage debt amount and the mortgage company's intention to foreclose. Even though M was a REALTOR®, the court found that he did not consent to or waive the conflict. Of particular concern to the Court, was S's conduct in filing affidavits in support of the foreclosure proceedings. These contained confidential facts obtained in his role as M's REALTOR®, which were detrimental to M and benefitted the mortgage company.
What is unusual about this case is that M agreed he had not suffered any actual monetary loss from S's actions as the foreclosure court had held that the mortgage was valid and the property was sold for a fair and reasonable price. However, proof of loss is not necessary to establish a claim for breach of fiduciary duty and the Court found that S's "multiple acts of disloyalty" justified an award of $15,000 to M.
The Court awarded a further $25,000 in punitive damages noting that the "modest punishment imposed by the Real Estate Council (had) little, if any, discernible punitive or salutary effect." All in all, this acts as a reminder to REALTORS® (from both the Real Estate Council and the Court) of their duty to never put their own interest in conflict with the interests of their client.
Norton Rose Fulbright LLP
|1.||Mulligan v. Stephenson, 2016 BCSC 1941.|
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