Garren v. First Realty, Ltd.

• Decision Date: 19 February 1992
• Docket Number: No. 89-1738,89-1738
• Citation: 481 N.W.2d 335
• Parties: Errol GARREN and Nancy Garren, Individuals, Appellants, v. FIRST REALTY, LTD., Appellee.
• Court: Iowa Supreme Court

Page 335

481 N.W.2d 335

Errol GARREN and Nancy Garren, Individuals, Appellants, v. FIRST REALTY, LTD., Appellee.

No. 89-1738.

Supreme Court of Iowa.

Feb. 19, 1992.

John R. Hearn, Des Moines, for appellants.

William B. Serangeli and Michael E. Marshall of Smith, Schneider, Stiles, Mumford, Schrage, Zurek, Wimer & Hudson, P.C., Des Moines, for appellee.

Considered by LARSON, P.J., and SCHULTZ, CARTER, NEUMAN and SNELL, JJ.

SCHULTZ, Justice.

In this appeal, plaintiffs, Errol and Nancy Garren, are dissatisfied with the judgment they obtained against a real estate broker. Plaintiffs purchased a home in 1985. Defendant First Realty, Ltd., acted as broker in the transaction. Plaintiffs were not told that the purchased property was in a flood fringe zone. In 1986, a flood damaged plaintiffs' home and their personal property and they sought reimbursement for their losses. Plaintiffs secured settlements for their flood damage from the appraiser, the mortgage lender, and the sellers. They were unable to settle with defendant and brought this action. They recovered from defendant; however, their loss was reduced by the apportionment of fault among the other released parties. On appeal, plaintiffs challenge the apportionment of fault. Our court of appeals reversed and remanded. We disagree and affirm the district court's judgment.

The sellers contacted Mrs. Babcock, one of defendant's sales agents, and selected defendant as their real estate broker. After seeing defendant's for sale sign while driving by the house, plaintiffs contacted another sales agent of defendant, Ms. Daniels, and requested information about the house which was for sale. Daniels showed plaintiffs the house and plaintiffs then purchased the property.

Although the sellers knew that the property was in a flood fringe zone, they did not reveal this information to either plaintiffs or defendant. Plaintiffs' mortgage lender required an appraisal of the property. In completing the appraisal form, the appraiser indicated that the property was not included in a flood plain. The title examination also did not reveal this information.

Plaintiffs alleged several theories of recovery, including negligence, breach of fiduciary duty, fraud, and breach of implied contract. At the conclusion of the evidence, the trial court submitted the negligence theory to the jury and directed a verdict against plaintiffs on all other theories. The jury was allowed to compare the fault of the sellers, lender, appraiser, and plaintiffs. The jury determined plaintiffs' damages and apportioned fault as follows: fifty percent to the sellers; thirty-four percent to the lender and appraiser; fifteen percent to the defendant First Realty; and one percent to plaintiffs. The trial court entered judgment for plaintiffs against defendant based on the jury's apportionment of fault.

On appeal, plaintiffs maintain that the trial court erred in (1) dismissing their breach of contract and fraud claims; (2) giving a jury instruction which allowed the jury to consider and compare the sellers' fault in apportioning fault among the parties; (3) evidentiary rulings; and (4) giving and failing to give certain jury instructions. We address these matters in turn.

I. Breach of contract. Plaintiffs claim that the district court erred by failing to submit a theory of recovery based on express and implied contract to the jury. They argue that a contract theory of recovery would avoid apportionment of fault and the resultant reduction in the verdict for the percentage degree of fault of other parties.

In their pleadings, plaintiffs alleged that an express or implied contract had been created with defendant; therefore, defendant was contractually obligated to act as plaintiffs' real estate agent. Plaintiffs testified that Daniels verbally agreed to act as their agent and protect their best interests. They urge that this verbal agreement is substantial evidence that a contract was formed with Daniels for which the defendant, as her employer, is responsible. We disagree.

We first examine the principles of an agency relationship. An agency relationship is created by contract. Thompson v. Cedar Rapids Nat'l Bank, 207 Iowa 786, 790, 223 N.W. 517, 518 (1929). Real estate brokers assume a fiduciary relationship with their principals which creates a duty of fidelity and good faith. Menzel v. Morse, 362 N.W.2d 465, 474 (Iowa 1985). In addition, brokers are agents of the party who first employs them. Id. at 475. Generally, brokers "cannot act for both [buyers and sellers] in the transaction without the knowledge of both." Menzel, 362 N.W.2d at 475 (quoting Restatement (Second) of Agency § 391 (1958)); see also Murphy v. Brown, 252 Iowa 764, 770, 108 N.W.2d 353, 356 (1961).

