Oral Argument Preview: Respondeat Superior Liability of a Real Estate Broker for the Intentional Misdeeds of an Associated Salesperson. Auer v. Paliath

Update: On August 28, 2014, the Supreme Court handed down a merit decision in this case. Read the analysis here.

On February 4, 2013 the Supreme Court of Ohio will hear oral argument in the case of Auer v. Paliath, 2013-0459. At issue in this case is whether a real estate broker is vicariously liable for the intentionally tortious conduct of an associated sales agent solely because the broker received a share of the commission.

Case Background

Torri Auer entered into a number of real estate transactions with Jamie Paliath. At the time, Paliath was a salesperson for Keller Williams Home Town Reality (“Home Town”). Paliath’s agreement with Home Town was an independent contractor agreement in which she was specifically prohibited from doing anything that would damage Home Town’s goodwill and reputation or cause the public to lose confidence in Home Town.

Unbeknownst to Home Town, at the same time Paliath was working for them, she secretly established a number of other real estate, property management and rehabilitation companies of her own, contrary to her employment agreement with Home Town, and solely to benefit herself. This was also contrary to Ohio law, which requires all real estate salespersons to operate under a real estate broker.

Auer, a California resident, became interested in Paliath’s listings through an internet website. Auer visited Dayton, Ohio to tour several properties. In her dealings with Auer, Paliath operated under her personal real estate entities. Upon her arrival in Dayton, Auer met Paliath not at Home Town’s offices, but at the offices of her personal entities. Paliath was Auer’s only contact or connection to Home Town. However, Home Town shared in the commissions generated from Paliath’s real estate sales to Auer.

Auer claims that Paliath induced her to purchase several properties, and made various misrepresentations throughout the transactions. Auer asserted claims against Home Town for vicarious liability on these allegations. Auer also alleged that Home Town failed to supervise Paliath properly while she was an agent there.

At trial, the jury was instructed on vicarious liability. Specifically, the jury was told that if it found Paliath had committed fraud in her dealings with Auer, then Home Town must be found vicariously liable. Home Town objected to these instructions. The jury found in favor of Auer and against Paliath and Home Town in the amount of $135,000. Home Town appealed the judgment against it.

The Second District Court of Appeals affirmed the imposition of vicarious liability on Home Town. The Court ruled that, as a matter of law, real estate brokers couldn’t argue that the acts of a salesperson were outside the scope of her authority where the broker shared in the real estate commissions.

Key Precedent

Groob v. Keybank, 2006-Ohio-1189 (respondeat superior liability for tortious acts only attaches when an employee acts within the scope of his or her employment; where the tort is intentional, the behavior giving rise to the tort must be calculated to or promote the business for which the servant is employed.)

Commercial Business Systems v. Aztec Partnership, 1997 WL 674659 (2nd district) (scope of employment is a factual question and the liability of the broker is dependent upon the action being within the scope of the salesperson’s authority.

Posin v. A.B.C. Motor Court Hotel, 45 Ohio St.2d 271 (1976), (when reasonable minds could come to but one conclusion, the issue of scope of employment becomes a question of law.)

Home Town’s Argument

Home Town maintains that it is undisputed that Paliath engaged in various pursuits outside her employment as a Home Town agent in her dealings with Auer. She was a “rogue salesperson.” As evidence, Home Town points to Auer’s own expert testimony that the activities engaged in by Paliath were outside the scope of her agency with Home Town.

Home Town argues that the appellate decision has promulgated an industry wide rule mandating that real estate brokers, as a matter of law, are vicariously liable for the conduct of their salespersons, regardless of whether the actions were outside the scope of their employment, if the broker receives a commission. Home Town suggests that the court included no limiting principles to this analysis whatsoever. Given that a majority of real estate salespersons are independent contractors, Home Town argues that brokers, who maintain little control, are subject to incredible liability.

Home Town argues that the Second District’s opinion is inconsistent with applicable statutes and precedent. Although real estate salespersons are required to work under a real estate broker, statutes do not specify the scope of a salesperson’s agency and do not mandate automatic vicarious liability. In other contexts, a broker is only liable for actions of a salesperson when the broker has knowledge of the salesperson’s sanctionable conduct. Here, evidence shows that Home Town was completely unaware of Paliath’s side businesses. Additionally, the statutory requirement that commissions be collected through the broker only ensures that the process by which commissions are collected is properly observed, and in no way signifies the broker’s tacit acquiescence to any improper activity by the salesperson. A broker cannot consent to fraudulent practices it knows nothing about.

Home Town argues that it may only be vicariously liable if Paliath’s actions were within the scope of her employment, a question of fact for the jury’s determination. Under Groob, “merely being aided by [one’s] employment status is not enough”. Here, the evidence overwhelmingly shows that Paliath was not acting within the scope of her employment. Worse, the jury was not given the opportunity to determine this factual question.

