Funk v. Tifft, 73-1785

Citation515 F.2d 23
Decision Date22 January 1975
Docket NumberNo. 73-1785,73-1785
PartiesBenjamin FUNK and Betty Lou Funk, Plaintiffs-Appellants, v. Ward TIFFT d/b/a the Tifft Agency and Pendor-Idaho Corporation, Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Stephen Bistline (argued), Sandpoint, Idaho, for plaintiffs-appellants.

Hardy C. Lyons (argued), Sandpoint, Idaho, for defendants-appellees.

Before LUMBARD, * MERRILL and WRIGHT, Circuit Judges.

OPINION

LUMBARD, Circuit Judge:

Plaintiffs Benjamin and Betty Lou Funk appeal from a judgment of the District Court of Idaho entered on November 10, 1972, by J. Blaine Anderson, J., dismissing their complaint. The principal issue presented by this diversity of citizenship case is whether a licensed real estate broker in Idaho owes a fiduciary duty to a prospective buyer not to purchase a tract of land for himself while his prospective buyer's offer to buy that land is outstanding. The district court found that there had been no breach of duty and refused to impose a constructive trust in favor of plaintiffs. We reverse.

In 1968, defendant Ward Tifft was a licensed real estate broker doing business as the Tifft Agency in Sandpoint, Idaho. On August 22, 1968, the plaintiffs, Benjamin and Betty Lou Funk, who were residents of California, came into the Tifft Agency and asked to see some property. Salesman Ron Fillion showed them the Godfrey property, which is the subject matter of this suit. The following day the Funks made out a check for $100 to the Tifft Agency as an earnest money deposit and signed an agreement to purchase the property for $30,000, with $1,000 to be paid upon acceptance of the offer followed by payments of $100 per month for fifteen months, followed by a lump sum payment of $5,000 and payments of $150 per month thereafter.

On August 26th, Tifft mailed the Funk offer to Mrs. Carlock, the daughter of the owner. Mrs. Carlock, who lived in Florida, had a power of attorney from her father which authorized her to act with respect to the property. Two days later and before Mrs. Carlock received the Funk offer, Tifft called Mrs. Carlock and advised her that he, Fillion and a Mr. Kahn were mailing her an offer for $30,000, with $6,000 down and payments of $300 per month.

A month later, in response to a telephone call from the Funks, Tifft returned their $100 and informed them that their offer had been rejected. He did not tell them that he, Fillion, and Kahn had purchased the property.

Kahn, Fillion, and Tifft formed the Pendor-Idaho Corporation on October 23, 1968. Kahn received 51% of the stock, and Tifft and Fillion split the remaining 49%. Tifft was a director and president of the corporation. The deed to the Godfrey property was granted to the corporation.

When the Funks returned to Idaho in 1970, they learned who had purchased the property, and they sued to have Pendor-Idaho declared a constructive trustee and to obtain other relief. The district court found for the defendants and asked their counsel to prepare findings of fact and conclusions of law.

While it is agreed that Idaho law governs, the Idaho Supreme Court has never ruled on the duty that a realtor owes a prospective buyer. Consequently we must distill from the decisions of other jurisdictions the principles which we believe the Idaho courts would apply.

Most modern cases dealing with the relationship of a broker and a buyer impose a duty of fairness and honesty on the broker. One of the leading cases, Quinn v. Phipps, 93 Fla. 805, 113 So. 419 (1927), held that when a person undertakes to act as an intermediary between the seller and a prospective buyer of a parcel of land, he becomes a constructive trustee for the benefit of the prospective buyer if he purchases the land from the seller for himself without advising the prospective buyer of his actions. See also Mitchell v. Allison, 51 N.M. 315, 183 P.2d 847 (1947), 54 N.M. 56, 213 P.2d 231 (1949); Stephenson v. Golden, 279 Mich. 710, 276 N.W. 849 (1973). Cf. Ward v. Taggart, 51 Cal.2d 736, 336 P.2d 534 (1959).