As a general rule, a transaction in which a broker represents another party is contrary to public policy and unenforceable without the principal party's knowledge or consent. Hughes v. Miracle Ford, Inc., 676 S.W.2d 642, 645 (Tex.Ct.App.1984); see also Barbat v. M.E. Arden Co., 74 Mich.App. 540, 543, 254 N.W.2d 779, 781 (1977). A bargain with any person in a fiduciary relationship with another, the purpose and terms of which are likely to cause a breach of the fiduciary's duty to that other party, is illegal and unenforceable. 6A Arthur L. Corbin, Corbin on Contracts § 1456 (1962). Thus, if a buyer knows the seller has hired a broker and the seller did not consent to that broker representing the buyer, then the buyer cannot enforce a claim against the broker for breach of duty as an agent. Warren v. Mangels Realty, 23 Ariz.App. 318, 321, 533 P.2d 78, 81 (1975).

In this case, it is undisputed that defendant was first employed as an agent for the sellers and that plaintiffs were aware of this employment relationship. Plaintiffs also knew that Daniels was employed by defendant. There is no evidence in the record that the sellers had consented to defendant acting in a dual agency relationship. Therefore, plaintiffs cannot enforce a claim against the broker for breach of duty as their agent. Id. Consequently, we hold that the alleged contract between plaintiffs and the broker is unenforceable. Thus, we reject plaintiffs' claim that the trial court should have instructed the jury on defendant's duties regarding the realtor-client relationship and defendant's fiduciary relationship with plaintiffs. Under this holding, we need not determine whether the wrongful acts under this alleged contract are subject to the comparative fault provisions in Iowa Code chapter 668 (1989).

II. Fraud. The basis for plaintiffs' fraud claim was defendant's failure to discover and disclose that the property was in a flood fringe zone. Defendant maintains that it made no false representations with intent to deceive. The court of appeals concluded that defendant possessed superior knowledge and had a duty to disclose facts which would be unfavorable to plaintiffs. It further concluded that the requirements of scienter and intent to deceive were met by defendant's failure to disclose the flood zone information.

The elements for a cause of action based on fraud consist of (1) representation; (2) falsity; (3) materiality; (4) scienter; (5) intent to deceive; (6) reliance; and (7) resulting injury and damage. Hagarty v. Dysart-Geneseo Community School Dist., 282 N.W.2d 92, 95 (Iowa 1979). Scienter and intent to deceive may be shown when the speaker has actual knowledge of the falsity of his representations or speaks in reckless disregard of whether those representations are true or false. Beeck v. Aquaslide 'N' Dive Corp., 350 N.W.2d 149, 155 (Iowa 1984). In this case, there is no showing that defendant's agent had actual knowledge of the flood fringe zone or that she made any representations concerning the zoning of the property. Thus, the question becomes whether defendant's conduct was sufficiently reckless to permit implication of the elements of scienter and intent.

In this case, we must determine whether there is any evidence of recklessness on the part of defendant's agent. Since there is no proof that defendant's agent knew of the zoning or made any representations regarding the zoning, plaintiffs can only claim that defendant's agent should have made zoning inquiries. The fact that defendant's agent could have been more careful by making further inquiry is insufficient to prove that she acted in reckless disregard of the truth. B & B Asphalt Co. v. T.S. McShane Co., 242 N.W.2d 279, 284 (Iowa 1976). Thus, we conclude that the trial court was correct in directing a verdict in defendant's favor on plaintiffs' fraud claim.

III. Evidentiary rulings. We address in turn the three issues plaintiffs raise concerning the trial court's ruling on objections to offered evidence.

A. Claims and releases. Over plaintiffs' objections, defendant introduced evidence that plaintiffs made claims against other parties and then released those claims. Plaintiffs urge that this evidence violates Iowa Rule of Evidence 408 which prohibits the admission of evidence of compromise of a disputed claim to prove liability. Defendant counters that it presented no evidence of settlement or compromise and limited its proof to the initiation of plaintiffs' claims and releases of certain parties.

Rule 408 addresses the admissibility...