Lessons from the Courts: Did the Broker Act Correctly?

 Debbi Conrad  |    February 11, 2019
Lessons from the Courts

Real estate professionals have countless opportunities to learn how to conduct their practice and transactions legally, competently and professionally. Training is available in person and electronically, and there are abundant publications and internet resources for helping a licensee learn the basics and pick up new pointers for improved practice. Unfortunately, not everyone takes advantage of those opportunities due to time constraints or other reasons. It goes without saying that certain people learn better through hands-on experiences, and some learn best by making mistakes. Perhaps a better middle ground for these learners is not to actually make the mistakes but instead look at the mistakes made by others and integrate those lessons into their own professional compass.

The following situations are based on cases decided in other states. What lessons can a Wisconsin licensee learn?

The garden lot 

The buyers were looking for a home for the wife’s mother, and a family member referred them to a buyer’s agent. The buyer’s agent showed them a number of homes, including a home with an adjacent garden lot. This garden was shown in the MLS photographs for the property listing, and the buyer’s agent represented the garden lot was included in the sale.

The MLS listing showed three lots for sale: two lots where the home was situated and the garden lot, but the sellers had sold the garden lot to neighbors the year before. Apparently, the listing agent failed to update the MLS description and remove the photos of the garden lot.

The buyers wrote an offer believing the garden lot was included. Their offer was eventually accepted for $517,500, but it only included the two lots where the house sat. The buyers apparently didn’t realize the purchase did not include the garden lot until shortly after closing. They sued the sellers and the buyer’s firm and agent, and the sellers filed a third-party complaint against the listing firm and agent. By the time of trial, many of the parties had settled and the only claims remaining in play were against the buyers’ firm and agent.

The buyers asserted the buyers’ agent believed the transaction included two lots — one with the house and the other with the garden — not realizing the house was on two lots. The buyers alleged the buyers’ agent failed to properly determine what was being sold and made misrepresentations that caused them to believe the garden lot was included in the transaction. The buyers’ firm argued the buyers had plenty of information showing they were only buying the house. The trial court found in the buyers’ favor and awarded damages in the amount of $100,000, the amount for which the sellers had sold the garden lot. The buyers’ firm appealed.

The Michigan Court of Appeals affirmed the trial court. Although the offer and deed were clear as to the property conveyed, the court’s focus was on whether the buyers were justified in relying upon the misrepresentations of the buyers’ representative. The court upheld the trial court’s ruling that the buyers had adequately demonstrated fraud and negligent misrepresentation. 

Briggs v. Kidd & Leavy Real Estate Co., No. 340713 (Mich. Ct. App. Sept. 25, 2018) at http://publicdocs.courts.mi.gov/OPINIONS/FINAL/COA/20180925_C340713_33_340713.OPN.PDF

Lessons for Wisconsin licensees

In this case, the brokers acted incorrectly. 

  1. The case did not explain what happened to the claims against the listing firm and agent, but clearly there would not have been any case at all had the listing agent modified the property description and photographs in the MLS after the owner sold the garden lot. Advertising cannot be false, deceptive or misleading!
  2. In this case, the agents did not properly identify what the property included in their representations to the buyers. One way to avoid this is to never walk around the perimeter of the property or point out the lot lines to buyers; instead always attribute the source of information provided to the parties. A Wisconsin licensee can be found liable to a buyer for inaccurate statements made by the broker that appear to the buyer to have been made from the broker’s own personal knowledge. Under Wisconsin law, a buyer is entitled to rely on the factual statements made by a professional. When a broker receives data from the seller, the city treasurer’s office, or another third party and restates the information in the MLS or in other advertising as if it were fact, the broker may be held responsible for the accuracy of the information. Licensees should specifically attribute data, such as acreage, square footage and assessed values, to its source. See “Y’all Can’t Walk No Line: A reminder about refraining from explaining the boundary line location,” in the January Wisconsin Real Estate Magazine at www.wra.org/WREM/Jan16/Line

Faulty septic system

The buyers sued the sellers and the listing firm and agent for professional malpractice, negligent misrepresentation, fraud and unfair trade practices, alleging that the property disclosure statement contained misleading information. The disclosure statement stated there were no issues with the drainage, grading or soil stability of the property, and that a new septic system had been installed in 2014. The buyers later discovered the septic system did not work and would need to be replaced; the new septic system would have to be drained into a nearby creek; this drainage would require permission from the state of North Carolina; and without the permission and drainage, the septic system would be inoperable.

