(Updates with comment from California Association of Realtors in second paragraph under No Intent subheadline.)
Aug. 20 (Bloomberg) -- Millionaire Hiroshi Horiike spent two years searching California for a dream home, one grander than any he could find in his native China.
After visiting more than 80 properties in the Los Angeles area with an agent from Coldwell Banker, Horiike paid $12.25 million in cash for a four-bedroom, six-bath Tuscan-style mansion with a swimming pool, spa and guest house on 5.1 acres (2.1 hectares) overlooking the Pacific Ocean.
There was just one catch. After settling in, Horiike found the Malibu home had less living space than he’d been told -- a third less. It had 9,434 square feet (876 square meters) instead of the 15,000 square feet shown in marketing brochures from the seller’s agent, who also worked with Coldwell Banker.
Horiike, who also goes by his native Chinese name Peng Hong Ling after adopting a Japanese name as an adult, claimed he was cheated and sued the agent and the brokerage. He won a state appeals court ruling that sellers’ agents have a fiduciary duty to protect buyers’ interests, not just those of their clients, when there’s only one brokerage involved in a deal.
If left standing, the decision could compel disclosure of confidential client information or force brokerages to drop out of transactions where they represent both buyers and sellers, threatening commissions on tens of thousands of deals.
“This luxurious problem of a mansion that wasn’t big enough has become an industry’s potential nightmare,” said Dana Tsubota, an attorney in Oakland, California, who represents real estate developers and investors and isn’t involved in Horiike’s case. “The decision takes a large step away from what is current practice, and it would surprise me if brokers continue to have ‘dual agency’ deals if the ruling isn’t struck down.”
The issue of dual agency arises when the agents for both a home’s seller and its buyer work for the same brokerage. Florida, Colorado, Kansas and Wyoming are the only states that prohibit dual agency in real estate transactions, while most states -- including California, home to more than 10 percent of U.S. residential sales last year -- require disclosures by agents, according to the National Association of Realtors.
California Governor Jerry Brown last week signed a bill into law that extends dual agency disclosure requirements to commercial real estate deals.
Dual-sided transactions are becoming increasingly common as home brokerage companies such as Coldwell Banker’s parent, Realogy Holdings Corp., and Warren Buffett’s Berkshire Hathaway HomeServices take bigger shares of the market. The practice is especially frequent among agents who deal in multimillion-dollar properties.
Horiike sued Coldwell Banker and Chris Cortazzo, the Malibu mansion’s selling agent, in state court in Los Angeles in 2010, alleging false advertising, unfair business practices and breach of fiduciary duty. He claimed he overpaid as much as $5 million and demanded punitive compensation for misrepresentation of the home’s size.
Horiike, 56, lost a jury trial in 2012. That verdict was overturned in April by the appeals court, which ordered a retrial, saying that the jury received incorrect instructions. Coldwell Banker and Cortazzo then appealed to the California Supreme Court. It agreed last month to hear the request to reverse the appeals court’s decision.
Coldwell Banker’s lawyers argue that agents will be forced to disclose information that buyers and sellers typically keep quiet, such as a homeowner needing a quick sale because of financial problems.
“The buyer’s or seller’s only options are to 1) agree to this nightmare; 2) forgo the sale or purchase they wanted to consummate; or 3) fire their sales person,” Coldwell Banker’s attorneys said in a court filing.
In California, licensed real estate agents must work for brokers, who have more credentials and are responsible for the agents’ actions. Coldwell Banker, the broker, and Cortazzo, its No. 1 selling agent in Malibu, are scheduled to file their opening arguments with the California Supreme Court by Sept. 15. The court may rule on the matter next year.
“I want justice,” Horiike, said in an interview at the Malibu mansion last month. “I don’t want anybody to be cheated by a real estate agent.”
Cortazzo declined to comment and referred questions to his attorney, Neil Gunny, who also declined to comment because the case is still pending. Coldwell Banker Residential Brokerage Co., the California affiliate named in the complaint, doesn’t comment on pending litigation, said Holly Taylor, a spokeswoman for the brokerage with Rogers & Cowan.
Cortazzo said in court filings and testimony that a Malibu ordinance allows for more of a property’s space to be counted in its square footage, and that he explained to potential buyers, including Horiike, why he used the larger size in his brochure.
Malibu is a Los Angeles getaway for Hollywood celebrities, business barons and international investors. Pacific Coast Highway slices between a string of waterfront enclaves with names such as Paradise Cove and hills that are home to villas with ocean vistas. Property owners on Malibu’s Carbon Beach, nicknamed Billionaires’ Beach, include Oracle Corp. founder Larry Ellison and entertainment mogul David Geffen.
Cortazzo, a native of Malibu and real estate agent since 1994, “has attracted some of the biggest names in entertainment and business,” according to his website. He closed deals totaling $325.5 million last year, the seventh-highest volume of any U.S. agent, according to Real Trends Inc., a Castle Rock, Colorado-based consulting service.
“The secret is to work hard and have integrity,” he said on his website. “I am proof that you can reach the top without sacrificing your values.”
