QUEIROZ v. Harvey

SUPREME COURT OF ARIZONA
En Banc

IVO QUEIROZ, an unmarried man, ) Arizona Supreme Court
) No. CV-08-0308-PR
Plaintiff-Counterdefendant/ )
Appellant, )
) Court of Appeals
v. ) Division One
) No. 1 CA-CV 07-0309
DANIEL HARVEY, )
) Maricopa County
Defendant-Counterplaintiff/ ) Superior Court
Appellee. ) No. CV2005-004469
)
)
) O P I N I O N
_________________________________ )

Appeal from the Superior Court in Maricopa County
The Honorable Colin F. Campbell, Judge
The Honorable Bethany G. Hicks, Judge

AFFIRMED
________________________________________________________________

Opinion of the Court of Appeals, Division One
___ Ariz. ___, ___ P.3d ___ (App. 2008)
2008 WL 2058233 (May 15, 2008)

VACATED
________________________________________________________________

GUST ROSENFELD, P.L.C. Phoenix
By Charles W. Wirken
Attorneys for Ivo Queiroz

JENNINGS, STROUSS, & SALMON, P.L.C. Phoenix
By David B. Earl
David Brnilovich
Attorneys for Daniel Harvey

THOMAS, THOMAS & MARKSON, P.C. Phoenix
By Neal B. Thomas
Attorneys for Amici Curiae Arizona Association of Realtors,
West USA Realty, Inc., and John Hall & Associates
________________________________________________________________

1 
R Y A N, Justice

¶1 In this opinion, we address whether a court may

consider a real estate agent’s inequitable conduct in deciding

if the agent’s principal is entitled to specific performance of

a contract for the sale of real estate. We conclude that the

agent’s inequitable acts may be imputed to the principal whether

or not the principal knew of the agent’s misconduct.

I1

¶2 Daniel Harvey listed ten acres of land in Tonopah for

sale. Through his agent, Charles Harrison, Ivo Queiroz offered

to purchase the land, along with an additional ten acres. The

purchase offer called for a $1,000 earnest-money payment and a

closing date of February 15, 2005. The proposed purchase price

was $150,000, with $68,000 due at closing. Harvey was to

finance the balance of $82,000. A counteroffer, faxed the next

day and accepted by Queiroz, retained the closing date and the

earnest-money requirement, but changed escrow agents. Harrison

faxed the contract to the escrow agent on December 10, but sent

no earnest money during the following week.

¶3 Harvey and his agent became concerned about Queiroz’s

1
Because this case was tried to the bench and findings of
fact were entered, we defer to the superior court’s findings of
fact unless clearly erroneous. Valley Med. Specialists v.
Farber, 194 Ariz. 363, 367, ¶ 11, 982 P.2d 1277, 1281 (1999).

2 
failure to deposit the earnest money. Repeated efforts to reach

Harrison were unavailing. Finally, on Friday of that week,

Harvey’s agent told the escrow agent that the contract was

cancelled. Either that night or the next day, Harrison learned

that Harvey had cancelled the contract. Nevertheless, on the

next Monday morning, Harrison took two money orders amounting to

$1,000 to a branch of the escrow company. Several hours later,

Harvey’s written notice of the cancellation arrived at another

branch of the escrow agent’s office.2 Harvey’s agent returned

Harrison’s earnest money, informing him that the contract had

been cancelled.

¶4 Queiroz sued Harvey, seeking specific performance of

the contract. The superior court found that Harrison had acted

inequitably and thus denied Queiroz specific performance. The

court determined that Harrison lied about the source of the

earnest money, testifying that it was Queiroz’s when in fact it

was Harrison’s. The court found that in providing the earnest

money Harrison either made an undisclosed loan to Queiroz or

commingled his own money with Queiroz’s funds. The court

2
The contract called for written notice before cancellation.
The superior court concluded that the failure to timely pay the
earnest money was a material breach. The court of appeals,
however, concluded that payment of the earnest money before the
written notice of cancellation had been received cured the
breach. See Queiroz v. Harvey, __ Ariz. __, __, ¶¶ 18, 22, __
P.3d __, __ (App. 2008). Harvey did not seek review of this
holding.

3 
further found that Harrison’s subterfuge went further when he

printed his name, rather than signing it, on the purchase offer

because he did not have the required earnest-money check, failed

to return phone calls, and “raced to the escrow agent to deposit

the funds,” knowing that Harvey had cancelled the contract.

Finally, the court found that Harrison had not testified

truthfully.

