F. Baxter Lane v. A. J. M. Oustalet, Jr. ( 2000 )

IN THE SUPREME COURT OF MISSISSIPPI
NO. 2000-CT-01814-SCT
F. BAXTER LANE AND KATHRYN LANE
v.
A.J.M. OUSTALET, JR., ALFONSO REALTY, INC.
AND JERRY ROSETTI, ESQUIRE
ON WRIT OF CERTIORARI
DATE OF JUDGMENT: 10/05/2000
TRIAL JUDGE: HON. JOHN H. WHITFIELD
COURT FROM WHICH APPEALED: HARRISON COUNTY CIRCUIT COURT
ATTORNEY FOR APPELLANTS: ROBERT H. TYLER
ATTORNEYS FOR APPELLEES: JAMES C. SIMPSON, JR.
RICHARD SALLOUM
FREDRICK B. FEENY
FRED MANNINO
W.F. HOLDER, II
NATURE OF THE CASE: CIVIL - BREACH OF CONTRACT
DISPOSITION: THE JUDGMENT OF THE COURT OF APPEALS
IS AFFIRMED AS TO ALFONSO REALTY, INC.
AND REVERSED AS TO A.J.M. OUSTALET, JR.
AND JERRY ROSETTI, ESQUIRE. THE
JUDGMENT OF THE CIRCUIT COURT IS
REVERSED, AND THIS CASE IS REMANDED
FOR A NEW TRIAL - 05/13/2004
MOTION FOR REHEARING FILED:
MANDATE ISSUED:
EN BANC.
GRAVES, JUSTICE FOR THE COURT:
¶1. This case, before the Court on petition of F. Baxter Lane and Kathryn Lane for writ of certiorari
from the decision of the Court of Appeals, involves a real estate transaction in which the Lanes purchased
a single family residence from A.J.M. Oustalet, Jr. The transaction was brokered by Alfonso Realty, Inc.,
through its agent, Sherry Owen, with Jerry J. Rosetti serving as closing attorney. After taking possession
of the house, the Lanes discovered extensive, unrepaired termite damage and received an estimate for
repairs of $35,000. They filed suit against Oustalet, Alfonso Realty, and Rosetti for breach of fiduciary duty
and negligent misrepresentation. Evidence was presented indicating that Oustalet, Owen and Rossetti knew
of the damage, that they knew that it was possibly quite extensive, and that they failed to pass this
knowledge to the Lanes at or prior to closing.
¶2. At the conclusion of the Lanes’ case, the Circuit Court of Harrison County granted directed
verdicts for all defendants. The Lanes appealed, and the case was assigned to the Court of Appeals,
which affirmed in part and reversed in part. The appellate court found that the Lanes failed to establish the
breach of contract charges against the seller because he did disclose a termite problem and told Owen to
“do what was necessary to have the problem corrected.” Lane v. Oustalet, 850 So. 2d 1143 (Miss.
2002).
¶3. As to Rosetti, the Court of Appeals held that the buyers failed to meet the burden of proof with
regard to his duty as closing attorney when they failed to offer expert testimony on the prevailing standards
of professional care.
¶4. The Court of Appeals also held, however, that, as a dual agent, Alfonso Realty had a heightened
fiduciary duty and that the purchasers met the burden of proving that Alfonso breached that duty,
Therefore, it reversed and remanded as to that defendant.
2
¶5. Following the Court of Appeals’ decision, the Lanes and Alfonso Realty filed petitions for certiorari
with this Court. Alfonso Realty’s petition was denied, and that of the Lanes has been granted. We affirm
the Court of Appeals judgment as to Alfonso but reverse as to Oustalet and Rossetti. Accordingly, we
reverse the circuit court’s judgment and remand this case for a new trial as to all three defendants.
FACTS
¶6. In 1996, the Lanes, having made plans to move from New York to the Mississippi Gulf Coast,
contacted Sherry Owen of Alfonso Realty and ultimately found Oustalet’s residence that they wished to
purchase. The parties agreed to have Alfonso act in a dual agency capacity and executed a sales contract.