When he was a boy, Horiike’s four-member family lived in a 200-square-foot attic in Shanghai, where his father worked as a book editor and film critic. The family couldn’t afford an electric fan to get through the summer heat, he said. After earning a degree in Japanese at Shanghai University’s School of Foreign Languages, he moved to Japan, where he married, changed his name and became a Japanese passport holder.
He founded Large Horse International Group, a holding company headquartered in Hong Kong with about 2,000 employees that invests in energy deals and manufactures electric appliances and parts sold to customers including Whirlpool Corp. He retired in 2002, at age 44, with plans to buy a California mansion larger than anything he could find in Asia.
“In Hong Kong or Japan, it’s impossible, because the land is very small,” he said. “Only here in America, I can find my dream house.”
The case has implications for the growing number of cash- bearing foreigners, who may make quick deals dependent upon agent advice. International buyers spent $92 billion on American houses in the 12 months through March, led by a record $22 billion from Greater China, including Taiwan and Hong Kong, where Horiike resides much of the year. About 60 percent of the foreign buyers paid cash, according to a July report by the National Association of Realtors.
“At the end of the day, I think they trust America more than China,” Sam Van Horebeek, director of East-West Property Advisors, a Hong Kong-based firm that advises Chinese investors on U.S. real estate deals, said in a telephone interview.
Horiike started his Los Angeles search in 2005, guided by Coldwell Banker agent Chizuko Namba, who spent more than two years showing him dozens of homes in Beverly Hills and Bel Air, communities Horiike said he liked for their luxurious reputations. Nothing met his criteria.
“Everything big was old,” Horiike said. “I wanted new, because I didn’t want to spend time to remodel.”
In November 2007, Namba took Horiike to Malibu to see the house shown by Cortazzo, who told Horiike it was built in 2002, before Malibu imposed a size limit on new homes, according to court filings.
“I said that this property cannot be duplicated,” Cortazzo testified in September 2012, according to a trial transcript.
“My heart was moved by his words,” Horiike said in last month’s interview.
After viewing the house in the afternoon, Horiike returned in the evening to see the property, which climbs a hill overlooking Pacific Coast Highway and the ocean. He negotiated the price after taking a flight to Hong Kong, according to a court filing.
A full appraisal wasn’t necessary because Horiike was paying with cash and didn’t need to qualify for a mortgage. While the house was in escrow, Horiike ordered inspections of the utilities and foundation. He didn’t ask to measure the square footage or obtain a copy of the architect’s blueprints, according to court filings. Los Angeles County property records list the size of the living area as 9,434 square feet.
Horiike learned of the size discrepancy only in 2009, when he sought a city permit to remodel a sun room. Cortazzo said that the larger size he used is valid when the lower level, garage and patio areas are included, according to court filings. Cortazzo said county records of the house size didn’t reflect Malibu’s “post-2005 formula for allowable square footage,” which would add the basement and other spaces to the total area, and that he relied on the home’s architect for the 15,000- square-foot figure.
He also said that he was never asked nor agreed to represent Horiike. The two met only the day Horiike visited the Malibu house, and his limited English made it hard for them to talk directly, Cortazzo said in court filings. A trial court jury, acting on the judge’s instructions, found that Cortazzo as the listing salesperson had no fiduciary duty to the buyer.
Namba, Horiike’s agent, declined to comment on the case. She wasn’t named in the complaint because she didn’t misrepresent the size of the house and “to sue Coldwell Banker is to sue her,” Horiike said in an e-mail.
Horiike appealed and a state appeals court panel in Los Angeles last year ordered a new trial. It cited closing documents required under state law establishing that Coldwell Banker, as broker for both the buyer’s and seller’s agents, had “a fiduciary duty of utmost care, integrity, honesty and loyalty” that extended to Cortazzo as well. Coldwell Banker appealed that ruling before a second trial could be held.
The appeals court also said that Cortazzo told shoppers who had looked at the home earlier that the architect put the living space at 15,000 square feet and they should hire a specialist to verify that. Cortazzo’s lawyers said in court filings that he removed the square footage from the official listing and put it at zero so he could personally explain to a potential buyer his rationale for using 15,000 square feet in the sales brochure -- which he said he did with Horiike.
A judge or jury “could conclude that Cortazzo was aware of material information that he failed to provide Horiike, even though he did not have a fraudulent intent,” the appeals court said. No court has found Cortazzo or Coldwell Banker liable, with the appeals court and California Supreme Court examining only the law, not the actions of the agent or brokerage.
“If the appellate court decision is upheld, the fact that there was no misrepresentation is still the same, but it would change the landscape of consumers choosing their own professional, as Mr. Horiike did, instead of having fiduciary relationships foisted on parties with persons they have not selected and may not ever even meet,” Lotus Lou, a California Association of Realtors spokeswoman, said in an e-mail today.
Horiike, who’s divorced and wears his red-tinted hair down to his collar, spends about 100 days a year at the Malibu home, which he shares with three of his 10 dogs. He rejected offers to resolve his complaint against Coldwell Banker and Cortazzo through arbitration. He said he wants the outcome to be public.
“This case isn’t just for me,” Horiike said. “It’s about justice for people.”
The case is Horiike v. Coldwell Banker Residential Brokerage Co., S218734, California Supreme Court (San Francisco).