¶5 The court of appeals reversed. Queiroz, __ Ariz. at

__, ¶¶ 18, 22, __ P.3d at __. The court held that an agent’s

fraudulent or dishonest acts could not be attributed to a

principal for purposes of an equitable defense absent the

personal involvement or knowledge of the principal. Id. at ¶

31. The court concluded that it could not determine whether

Queiroz knew of Harrison’s conduct and therefore could not

decide whether the superior court would have reached the same

result based solely on Harrison’s misrepresentations about the

escrow check. Id. at ¶ 32. It consequently remanded for

further proceedings. Id.

¶6 We granted review because whether an agent’s

inequitable conduct is chargeable to the principal is an issue

of statewide importance and is likely to recur. ARCAP 23(c).

We have jurisdiction under Article 6, Section 5(3) of the

Arizona Constitution and Arizona Revised Statutes (“A.R.S.”) §

12-120.24 (2003).

4 
 II

¶7 A trial court’s grant or refusal of specific

performance is reviewed for an abuse of discretion. Kimball v.

Statler, 20 Ariz. 81, 84, 176 P. 843, 844 (1918). Queiroz does

not dispute that specific performance, although a routine remedy

in actions involving contracts for the sale of real property,

may properly be refused on the basis of unclean hands. See

MacRae v. MacRae, 57 Ariz. 157, 161, 112 P.2d 213, 215 (1941)

(“It is a cardinal rule of equity that [one] who comes into a

court of equity seeking equitable relief must come with clean

hands.”). Rather, Queiroz argues that a mere agency

relationship does not suffice to establish inequitable conduct

and that such conduct should not be imputed to an “innocent”

principal.

¶8 We reject these arguments. Under ordinary principles

of agency law, an agent’s acts bind the agent’s principal.

E.g., Restatement (Third) of Agency § 6.01 (2006) (stating

general rule that principal may work through an agent to secure

contract with third party); id. at § 1.01 (agent acts “on the

principal’s behalf”); see also id. at § 4.01 (explaining that

manifestation of assent ratifies an agent’s conduct). “A

representation by an agent made incident to a contract or

conveyance is attributed to a disclosed . . . principal as if

the principal made the representation directly when the agent

5 
had actual or apparent authority to make the contract or

conveyance . . . .” Id. at § 6.11. This includes “the

circumstances under which representations made by an agent

affect a principal’s legal position in actions brought to

enforce or rescind a contract.” Id. at cmt. a.

¶9 Other courts have similarly concluded that a principal

seeking specific performance may be bound by an agent’s

inequitable conduct. E.g., Handelman v. Arquilla, 95 N.E.2d

910, 913 (Ill. 1951) (rejecting specific performance based on

agent’s material misrepresentation); Alexander v. Hughes, 472

P.2d 818, 819-20 (Or. 1970) (affirming the denial of specific

performance when agent misled opposing party about nature of

document signed).

¶10 The Restatement and the cited cases are consistent

with the duties both agents and principals owe to third parties

in the context of the sale of real property. See Lombardo v.

Albu, 199 Ariz. 97, 100-01, ¶¶ 13-15, 14 P.3d 288, 291-92 (2000)

(noting common law and regulatory duties). In addition, the

rule that the principal is bound by his agent’s conduct is

consistent with long-established principles of equity. See

Dawson v. McNaney, 71 Ariz. 79, 87, 223 P.2d 907, 912 (1950)

(equitable rule will not be applied to “defeat the ends of

justice” and “perpetrate a fraud”); Giovani v. Rescorla, 69

Ariz. 20, 25, 207 P.2d 1124, 1127 (1949) (equity denies title to

6 
property “obtained through actual fraud, misrepresentations,

concealments, or through undue influence, duress, taking

advantage of one’s weakness or necessities, or through any other

similar means or under any other similar circumstances”). Each

of these cases stands for an unexceptionable rule: Principals

may not benefit from the inequitable conduct of their agents.

III

¶11 The court of appeals, however, declined to apply this

rule. The court concluded that the unclean hands doctrine

implicates the moral blameworthiness of the party who seeks

equitable relief. Queiroz, __ Ariz. at __, ¶¶ 25, 31, __ P.3d

at __. Thus, the court held that imputing inequitable conduct

of an agent to a principal is not appropriate absent a showing

that the principal knew of the agent’s misconduct. Id. The

court found support for this proposition principally in one

Arizona case and two cases from other jurisdictions. None of

these cases, however, is apposite.