The trial court held that absent evidence the firm’s statements were false, summary judgment in their favor was appropriate. The burden was on the buyers to prove the listing firm knew of the defects, but no such evidence was provided. 

The buyers had the home inspected, and the inspection report specifically noted “septic systems often fail when a new family moves in[,]” and “[a] home buyer will have to make special arrangements to have the system inspected[.]” A septic services report noted the septic tank was “in working order at this time[,]” but that the distribution box and drain lines were “not draining at this time.” During negotiations, the buyers asserted they preferred to handle septic repairs themselves rather than having the sellers make the repairs.

On appeal, the North Carolina appellate court held the buyers did not establish the listing firm knew, or reasonably should have known, of the defects in the septic system, or that it misrepresented or omitted that fact. The listing firm and agents could not disclose or conceal facts they were not aware of. 

The buyers received a disclosure statement where they were “strongly encouraged to obtain their own inspections from a licensed home inspector or other professional.” The buyers did have an inspection performed. The court therefore held the buyers failed to show justifiable or actual reliance on the statements.

Apperson v. Intracoastal Realty Corp., 818 S.E.2d 202 (Ct. App. N.C. September 18, 2018) at https://law.justia.com/cases/north-carolina/court-of-appeals/2018/18-147.html.

Lessons for Wisconsin Licensees

The listing firm acted correctly. 

  1. Licensees should disclose the known facts and are not required to investigate.
  2. Licensees are required to disclose known material adverse facts and information suggesting the possibility of material adverse facts per Wis. Admin. Code § REEB 24.07(1) – (3) and Wis. Stat. § 452.133(1). Information should be stated without embellishment or conjecture, and the parties can include inspection and testing provisions in their offer to investigate the situation. See the October 2009 Legal Update, “Diligent Disclosure,” at www.wra.org/LU0910 and Legal Update 02.07, “Duty to Disclose,” at www.wra.org/LU0207

Licensee liable for wire fraud losses

An unknown criminal inserted himself into the transaction by infiltrating the email of the real estate agents and the parties. The criminal used fake email accounts with names similar to the accounts used by participants in the transaction, which resulted in the buyer losing the purchase price of $196,622.67 when he wired that amount to a bank account controlled by the criminal. The buyer alleged that the listing agent emailed fake wiring instructions to him, thereby misrepresenting that those instructions were correct. 

The buyers sued the listing firm and listing agent claiming negligent misrepresentation. The agent claimed she never sent the email with the false wiring instructions. She initially forwarded an email with the false wire instructions, but she sent it to one of the fake accounts set up by the criminal. She claimed that she had not sent the later email the buyer did receive and relied on when he sent the purchase money to the fraudulent account.

The case went to trial, and the jury found the listing agent was 85 percent responsible for the loss, and the court entered judgment against her for $167,129. The listing agent filed a post-trial motion seeking a determination in her favor.

The United States District Court for the District of Kansas affirmed the jury verdict. The court rejected the agent’s argument that she did not send the email with the fake wiring instructions, finding this was an issue of fact for the jury to resolve. There was some evidence that the agent had sent the fatal email. In addition, the agent had deleted all emails concerning the transactions, which could indicate an intent to conceal evidence. Finally, the agent did nothing after the discovery of the theft to investigate with her email provider how the unauthorized use of her address could have occurred. The jury determined that the agent had sent the email, and so the court affirmed the $167,129 jury verdict in favor of the buyers.

Bain v. Platinum Realty, LLC, No. 16-2326-JWL (D. Kan. June 25, 2018). www.nar.realtor/legal-case-summaries/licensee-liable-for-wire-fraud-losses.

