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Property Ownership Dispute

Friends and relatives sometimes buy a rental house or commercial property together as partners, either in the name of a LLC or partnership or their individual names. If irreconcilable differences arise amongst the partners, what can they do?

If all partners want to sell the property, the answer is simple. List it for sale. However, when only some of the partners want to sell, the answer is to file a lawsuit for partition. What partition means depends on the nature of the property.

For a single family home, partition would be an outright sale of the property. Why? Because the property cannot be divided into multiple parcels. So, the court would order a sale of the property and a division of the sale proceeds according to each partner’s ownership interest.

On the other hand, if the property has multiple residences or commercial buildings, the court can and will likely order the property divided up and the pieces will be distributed to the owners. For example, I recently had a case where my clients were partners in a partnership owning a 1.5 acre parcel that had two commercial buildings. My clients wanted to keep their investment; the other partners wanted to sell the entire parcel. In that case, the correct resolution is to partition the property into two parcels, with one of the buildings on each parcel. That way, my clients can keep their portion of the real estate investment – without incurring capital gains taxes on a sale – and the other partners can sell their portion of the property. This is fair to everyone and comports with the law of partition.

Complications may arise if a deed of trust encumbers the property. If the encumbrance can be satisfied by the sale of one of the sub-parcels, then the mortgage holder will likely support the partition. If not, the partners may need to refinance the property with an agreement from the lender that the two sub-parcels will secure portions of the loan. The key here is to make a plan that satisfies the lender(s) holding interests in the property.

Another important issue in deciding to file a lawsuit for partition or to oppose one is the cost of attorneys’ fees.  The plaintiff who files the lawsuit for partition is entitled to recover attorneys’ fees against the other party (the defendant) if the plaintiff prevails in the case.  Because cotenants have an “absolute right” to partition under most circumstances, the plaintiff is likely to win an award of attorneys’ fees.  Therefore, when this issue arises, the smartest move for the party opposing partition is to reconsider whether to oppose it.  Otherwise, the defendant will lose the partition action, the property will be sold or divided, and the plaintiff will also be awarded attorneys’ fees.

I’ve been defending or prosecuting cases against insurance agents and brokers for over 15 years, and I find the issue of fiduciary duty in that context very interesting.

Generally, everyone is liable for damages caused by their failure to use reasonable care; i.e., negligence. People in a special relationship of trust and confidence, such as attorneys and trustees, owe a much higher duty of care – a fiduciary duty, which requires the fiduciary to act solely in the best interests of the client, even if doing so is not in the best interest of the fiduciary himself. This gives rise to more specific duties, such as the prohibition against self-dealing, conflicts of interest, and the duty to disclose material facts.

Fiduciary Duty

The fiduciary duty requires fiduciaries to disclose all material knowledge and advise client’s on specific insurance matters even if the broker is not required to do so by the duty of care. Indeed, “the duty of undivided loyalty the fiduciary owes to its beneficiary … [is] far more stringent” than the duty of care. Wolf v. Superior Court (2003) 107 Cal.App.4th 25, 30. “‘Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A [fiduciary] is held to something stricter than the morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive is then the standard of behavior.’ [Citation.]” (Ibid.)

In California, whether an insurance broker owes a fiduciary duty to his clients is unsettled. Under a logical analysis of fiduciary law to the broker-client relationship, the existence of a fiduciary duty seem undeniable. “[A]n agent is a fiduciary” of her principal.” Michelson v. Hamada (1994) 29 Cal.App.4th 1566, 1580. As the Ninth Circuit has explained, “[t]he very meaning of being an agent is assuming fiduciary duties to one’s principal.” Chem. Bank v. Sec. Pac. Nat. Bank, 20 F.3d 375, 377 (9th Cir. 1994).

Equally indisputable, an insurance broker is an agent of its client. Carlton v. St. Paul Mercury Ins. Co., 30 Cal.App.4th 1450, 1457 (1994) (“a broker in securing a policy for a client ‘acts only as agent for the [in]sured.’”). Under Insurance Code §1623, an insurance broker is “a person who, for compensation and on behalf of another person, transacts insurance other than life insurance with, but not on behalf of, an insurer.”

A couple of California cases have specifically found that insurance brokers owe fiduciary duties. In Eddy v. Sharp, 199 Cal.App.3d 858 (3d Dist. 1988), Plaintiff insureds, the owners of a commercial building, sued defendant insurance agent and his agency for negligent misrepresentation and breach of a contract to insure them, after they discovered that the policy the agent had obtained for them did not cover a loss they sustained from water that backed up through sewers and drains. The insureds had requested coverage similar to their previous policy, which contained an exclusion for loss caused by water backing up through sewers or drains, as did the policy obtained by the agent. However, in his proposal and cover letter, the agent had offered the insureds “all risk” coverage subject to specified exclusions, which did not include loss resulting from water backing up through sewers or drains. The trial court granted summary judgment to the broker.

The court of appeal reversed. The Eddy court first pointed out that the broker was in fact an independent insurance agent representing several insurance companies. Eddy, 199 Cal.App.3d at 865. The court then explained, “If an insurance agent is the agent for several companies and selects the company with which to place the insurance or insures with one of them according to directions, the insurance agent is the agent of the insured.” Id. (citations omitted). Therefore, “[w]here the agency relationship exists there is not only a fiduciary duty but an obligation to use due care.” Id.

Similarly, in Westrec Marina Management, Inc. v. Jardine Ins. Brokers Orange County, Inc. (2000) 85 Cal.App.4th 1042, 1049, the court of appeal affirmed jury verdict finding broker liable for breach of fiduciary duty where broker failed to obtain insurance at the best available price.

Yet, the court of appeals in Hydro-Mill Company v. Hayward, et al. (2004) 115 Cal.App.4th 1145, 1157, declined to find that an insurance broker is a fiduciary. “[I]t is unclear whether a fiduciary relationship exists between an insurance broker and an insured. . . . Furthermore, the relationship between an insurance broker and its client is not the kind which would logically give rise to such a duty.” Id. Several federal district courts have relied on Hydro-Mill in reaching the same conclusion.

Why Is It Important Whether an Insurance Broker Owes Fiduciary Duties?

A wronged client will have a slightly better chance of prevailing against the broker under the fiduciary standards. Moreover, arguably, the four-year statute of limitations will apply to a breach of fiduciary duty claim, which may save a client who sat on his rights from losing his claim. Most importantly, however, I believe the nature of an insurance broker’s relationship with his clients fits precisely within the definition of a fiduciary relationship, and I see no reason to deviate from that standard in this particular circumstance.

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