Coin Laundry Brokers: What Level Of Care Do You Owe Your Clients?
So with pen in hand and a cup of coffee close by, you
review the Sunday advertisements for coin laundries in the area of your
interest. One advertisement seems
particularly appealing, and you resolve to contact the broker first thing
Monday morning. When you reach the
broker, he shares with you his expectation of multiple offers by Tuesday
afternoon, but since you seem like a nice fellow,
he will squeeze you in Monday afternoon for an inspection.
You meet the broker at the coin laundry on Monday
afternoon, and, much to your delight, the financial information regarding the
coin laundry presented to you by the broker supports the listing price.
You note, however, that the equipment belongs
in the local museum of science and industry reflecting some early period of
equipment evolution.
The broker agrees with your appraisal, notes that his
brokerage company is related to an equipment distributor, and hands you a
proposed purchase agreement for equipment necessary to outfit the coin laundry.
The broker indicates that he would be pleased to submit an
offer on your behalf for the coin laundry so long as, as a condition to closing
the transaction, you also agree to sign the equipment purchase order. You indicate that you would prefer to
acquire the coin laundry first, and make decisions with regard to equipment
replacement at some other time. The
broker, however, insists that the transactions be tied together.
Any problem?
I would suggest that the broker is acting at his peril and
might find himself in the unenviable position of explaining his actions to
twelve peers of the realm, commonly known as a jury!
In the above scenario, our broker has a listing agreement
with the owner and seller of the coin laundry.
The broker thus owes the seller a fiduciary duty, commonly described in
most statutes as the “utmost care, integrity, honesty and loyalty” in such
dealings. By conditioning the broker’s
willingness to submit an offer upon the concurrent purchase of equipment, the
broker is potentially keeping offers from the seller and can thus hardly be
considered acting with such “utmost care, integrity, honesty and loyalty” in
dealing with the seller.
In agreeing to represent the buyer as well as the seller, a
dual agency situation is created and the broker has the same affirmative
obligations to the buyer. Can it be
said that the broker is complying with his fiduciary obligation to the buyer by
withholding the offer to purchase until the buyer agrees to buy equipment from
the equipment distributor?
Another issue that is raised by this scenario is the
potential violation of the Sherman Antitrust Act and Clayton Antitrust Act
which prohibits certain forms of exclusive dealings, including tying arrangements.
A tying arrangement involves an agreement, for example, by
a seller to sell to the buyer a desired product, only if the buyer also
purchases a second, distinct product that is not desired. Although the broker is not the seller of the
coin laundry under the above fact situation, the circumstances may be
sufficiently similar so as to constitute a violation of these federal acts.
Assume the equipment distributor foreclosed upon the coin
laundry for nonpayment and the broker, employed by a brokerage firm related to
the equipment distributor, made the same demand, selling the location on behalf
of the equipment distributor as seller.
The likelihood of a violation of these federal acts would be enhanced.
Can the secretiveness with which the seller’s broker is
operating cause the broker still further difficulty? As one California appellate court stated,
“An agent shall make known to his
principal every material fact concerning his transaction and the subject matter
of his agency that comes to his knowledge or is in his memory in the course of
his agency, and if he fails to do so, he is liable in damages to his principal
for any injury incurred or loss suffered in consequence of such failure.”
Could it be that the secret profit being obtained in the
transaction might have to be disgorged?
Another California appellate court put it this way:
“In any transaction on behalf of
his principal, the agent is bound to exercise utmost good faith and honesty . .
. . ‘when the acts of an agent have been questioned by his principal and a
fiduciary relationship has been established, the burden is cast upon the
agent to prove that he acted with the utmost good faith towards his principal
. . . and that he make a full disclosure prior to the transaction of all facts
relating to the transactions under attack.’
It is an integral part of that rule
that, if the agent makes a secret profit from the agency, the principal may
recover such profit. The fact
that the agent may have paid a fair price for the property, or that the
property could not then have been sold for a greater price, are false factors
[not relevant] if a full disclosure, prior to sale, is not made.”
In this last case which I have quoted, an agent sold his
principal’s property to his wife, without disclosing the fact to the
principal. The wife then resold that
property at a profit.
Although such case is not directly analogous, the court’s
language suggests that under the right factual scenario, a jury might be
permitted to decide whether the broker and equipment distributor engaged in a
conspiracy to defraud the seller, require the equipment distributor to disgorge
the secret profit of the equipment transaction, and assess punitive damages
against both.
The moral of the story?
For the buyer and seller, ask lots of questions with the aid of a
knowledgeable attorney. For the broker,
jury instructions will note that the statutes require “utmost care” and not
“slight care” in abiding by your fiduciary duty!
[This column is intended to provide general information only and
is not intended to provide specific legal advice; if you have a
specific question regarding the law, you should contact an
attorney of your choice. Suggestions for topics to be discussed
in this column are welcome.]
Reprinted from The Journal
Myles M. Mattenson © 2004
