Thank you for sharing!

Your article was successfully shared with the contacts you provided.
Real estate brokers who purchase their client’s apartment extinguish their fiduciary duty to the seller at the moment the sales contract is executed, a sharply divided panel of the Appellate Division, 1st Department, ruled in a case of first impression. The appeals court affirmed the dismissal of a suit by a two-lawyer couple who said their broker took advantage of an opportunity that they had sought for themselves before deciding to sell their Carnegie Hill apartment. By a 3-2 margin, the 1st Department upheld a decision by Manhattan Supreme Court Justice Sheila Abdus-Salaam to dismiss the plaintiffs’ complaint. The majority, in an opinion by Justice David Friedman, wrote that any actions taken by the broker after the clients agreed to sell the apartment could not have been a breach of fiduciary duty, since the duty had been severed by the agreement of sale. “[W]here a broker contracts to purchase her client’s property, the relationship of principal/broker terminates when the contract is executed, thereby severing the fiduciary relationship,” Friedman said. When the agreement of sale was finalized, the broker completed its job, which was to find a buyer for the principal’s apartment, the majority reasoned. Furthermore, in this case, the broker, by becoming the buyer, placed itself in a different posture with respect to the principal. “At the moment of contract, any reasonable person … would recognize that the parties relationship had experienced a fundamental metamorphosis � a metamorphosis so substantial that it no longer retained any of the fiduciary characteristics previously associated with it,” Friedman wrote. After the sales contract was complete, that agreement defined the relationship between the parties, he said. The suit, Dubbs v. Stribling & Associates, 2701-2701A, involves two adjacent apartments located at 139 E. 94th Street in Manhattan. The two units could be combined to create a larger apartment because they shared plumbing and utility lines. The combination would create a new apartment of greater value than the two separate properties. In 1994, plaintiffs Elizabeth M.R. Dubbs and Thomas A. Dubbs wanted a larger apartment, but their neighbor, Nancy Kelly, was unwilling to sell her apartment. The couple decided to sell their apartment and seek a larger dwelling. The Dubbses listed their apartment with the real estate broker Stribling & Associates, and told two Stribling saleswomen, Judith Durham and Avery L. Chappell-Smith, that their apartment had the potential to be combined with the neighboring apartment. Dubbs also told Durham and Chappell-Smith that she and her husband had wanted to buy the next-door apartment, but that Kelly would not sell. Over several months, Chappell-Smith made several fruitless attempts to sell the Dubbses’ apartment. She then showed the apartment to her husband, and they became interested in purchasing it for themselves. Durham asked the neighbor to sell her apartment to the Dubbses, but was again turned down. On Dec. 14, 1994, and Dubbs entered into a contract with Chappell-Smith and her husband to sell the apartment. Closing took place on May 30, 1995. It was what happened between the contract date and the closing date that precipitated the lawsuit. NEIGHBOR SELLS On May 8, Kelly decided to sell her apartment and listed it with six brokers, including Stribling. Chappell-Smith and her husband discovered the listing and immediately began negotiating to buy the next-door apartment. Less than a week after closing on the Dubbs property, Chappell-Smith and her husband entered into an agreement to buy the adjacent unit. Plaintiffs were incensed and contended that the brokers’ fiduciary duty extended to the date of closing and required Stribling to notify them of the availability of the neighboring apartment. On May 8, Kelly decided to sell her apartment and listed it with six brokers, including Stribling. Chappell-Smith and her husband discovered the listing and immediately began negotiating to buy the next-door apartment. Less than a week after closing on the Dubbs property, Chappell-Smith and her husband entered into an agreement to buy the adjacent unit. The Dubbs sought money damages and an accounting of any profits made by the broker as a result of the purchase of the plaintiff’s apartment. The court said there were no grounds for such a recovery. While a broker may not use confidential information obtained in the course of their representation in order to compete with or injure the principle, the court said there was no evidence to show that any of the defendants, on their own behalf, contacted Kelly about the next-door apartment before Dec. 14, when the plaintiffs and defendants entered into the sale agreement. Friedman added, however, that the majority was not handing down a “bright-line rule that the execution of a contract will always cut off a broker’s fiduciary obligations. Where the broker is not the purchaser there may be good reason to extend the broker’s fiduciary duties until the time of closing.” STRONG DISSENT In a lengthy and strongly-worded dissent, Justice David B. Saxe wrote that the fiduciary duty must be broadly construed for the protection of the principle. “To terminate that [fiduciary] duty … at the instant a broker becomes the contract-vendee of the client’s property, would deprive the client of the law’s protection when it is needed most,” Justice Saxe said. “At the moment when the contract of sale is executed, the broker, who previously acted to protect his client’s interests, suddenly occupies a position adverse to the former client.” The best way to protect the client, the dissenters argued, is to continue to hold the broker to the standard of a fiduciary � to act in the utmost good faith � until the time of closing. The dissenters said that the broad view of fiduciary duty was necessary to protect the principals. “The field of real estate sales is … unusually vulnerable to the possibility that those with special access to inside information will take advantage of those they are employed to serve,” Saxe wrote. The dissenters said that the plaintiffs had stated a cause of action that the broker acted upon information that would have been advantageous to and Dubbs without first advising them of it. In a case with no controlling New York authority, Friedman said that the majority position was consistent with that of six other states, including Illinois, Pennsylvania and Texas. But Saxe argued that two New York appellate cases support a continuing fiduciary duty. Justice Richard W. Wallach joined Saxe in dissent. Joining Friedman in the majority were Justices Joseph P. Sullivan and Eugene Nardelli. Edward J. Guardaro Jr., formerly of Goodkind Labaton Rudoff & Sucharow, represented the plaintiffs. Guardaro is a partner at Bartlett, McDonough, Bastone & Monaghan. Steven M. Nachman of Manhattan represented the broker.

This content has been archived. It is available exclusively through our partner LexisNexis®.

To view this content, please continue to Lexis Advance®.

Not a Lexis Advance® Subscriber? Subscribe Now

Why am I seeing this?

LexisNexis® is now the exclusive third party online distributor of the broad collection of current and archived versions of ALM's legal news publications. LexisNexis® customers will be able to access and use ALM's content by subscribing to the LexisNexis® services via Lexis Advance®. This includes content from the National Law Journal®, The American Lawyer®, Law Technology News®, The New York Law Journal® and Corporate Counsel®, as well as ALM's other newspapers, directories, legal treatises, published and unpublished court opinions, and other sources of legal information.

ALM's content plays a significant role in your work and research, and now through this alliance LexisNexis® will bring you access to an even more comprehensive collection of legal content.

For questions call 1-877-256-2472 or contact us at [email protected]


ALM Legal Publication Newsletters

Sign Up Today and Never Miss Another Story.

As part of your digital membership, you can sign up for an unlimited number of a wide range of complimentary newsletters. Visit your My Account page to make your selections. Get the timely legal news and critical analysis you cannot afford to miss. Tailored just for you. In your inbox. Every day.

Copyright © 2020 ALM Media Properties, LLC. All Rights Reserved.