¶7. Prior to signing the Contract of the Sale and Purchase of Real Estate, the buyers received the
Seller’s Disclosure Statement that included a notation that the home had prior termite infestation and
repaired damage. The sales contract includes a provision requiring the seller to provide a termite certificate
prior to or at closing, which reads pertinent part:
TERMITE CERTIFICATE AND RESPONSIBILITY OF BROKER. Seller shall, as a
condition of sale, furnish Purchaser, prior to or at closing, a closing certificate from a
licensed, termite company, that subject property shows no evidence of termite or other
wood destroying insect infestation. If such infestation exists, seller shall furnish warranty
of approved treatment and correct any structural damages caused by such infestation. If
cost of said treatment is prohibitive to seller, or, if buyer deems damage unacceptable,
contract shall be declared null and void and earnest moneys shall be refunded. By signing
below, both Purchaser and Seller acknowledge that the Broker did not recommend any
pest control company, in any way warrant the inspection or treatment made by the
company, and is in no way responsible for any termite damage.
A special clause is also included in the sales contract allowing for a home inspection to be conducted within
five days of the signing of the sales contract.
3
¶8. At Alfonso's request, an Orkin Pest Control technician performed the pest inspection and
completed the Mississippi Official Wood Destroying Insect Report, also referred to as the closing certificate
or termite inspection report, on November 6, 1996. The report indicated unrepaired termite damage and
recommended that a qualified expert be consulted to determine whether the damage needed to be repaired.
¶9. Orkin delivered this report to the closing attorney, who then notified Owen at Alfonso Realty of
the unrepaired damage, and Owen arranged for a contractor who had previously repaired termite damage
to the home to examine the damage. The contractor inspected the property and reported to Owen that,
in his opinion, there was no loss of structural integrity. Owen testified that she notified the seller and the
attorney, but did not notify the buyers. Rather, she relied on the attorney to include a copy of the termite
report in the closing documents. She further testified that by obtaining the report and the home inspection
arranged prior to the closing, she was doing everything she could to fulfill her duties to both the seller and
the buyers.
¶10. The trial court concluded as a matter of fact that the buyers did not receive the termite inspection
report at closing. The closing was conducted on November 18, 1996, and Rosetti testified that he was
sure that he showed the buyers a copy of the contractor’s report. However, he could not say with certainty
due to the large volume of closings he conducted during that week, and he apparently did not discuss it with
them. He relied upon the fact that the termite inspection report was included in his closing documents and
that it was his general practice to deliver it. The buyers expressly denied receiving the termite inspection
report or the report of the contractor engaged by Owen.
¶11. The Lanes took possession of the home shortly after closing. They requested and were provided
a copy of the Orkin report from Rosetti on January 20, 1997, and obtained an inspection from Terminix
4
which revealed an area of 750 to 800 square feet of damage. The Lanes then obtained estimates from two
different professional who both testified at trial that the cost of repair would be over $35,000.00.
¶12. The Lanes’ petition presents two questions for consideration:
1. When an agent serves the dual interest of two principals, should this
Court recognize an exception to the general rule of agency that notice
to the agent is constructive notice to the principals?
2. When a claim of legal malpractice is based not on a violation of a
standard of care, but on a violation of a standard of conduct, is expert
testimony necessary?
DISCUSSION
Standard of Review
¶13. We have stated:
The standard of review in cases where a directed verdict has been granted is as follows:
“[t]his Court conducts a de novo review of motions for directed verdict. . . . If the Court
finds that the evidence favorable to the non-moving party and the reasonable inferences
drawn therefrom present a question for the jury, the motion should not be granted.” Pace
v. Fin. Sec. Life of Miss., 608 So. 2d 1135 (Miss. 1992) (citations omitted).
Entergy Miss., Inc. v. Bolden, 854 So. 2d 1051, 1054 (Miss. 2003. The Court of Appeals applied
this standard in this case, as shall we.
The Agency Issue
¶14. The buyer, the real estate agent, and the attorney each knew of the termite inspection report and
of the report of the contractor engaged by Owen. Each argues that it was the responsibility of the others
to inform the buyers, who deny receiving both reports. Each would have us impute to the buyers
constructive knowledge of these important documents through the agency of either the real estate agent or
the attorney.
