The long history of Queiroz v. Harvey (a case tried in Maricopa County in 2005, not related to my co-blogger) mercifully came to a satisfying end a couple of months ago. The Court of Appeals had issued a disturbing opinion in May of 2008, in which it held that since the Buyer had cured a default in a real estate purchase contract before it had received Seller’s written notice of cancellation in writing, per the terms of the contract, the Seller was bound to perform. What the Supreme Court of Arizona decided, however, was that an Agent’s dishonest acts could be imputed to the principal even if it was unaware of those acts; therefore, the principal seeking specific performance of the contract could not benefit from Agent conduct that is inequitable. Thus, under the maximum of “he who seeks equity must do equity,” the Buyer could not compel performance from the Seller.

Specifically, Buyer’s Agent rushed to a branch of the title company that was not the branch where the escrow was to be opened without the earnest money deposit and quickly deposited $1,000 earnest money funds by money orders. Shortly thereafter, the Seller’s cancellation notice was sent to the branch where the escrow was to have been opened. Buyer argued this notice was untimely – the breach (failure to deposit earnest money along with the faxed signature page from the contract) was cured prior to the written cancellation notice (expressly required under the contract) was received – and, therefore, the Seller’s cancellation was superseded by the Buyer’s Agent’s cure.

The Court of Appeals was not persuaded by evidence that the “deposit rush” was precipitated by the Agent’s knowledge that the Seller was going to cancel the contract. Instead, it held that as a matter of law that the Buyer as principal actually must know that the Agent was acting dishonestly in its dealings with the Seller before being barred from prevailing on its specific performance claim.

One moment, please, ruled the Supreme Court. A principal seeking specific performance as its remedy may indeed be bound by its Agent’s inequitable conduct, knowledge of that conduct or its absence thereof notwithstanding. A representation by an agent incident to a contract is attributed to a disclosed principal no differently than if the principal made the representation directly “when the agent had actual or apparent authority to make the contract.” The Supreme Court indicated the Court of Appeals misunderstood the meaning of the Weiner opinion from 1963, which suggested that the principal must himself act willfully – but not in a case like this one, the high court opined:. “As between the principal who has retained an unscrupulous agent and an innocent third party who relies on the agent’s misrepresentation, it is the third party who deserves protection.” (¶ 15 of the Supreme Court opinion)

The Supreme Court seemed most impressed by its conclusion that the Agent was concealing the fact, by its hurried deposit of the earnest money from the Agent’s own funds (anonymously, recall, via money orders), that the Buyer might be unable to make payments of the deferred portion (i.e., Seller carry-back) of the purchase price – a non-disclosure “that goes to the heart of the transaction” and therefore should have been disclosed by the principal-Buyer and the Agent to the Seller. For today, truth and justice will out.

Now, more than ever, who you associate with in the real estate business matters profoundly.

-MNW