Lessons for Wisconsin licensees

The listing agent and her firm acted incorrectly and had no safeguards in place. 

  1. Clearly, firms must guard against this danger. One strategy is to avoid the situation and never email wire transfer instructions to any client or customer financial information. Another approach is to establish protocols whereby everyone double-checks wire instructions: the person wiring funds first contacts the sender of the wire transfer instructions, using an independently verified means of communication. But hackers will recreate legitimate-looking email signature blocks with their own telephone number and include links to fake websites to further convince victims of their legitimacy. It is also prudent for agents to call the buyers on the phone immediately prior to the transfer of funds so buyers know they’re sending money to a legitimate source.
  2. Protect email from hackers: Use up-to-date cybersecurity measures. If you must use email to send sensitive information, use encrypted email. Consider two-factor authentication whereby an email account is protected by a password and another personal security measure. Carry cyber-liability insurance.
  3. See “The Risks of Sending Wire Transfer Instructions: Don’t be the broker the buyer sues!” in the October 2017 Wisconsin Real Estate Magazine at www.wra.org/WREM/Oct17/WireTransferFraud and the resources listed therein. 

Photograph copyright claims

In a federal court case from Texas, a licensed Texas real estate broker and architectural photographer, Alexander Stross (Stross), participated in the Austin Board of REALTORS® multiple listing service (MLS). Stross filed a copyright infringement lawsuit against MLS participant Redfin, alleging Redfin’s display of more than 1,800 of his photos on its website was in violation of one or more of the MLS’ Virtual Office Website (VOW) rules and, therefore, such display exceeded the scope of the license granted to Redfin by the MLS for such display. 

The Austin MLS rules provide that by submitting listing content to the MLS, a subscriber grants the MLS a license to use the listing content “for any purpose consistent with the facilitation of the sale, lease and valuation of property.” The MLS rules also permit a participant to “promptly” notify the MLS if the participant believes another participant is violating the rules, to enable the MLS to enforce its rules.

Stross never notified the MLS about Redfin’s alleged violations.

Redfin raised two defenses: First, it complied with its license to use the photographs; and second, it was shielded from liability by the safe harbor provision of the Digital Millennium Copyright Act (DMCA). The DMCA safe harbor protects websites from copyright infringement, subject to the site’s compliance with certain requirements. NAR filed an amicus curiae brief in support of Redfin’s argument that the DMCA safe harbor protected it from liability. 

The federal district court held Stross had no standing to sue Redfin to enforce the MLS rules and indicated Stross should have reported the violations to the MLS. The court also acknowledged the purported improper use of the photos may have been protected from copyright infringement claims under the DMCA. 

The U.S. Court of Appeals for the Fifth Circuit reversed the district court, finding the district court erroneously mixed the right of Stross to sue under federal copyright law with Redfin’s defense regarding the license rights enjoyed under the MLS and its agreements. The court found Stross had created a genuine issue of material fact under the federal Copyright Act with regard to the time period and scope of the license issued to Redfin via the MLS. 

Alexander Stross v. Redfin Corporation, Case No. 17-50046 (5th Cir., Apr. 9, 2018) (per curiam) at www.nar.realtor/legal-case-summaries/mls-copyright-lawsuit-dismissed

Lessons for Wisconsin licensees

Both brokers may have acted correctly, pending a decision on whether Redfin infringed Stross’ copyright.

  1. DMCA compliance is important. Watch NAR’s Window to the Law: Copyright Infringement Safe Harbor: www.nar.realtor/window-to-the-law/window-to-the-law-copyright-infringement-safe-harbor and the “Designating an Agent for a Service Provider” video tutorial at www.copyright.gov/dmca-directory/help.html for step-by-step instructions. For more information, visit www.copyright.gov/dmca-directory and see the April 2014 Legal Update, “Avoiding Liability for Copyright and Patent Infringement,” at www.wra.org/LU1404
  2. Be clear about the rules of your MLS regarding the purpose and extent of any allowable use of photographs appearing in the MLS.

Debbi Conrad is Senior Attorney and Director of Legal Affairs for the WRA.

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