Update: On August 28, 2014, the Supreme Court handed down a merit decision in this case. Read the analysis here.
On February 4, 2013 the Supreme Court of Ohio heard oral argument in the case of Auer v. Paliath, 2013-0459. At issue in this case is the scope of respondeat superior liability of a broker for the intentionally tortious conduct of a “rogue” associated sales agent.
Jamie Paliath was a sales agent associated with Keller Williams Home Town Reality (“Home Town” or “Keller Williams”). By law, a real estate sales agent can only operate through a broker. Paliath had an independent contractor agreement with Home Town.
Unbeknownst to Home Town, at the same time Paliath was working for them, she secretly established a number of other real estate, property management and rehabilitation companies of her own, contrary to her employment agreement with Home Town, and solely to benefit herself.
Torri Auer, a California resident, became interested in Paliath’s listings through an internet website. Auer visited Dayton, Ohio to tour several properties, and entered into a number of real estate transactions with Paliath. In her dealings with Auer, Paliath operated under her personal real estate entities. Paliath was Auer’s only contact or connection to Home Town. The sale of these properties was done on Home Town contracts, and Home Town shared in the commissions generated from Paliath’s real estate sales to Auer. Read the oral argument preview of this case here.
In the part of the case pertinent to this appeal, Auer sued Paliath and Home Town for Paliath’s fraud in the inducement of the sale of five specific properties. As to this claim, the trial court instructed the jury, over Home Town’s objection, that if it found Paliath had committed fraud, Home Town would be vicariously liable. The jury so found, and judgment was entered on the jury verdict’s verdict in the amount of $135,200 against Paliath and Home Town. The Second District Court of Appeals affirmed the imposition of vicarious liability on Home Town.
At Oral Argument
Home Town’s Argument
The jury instruction about the imposition of vicarious liability on Home Town because of the acts of a rogue sales agent was erroneous as a matter of law. The scope of an agency relationship is a question of fact for the jury to decide.
Home Town was completely duped by Paliath’s actions. It was as much a victim as Auer was. A broker can only be liable if it knows about the agent’s misconduct. The fact that Home Town did receive a commission from these sales cannot be viewed in isolation. The totality of the circumstances must be examined. Home Town knew nothing of Paliath’s fraudulent schemes. By law in Ohio, a sales agent must be associated with a broker and must work through a broker, which is why Paliath’s side companies were totally unlawful. Paliath was also unlawfully competing with Home Town, and in violation of her own agreement with them.
Under the particular facts and circumstances of this case, respondeat superior liability properly attached as a matter of law. In Ohio, by statute, a real estate sales person cannot operate independently of a broker. Allowing such individuals to be called independent contractors is a legal fiction. Everything they do binds the broker, including committing fraud. A broker must be held liable for intentional torts of salespersons acting within the scope of their authority.
Real estate salespeople are supposed to be supervised. Paliath wasn’t. There are things brokers can do to prevent the kinds of problems that occurred here. In this case no one was looking at or tracking any of the sales documents. No one seemed to notice or be concerned that Paliath was selling the same property over and over, in a particularly depressed market area. Additionally, all checks and closing statements were in the name of Keller Williams. The broker here should have made certain Paliath was not engaging in self dealing. It utterly failed to do so.
What Was on their Minds
Paliath’s Employment Status
This was first and foremost on everyone’s mind.
Was Paliath acting within the course and scope of her employment, or her agency relationship with Keller Williams, asked Justice O’Donnell?
Was the liability here because Paliath induced Auer to buy these properties, asked Chief Justice O’Connor? Was there an agency relationship that was breached once Paliath became a rogue agent? She did sell some properties legitimately, commented the Chief, but is it that she exceeded the scope of her authority in regard to this select group of properties? Was Keller Williams also a victim here, used to perpetrate this fraud? (answer: yes).
What does “associated with” mean, as between Paliath and Keller Williams, asked Justice Lanzinger? Paliath was not a Keller Williams employee? (no, replied counsel, she was an independent contractor, and one who violated several provisions of her contract). What does the statute (R.C. 4735) call the relationship? In a key remark of the day, she asked, isn’t that part of the problem here, noting the Court must decide what the relationship is between the broker and an associated agent. Later, she asked if it made any difference if salespersons were employees or independent contractors? Doesn’t the scope of authority issue have to go to the jury, asked Justice Lanzinger?
Is the liability of the broker for the fraud of a sales agent a matter of law or a question of fact, asked Justice French, in another key exchange of the day. Would a broker be liable as a matter of law because the agent performed the actions while under the broker’s supervision? What should the Court write here?
What was Auer’s perception of the relationship in this case, asked Justice Pfeifer? The signage and the contracts would all have led a buyer to believe she was dealing with a broker. Wasn’t that what was presented to the jury? (Home Town’s lawyer insisted apparent authority was never pursued at trial in this case)
An agent has no authority to enter into any contract unless the agent worked through a broker, asked Justice O’Neill? (answer:yes). Then how can a third party know she is dealing with a rogue agent if the broker is insulated? Even if the broker is innocent as to knowledge, isn’t the broker still responsible for what is happening under its license? It’s a matter of actual, not apparent authority, he commented. An agent just cannot work without a broker.
