Starr v. International Realty, Ltd.

• Decision Date: 13 March 1975
• Citation: 533 P.2d 165,271 Or. 396
• Parties: Albert STARR et al., Respondents, v. INTERNATIONAL REALTY, LTD., a corporation, et al., Appellants.
• Court: Oregon Supreme Court

Page 165

533 P.2d 165

271 Or. 396

Albert STARR et al., Respondents, v. INTERNATIONAL REALTY, LTD., a corporation, et al., Appellants.

Supreme Court of Oregon.

Argued and Submitted Feb. 4, 1975.

Decided March 13, 1975.

Dennis H. Elliott, Portland, argued the cause for appellants International Realty Ltd., Stanley G. Harris and Kaaren L. Harris. With him on the briefs were John J. Haugh and O'Connell, Goyak & Haugh, P.C., Portland.

Herbert H. Anderson, Portland, argued the cause for respondents. With him on the briefs were John M. Berman and Dezendorf, Spears, Lubersky & Campbell, Portland.

Before McALLISTER, P.J., and DENECKE, HOLMAN, TONGUE, HOWELL and BRYSON, ^* JJ.

TONGUE, Justice.

This is a suit by the partners in a real estate venture to require the realtor and promoter of the venture, who was also a partner, to account to the partnership for the commission received by him as the realtor without consent of the remaining partners and to hold in trust for the partnership the vendor's interest in the real estate purchased, which he also acquired without their consent. Defendants appeal from an adverse decree and plaintiffs cross-appeal from other portions of that decree.

The case involves a group of prominent Portland doctors and others in high income tax 'brackets' and in need of 'tax shelters.' They were persuaded by one Stanley G. Harris, a Portland 'expert' in real property investments, that by investing $285,000 and joining with him in a partnership for the purchase of an apartment house then under construction, the entire down payment of $265,000 could be treated for federal income tax purposes as 'prepaid interest,' thereby saving large amounts otherwise payable in income taxes.

It would serve no useful purpose to summarize the entire transaction for the purchase of this property for the sum of $1,010,000 in all of its details, as 'put together' by Harris. Suffice to say that we have reviewed the lengthy transcript of the testimony of some 21 witnesses, together with 94 exhibits, and agree with the trial court in its findings that Harris did not reveal to his partners that the property could have been purchased for $907,500 'net' to the seller (including $207,500 to the seller to 'cash (him) out of the transaction' and the assumption of a $700,000 mortgage), and that a commission of $100,000, together with an escrow fee of $2,500, was to be paid to International Realty Ltd., of which Harris was president, or that Harris had made an agreement with the seller of the property under which International or Harris would acquire the vendor's interest in the contract under which the property was being purchased by the partnership.

1. Defendants' failure to disclose the receipt of the broker's commission.

In Liggett v. Lester, 237 Or. 52, 58, 390 P.2d 351 (1964), although under different facts, we stated that:

'The rule which requires an accounting for secret profits applies to commissions and discounts Secretly obtained by a partner on purchases made by him for the firm. 1 Rowley, Partnership 532, § 21.1 (2d ed 1960). It was Lester's duty to obtain petroleum products for the partnership at the best price possible. * * *' (Emphasis added)

and (at 60, 390 P.2d at 354):

'* * * The case at bar * * * involves purchases for the partnership resulting in Secret commissions or discounts. Where a secret discount is withheld by one partner on purchases which he has made on behalf of the partnership, the entire amount of the discount must be accounted for. See Restatement, Restitution § 197 (1937).' (Emphasis added)

To the same effect, see Crane and Bromberg on Partnership 389--90, § 68 (1968); and Gilmore, Handbook on the Law of Partnership 374--75, § 129 (1911). The question to be decided in this case, however, is whether the $100,000 commission paid to International, of which Harris was the president, was a 'secret' commission.

Defendants contend that the broker's commission paid to International was not 'secret' or 'concealed'; that 'explicit consent' is not required; and that 'sufficient disclosure' was made 'through documents, through the plaintiffs' general knowledge of the general manner in which real estate transactions are conducted, and through specific conversations * * *.' Defendants 'do not contend that plaintiffs explicitly and expressly consented to the commission.'

