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Brokers Liable When Agents Commit Fraud While Promoting a Real Estate Business

Updated on December 28, 2014

Real Estate Brokers Face Liability for an Agent's Fraud

Real estate brokers can be personally liable for the wrongdoing of their agents who are acting within their employment, an Ohio court ruled recently.

A client, Torri Auer, from California purchased five properties that a real estate agent from the brokerage firm of Keller Williams Hometown Realty listed on the Internet. Before the deal closed, the agent, Jamie Paliath, told the buyer that he owned a building rehab and property management business. He convinced the buyer he could increase the value of the properties by rehabbing them and renting them out for her.

Keller Williams Home Town Realty received commissions on each of the five properties sold by Paliath.

Later, Auer visited the Ohio properties to check on progress of the rehab work.

Auer soon discovered, however, that although she had paid Paliath considerable sums to renovate the buildings, Paliath had actually done very little work, the Ohio Supreme Court ruling said. When Auer visited Dayton in 2008 to inspect her properties, she found them to be uninhabitable and still in need of considerable repair. The business relationship soon began to sour. All told, Auer invested over $430,000 in the properties. As of 2012, the properties had no value and were scheduled for destruction.

The client sued both the agent and the broker to recover her money. She accused the agent of fraud and claimed the broker was liable for negligent supervision.

The judge told the jury to decide not only whether the agent committed fraud but also whether he was acting within the scope of his employment on behalf of the broker. If the agent was acting within his authority, then the broker could be liable to pay for the damages.

The jury decided the broker was liable and awarded the client $135,000. When the broker appealed, the state Supreme Court said the broker was liable if the facts showed the agent was promoting the broker’s business.

The Supreme Court added the fact the broker received a commission would not by itself make the broker liable for fraud. Only proof the agent’s fraud was within the scope of his employment would make the broker liable.

Vicarious liability by its very terms attaches to the principal through the agent's actions, not through the principal's own actions, the Ohio Supreme Court’s ruling said.

The case is Auer v. Paliath et al., Keller Williams Home Town Realty; Supreme Court of Ohio, No. 2013-0459 (Aug. 28, 2014).

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