Hahn v. Stone House Properties LLC: The Duty of Loyalty and Fiduciary Relationships

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Loyalty is perhaps the quintessential characteristic of a fiduciary relationship. Indeed, someone who occupies the role of a fiduciary is expected to be loyal above all else. For that reason, the phrase “duty of loyalty” is often bandied about in relation to fiduciary-duty claims. In the abstract, merely stating that a fiduciary has a “duty of loyalty” is not particularly illuminating. Just what does it mean to act with sufficient loyalty in the role of someone’s fiduciary? Put differently, when does someone’s disloyalty amount to the breach of a legally-binding fiduciary duty? 

In Hahn v. Stone House Properties LLC, 206 A.D.3d 408 (1st Dep’t 2022), the Appellate Division, First Department, helpfully clarified precisely when acting disloyally amounts to the violation of a duty imposed by law.      

The facts of this case are straightforward. The plaintiff, property-owner Richard Hahn, was selling his real property.  He engaged the defendants, Stone House Properties and Nikki Carchedi (the “Brokers”), to represent him in the transaction. The Brokers also represented the buyers of Hahn’s property in the transaction.  For that reason, Hahn signed a standard form—the “New York State Disclosure Form for Buyer and Seller”—where he granted the Brokers “dual agency,” or the authority to represent both buyer and seller simultaneously. Allegedly unbeknownst to Hahn, one of the Brokers, Carchedi, had a personal stake in the transaction:  Carchedi purportedly knew that the buyers of Hahn’s property planned to subdivide it after the purchase. What is more, the buyers allegedly agreed to retain Carchedi in connection with the sale of the subdivided parcels. The buyers ultimately did retain Carchedi, and listed the subdivided parcels for three times the price that Hahn received for the property. 

Hahn sued the Brokers, but the lower court dismissed the case in light of the disclosure form that Hahn signed. Hahn acknowledged that he signed the form, but he argued to the court that Carchedi never explained the consequences of the Brokers’ dual agency in representing both Hahn and the buyers of his property simultaneously. The lower court rejected this argument, however, and held that Hahn was bound by the form and its express authorization of a dual agency.

Fortunately for Hahn, the appellate court reversed this decision and held that he had stated a valid breach of fiduciary duty claim against the Brokers. The appellate court’s analysis centered on the Brokers’ duties of loyalty to Hahn. The disclosure form Hahn signed expressly stated that the Brokers could not give either Hahn or the buyers their “undivided loyalty,” since they were representing both sides of the transaction.  But the court cautioned that that disclaimer “does not relieve defendants from all fiduciary duty.” Accordingly, the court held, Hahn sufficiently pled a claim alleging that the Brokers breached their fiduciary duties to Hahn—even in the face of the disclosure form authorizing their dual agency—by failing to disclose Carchedi’s personal stake in the transaction to Hahn.

This is a striking decision and demonstrates how serious courts are about holding fiduciaries to an exacting standard of behavior. Even in the face of an express, written disclaimer of “undivided loyalty,” the real-estate brokers in this case still faced liability for failing to be completely forthright and transparent with their client about their personal stake in the transaction. In short, the fiduciary’s “duty of loyalty” is not just rhetorical fluff. Disloyal conduct carries real consequences for fiduciaries and can expose them to substantial legal liability.