These cases are consistent with the testimony of two Idaho real estate brokers who stated at trial that a realtor who acts as an intermediary between a seller and a prospective buyer has a duty not to compete secretly with and outbid the prospective buyer when that buyer has made an offer on a piece of property and signed an earnest money purchase agreement. The trial judge found that Tifft did not breach his duty to the Funks when he outbid them without their knowledge. 1 However, the legal conclusions of the district court are not binding upon us. Stevenot v. Norberg, 210 F.2d 615, 619 (9th Cir. 1954). We think that it is clear on the facts outlined above that Tifft did breach the fiduciary duties he owed the Funks. When a real estate broker acts as an intermediary between a seller and a prospective buyer, he is under a duty to deal fairly and honestly with the prospective buyer. That duty is breached when the real estate agent outbids the prospective buyer without notice to him before the seller has acted on his offer. Our holding obviously benefits the prospective buyer, but it is important to note that the seller is also better served by this rule. If the real estate agent sends his own offer to a seller without notifying the prospective buyer, the seller is deprived of the possibility that the prospective buyer might better the agent's offer. 2

The district court refused to impose liability on the defendants because it felt that Kahn, not Tifft, was the principal offeror in the second offer and because it found no "malice or legal wrongdoing" involved in Tifft's actions. We do not agree. Tifft was director and a 24.5% stockholder of the corporation that bought the land. The lack of malice is irrelevant; there is sufficient "legal wrongdoing" in Tifft's breach of his fiduciary duty. 3 Suffice it to say that Tifft's involvement tainted the actions of his fellow stockholder and those of the corporation.

Idaho has long recognized the constructive trust as the appropriate remedy when a fiduciary violates his duties and takes property for his own use. Reid v. Keator, 55 Idaho 172, 39 P.2d 926 (1934). Here the Funks established the essential elements required for imposition of a constructive trust the existence of a fiduciary relationship, its breach, and the wrongful acquisition of the land by the breacher, 89 C.J.S. Trusts § 158 (1955). The only remaining question is whether it is appropriate to impose a constructive trust on the Pendor-Idaho Corporation since Tifft only has a 24.5% interest in it. However, if the corporation took title to the Godfrey property with knowledge of Tifft's breach of his fiduciary duty, the corporation is not a bona fide purchaser and a constructive trust can be imposed in favor of the Funks. See Fenton v. King Hill Irrigation District, 67 Idaho 456, 186 P.2d 477 (1947). Since Tifft was president of Pendor-Idaho, as well as a director and owner of 24.5% of its stock, the corporation had notice of his actions. 4 New England Natl. Bank v. Hubbell, 41 Idaho 129, 238 P. 308 (1925). Thus, the corporation was not a bona fide purchaser, and a constructive trust should be imposed against the corporation in favor of the Funks.

On remand the district court should order transfer of the Godfrey property to the Funks upon their tender to the Pendor-Idaho Corporation of the money and/or other consideration which it paid to the seller and their assumption of any obligation which Pendor-Idaho Corporation still owes to the seller.

The court will also have to take into consideration any capital improvements made to the property by Pendor-Idaho. See generally Ryan v. Plath, 18 Wash.2d 839, 140 P.2d 968 (1943). When it fashions its final order, the court should give the parties and the seller opportunity to be heard should that be necessary. 5

Reversed and remanded.

EUGENE A. WRIGHT, Circuit Judge (dissenting):

I must dissent. The decision of my brothers is supported neither by the weight of precedent nor the unequivocal findings of the district court. Even if the courts of Idaho were to ignore the weight of authority in other states and hold that Mr. Tifft owed a fiduciary obligation to the Funks, the plaintiffs have failed to sustain their burden of showing they were injured by the alleged breach.

The district court found that an Idaho real estate broker did not owe a duty to a prospective buyer for his client's property requiring him to inform the buyer that he was bidding on the property himself. The rule of this circuit is that

In diversity cases, where state law controls, a district judge's interpretation of the law of the state where he sits will not be overturned unless clearly wrong, particularly if the highest state court has not passed on the matter.

Douglas v. Beneficial Finance Co. of Anchorage, 469 F.2d 453, 455 (9th Cir. 1972).

There is no Idaho case in point. However, the courts in other states which have considered similar facts have concluded that a broker for the seller can, with the seller's knowledge, outbid prospective buyers, Ries v. Rome, 337 Mass. 376, 149 N.E.2d 366, 371 (1958); Klotz v. Fauber, 213 Va. 1, 189 S.E.2d 45 (1972); DiBurro v. Bonasia, 321 Mass. 12, 71 N.E.2d 401 (1947); cf. Fish v. Teninga, 330 Ill. 160, 161 N.E. 515 (1928); Jacoby v. Shell Oil Co., 196 F.2d 855 (7th Cir. 1952); Quinn v. Phipps, 93 Fla. 805, 113 So. 419, 423 (1927).

In Ries, supra, plaintiffs sued to impose a constructive trust on property purchased by an associate of the seller's agent. They argued that the broker had a fiduciary duty not to compete with them for the property. The court held that the plaintiffs dealt with the broker "with whom they were, or should have been, dealing at arm's length . . . and who was under no fiduciary duty not to compete with them." 149 N.E.2d at 371.

In Klotz, the Virginia Supreme Court held that the agent of a seller...

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