Dealing with broker's representation.

Houlihan/Lawrence, Inc. was the Westchester real estate broker who was instrumental in the sale of an "estate" in Westchester to Michael Duval. Although Houlihan was the seller's broker, Duval the purchaser, relied upon the broker's representation when he purchased the property that the residence was designed by the internationally renown architect Stanford White.

About two years after Duval purchased the property, he sought to sell it and retained the same Houlihan as his broker to bring about the sale. Houlihan produced a purchaser but Duval ran into difficulty when the prospective purchaser demanded proof that Stanford White did in fact design the building. Duval, being unable to provide the required proof as to the architect, was required to reduce the purchase price in order for the sale to conclude.

Duval then refused to pay Houlihan its brokerage commission and Houlihan commenced a lawsuit to recover the commissions due. Duval counterclaimed, alleging that because he had to reduce the sale price of the property due to Houlihan's negligent misrepresentation of Stanford White's involvement with the building, he was thus damaged by Houlihan.

Houlihan moved to dismiss Duval's counterclaim on the grounds that (1) Duval had no claim for negligent misrepresentation because Houlihan (as the previous seller's broker) had no privity with Duval (as purchaser) when Houlihan made the representations regarding Stanford White, and (2) Duval failed to establish that the representations made by Houlihan regarding Stanford White were in fact not true.

Justice J. Colabella of the Supreme Court, Westchester County held that Duval's counterclaim must be dismissed because there was a lack of privity between Houlihan and Duval regarding the Stanford White representations, and for the additional reason that Duval failed to show that there was any misrepresentation at all by Houlihan.

Duval appealed to the Appellate Division, Second Department. The Appellate Division, in a unanimous ruling held that the reasoning of Justice Colabella was incorrect as to the issue of privity. The appellate court stated that the evidence submitted by Duval demonstrated that Houlihan allegedly misrepresented the authenticity of the design of the house to a known party (Duval) with whom it had personal, direct dealings and whose reliance thereupon could be reasonably anticipated. This is not a case where the representations were made to a faceless or unknown class of persons, but rather, to Duval, a known individual.

The court went on to state that with respect to an alleged negligent misrepresentation, privity may exist where the party providing the information is aware that the recipient of the information will rely upon the information for a particular purpose and in furtherance of that purpose. In other words, privity exists when one makes representations to the recipient (who could be an individual or a member of a very small group of persons) whose reliance upon the information could be reasonably anticipated.

The Appellate Division did agree with Justice Colabella in finding that Duval failed to demonstrate that Houlihan's representations were false. Indeed Duval's complaint is that when he tried to resell the property, he could not prove Stanford White's involvement with the residence to the satisfaction of his buyer because Duval could not produce the necessary authenticating documents. However, the record suggests that Duval made no attempts to otherwise verify Stanford White's status as the architect beyond simply asking Houlihan to produce documents which Duval never proved Houlihan even possessed.

Moreover, Duval refused Houlihan's offer to put Duval in touch with the prior owners who might have been able to produce the requested proof. The record does not show that Stanford White did not design the house; only that Duval failed to secure from Houlihan the proof satisfactory to Duval's purchasers that Stanford White was the architect. The Appellate Division agreed with Justice Colabella that Duval's counterclaim should be dismissed.

Brokers should take heed that they may be held liable for untrue representation which they make to parties to a transaction, even if those parties are not their clients.

(HoulihanILawrence Inc. v. Duval 644 N. Y S. 2d 553).