A dispute over the sale of a $12.25 million mansion that allegedly turned out to be smaller than advertised could end up greatly expanding the definition of what constitutes “dual agency” in California, and make brokerages more skittish about having two of their agents represent both the buyer and seller in the same deal.

If the California Supreme Court upholds an appeals court decision that a listing agent owed a “fiduciary duty” to a buyer represented by another agent at the same brokerage, it could upend the way agency representation has worked in the state for more than two decades, Bloomberg News reports.

This state’s high court is being asked to decide whether two agents working for the same brokerage — one representing the seller, and the other a buyer — each owe a “fiduciary duty” to both the buyer and the seller, with the duty to provide undivided loyalty, confidentiality and counseling to both.

Such a determination would be a “nightmare” for the real estate industry and “a large step away from” current practice, Oakland-based attorney Dana Tsubota told Bloomberg News.

Millionaire Hiroshi Horiike talks with Bloomberg News reporter John Gittelsohn about his dispute with Coldwell Banker Residential Brokerage Co.

In the dispute that brought the issue to the court’s attention, Coldwell Banker Residential Brokerage Co. agent Chizuko Namba spent more than two years showing millionaire Hiroshi Horiike homes before Horiike finally settled on a property in Malibu represented by another Coldwell Banker salesman, Chris Cortazzo.

The Malibu property was originally advertised in the MLS as offering “approximately 15,000 square feet of living area.” Although Cortazzo allegedly deleted that figure from the MLS after a couple who made an offer on the property asked him to verify it, he provided Horiike with a sales brochure that made the same claim.

When Horiike sued Cortazzo and Coldwell Banker, claiming that the home’s actual square footage was closer to 12,000 square feet, a jury found that Cortazzo had indeed made a “false representation of material fact” to Horiike. But the jury found Cortazzo not liable for “negligent misrepresentation” because he had reasonable grounds for believing that the representation was true when he made it.

But in an opinion published in April, an appeals court ruled that Cortazzo, even though he represented the seller, also had a fiduciary duty to Horiike, the buyer. Because Horiike was represented by a Coldwell Banker agent, Coldwell Banker “owed a fiduciary duty to Horiike, and therefore, Cortazzo owed a fiduciary duty to Horiike,” the appeals court ruled.

If Cortazzo did, in fact, owe a fiduciary duty to Horiike, that would mean he would not be off the hook just because he mistakenly believed the home was 15,000 square feet.

A fiduciary “has a duty to learn the material facts that may affect the principal’s decision” and is “expected to perform the necessary research and investigation in order to know those important matters that will affect the principal’s decision,” the appeals court said, citing a previous ruling.

Cortazzo, the appeals court said, “knew the square footage of the property had been measured and reflected differently in different documents,” but failed to “explain to Horiike that contradictory square footage measurements existed.”

A judge or jury “could conclude that although Cortazzo did not intentionally conceal the information, Cortazzo breached his fiduciary duty by failing to communicate all of the material information he knew about the square footage.”

Attorneys for Cortazzo and Coldwell Banker are expected to file opening arguments with the Supreme Court by Sept. 15, which may rule on the case next year, Bloomberg News reports.

If the appeals court’s decision stands, brokerages may decide that in some situations they must disclose confidential client information, or avoid getting involved in sales where they represent both the buyer and seller, “threatening commissions on tens of thousands of deals,” Bloomberg reports.

The California Association of Realtors — which claims that the lobbying it has done to preserve dual agency in the state “saves” Realtors thousands of dollars each year — has urged the Supreme Court to overturn the decision, calling the consequences of “court-created” dual agency “unreasonable and absurd.”

California was the first state in the nation to codify agency relationships in real estate, adopting industry-backed legislation intended to protect listing brokers from claims that they owed a fiduciary duty to buyers.

In 1988, the California Association of Realtors endorsed legislation requiring brokerages to explain agency relationships to consumers, and allowing buyers and sellers to choose how they will be represented.

When the buyer and seller consent to be represented by the same agent, that agent is considered under California law to be acting in a “dual agency” relationship, owing a fiduciary duty to both parties.

But when two agents at the same brokerage are providing services to the buyer and seller, they are usually presumed to be acting in a “single agency” relationship, owing fiduciary duties only to the party they are representing (California also allows agents to provide services to buyers as subagents of the seller, with the appropriate disclosures).

In its decision, the appeals court cited warnings in a textbook, “Miller & Starr California Real Estate,” that a brokerage “becomes a dual agent representing both parties” when one of its agents obtains a listing and represents a seller, and another of its agents represents the buyer of that property.

“Salespersons commonly believe that there is no dual representation if one salesperson ‘represents’ one party to the transaction and another salesperson employed by the same broker ‘represents’ another party to the transaction,” the textbook warns. “The real estate industry has sought to establish salespersons as ‘independent contractors’ for tax purposes, and this concept has enhanced the misunderstanding of salespersons that they can deal independently in the transaction even though they are negotiating with a different salesperson employed by the same broker who is representing the other party to the transaction.”

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