Clarkson-11eCase Problem with Sample Answer

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					Clarkson-11e: Case Problem with Sample Answer
Chapter 31: Agency Formation and Duties

31–7. Case Problem with Sample Answer

In July 2001, John Warren viewed a condominium in Woodland Hills, California, as a

potential buyer. Hildegard Merrill was the agent for the seller. Because Warren's credit

rating was poor, Merrill told him he needed a co-borrower to obtain a mortgage at a

reasonable rate. Merrill said that her daughter Charmaine would “go on title” until the

loan and sale were complete if Warren would pay her $10,000. Merrill also offered to

defer her commission on the sale as a loan to Warren so that he could make a 20

percent down payment on the property. He agreed to both plans. Merrill applied for and

secured the mortgage in Charmaine’s name alone by misrepresenting her daughter’s

address, business, and income. To close the sale, Merrill had Warren remove his name

from the title to the property. In October, Warren moved into the condominium, repaid

Merrill the amount of her deferred commission, and began paying the mortgage. Within

a few months, Merrill had Warren evicted. Warren filed a suit in a California state court

against Merrill and Charmaine. Who among these parties was in an agency

relationship? What is the basic duty that an agent owes a principal? Was the duty

breached here? Explain. [Warren v. Merrill, 143 Cal.App.4th 96, 49 Cal.Rptr.3d 122 (2

Dist. 2006)]

Sample Answer:

Merrill and Warren were in an agency relationship in this case, with Merrill acting as

Warren’s agent. That relationship began when Merrill undertook to represent Warren in
the purchase of the condominium. Under the fiduciary duty that an agent owes a

principal, and that thus Merrill owed Warren, she was required to place his interests

above her own in the real estate transaction. Also, an agent is charged with a duty to

disclose all material facts that might affect a principal's decision. Merrill breached her

duties to Warren, and committed fraud, by falsely promising that she would put his

name on the title to the condominium if he went along with her plan to structure the

transaction in a certain way. Furthermore, she misappropriated his funds by having him

evicted soon after the transaction was completed but not before he had made several

mortgage payments. This conduct was more than sufficient to show violations of the

agent’s duty of loyalty. A court should at least order that the title in the condominium be

transferred to Warren.

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