5
¶15. The law of agency generally imputes knowledge and information received by an agent in conducting
the business of a principal to the principal, even where that knowledge or information is not communicated
by the agent to the principal. Pittman v. Home Indem. Co., 411 So. 2d 87, 89 (Miss. 1982) (citing
Home Ins. Co. of N.Y. v. Thornhill, 165 Miss. 787, 796, 144 So. 861, 863 (1932). See also
Weathersby v. Gore, 556 F.2d 1247, 1251 (5th Cir. 1977) (applying Mississippi law). This general
principle is fundamental to commerce; without the ability to rely on communications through representatives
most trade would halt. The Court of Appeals relied on this principle in holding that, as a matter of law, the
seller here satisfied his contractual obligation to the buyers by relying on the agents to communicate with
them.
¶16. Here, however, Alfonso Realty served two masters, the buyer and the seller. Miss. Code Ann.
§ 73-35-21, allows such representation by real estate professionals if the dual representation takes place
with the knowledge of all parties. In addition, the trial court found that Rosetti as well as Alfonso
represented both parties. The Lanes argue that there should be an exception to the rule of imputed
knowledge when the agent is acting in a dual capacity for two principals. The argument is that imputing the
knowledge of the agent to both principals whose interests may become adverse is unreasonable and unfair.
On appeal, the Lanes further argued that the attorney breached his fiduciary duty, not only in failing to
inform them of the documents, but also in his failure to ensure that the seller complied with all of his
contractual obligations. This argument proceeds to conclude that it is improper to constructively impute the
knowledge of the seller to the Lanes, via the attorney, when it is unclear what principal he was representing
when he received the termite inspection report.
¶17. In a number of jurisdictions, knowledge of a dual agent, acquired in the course of his employment,
at least where the agent has not acted out of self interest or fraudulently, has been held, as between the
6
principles, to be imputed to each of the principles even if not actually transmitted to them. Carlton v.
Moultrie Banking Co., 152 S.E. 215 (Ga. 1930); Farr v. Newman, 199 N.E.2d 369 (N.Y. 1964)
(holding the rule applicable as to third parties.)
¶18. In an opinion which is somewhat at odds with Farr, at least one New York appellate court,
recognizing that an agent serving dual interests occupies “a field of extremely delicate relationships,”
observed:
[t]he important thing about the case in hand, however, is not fraud or the authority of the
agent. It is the fact that when an agent undertakes to act in a transaction for two parties
whose interests are or can become adverse, as a reasonable man might foresee,
knowledge of facts arising from the transaction is not deemed the knowledge of the
principal to operate as a waiver or to work otherwise to his detriment, unless the principal
has actual and not merely constructive knowledge of the true facts.
Ostego Aviation Serv. Inc. v. Glens Falls Ins. Co., 102 N.Y.S.2d 344, 349 (N.Y. App. Div.
1951), cited with approval in C.B. & T. Co. v. Hefner, 651 P.2d 1029 (N.M.Ct. App. 1982.) ¶19.
Alabama has also held that where an agent occupies a dual relation, notice acquired by him in such
other agency is not binding on the principal. Florence v. Carr, 148 So. 148, 149 (Ala. 1933).
¶20. It has been said also that even where there is no ethical breach, “an attorney must act with the
greatest circumspection in the representation of multiple clients where their exists a possibility that their
interest may conflict or be at cross purposes.” Stump v. Flint, 402 P.2d 794, 801 (Kan. 1965) (attorney
representing seller and purchaser in real estate transaction.) Put differently, whether real estate broker or
attorney, although a professional may be permitted under law to represent both parties to a transaction, as
a dual agent he must proceed with a heightened since of duty and conduct to assure that he serves both
masters’ interests fully.
7
¶21. The problem with rigidly imputing knowledge of the agent to both principals in a dual agency
context is clear. Simply put, if everyone is responsible, then no one is responsible. In such a situation, the
imputation, based on the presumption that the agent will do what is expected of him becomes a fiction
which interferes with rather than promotes commerce and the interest of full disclosure. A proper analysis
requires that we recognize that in a dual agency two distinct agencies are vested in the agent with separate
duties and responsibilities as to each principal. If Alfonso and Rosetti, as agents of Oustelat, failed to
communicate required information to the Lanes, then Oustelat breached his contract through the neglect
of his agents. If, on the other hand, Oustelat delivered the information to Alfonso and Rosetti, as the
agent of the Lanes, they are deemed to have received it and have no complaint against Oustelat. The
arguments become circular and cannot lead to a resolution of the equities between the buyers and the
sellers. No doubt, this can create special difficulties for the dual agent, but they are difficulties inherent in
choosing to serve two masters.
