Merit Decision. Responsibility of Realtor for Agent’s Fraud is Question of Fact, not Law. Auer v. Paliath.

Update: This case was settled on January 17, 2017, and dismissed February 6, 2017.

On August 28, 2014, the Supreme Court of Ohio handed down a merit decision in Auer v. Paliath, 2014-Ohio-3632. In a 5-2 opinion written by Justice French, the Court held that the question of the vicarious liability of a real estate broker for the intentional misconduct of an agent is one of fact, not law.  Justice Pfeifer dissented, joined by Justice O’Neill. The case was argued February 4, 2014.

Case Background

Jamie Paliath was a real-estate agent for Keller Williams Home Town Realty (Home Town.) Her contract with Home Town required her to pay Home Town 30% of all commissions she earned on real estate transactions. Unknown to Home Town, Paliath set up her own property rehab and property management businesses.

Torri Auer, a California resident, became interested in buying investment properties in Dayton Ohio, and learned of Paliath’s listings through an internet website. Auer arranged to come to Dayton to look at some of these properties and to meet Paliath.  During this visit, Paliath told Auer about her own businesses, and suggested the two begin rehabbing properties together.  Auer was to provide the money; Paliath would renovate, manage and sell the properties. Between October and December of 2007, Paliath helped Auer buy five properties.  Home Town got a commission on each of these sales.

The business relationship between Auer and Paliath soon began to sour. Auer visited Dayton in 2008 and found the properties virtually uninhabitable. By 2012 the properties had no value and were scheduled for demolition. All told, Auer had invested over $430,000 in the properties.

Auer sued Paliath and Home Town for misrepresentation and fraudulent inducement. Initially, Auer also sued Home Town directly for negligent supervision of Paliath, but abandoned that theory during trial, and focused her claim against Home Town solely on the basis of respondeat superior liability.

Jury Trial

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 for Paliath’s fraud.  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.

Appeal

Home Town appealed, arguing that the jury instruction given was improper on the agency question. The Second District Court of Appeals affirmed the verdict, finding that any error in the jury instruction was harmless because the question of agency was a matter of law.

Read the oral argument preview of this case here and the analysis of the argument here.

Key Statutes and Precedent

R.C. 4735.21 (no real estate salesperson…shall collect any money in connection with any real estate…transaction…except in the name of and with the consent of the licensed real estate broker…)

Byrd v. Faber, 57 Ohio St.3d 56 (1991)(in order for an employer to be liable under the doctrine of respondeat superior, the tort of the employee must be committed within the scope of employment.

Groob v. Keybank, 2006-Ohio-1189 (respondeat superior liability for tortious acts only attaches when an employee acts within the scope of his or her employment; where the tort is intentional, the behavior giving rise to the tort must be calculated to or promote the business for which the worker is employed. It is not enough that the agent’s position within the principal’s business simply aided her in committing the tort.)

Theobald v. Univ. of Cincinnati, 2006-Ohio-6208 (if an employee’s actions are self-serving or have no relationship to the employer’s business, then the conduct is ‘manifestly outside the scope of employment’)

Ohio Gov’t Risk Mgt. Plan v. Harrison,2007-Ohio-4948 (the determination of whether conduct is within the scope of employment or outside the scope of employment necessarily turns on the factfinder’s perception of whether the employee acted, or believed himself to have acted, at least in part, in his employer’s interests.)

Supreme Court Merit Decision

At oral argument, the lawyer for Home Town said, in a number of ways, that all the company was asking for was a correct jury instruction in the case.  And that is what the realty company got.

The only issue for the jury to decide in this case was whether to impose respondeat superior liability on Home Town for Paliath’s fraud. The Court writes no new law here; it merely follows longstanding precedent in the area of vicarious liability, namely, that to impose vicarious liability on an employer, the jury must make a factual determination that the agent was acting within the scope of that agency when the tort was committed.  The error here both by the trial court and the appeals court was finding this to be a matter of law. Here, to find Home Town vicariously liable, the jury would have to have found that Pailath committed the fraud at least in part with the intent to facilitate or promote Home Town’s business.  If what she was doing was strictly for her own benefit, then respondeat superior would not attach.  The Court took no position on the likely outcome here—it will be for the factfinder to determine on remand.

