The Franchise Memorandum

National real estate firm RE/MAX may be held vicariously liable for the fraudulent conduct of its former broker, a Delaware court recently held, finding that the plaintiffs adequately pled that the former broker acted as an apparent agent of RE/MAX. Patel v. Sunvest Realty Corp., 2018 WL 4961392 (Del. Super. Ct. Oct. 15, 2018). The dispute arose when a real estate broker formerly employed by a franchised branch of RE/MAX allegedly embezzled funds from a group of promissory note holders. After the former broker declared bankruptcy, the investors brought claims of vicarious liability, common law negligence, negligent hiring, retention, and supervision, breach of contract, and fraud against RE/MAX and the franchisee. RE/MAX moved to dismiss the claims, arguing that the plaintiffs failed to allege the existence of any legallycognizable relationship between the former broker and RE/MAX.

The court ultimately found that the plaintiffs failed to allege the broker was RE/MAX’s employee or actual agent, but allowed the vicarious liability claims to proceed under a theory of apparent authority. Under Delaware law, apparent agency in a franchise relationship exists where a third party reasonably relies on the franchisor’s name and the quality it represents. Here, the plaintiffs sufficiently alleged that RE/MAX had apparent authority over the franchisee because its logo and trademark were featured prominently in the franchisee’s office and website. The plaintiffs also alleged that they reached out to RE/MAX franchises because they thought the franchises would be backed by RE/MAX and “its philosophy of caring for customers.” Accordingly, the court found it was reasonable to infer that the franchisee was RE/MAX’s apparent agent. The plaintiffs were allowed to proceed with their claims that RE/MAX was vicariously liable for the former broker’s fraudulent conduct and breach of contract, although the court indicated that these claims were not likely to succeed on the merits.