When Courts Look at NAR’s Code of Ethics

BY NAN ROYTBERG, NAR LEGAL AFFAIRS

“NAR’S Code of Ethics clearly makes REALTORS® respected leaders in the real estate industry in the eyes of courts.”

Scrolling through the NAR archives, I discovered a previously published article related to the Code of Ethics and court interpretations. This article offers insight into how the courts view the REALTOR® Code of Ethics when deciding court cases and the rationale behind those decisions. I knew it was a great find to share with our members! –  Jan Steward, AAR Risk Management Specialist

NAR’s Code of Ethics may be to REALTORS® what the law is to ordinary citizens–there are rules, means of enforcement, hearings for the accused, and punishment for the guilty–but can it hold up in real courts of law?

Absolutely.

In case after case, courts afford the REALTOR® Code of Ethics just as much respect as case law, statutes and license law in determining what standard of care a real estate professional owes the public. And courts often hold all licensees to the high standards of the Code, whether or not they’re members of a REALTOR® association.

What’s more, courts consistently support the REALTOR® organization’s enforcement of its Code of Ethics.

A good illustration of how courts look to the Code of Ethics for guidance is found in Norman I. Krug Real Estate v. Praszker, 1994. In that case, a listing broker named Praszker failed to disclose to a potential buyer that Krug had an unrecorded security interest in the property. Praszker also failed to discuss the pending sale of the property with Krug so that he could record his security interest. When Krug learned of the sale, he sued Praszker for negligence. The California Superior Court ordered Praszker to pay Krug $27,000. When Praszker appealed, the Court of Appeals began its analysis by noting that [T]he imposition of a duty on a REALTOR® to disclose a known unrecorded lien interest is supported by standards already existing in the industry. The Code of Ethics of NATIONAL ASSOCIATION OF REALTORS® provides that a REALTOR® has an obligation to treat fairly all persons to the transaction [Article 1] and to assure that all financial obligations and commitments must be reduced to writing [Article 9].

The court also took judicial notice of the Code of Ethics “as bearing on the standard of care for professionals in the industry.” It also quoted from the Preamble to the Code of Ethics:

The term REALTOR® has come to connote competency, fairness, and high integrity resulting from adherence to a lofty ideal of moral conduct in business relations. No inducement of profit and no instruction from clients ever can justify departure from this ideal.

The court then affirmed that Praszker had breached his duty to both the buyer and Krug and upheld the lower court’s ruling.

The Code’s Broad Reach
A case that demonstrates how courts don’t always distinguish between REALTORS® and nonmember defendants in relying on the Code as the standard for the real estate industry is Menzel v. Morse, 1985. In that case, the buyers, Mr. and Mrs. Menzel, purchased a new-construction home on the basis of various representations and assurances of Morse, a salesperson with Dave Jones Realty, the listing broker for the property. The Menzels mistakenly believed Morse was representing them and their best interest. When it turned out that the property had extensive defects, the Menzels sued Morse and Dave Jones Realty for breaching their fiduciary and contractual duties and for negligence.

The trial court dismissed the Menzels’ claims, reasoning that the defendants had no duty toward them. On appeal, however, the Iowa Supreme Court cited numerous cases that had found that the REALTORS® Code constitutes the established standards of conduct in the industry. In fact, the court noted that even though there was no indication that Morse was a member of a REALTOR® board, he had admitted at trial that the REALTORS® Code was “widely recognized and uniformly accepted by real estate salespersons and those in the real estate world in general.” Morse had also admitted that he was aware of the relevant provisions of the Code, including [Article 2], which states that REALTORS® have an affirmative obligation to discover adverse factors that a reasonably competent and diligent investigation would disclose.

The court then reversed the trial court’s decision and remanded the case because the trial court had erred by “rejecting the standards of skill, knowledge, and conduct conceded by defendants to be applicable.”

On a similar issue is the case, Baker v. Leight, 1962, in which a homebuyer brought action for fraud, rescission of contract and unjust enrichment against the seller and the seller’s broker, who was not a member of a REALTOR® association. In reversing the decision of the Arizona Superior Court in favor of the seller and his broker, the Arizona Supreme Court stated:

“It is immaterial as to whether the broker is a member of the National Association if it is established that this Association Code of Ethics is applicable to those in the real estate profession in this state.” The court further noted that NAR’s Code of Ethics “is regarded as the standard of conduct by real estate men throughout the United States and shall be regarded as such in the State of Arizona.”

Courts Back Code Enforcement
Courts also recognize the societal value of our Code of Ethics through their consistent support of our enforcement of the Code against REALTORS® who don’t live up to its high standards. Courts typically say they won’t interfere with our enforcement of the Code so long as we follow our own disciplinary rules and so long as those rules are consistent with fundamental due process, whether it be fines, suspensions or other disciplinary actions. One of the landmark cases on this point was Kendler v. Rutledge, 1979, which stated that judicial review is “limited to ascertaining whether the [association’s] power was exercised in conformity with the association’s internal law and the member’s fundamental fair hearing rights.”

In a similar case, Stewart v. Colorado Association of REALTORS®, the District Court of Colorado said that the court shouldn’t interfere with the internal operations and affairs of voluntary associations. The court noted that Colorado recognizes that membership in a voluntary association is contractual and that members agree to submit to the rules and regulations of the organization and assume the obligations of membership. The only exception to this rule would be when an enforcement procedure was “clearly arbitrary and [an] unreasonable invasion of a member’s rights,” the court stated.

Not Licensed for Law 
In an Iowa court case, two real estate agents were found liable for $536,250 for failing to advise sellers to seek legal advice. In Crutchley v. First Trust and Savings Bank, 1990, the installment contract for the sale of a property contained a nonrecourse clause. The sellers didn’t fully understand the clause, which limited their rights upon default to whatever payments had been made by the buyers prior to the default and regaining the property itself.

Subsequently, the value of real estate in that area sharply declined, and upon default by the buyers, the sellers were forced into bankruptcy. The sellers had to sell the property at a significant loss and then sought to recover money damages from the agents. The sellers contended that the agents failed to observe [Article 13] of NAR’s Code of Ethics by not recommending that they seek legal counsel regarding the nonrecourse clause.

The trial court held that the agents were at fault under breach of contract and negligence claims. In affirming the lower court’s decision, the Iowa Supreme Court relied on previous case law establishing that the violation of NAR’s Code of Ethics is sufficient to determine negligence.

NAR’s Code of Ethics clearly makes REALTORS® respected leaders in the real estate industry in the eyes of courts. And as the Professional Standards Committee comes closer to implementing new procedures for Code education and enforcement, it’s important to stress that NAR has consistent and strong court backing for the Code.

REALTORS® need to understand the importance of the Code of Ethics and take it as seriously as the courts do. After all, we set the standards for the industry.

Reprinted from REALTOR® AE Magazine September 1999 with permission of the NATIONAL ASSOCIATION OF REALTORS®. Copyright 2011. All rights reserved.