¶12 For example, the court of appeals reasoned that Weiner

v. Romley, 94 Ariz. 40, 381 P.2d 581 (1963), supported its

conclusion. In Weiner, this Court held that when inequitable

conduct was not “willful,” unclean hands would not apply. Id.

at 42-43, 381 P.2d at 582-83. The court of appeals understood

this to mean that principals must themselves act willfully.

Queiroz, __ Ariz. at ___, ¶¶ 29-30, __ P.3d at __. The court

7 
reasoned that if an individual’s act must be “willful” for an

equitable defense to apply, then, a fortiori, a principal who

does not act at all, because his agent does, cannot be found to

have acted willfully. Id. at ¶ 31. Weiner, however, does not

speak to the issue in this case, which is whether an agent’s

conduct may be imputed to his or her principal.

¶13 Closer to the point, yet nevertheless distinguishable,

are Vulcan Detinning Co. v. American Can Co., 67 A. 339, 340-41

(N.J. 1907), and Associated Press v. International News Service,

240 F. 983 (S.D.N.Y. 1917). In the former, the New Jersey court

simply rejected imputing the conduct of a defendant’s agent in a

prior transaction to the defendant in the separate transaction

before the court. Vulcan Detinning, 67 A. at 341. In this

case, however, the alleged misconduct occurred within the very

transaction that was the subject of the litigation.

¶14 Associated Press is also inapposite, as it addresses

one company’s effort to defend itself against charges of

inequitable conduct by pointing out the inequitable conduct of

its opponent’s agents. 240 F. at 984, 989. Here, in contrast,

Queiroz seeks specific performance by relying on the very

inequitable acts committed by his own agent to secure the

contract. Associated Press does not countenance employing the

inequitable conduct of one’s own agent as a sword.

8 
 IV

¶15 Queiroz’s additional arguments are equally

ineffectual. First, he claims that we should protect innocent

principals from the misconduct of the agents they choose to

hire. There are cases in which, as a matter of fact, a

principal cannot be charged with the acts or knowledge of his or

her agent. E.g., Restatement (Third) of Agency § 6.10 cmt. b

(outlining situations in which purported principal may not be

bound by agent). This is not such a case. The principles of

agency discussed above refute Queiroz’s policy argument that we

should protect all principals from liability, especially given

that without Harrison’s acts, the deal here would not have been

completed. 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.

¶16 Queiroz also argues that, notwithstanding Harrison’s

inequitable conduct, Harvey has suffered no harm and thus he

should be forced to perform the sale-and-financing contract.

This claim, of course, is belied by the transaction, which

requires Harvey not only to sell the property, but also to carry

the mortgage for Queiroz. Thus, ordering specific performance

in this case would effectively place Harvey in a continuing

relationship with Queiroz. Cf. Copylease Corp. of Am. v.

9 
Memorex Corp., 408 F. Supp. 758, 759 (S.D.N.Y. 1976) (refusing

“to order specific performance of contracts which are not

capable of immediate enforcement, but which require a continuing

series of acts and cooperation between the parties for the

successful performance of those acts”) (internal quotation marks

omitted) (applying California law).

V

¶17 In his response to the petition for review, Queiroz

preserved the issue of whether, assuming Harrison’s conduct may

be imputed, it was actually inequitable. We defer to the

superior court’s findings that Harrison’s conduct was

inequitable and that his statements and actions were dishonest

and misleading. Valley Med. Specialists, 194 Ariz. at 367, ¶

11, 982 P.2d at 1281. Consequently, we are in no different

position than the court of appeals would have been in reviewing

the record. City of Phoenix v. Fields, 219 Ariz. 568, ___, ¶

26, 201 P.3d 529, 535 (2009). We conclude that the evidence

supports the superior court’s finding that Harrison acted

inequitably. Harrison’s conduct misled Harvey regarding

Queiroz’s capacity to go forward with the earnest-money payment

and concealed his potential inability to make payments on an

ongoing basis. See Lombardo, 199 Ariz. at 100, ¶¶ 12-13, 14

P.3d at 291 (noting that “the ability of the buyer to perform

goes to the heart of the transaction” and that both principal

10 
and agent have a duty to disclose).

VI

¶18 For the foregoing reasons, we vacate the court of

appeals’ opinion and affirm the judgment of the superior court.

Because the contract here requires the prevailing party to be

awarded reasonable attorneys’ fees, we grant Harvey’s request

for attorneys’ fees.

_______________________________________
Michael D. Ryan, Justice

CONCURRING:

_______________________________________
Ruth V. McGregor, Chief Justice

_______________________________________
Rebecca White Berch, Vice Chief Justice

_______________________________________
Andrew D. Hurwitz, Justice

_______________________________________
W. Scott Bales, Justice

11