Resop v. Tarnowski

Supreme Court of Minnesota · Corporations

CorporationsAgencyFiduciary dutySecret commissionsElection of remediesDamagesagent-principalduty of loyalty

Facts

Plaintiff hired defendant as his agent to investigate and negotiate the purchase of a coin-operated music machine route, and bought the business in reliance on defendant's representations about the number of locations, age of machines, and monthly gross income. Defendant had only superficially investigated the route, passed along false statements from the sellers as his own, and secretly received a $2,000 commission from the sellers for completing the sale. After discovering the falsity of the representations, plaintiff rescinded the sale, sued the sellers, recovered money from them, and then brought this action against defendant to recover the secret commission and additional losses caused by defendant's misconduct. Those additional losses included operating losses before rescission, lost time, investigation and rescission expenses, litigation expenses, and attorneys' fees incurred in suing the sellers.

Issue

After a principal rescinds a fraud-induced transaction against third-party sellers and recovers money from them, may the principal still sue his agent for a secret commission and for damages caused by the agent's breach of loyalty and misrepresentations? Also, are attorneys' fees and related litigation expenses from the suit against the sellers recoverable from the agent as damages?

Rule

An agent must account to the principal for all profits made in the course of the agency, including secret commissions, regardless of whether the principal suffered actual damage or even profited from the transaction. In addition, if the agent violates the duty of loyalty, the principal may recover both the benefit the agent received and all damages legally caused by the breach, including litigation expenses and attorneys' fees incurred in necessary litigation with third parties caused by the agent's tortious conduct. A prior rescission action and recovery against the third party do not bar such claims against the agent when the causes of action and recoverable elements of damage are not the same.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Chicago, Lena Ortiz hired Daniel Voss to evaluate and negotiate the purchase of a neighborhood laundry business. Daniel secretly accepted $8,000 from the seller for steering Lena into the deal, but the business unexpectedly became highly profitable for Lena during the first year.

If Lena later learns about the hidden payment and sues Daniel, which is the most accurate result?

Explanation. The majority states that all profits made by an agent in the course of the agency belong to the principal, including profits obtained through disloyalty. It does not matter that the principal suffered no damage or even profited from the deal. The law aims at fidelity by the agent, so the secret payment must be disgorged.