Where the Appeals Court Went Wrong

Because R.C. 4735.21 only allows a real estate agent to collect money from the transaction through the broker, the court of appeals held that whenever a broker receives a portion of the agent’s commission, the broker is liable as a matter of law for the agent’s tortious conduct.  The high court rejected this bright line rule, and noted that at oral argument, when asked if the Court should adopt such a rule, Auer’s lawyer said no.

“The scope-of-agency determination necessarily turns upon a multitude of considerations and fact-specific inquiries that R.C. 4735.21 does not address,” wrote French. In keeping with long standing precedent, the key factual inquiry is whether the acts were calculated to facilitate or promote the employer’s business or were strictly for the agent’s personal self interests.

Incorrect Jury Instruction

This is the instruction given in part by the trial court that the Court found to be incorrect.

“If you find that Defendant Jamie Paliath committed fraud with respect to the sale of [properties] to Plaintiff Torri Auer, then Defendant Keller Williams Hometown Realty of Vandalia is vicariously liable and you must find in favor of Plaintiff Torri Auer and against Defendant Keller Williams Hometown Realty of Vandalia * * *”

In her opinion, Justice French notes juror confusion on this key point.  During the deliberations, a question was set to the judge asking if the jurors were required to find against Home Town if they found against Paliath. The judge referred them back to the original charge.

Correct Jury Instruction

This is the charge the high court found the trial court should have given:

“If you find that Defendant Jamie Paliath committed fraud, and if you find that Paliath committed this fraud within the scope of her agency, then Home Town is vicariously liable.”

 Auer’s Failure to Supervise Claim

Justice French notes that Auer consistently argued, both in her brief and her argument, that Home Town should be liable because of its failure to supervise Paliath.  That is direct, not vicarious liability.  But Auer abandoned that claim during the trial. The Court found Home Town’s direct conduct irrelevant to the vicarious liability claim.

Bottom Line

Home Town’s liability depends on whether Paliath was acting within the scope of her agency.  That is a question of fact for the jury to determine on remand.

Dissent

Justice Pfeifer, joined in dissent by Justice O’Neill, agreed that the sentence singled out by the majority was “imperfect,” but would find that the jury instruction taken as a whole was correct. The instruction that was given clearly and correctly stated in other parts that vicarious liability does not attach unless the agent was acting within the scope of his or her employment.

“This court is remanding the case for a new trial at which the parties will present the same evidence and the judge will issue the same instructions, with one small unnecessary if helpful addition. So much for judicial economy.”

Pfeifer would affirm the court of appeals decision.

Case Syllabus

None

Concluding Observations

Here’s what I wrote after argument:

“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.”

The Court spent a lot of time at oral argument asking questions about the exact nature of the relationship between Paliath and Home Town Realty. I noted at the time I thought that was a red herring.   That issue did not really surface in the opinion.

At oral argument it was Justice French who cut right to the chase and asked whether the liability of the broker for the fraud of a sales agent was a matter of law or a question of fact. And in another key question at oral argument, Justice O’Donnell asked whether there needed to be a further instruction that there must be a finding that the agent was within the scope of her agency.  This set of concerns form the backbone of the majority opinion.

Given the difficulty of imposing respondeat superior liability in intentional tort cases, I predict Auer will lose on remand. But Auer’s direct liability claim against Home Town for negligent supervision would appear to have more legs.  It is unclear whether Auer will be able to revive that claim and proceed with it on remand.

And finally, as I wrote after this argument, as a torts professor, I continue to find the law on respondeat superior for intentional tort claims too protective of employers.  Seldom, if ever, will an intentional tort be in furtherance of the employer’s interest. Instead, I think the test should be that if a person’s employment (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. But I haven’t yet found a Supreme Court majority to agree with me.

 

 

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