Opinion
No. 31837
Decided April 5, 1950.
Real estate brokers — Bond must be conditioned upon faithful observance of Real Estate Brokers Act — Sections 6373-25 to 6373-51, inclusive, General Code — Bond must indemnify person damaged by broker's conduct of business, when — Earnest money received by broker in trust capacity, when — Surety liable for broker's failure to return earnest money, when.
1. The bond required of a real estate broker licensed under the provisions of the Real Estate Brokers Act (Sections 6373-25 to 6373-51, inclusive, General Code) is conditioned upon the faithful observance of all the provisions of that act, and indemnifies any person who is damaged by a failure of the broker to conduct his business in accordance with the requirements of such act.
2. Money received from a prospective purchaser by a real estate broker, as a deposit on a contract of sale, on the express condition that if the transaction is not completed the deposit will be returned, is received by the broker in a fiduciary capacity, and his failure to return such money to the prospective purchaser, upon direction by the broker's principal (the seller) and upon the abandonment or termination of the negotiations, constitutes a violation of the essential provisions of the Real Estate Brokers Act (Sections 6373-25 to 6373-51, inclusive, General Code), and the surety on the bond executed by the broker in accordance therewith is liable to the prospective purchaser for damages caused by such violation.
APPEAL from the Court of Appeals for Hamilton county.
This action originated in the Municipal Court of Cincinnati, where the plaintiff sought to recover $1,000, the amount of a deposit in a real estate transaction.
The plaintiff is a religious corporation organized under the laws of this state, with its principal place of business in Cincinnati. The defendants are the Wahn-Evans Company, which is a corporation and a duly authorized real estate broker with its principal place of business also in Cincinnati, and General Casualty Company of America, a corporation duly organized and engaged in the bonding and surety business in the state of Washington and authorized to do business in the state of Ohio, with a branch office in Cincinnati.
The parties will be referred to hereinafter respectively as plaintiff, broker and surety.
The allegations of the amended bill of particulars are in substance as follows:
The plaintiff sought the aid and advice of the broker in the financing of the purchase of certain property belonging to the First English Lutheran Evangelical Church. The broker, through its president and principal agent acting within the scope of his authority, on behalf of the plaintiff contacted the owner of the property hereinbefore referred to and thereafter represented to the plaintiff that the broker could procure a purchaser who would pay $20,000 for plaintiff's church property, and that the broker could arrange the financing of the remaining $30,000, making a total of $50,000 to complete the purchase price of the property of the First English Lutheran Evangelical Church.
The plaintiff accordingly made an offer to purchase such church property for $50,000 and deposited with the broker earnest money in a sum of $1,000 to bind plaintiff's offer. The owner of that property accepted plaintiff's offer, and on or about November 4, 1947, a written agreement was entered into between the authorized representatives of the prospective purchaser and seller. The broker was unable to secure the necessary financing of the transaction, as it had previously represented it was able to do, and consequently the seller and purchaser were unable to consummate such purchase and sale.
On January 19, 1948, the broker represented that if the parties would enter into a new contract the broker would within 90 days procure the necessary financing in the amount of $30,000 for the plaintiff, and further represented that in the event of the broker's failure to do so, at the direction of the seller, plaintiff's deposit of $1,000 would be duly returned.
The broker was unable to procure the promised financing, and on August 2, 1948, the contract between the seller and purchaser was by agreement rescinded. The seller notified the broker of such action and instructed the broker to return to plaintiff the binder money theretofore deposited in the amount of $1,000. The plaintiff made repeated demands for the return of the deposit but the broker failed to account for or remit the same to the plaintiff.
A copy of the contract involved herein is attached to the amended bill of particulars. It is disclosed thereby that an offer was made by plaintiff to pay $50,000 for the property in question, $1,000 of which was to accompany such offer. The following is a provision of the contract:
"I/we hereby deposit one thousand dollars ($1,000) as above provided with Wahn-Evans Company as agent for the seller, to apply on the purchase price which is to be retained by the agent until the terms of this contract have been complied with. Said payment to be refunded if offer is not accepted or if title to said real estate is not as above set forth."
As a part of the instrument containing such offer is the written acceptance by the owner of the property in question together with an agreement to pay the broker for services rendered and authorizing the broker, "when this transaction is completed, to apply the above payment in your hands in connection therewith toward the payment of such commission." Thereunder is the following receipt duly signed by the broker:
"I/we hereby acknowledge receipt of one thousand dollars ($1,000), payment as above provided."
The surety is now, and was at all times previously mentioned, the surety on the broker's real estate broker's bond, which bond was conditioned upon the faithful performance by such broker of all the provisions of Sections 6373-25 to 6373-51, inclusive, General Code. The surety has been informed "of the continued course of misrepresentation, false promises and dishonest dealings of Wahn-Evans Company." The broker breached its bond by failing to account for or to remit the $1,000 deposited by plaintiff.
A general demurrer of the surety to the amended bill of particulars was sustained by the Municipal Court, and judgment of dismissal of the surety was entered.
That judgment was reversed by the Court of Appeals.