The Jury Instruction
Was there an objection to the jury instruction, asked Justice O’Donnell (answer: yes). In a key question of the day, he added, should there have been a further instruction that there must be a finding that the agent was within the scope of her agency? Was there a request that there be a separate finding that Keller Williams participated in the fraud to find against it? In another key question of the day, he later asked, how does the fraudulent inducement by Paliath “translate” into a judgment against Keller Williams? If Paliath is an independent contractor, how does that transfer liability to another party?
Broker’s Receipt of the Commission
If the money is flowing to both parties, doesn’t that carry the day for respondeat superior liability, asked Justice O’Neill? Didn’t Paliath’s transactions with Auer go through the Keller Williams account? How can a broker disclaim this?
Was there testimony about how Keller Williams could have prevented this, asked Chief Justice O’Connor? If Paliath was operating under a fictitious name, how was Keller Williams supposed to know that? Or is the standard knew of should have known?
Is there a duty to supervise, under the statute, asked Justice Lanzinger?
Is there something this or any broker could do to avoid actions by a rogue agent, even with the best training program in the country, asked Justice French?
How it Looks from the Bleachers
To Professor Bettman
Complicated. This case is obviously being closely watched by the real estate profession, as evidenced by the strong amicus briefs in support of the broker.
First off, a red herring. I don’t think it matters how the Court characterizes Paliath’s employment status with Home Town. I agree with the appeals court’s finding that is irrelevant in this case. What matters is Paliath’s employment status as it appears to Auer-an innocent third party purchaser. To Auer, Paliath appeared to be a legitimate salesperson affiliated with a legitimate broker, with the legitimate authority to sell the properties she did.
It seemed as if a majority of justices did not agree that respondeat superior liability attaches here as a matter of law, but rather should be decided as a question of fact. The trial court did instruct the jury that “a real estate agent is not within the scope of her agency when she clearly and completely departs from the services or job that she was hired to do. When an agent acts solely for her own benefit, or solely for the benefit of a person other than her broker, she does not act within the scope of her agency, and the broker is not liable for the agent’s acts.” But then, the trial court did not let the jury decide this as a fact question. I think a majority of the court is going to find that was error.
Taking this to the next level, I also think a majority of the justices probably still think, consistent with the Court’s decision in Groob v. Keybank, 2006-Ohio-1189 (written by Justice Lanzinger), that where the tort is intentional, the behavior giving rise to the tort must be calculated to promote the business for which the person is employed in order for respondeat superior liability to attach, and that clearly was not the case here.
But now I am going to digress as to why I think the imposition of respondeat superior liability was correct in this case as a matter of law. As a torts professor, I’ve always felt the Court has been far too lenient toward employers in respondeat superior intentional tort situations. If the test is that respondeat superior liability should attach only if the behavior giving rise to the tort must be calculated to promote the employer’s business, then it probably never will attach. When will something like fraud ever be in furtherance of the employer’s business? (For that matter, does a negligence action by an employee further the employer’s business?) Instead, I think the test should be if a person’s employment status (whatever it is) enables the intentional tort, respondeat superior liability should attach. And I think that question should be decided from the point of view of the injured party.
Section 219(2) of the Restatement of the Law of Agency provides, “A master is not subject to liability for the torts of his servants acting outside the scope of their employment, unless:
“(d) the servant purported to act or to speak on behalf of the principal and there was reliance upon apparent authority, or he was aided in accomplishing the tort by the existence of the agency relation.”
In Groob, the Court expressly declined to adopt this provision. I think it should revisit that decision, and this would be an ideal case in which to do so. In this case, Paliath’s status as a sales agent for Keller Williams enabled her to defraud Auer. Paliath appeared to Auer to have the legitimate authority to do everything she did. To Auer, the for sale signs and the contracts were bona fide Keller Williams documents. The fact that Keller Williams got commissions on these sales just adds icing to the cake. I sense that Justices O’Neill and Pfeifer could see this case this way.
Or, looking at it from a broader perspective, as I always tell my torts students to think about, in a situation like the case at bar, which party should bear the risk of loss—the innocent purchaser or the duped broker?
End of speech
To Student Contributor Katlin Rust
This is quite an interesting case, and one that could send ripples throughout the real estate industry in Ohio. In my opinion, Justice French asked the key question in this case–“Let’s assume the broker did everything right, are they still liable as a matter of law? Response, each case is different and that’s not what we have here, the Second District should be upheld because the facts were so egregious to permit it in this case.”
To find that brokers are responsible, period, for the misdeeds of their sales persons absent a finding that the sales persons were acting within the scope of their employment goes against the general tenets of respondeat superior liability in Ohio. I think that a majority of the justices will find that the jury instructions given at trial were erroneous and Home Town’s liability for Paliath’s actions is a question of fact that necessitates a finding that Paliath was acting within the scope of her employment. Broker liability, under these circumstances, cannot be determined as a matter of law. The trial court should have permitted the jury to decide whether Paliath was acting within the scope of her employment before imposing liability on Home Town.
However, an interesting issue is raised in this case regarding the broker-sales person relationship. The issue of what Paliath could feasibly do on her own was discussed at length. Although she may be termed an independent contractor, how does liability change when Paliath cannot legally act outside of Home Town? I’m not sure this conundrum will be, or needs to be, addressed by the Court to reach a decision that Home Town is not liable as a matter of law in this case.