The duty of a listing broker and agent to a buyer has changed in light of the onslaught of short sales.  On October 6, 2010, the California Appellate Court in the case of Holmes v. Summer, 4th Appellate Dist., 3rd Div. 2010, extended the listing agents' duty to a buyer, requiring disclosure of financial obstacles affecting title.  Specifically, if the listing agent or broker is aware that monetary liens and encumbrances exceed the sale price of a residential property, requiring the seller to either undergo a short sale or deposit a substantial amount of cash into the escrow to obtain a release from the lender, there is a duty to disclose this state of affairs to the buyer.

In the case of Holmes, a buyer of a residential property sued the sellers' broker, asserting misrepresentation, failure to disclose, and negligence.  Escrow was cancelled as result of the seller being unable to effectuate a short sale or come up with sufficient cash to obtain the release of a monetary lien.  The Court applied a strict standard of care to the sellers' agent, scrutinizing everything she did.  For example, the Court found fault with the fact that the Multiple Listing Service ("MLS") advertised the sale of property for approximately $750,000, stating only that the "seller was motivated and that the [listing agent] would get a 3 percent commission."  The buyers were never advised that the property was subject to three deeds of trust, with a total debt of $1,141,000, or that the seller's lenders would need to either approve a short sale or the seller would have to deposit $392,000 in cash to escrow to cover the shortfall.  The buyers never did a title search, and in reliance on the purchase agreement, sold their home to fund the purchase of what they thought would be their new residence.  When the deal fell through, the buyers sued the listing agent and broker, not the sellers. 

The buyers did not sue the sellers because they were said to be "judgment proof."  Because the sellers could not afford to keep their home, they could not, in all likelihood, afford to compensate the buyer for his damages.  Under different circumstances, even if a buyer sues the broker, agent and the seller, and they are all found at fault, the legal theory of joint and several liability would apply.  This means that if two or more defendants are found responsible for an indivisible injury, each defendant is liable for the entire award regardless of the individual's degree of fault.  A so-called "deep pocket" defendant may be held liable for an entire damage award even if such a defendant is only fractionally liable.  The broker could end up responsible for all of the buyer's damages, if in fact the seller is "judgment proof."

Licensed real estate brokers and salespersons should consider the following to limit their liability exposure. First, the agent should have an understanding of the client's financial obstacles and advise the client from the start that they may be required to disclose such information to the buyers.  This type of communication should be solidified with a signed written consent to use confidential information. Second, if applicable, the MLS should include notice of a potential need for Short Sale.  Pursuant to Civil Code § 1088, an agent is responsible for the truth of all representations and information listed in the MLS.  Constructive notice is not a viable defense.  Even assuming a title search would reveal the existence of deeds of trusts on the property, the agent cannot rely on a buyer doing such a search.

Many companies today offer flexible spending accounts (FSAs) as part of their health care packages for employees.  On September 3, 2010, the IRS issued new guidelines to help employers interpret the rules put in place by recent health care reform changes, relating to over-the-counter medicines and drugs.  These changes will take effect as of 2011.

The Patient Protection and Affordable Health Care Act, enacted in March, 2010, established a new uniform standard that, effective January 1, 2011, applies to FSAs and health reimbursement arrangements (HRAs).  Under the new standards, the cost of over-the-counter medicines or drugs cannot be reimbursed from the account unless a prescription is obtained.  The IRS clarified that the new standards do not affect insulin, medical devices, and contact lenses, even if purchased without a prescription.  The new standards also do not affect deductibles and co-payments.

The new standards apply only to purchases made on or after January 1, 2011.  Claims for medicines or drugs purchased without a prescription in 2010 can still be reimbursed in 2010, if allowed by the employer's plan.

To verify prescription purchases in 2011, employees must provide the prescription or a copy, and a customer receipt showing the date of the sale and the amount of the charge.  Another important change pertains to the use of FSA Debit Cards or credit cards.  After December 31, 2010, employees will not be able to use the cards to buy over-the-counter medicines or drugs.  According to the IRS, employers must ensure that the card is reprogrammed no later than January 15, 2011, so that the card can no longer be used to purchase over-the-counter medicines or drugs.

If your company has a FSA program, it is imperative that you notify your employees in advance of the upcoming changes, so that they are aware of these modifications going into the new year.  Details on the new rules can be found online on the IRS website, at www.irs.gov, under IRS Notice 2010-59.  The attorneys at Kring & Chung are available to discuss these important issues with you.