In the recent decision Auer v. Paliath, 2014-Ohio-3632 (August 28, 2014), the Supreme Court of Ohio held that a broker is not always liable “as a matter law” for the tortious conduct of a real estate agent whenever the broker receives a portion of the agent’s sales commission.

At issue in the case was the vicarious liability of real estate broker Keller Williams Home Town Realty (“Home Town”), for the conduct of its former real estate agent, Jamie Paliath (“Paliath”).  In 2006, Paliath began working as a licensed real estate agent for Home Town.  As her broker, Home Town would receive 30 percent of Paliath’s commission on all sales.

In September 2007, California resident Torri Auer contacted Paliath to discuss purchasing certain Dayton area properties as investments.  During a visit to Ohio, Paliath informed Auer that she also owned property rehabilitation and management businesses. Paliath suggested the two women work together; if Auer could provide the funds, Paliath would renovate, manage, and sell the properties.  Auer purchased five separate properties that Paliath had listed, and Home Town received a commission on each of these sales.

Auer hired Paliath’s businesses to rehab and renovate the properties.  In all, Auer invested $430,000 in the venture.  However, when Auer visited Dayton in 2008 to inspect the properties, she found them to be uninhabitable and still in need of significant repairs.  The business relationship soon ended.

Auer filed a lawsuit against Paliath and Home Town to recover the amounts she had invested and for fraud in the inducement in the sale of the properties.  Auer alleged that Paliath misrepresented the worth of the properties and their capacity to generate investment income. Auer further claimed that as Paliath’s broker, Home Town was vicariously liable for Paliath’s fraud.

In March 2012, the jury returned a verdict against both Paliath and Home Town, awarding Auer $135,200 in damages for fraudulent inducement.

Home Town appealed the decision to the Second District Court of Appeals.  The Court of Appeals affirmed the decision, finding, among other things, that Paliath was working within the scope of her agency relationship with Home Town when she committed her fraud because Paliath worked as a real-estate salesperson for Home Town, Assisted Auer in purchasing the properties, and gave Home Town commissions from the sales.  The Court of Appeals also found that the instructions given to the jury adequately defined a real estate agent’s scope of employment based on its reading of Ohio Revised Code Section 4735.21.

Home Town appealed to the Supreme Court of Ohio.  In a 5-2 decision, the Supreme Court of Ohio reversed the decision of the Second District.   In remanding the case back to the trial court, the Supreme Court opined that it would not endorse a “bright-line rule” that effectively holds a broker liable as a matter of law for the tortious conduct of rogue agents whenever the broker receives a portion of the agent’s sales commission.  In other words, the mere fact that a broker eventually receives a commission from an agent’s sale does not mean that every action the agent took prior to the sale was within the agent’s scope of authority as a matter of law.

If you have any questions regarding this opinion, or other questions regarding real estate broker liability, please contact attorney Brad Leach.