## Facts

- Roland J. Tarnowski hired F. James Resop as his agent to investigate and negotiate the purchase of a coin-operated music machine route in Wisconsin.
- Resop recommended a route sold by Phillip Loechler and Lyle Mayer and represented that he had thoroughly investigated it, that it had 75 operating locations with machines not more than six months old, and that gross income exceeded $3,000 per month.
- In fact, Resop investigated only a few locations, adopted the sellers’ misstatements, and relayed them to Tarnowski as his own.
- After purchase, Tarnowski discovered there were substantially fewer locations, some locations had no machines, many machines were far older than represented, and income was far less than stated.
- Resop secretly received a $2,000 payment from the sellers in connection with the transaction.
- Tarnowski rescinded and sought return of his money from the sellers; they refused, leading him to sue them, obtain a verdict, and then settle the case, after which it was dismissed with prejudice.
- Tarnowski then sued Resop for (1) recovery of the secret commission and (2) damages including operating losses before rescission and attorneys’ fees and expenses incurred in the seller litigation.

## Issues

1. Whether an agent must account to the principal for a secret commission received in connection with the agency transaction.
2. Whether the principal’s prior rescission action and settlement with the sellers barred a later action against the agent for losses and expenses caused by the agent’s breach of duty.
3. Whether attorneys’ fees and litigation expenses incurred in suing the sellers were recoverable from the agent as damages when the agent’s misconduct made that suit necessary.

## Decision

- The Minnesota Supreme Court affirmed a jury verdict and judgment for Tarnowski.
- The court held that Resop was required to disgorge the $2,000 secret commission received from the sellers.
- The court held that Tarnowski’s rescission suit and subsequent settlement with the sellers did not bar claims against Resop for distinct losses and expenses attributable to Resop’s breach of fiduciary duty.
- The court held that Tarnowski could recover, as consequential damages, reasonable attorneys’ fees and litigation expenses incurred in the necessary third-party action against the sellers.

## Legal Principles

- An agent owes the principal a fiduciary duty of loyalty and must account to the principal for profits obtained in the course of the agency, including profits derived from disloyal conduct such as secret commissions.
- A principal’s pursuit of rescission against third-party sellers, and settlement of that action, does not preclude an action against the agent for different elements of recovery arising from the agent’s separate duties to the principal.
- When an agent’s breach of duty foreseeably and directly causes the principal to sue a third party, the principal may recover from the agent the attorneys’ fees and litigation expenses of that suit, along with other losses directly resulting from the agent’s wrongful conduct.
- Recovery should avoid duplication; amounts attributable to the third-party rescission remedy do not eliminate the agent’s separate obligation to disgorge profits and pay consequential damages caused by the agent’s breach.

## Conclusion

The court held that a disloyal agent must disgorge secret profits and may also be liable for consequential losses, including third-party litigation costs made necessary by the agent’s misconduct; the principal’s rescission action and settlement with the sellers did not bar these distinct claims against the agent.


Tarnowski v. Resop, 236 Minn. 33, 51 N.W.2d 801 (Minn. 1952)