Additionally, Home Town argues that the jury instruction was inadequate and misleading in a number of ways. First, the trial court failed to inform the jury of what it was being asked to do, which was to determine whether Paliath was acting within the scope of her authority as a Home Town salesperson in her dealings with Auer. Home Town posits that the instruction merely supplied erroneous and incomplete legal principles without the legal structure to reach its factual conclusions. Second, the instructions failed to inform the jury that the burden was on Auer to prove that Paliath was within the scope of her authority. Third, the instructions included inapplicable language from cases discussing wholly separate aspects of real estate law thereby misleading the jury to conclude the scope of an agent’s authority is all-inclusive. To the extent the instructions suggested that Paliath worked under a broker in “all” her transaction, Home Town argues the jury was prejudiced. Finally, the trial court’s mandatory directive for the jury to find against Home Town if it determined Paliath committed fraud was incorrect. Absent from this directive is any reference to Paliath’s scope of authority, thereby compelling a finding against Home Town as a matter of law upon the jury determination of wrongdoing by Paliath.

Home Town argues that Paliath was well outside her authority. She duped and deceived Home Town, violated her agreement, and competed against it. The failure of the trial court to present the fact question of whether Paliath’s actions were within the scope of employment is reversible error.

In its reply brief, Home Town also argues that Auer failed to preserve her failure to supervise claim, rejected by the trial court, so that issue is not properly before the Court.

Auer’s Argument

Auer argues that not only is Home Town liable because of its association with Paliath, but the evidence also supports a determination that Home Town lacked the requisite supervision over Paliath. Auer quotes Home Town’s assertion that it “has no control over what they (salespersons) do outside my office” and its previous employees to support her contention that Home Town is liable for its failure to supervise its salespersons adequately. Auer argues that Home Town cannot reap the benefits (commissions) without expecting any consequences when it does not take any initiative to control a new salesperson or monitor that person’s activities in a more competent fashion.

Auer argues that the jury instruction given in the case was entirely correct, and the Second District’s determination that Paliath was acting within the scope of her employment as a matter of law is also correct and consistent with precedent. The willful or malicious acts of an employee do not necessarily remove the actions from the employee’s scope of employment. Auer argues that reasonable minds could only conclude that in her dealings with Auer, Paliath was acting within the scope of her employment with Home Town. Paliath was undisputedly working for Home Town at the time of the transactions and Home Town documents were incorporated throughout the transactions. Additionally, Home Town received a commission for all the sales of the real estate at issue here.

Finally, as a matter of policy, Auer argues that Home Town’s position would harm consumers by encouraging lax oversight of salespersons by brokers.

Home Town’s Proposed Proposition of Law:

The respondeat superior liability of an Ohio real estate broker for the intentionally tortious conduct of an associated salesperson is not absolute and instead is predicated upon the conduct being within the scope of the salesperson’s agency or employment.

Auer’s Proposed Counter Proposition of Law:

In the state of Ohio, when a real estate salesperson acts in the name of a real estate broker in regards to a real estate transaction for which he or she was hired and the real estate broker collects a commission for said transaction, the real estate broker is responsible for the salesperson’s action relating to said transaction because is it within the scope of the salesperson’s employment or agency.

Amicus Curiae in Support of Home Town

The Ohio Association of Realtors and the National Association of Realtors filed amicus curiae briefs in support of Home Town. The Ohio Association of Realtors (“OAR”) is Ohio’s largest professional trade association with more than 26,000 real estate brokers and salespersons. The National Association of Realtors (“NAR”) is a nationwide nonprofit professional organization that represents individuals engaged in all aspects of the real estate business.

OAR argues that the Second District’s holding exposes real estate brokers to expanded, and essentially limitless, liability as a matter of law and will have a major impact on the entire real estate industry. The amicus mirrors the concerns set forth in Home Town’s brief. OAR argues that employers are only liable for actions of employees within the scope of their employment. Furthermore, the determination of whether an employee was acting within the scope of the employment is a question of fact for the jury. Contrary to the Second District’s holding, brokers are not liable for each and every action of an employee. To establish such a bright line rule could expose real estate brokers to liability never before imposed on employers, such as liability for a salesperson’s assault of a client at a closing or injuries to a third party by a salesperson driving to an open house under the influence. OAR argues that the jury should have been instructed that Home Town, and all real estate brokers, is only liable for actions of employees within the scope of their employment. In the instant case, if any determination is to be made as a matter of law, the only permissible conclusion would be that Paliath was not acting within the scope of her employment and Home Town is not liable.

NAR similarly echoes the sentiments of Home Town’s brief. NAR submits that a broker’s receipt of a commission does not conclusively determine a broker’s liability; instead, it may be one factor in determining whether a salesperson acted within the scope of her employment. NAR argues that in determining whether a broker is liable, all facts and circumstances must be considered to determine if the salesperson was acting within the scope of her employment. The jury instructions provided were incorrect and confusing. The Second District erred in its failure to correct these misinterpretations of Ohio law by holding that a broker is liable for the intentionally tortious acts of its agents as a matter of law.

Student Contributor: Katlin Rust