The case is in this court pursuant to the allowance of a motion to certify the record.
Messrs. Berry, McClain White, for appellee.
Mr. James G. Headley, for appellant.
The question presented is whether the facts alleged constituted a cause of action against the surety on the bond executed pursuant to the provisions of Section 6373-35, General Code.
That section provides in part:
"Such bond shall be conditioned upon the faithful observance of all the provisions of this act and shall also indemnify any person who may be damaged by a failure on the part of the applicant for a real estate broker's license to conduct his business in accordance with the requirements of this act [Sections 6373-25 to 6373-51, General Code]. Any person claiming to have been damaged by any misrepresentation or fraud on the part of a real estate broker or by reason of the violation of the terms of this act, may maintain an action at law against the broker making such representations or perpetrating such fraud or violating the provisions of this act, and may join as parties defendant the sureties on the bonds herein provided for. Such bonds shall be in the form prescribed by the board of real estate examiners and approved by them."
That the bond involved herein fully conforms to the above statutory provisions is not questioned.
Since misrepresentation or fraud upon the part of the real estate broker or "violation of the terms of this act" constitutes the basis of the indemnity provided, an examination of the various provisions of the act becomes essential.
Section 6373-26, General Code, makes the procurement of a license a prerequisite to acting as a real estate broker.
Section 6373-29, General Code, requires that an application for a license as a real estate broker must be in writing accompanied by the recommendation of two resident freeholders of the county of the applicant's residence certifying that the applicant is honest, truthful and of good reputation, and recommending that he be admitted to the examination provided for in the act.
Under the provisions of Section 6373-30, General Code, an applicant is admitted to such examination only "if the state board of real estate examiners is satisfied that the applicant * * * is honest, truthful and of good reputation."
Section 6373-42, General Code, authorizes the suspension or revocation of any such license or the refusal to renew such license, where the licensee is guilty of, inter alia, any of the following:
(1) Knowingly making any misrepresentation.
(2) Making any false promises with intent to influence, persuade or induce.
(3) A continued course of misrepresentation or the making of false promises through agents or salesmen, or advertising or otherwise.
(4) Acting for more than one party in a transaction without the knowledge or consent of all parties thereto.
(5) Failure within a reasonable time to account for or to remit any moneys coming into his possession which belong to others.
(6) Any other conduct, whether of the same or a different character than thereinabove specified, which constitutes dishonest dealing.
There has heretofore been no case in this court involving the question presented by the record in this case. The decision of this court in the case of S.D. Stanson, Inc., v. McDonald, 147 Ohio St. 191, 70 N.E.2d 359, 169 A.L.R., 760, is relied upon by the surety particularly by reason of certain statements in the opinion. The action in that case was brought by one real estate broker, then unlicensed, against another real estate broker on an agreement for half of the commission resulting from a real estate transaction. It is only necessary to state that the facts disclosed by the record in that case make the decision therein entirely inapplicable here.
The deposit of $1,000 with the broker was made by plaintiff as a part of a transaction wherein the broker undertook to sell the plaintiff's property for $20,000, to procure the property sought by the plaintiff at a named price of $50,000, and to arrange the financing of the $30,000 essential to consummate the transaction. It was agreed that, in the event of the broker's failure in the respects indicated, the broker was to refund the deposit made by the plaintiff.
The deposit, referred to as "binder money," was made by plaintiff only for the purpose of being applied upon the purchase price of the property sought. Possession of such deposit was procured by the broker for that purpose, and that purpose only, and upon the express condition that if essential financing was not procured within the time stipulated the broker, upon direction of the seller, would return the deposit to the plaintiff.
The agreement for the payment of the commission to the broker was made only by the seller of the $50,000 property. The money deposited with the broker was at all times the money of the plaintiff. It could become the money of the seller only if the transaction were completed and only in that event could it ever become a part of the commission due the broker from the seller.
The broker came into possession of the deposit while acting in a fiduciary relationship and only by reason of that relationship which imposed an obligation of good faith and fair dealing. The broker was not authorized, or permitted, to exercise the function of a real estate broker and realize the benefits to be derived therefrom otherwise than by compliance with the law which must be treated as though it were written in his bond.
It must be concluded that the deposit procured from the plaintiff by the broker became a trust fund in the broker's hands and when the purpose for which the plaintiff had been persuaded to entrust the funds to the broker failed, it became the broker's duty, as trustee of that fund, under the very law by virtue of which it had been licensed to act as a broker, to return that sum to the plaintiff. That would have been the broker's duty and obligation even in the absence of an express promise so to do.
The statutory provisions, constituting the Real Estate Brokers Act, including Section 6373-42, General Code, and particularly subdivision (5) of that section, must be considered and construed together as a declaration of the standard of conduct of a real estate broker required and enforced, and for default or failure in that regard resulting in loss or damage the surety on the bond becomes liable.
It follows that the judgment of the Court of Appeals should be, and it is in all respects, affirmed.
Judgment affirmed.
WEYGANDT, C.J., HART, ZIMMERMAN, STEWART, TURNER and TAFT, JJ., concur.