¶22. We cannot establish a bright line for all cases as to whether knowledge held by the dual agent is
to be imputed to either or both principals. Here, the jury could have inferred that Oustalet, in telling Owen
to take care of the matter concerning termite certificate and any evaluation of the damage, was speaking
to her as his own representative. In resolving that question, we better approach the dilemma as to
Oustalet by asking whether the seller was acting reasonably in relying on the dual agents–the real estate
agent and the attorney–to attend to the matter and in believing that they would properly inform the buyer.
The question of Oustalet’s liability should have been submitted to the jury.
¶23. As to Alfonso Realty, the Court of Appeals correctly held that the real estate agency breached its
duty to the buyers in simply assuming that the attorney would provide the termite inspection report to them.
Owen had important information in her possession–the termite inspection report and the later report from
8
the contractor which she contacted-- and failed to disclose it to them. She recognized her obligation to
communicate directly with the seller, but did not accord the same treatment to the buyers. It is not enough
that she says that she thought she performed her duty by ordering the contractors inspection, which
concluded that there was no structural damage. The Lanes were entitled to have all significant information
in order to make their own decisions as to how they wanted to proceed under the sales contract. The jury
should determine under the facts presented whether this breach caused damage to the Lanes.
¶24. The Court of Appeals analyzed the duty of an attorney to his client and concluded that, under the
evidence, a reasonable person could conclude that there was an attorney-client relation between Rosetti
and the buyers. The evidence was sufficient to allow the jury to conclude that the buyers did not receive
the termite certificate at the closing conducted by Rosetti and that he did not inform them of the contractor’s
report. However, that court affirmed the directed verdict in his favor based on the belief that liability could
not be established without expert testimony as to the standard of care imposed on a closing attorney. This
brings us to the second issue presented by the petition for certiorari.
The Standard of Care Issue
¶25. The Lanes argued that Rosetti breached his fiduciary duty in failing to inform them of the unrepaired
termite damage and in failing to give them a copy of the termite report at closing. The trial court decided
and the Court of Appeals agreed that Rosetti owed a fiduciary duty to the Lanes. Rosetti in his testimony
acknowledged that the Lanes had a right to expect him to enforce their rights under the contract and that
he had a duty to close the sale in accordance with the contract between the buyer and the seller.
9
Nevertheless, the Court of Appeals held that the directed verdict in favor of Rosetti was proper because
the Lanes failed to offer expert testimony to support their malpractice claim. 1
¶26. The Lanes argue that their claim against Rosetti was not that he breached a standard of care of
minimally competent attorneys, but that his failure to disclose the unfavorable termite report was a breach
of standard of conduct. As such, they assert, there was no need to present expert testimony to support
the claim because there were no special skills, knowledge, experience, or the like involved. We think the
Lanes are correct. The Court has recognized that there are circumstances in which a jury might "determine
the issue of an attorney's negligence without the benefit of expert testimony." Dean v. Conn, 419 So. 2d
148, 151 (Miss. 1982).
¶27. In an action involving a legal malpractice claim where the attorney had represented both the insurer
and the insured in a personal injury action arising from an automobile accident, this Court held that legal
malpractice may be a violation of the standard of care of exercising the knowledge, skill, and ability
ordinarily possessed and exercised by members of the legal profession similarly situated, or the breach of
a fiduciary duty. Hartford Acc. & Indem. Co. v. Foster, 528 So. 2d 255, 285 (Miss. 1988). We
stated:
Some courts seem to distinguish a breach of the fiduciary obligations from legal
malpractice. The prevailing and more reasonable view, however, is that legal malpractice
encompasses any professional misconduct whether attributable to a breach of the standard
of care or of the fiduciary obligations. In recognition of the dual bases of an attorney's
liability, some courts have referred to the fiduciary obligations as setting forth a standard
of "conduct." Thus, under the theoretical approach legal malpractice may be defined as "a
breach by an attorney of either the standard of care or of the standard of conduct." Thus,
1
In contrast, when deciding whether the real estate agent committed an offense, the Court of
Appeals stated: "[W]e are of the opinion that sufficient evidence was presented that a question existed
for the jury to decide if Owen failed to uphold her fiduciary duty owed to the Lanes." Lane v.
