Legal Briefs Documenting Your Advice Y
ou are probably constantly being reminded to document your advice, in order to protect
yourself from claims by your clients or others. Some of that counsel might seem abstract. But here is a story that we had to deal with, so this is very real.
The Facts. Two of our agents were co-listing the sale of a farm property. The only structures on the property were an old barn, a manufactured home and a couple of outbuildings; most of the value was in the land. The property was therefore not eligible for conventional financing, and our agents’ initial marketing efforts generated little interest.
But a buyer came along and indicated she would pay cash for the property. She asked our agents to represent her as well as the seller. Our agents were reluctant at first, but eventually agreed. They wrote up the buyer’s offer, in which the buyer indicated that she was no longer willing to pay cash: the buyer now planned to get a loan from a private lender and asked the sellers to carry back the remainder of the financing in a second-position note and trust deed.
Our agents urged the elderly sellers to speak with an attorney about the offer, but the sellers said they couldn’t afford it. So the agents continued to facilitate negotiations, the parties reached agreement on the terms, the sale closed and everything went well for a few months.
Then the buyer lost her job. Eventually she defaulted on both the first and second mortgages. She tried to sell the property but was unsuccessful. She vacated the property and moved out of state. The first lender foreclosed, and the sellers didn’t have enough money to buy the property at the foreclosure sale, so the sellers lost their lien and are left with what is basically an unsecured debt.
The Complaints. The sellers sued the agents and our company, before the foreclosure was even final. Their lawyer made several claims against us:
our agents pressured the sellers to accept the buyer’s offer;
our agents told the sellers that the buyer’s offer was “foolproof;”
our agents didn’t recommend to the sellers that they should talk to an attorney and other experts;
our agents didn’t adequately review the buyer’s finances, and when we learned that the buyer had credit problems and had gone bankrupt, our agents didn’t tell the sellers;
our agents pressured the sellers to stay in the deal after they found out about the buyer’s credit problems;
our agents did not explain to the sellers the risks of having a second-position mortgage;
our agents asked a lender to write a letter to the sellers stating that the buyer was a good credit risk, which was our attempt to keep the sellers from cancelling;
our agents violated the listing agreement and their duties under ORS 696.805, in that they were not honest with or loyal to the sellers, and were only looking after their own and the buyer’s interests;
when the sellers did get a lawyer, our agents didn’t respond to one of his letters; and
our agents’ actions amounted to elder abuse, because they caused the sellers to lose money by failing to perform their duties to them. Under the state’s elder abuse law, we were therefore responsible for triple the usual damages.
The amount claimed was over half a million dollars. The sellers also filed a complaint against our agents with the Real Estate Agency.
Our Response. We hired outside counsel, began meeting with the agents and attending depositions, and answering the complaint that had been filed with the Agency. After just a few weeks, the legal fees were already over $10,000. We were able to refute some of the sellers’ claims, but for other claims it was our word against theirs.
Before I reveal the outcome, let me tell you how unfair this was to the agents. They had done a good job, and I am convinced that they didn’t do any of the things that the sellers accused them of doing. They did what the sellers asked them to do at every step of the way. When the sellers refused to hire an attorney, our agents hired one themselves, and paid for the attorney’s legal fees out of their own pocket. What was our agents’ reward for all this hard work? They were accused of horrible things, spent many hours meeting with lawyers and the Real Estate Agency, had to sift through and produce phone and other records, had to answer questions about their private financial and personal matters, and had to sit and listen while the other side said things about them that I am
convinced were not true. Not to mention having to pay their part of the deductible on the insurance claim.
The Outcome. After dealing with this for ten months, our insurance company became nervous about the large amount of this claim. Since the elderly sellers were sympathetic plaintiffs and there was no clear proof of who was telling the truth about some things, the insurance company wasn’t sure that we would win. We had already paid our entire $50,000 deductible in legal fees, so the insurance company was going to have to pay if the lawsuit was decided against us. After going through so much, our agents didn’t want to settle, but when you buy insurance you give up some of the control over whether you settle. The insurance company paid a lot of money to settle. Nobody felt good about it, but at least it was over. Well, at least the lawsuit was over. The Real Estate Agency took another year to conclude their investigation. Fortunately they took no disciplinary action against our agents.
Lessons Learned. Although our agents did a good job, there are some things they could have done better, things that might have kept us from being sued in the first place:
when the buyer made an offer that required seller financing, they could have recommended that the sellers talk to an accountant about that, and they could have documented that advice with a note to the sellers and the file;
when our agents recommended to the sellers that they get legal advice, they could have followed up with a note reminding the sellers of that advice, and made a copy of that note for the file;
our agents could have recognized that if things go badly in a seller financing situation, their loyalty might be questioned, and they could have declined the dual representation;
our agents could have continued to be in frequent communication with the sellers even after the sellers went to the attorney, and kept copies or a log of that communication in the file;
our agents could have recognized that where elderly people are parties to a transaction, someone may claim that the elders are being taken advantage of, and so they could have been extra cautious in fulfilling their duties; and
our agents could have talked to their principal broker about the transaction, and put a record of those discussions in the file.
I know, it’s easy to criticize with the advantage of hindsight. But this isn’t about criticism: it is about all of us finding a way to benefit from a bad situation by remembering to take the opportunity to give good advice and document that advice before things get messy. Sometimes there is no way to avoid a lawsuit, but if our agents had documented their advice better, we may have been able to get out of the lawsuit, or get out for less money. Taking a little extra time to manage these risks can and does have enormous payoffs. The most important lesson from all of this is: IT DOESN’T MATTER WHAT HAPPENED. IT ONLY MATTERS WHAT YOU CAN PROVE HAPPENED.
If I can help you through a difficult transaction, let me know.
Jeff