A broker who breaches his fiduciary duty to disclose material information to a client loses the right to collect a commission for his services, the Indiana Supreme Court ruled today.
The high court unanimously reversed a trial court decision finding that although a broker breached his fiduciary duty to his client, his commission shouldn’t be revoked and be repaid to his client.
In Tonda Beth Nichols v. Rex David Minnick and R. David Minnick Inc. d/b/a Commercial Properties, No. 53S01-0711-CV-515, Nichols sued Minnick for a $22,500 commission on the sale of a gentleman’s club and bar she owned in Bedford to James Blickensdorf. Nichols hired Minnick as her real estate broker to sell the club and signed a preprinted real estate listing agreement giving Minnick the exclusive right to sell the property with a 10 percent commission on the sale price.
Minnick showed the property to only one potential buyer, Blickensdorf, who made an offer of $225,000, which Nichols accepted. The agreement called for a $25,000 cash down payment and a five-year installment note for $175,000. The agreement also stated Blickensdorf would pay Minnick’s $22,500 commission.
After Blickensdorf took over the club, he had financial problems. Without Nichols’ knowledge, Minnick advanced money to Blickensdorf. He had also given Blickensdorf money for the cash down payment on the club. After Blickensdorf paid off the club in full to Nichols, he transferred the shares of the club to Richards Properties Inc., which was partly owned by Minnick.
After Minnick filed a lawsuit against Nichols for failing to convey the parking lot next to the club, which she still owned, Nichols discovered Minnick had given money to Blickensdorf for the down payment and to help keep the club afloat.
Nichols sued Minnick for his commission, claiming he used Blickensdorf as a straw man to purchase the club and he breached his fiduciary duty to her by failing to disclose those loans. The trial court ruled Minnick breached his fiduciary duty, but disgorgement of his commission wasn’t an appropriate remedy because Nichols didn’t prove she suffered monetary damages.
The trial court also found the breach was not serious because Nichols had reason to know of a relationship between the two men based on the purchase agreement in which Blickensdorf stated he would pay Minnick’s commission. The Indiana Court of Appeals affirmed the trial court decision. The Supreme Court granted transfer because the trial court applied the wrong legal standard to the case.
Minnick argued Nichols shouldn’t receive tort damages or restitution, which are remedies for the breach of duty to disclose material information, because Nichols didn’t suffer a loss from the sale because she received the total purchase price. The Supreme Court agreed with the trial court, which found Nichols didn’t prove she suffered any monetary loss as a result of Minnick’s actions. However, the trial court erred when it concluded disgorgement wasn’t required, wrote Justice Theodore Boehm.
Disgorgement may be the only available remedy for someone because harm to the principal is difficult to prove, and it removes the temptation for an agent to act in a way that breaches the fiduciary duty in hope no harm will happen to the principal or the principal will be unable to prove the harm in litigation. The disgorgement rule facilitates the principal’s trust on which a fiduciary relationship is grounded, the justice wrote.
The trial court’s conclusion was inconsistent in that although Minnick breached his fiduciary duty to Nichols, the breach was not a serious violation that requires him to repay his commission. Disgorgement is required, although it may be of little consequence, Justice Boehm wrote. Minnick received a $22,500 note from Blickensdorf instead of a monetary payment. Equity requires that Minnick transfer to Nichols what he wrongfully obtained, which in this case is the note and any payments he received toward that debt, plus interest at the statutory rate 8 percent per annum.
“If Blickensdorf’s note proves to be uncollectible, that merely reflects the fact that Minnick did not benefit from his breach, and restitution is not meaningful,” he wrote.