Cross-7e: Case Problem with Sample Answer
Chapter 19: Agency
19–6. Case Problem with Sample Answer
In July 2001, John Warren viewed a condominium in Woodland Hills, California, as a potential buyer. Hildegard Merrill was the agent for the seller. Because Warren's credit rating was poor, Merrill told him he needed a co-borrower to obtain a mortgage at a reasonable rate. Merrill said that her daughter Charmaine would “go on title” until the loan and sale were complete if Warren would pay her $10,000. Merrill also offered to defer her commission on the sale as a loan to Warren so that he could make a 20 percent down payment on the property. He agreed to both plans. Merrill applied for and secured the mortgage in Charmaine’s name alone by misrepresenting her daughter’s address, business, and income. To close the sale, Merrill had Warren remove his name from the title to the property. In October, Warren moved into the condominium, repaid Merrill the amount of her deferred commission, and began paying the mortgage. Within a few months, Merrill had Warren evicted. Warren filed a suit in a California state court against Merrill and Charmaine. Who among these parties was in an agency relationship? What is the basic duty that an agent owes a principal? Was the duty breached here? Explain. [Warren v. Merrill, 143 Cal.App.4th 96, 49 Cal.Rptr.3d 122 (2 Dist. 2006)]
Sample Answer:
Merrill and Warren were in an agency relationship in this case, with Merrill acting as Warren’s agent. That relationship began when Merrill undertook to represent Warren in the purchase of the condominium. Under the fiduciary duty that an agent owes a principal, and that thus Merrill owed Warren, she was required to place his interests above her own in the real estate transaction. Also, an agent is charged with a duty to disclose all material facts that might affect a principal's decision. Merrill breached her duties to Warren, and committed fraud, by falsely promising that she would put his name on the title to the condominium if he went along with her plan to structure the transaction in a certain way. Furthermore, she misappropriated his funds by having him evicted soon after the transaction was completed but not before he had made several mortgage payments. This conduct was more than sufficient to show violations of the agent’s duty of loyalty. A court should at least order that the title in the condominium be transferred to Warren.