Oustalet, 850 So. 2d at 152.
10
legal malpractice may be a violation of the standard of care of exercising the knowledge,
skill, and ability ordinarily possessed and exercised by members of the legal profession
similarly situated, or the breach of a fiduciary duty. The declaration here charges a fiduciary
violation as the basis for this malpractice action.
To recover under the negligence theory of legal malpractice, the client must prove
the existence of an attorney-client relationship, the acts constituting negligence, that the
negligence proximately caused the injury, and the fact and extent of the injury. Hickox v.
Holleman, 502 So.2d at 634; Hutchinson v. Smith, 417 So. 2d 926 (Miss.1982);
Thompson v. Erving's Hatcheries, Inc., 186 So. 2d 756 (Miss.1966). However, the
legal malpractice alleged in this case is a violation of the standard of conduct, not breach
of the standard of care. The elements of this cause of action are the same as other legal
malpractice actions except, instead of proving negligence, the plaintiff must prove a
violation of the attorney's fiduciary duty.
528 So. 2d at 285. Clearly established law provides that expert testimony is necessary to establish the
breach of a duty of care in a claim of legal malpractice; however, when the claim is for breach of the
standard of conduct, we conclude that lack of expert testimony should not preclude the issue from being
heard by a jury.
¶28. Whether Rosetti breached his fiduciary duty to the Lanes is not the kind of question that necessarily
confronts a jury with issues that require specialized knowledge or experience. Rosetti was aware of a
material fact affecting the terms of the Lane's real estate purchase. He was aware of the importance of
the noted unrepaired termite damage and demonstrated that awareness by informing Owen of the need to
have a professional inspect the house. Furthermore, Rosetti had a duty to bring this fact to the attention
of the Lanes and to be certain that they were aware of the termite damage to the house. The Lanes testified
that they did not receive a copy of the termite report at closing, and the trial court found that Rosetti did
not provide a copy to them. We find that a jury should have been allowed to make the determination on
the issue of breach of the standard of conduct or breach of the fiduciary duty without an expert witness'
testimony. This issue is remanded to the trial court for proceedings in accordance with this Court's decision.
11
CONCLUSION
¶29. Although dual agencies are allowed when all principals are aware of the multiple representation,
they are fraught with special problems and require a heightened standard of conduct on the part of the
agents in assuring that both masters are well served and that the agents’ responsibilities are fully performed
as to all. Whether attorney or real estate agent, a professional assumes a heighten responsibility when
assuming to act on behalf of parties who may have opposing interests. The dual agent assumes separate
burdens as to each principal which must be fully fulfilled, and a principal instructing or informing his agent
cannot be relieved of his responsibilities under a contract unless the circumstances are such as to indicate
that the dual agent received and handled the instruction or information as the agent for the opposing party.
Often, as here, these are factual circumstances which are best left to the trier of facts.
¶30. The standard of care and the standard of conduct are two distinguishable components of a legal
malpractice claim. Where a legal malpractice claim is based solely on a breach of a standard of conduct,
as opposed to a breach of a standard of care, proof of the violation of the fiduciary duty to disclose is
sufficient to create a jury question which, under facts such as these may be determined without the benefit
of expert testimony.
¶31. The judgment of the Court of Appeals as to Oustalet and Rosetti is reversed; as to Alfonso Realty,
it is affirmed. We reverse the circuit court’s judgment and remand to the circuit court for a new trial
consistent with this opinion as to all three defendants.
¶32. THE JUDGMENT OF THE COURT OF APPEALS IS AFFIRMED AS TO
ALFONSO REALTY, INC. AND REVERSED AS TO A.J.M. OUSTALET, JR. AND
JERRY ROSETTI, ESQUIRE. THE JUDGMENT OF THE CIRCUIT COURT IS
REVERSED AND THIS CASE IS REMANDED FOR A NEW TRIAL.
12
SMITH, C.J. WALLER AND COBB, P.JJ., EASLEY AND CARLSON, JJ.,
CONCUR. DIAZ, DICKINSON AND RANDOLPH, JJ., NOT PARTICIPATING.
13