Under California real estate law, a corporate brokerage firm must designate an individual officer to supervise and control the broker’s employees.  Cal. Bus. & Prof. Code §10159.2.  The California Court of Appeal recently held that this statute does not render the supervisor individually liable to the brokerage firm’s clients.  Sandler v. Sanchez, __ Cal.App.4th __(June 18, 2012).

In Sandler, a brokerage firm’s salesperson solicited clients to loan $600,000 for improvements to an apartment building.  He represented that upon completion, the building would have $2.75 million of available equity with which to repay the $600,000 loan.  He failed to disclose that $600,000 was woefully insufficient to finance the necessary repairs, that the property had inadequate equity to secure the note, and that the property was already facing foreclosure from a prior lender.  In addition, the salesperson was also a principal of the borrower, and used $300,000 of the loan proceeds to pay his personal expenses.

Not surprisingly, when the clients’ loan was not repaid, they turned to the courts for recovery.  By that time, the salesperson had died and his estate was insolvent, as were the borrower entity and the brokerage firm.  With no other available sources of recovery, the clients sued the broker’s designated supervisory officer.  Although the designated officer had no role in the transaction and apparently did not even know of it, the plaintiffs argued that California’s statutory requirement that he supervise and control the firm’s employees rendered him individually liable for those employees’ bad acts.The court dismissed the lawsuit, holding that the designated officer was not individually liable to the firm’s clients for failure to supervise.

The court noted that failure to supervise may render the officer subject to administrative discipline by the Department of Real Estate.  It also noted that a corporate brokerage firm might be liable to the firm’s clients because of an employee’s bad acts, and that a corporate broker might in turn sue the designated officer for indemnity.  But at least where he had no role in the transaction, the designated officer is not individually liable to the firm’s clients, since he only owes duties to his corporate broker and not to third parties.