It appears from the testimony that most of the plaintiffs knew or should have known that Harris and International were in the real estate business and that a realtor's commission in some amount would normally be paid to some realtor on this transaction. Apparently, because their interest in the income tax advantages of the transaction was so dominant and overriding, the doctors did not inquire whether such a commission would be paid to Harris or to International, or in what amount, and Harris did not tell them. It is contended by the doctors, however, that in this case they are entitled to the benefit of the equivalent of a rule more familiar to them in the practice of medicine--that of 'informed consent.'

In Liggett v. Lester, Supra, we also said (at 59, 390 P.2d at 354):

'Although Liggett was aware of Lester's bulkplant operation, it is clear that Lester failed to disclose the additional discounts he was receiving on the sales to the partnership. Lester not only failed to offer his partner an opportunity to share in the discount, but he tried to keep Liggett from learning of it. Liggett discovered this state of affairs by chance. Lester cannot rely upon the foregoing right to engage in other business since Liggett's consent was not truly obtained.'

It is contended by defendants that Liggett is not controlling because the defendant in that case 'actively attempted to keep his partner from learning of the discount.' In our view, however, the rule as stated by this court in Liggett is not limited to cases involving 'active attempts' to conceal.

ORS 68.340(1) provides:

'Every partner must account to the partnership for Any benefit, and hold as trustee for it any profits derived by him Without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property.' (Emphasis added)

See also Restatement of Restitution §§ 190, 191.

In Fouchek et al v. Janicek, 190 Or. 251, 262, 225 P.2d 783 (1950), we said that this section from the Uniform Partnership Law states 'the essence of the fiduciary (duty) of a partner,' as stated by Justice Cardozo in Meinhard v. Salmon, 249 N.Y. 458, 463, 164 N.E. 545, 546, 62 ALR 1 (1929), as follows:

'Joint adventurers, (and) copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm's length are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. As to this there has developed a tradition that is unbending and inverterate. Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the 'disintegrating erosion' of particular exceptions. * * * Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd. It will not consciously be lowered by any judgment of this court.'

Real estate brokers are subject to potential conflicting interest in many transactions. Even when a real estate broker does not become a partner in a venture involving the purchase of property this court has held that he owes a fiduciary duty to protect his client's interests and also 'to make a full, fair and understandable explanation to his client before having him sign any contract.' See Trip v. Barkdoll, 263 Or. 325, 332, 502 P.2d 219, 222 (1972), and cases cited therein.

When, as in this case, a real estate broker undertakes to join as a member of a partnership or joint venture in the purchase of real property on which he holds a listing, he is also subject to the fiduciary duties of undivided loyalty and complete disclosure owed by one partner to another. Indeed, one of the fundamental duties of any partner who deals on his own account in matters within the scope of his fiduciary relationship is the affirmative duty to make a full disclosure to his partners not only of the fact that he is dealing on his own account, but all of the facts which are material to the transaction. As held in Duniway v. Barton, 193 Or. 69, 78, 237 P.2d 930 (1951), although not involving a partnership, a fiduciary has a duty 'not only not to misrepresent,' but to 'disclose * * * fully all the material facts * * * within his knowledge * * *.' See also Restatement 2d on Trusts 67, § 2, comment B.

It follows that the 'consent of the other parnters' required by ORS 68.340(1) before any partner may retain 'any benefit' from 'any transaction connected with the formation (or) conduct' of a partnership must necessarily be an 'informed consent' with knowledge of the facts necessary to the giving of an intelligent consent.

In this case, Harris did not inform plaintiffs or disclose to them the fact that this property could have been purchased for $907,500 'net' to the seller or that upon its purchase for $1,010,000 Harris or International (of which Harris was the president) would be paid a commission in the amount of $100,000. In the absence of such a disclosure there could be no effective 'consent' by plaintiffs to the payment or retention by Harris of any such 'benefit' from that transaction, for the purposes of ORS 68.340(1).

For the reasons we must reject defendants' contention that the broker's commission paid to International was 'neither secret nor concealed.' ¹ For the same reasons, the trial court did not err in requiring defendants to account to...