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Complaints Against Arizona Real Estate Agents and Brokers |
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Presented on March 31, 2008: Case Studies of Complaints Filed Overview of the Complaint Process (A) Investigation Stage 2. ADRE determines whether the complaint is within the Department’s jurisdiction, and whether it presents possible violations. 3. If the answer to both questions is “yes”, then ADRE assigns a staffer to investigate the matter. 4. The licensee is sent a copy of the complaint, along with a letter instructing the licensee to provide a written response to ADRE. 5. If the investigator determines that ADRE needs additional information, she or he will send the licensee a document called a “subpoena”, ordering the licensee to send additional paperwork about the matter, such as transaction forms (listing agreements, purchase contracts, etc.) or copies of correspondence (e-mails between the agent and the client, etc.) 6. The investigator reviews all information gathered, and determines whether ADRE can prove the licensee violated any of the Commissioner’s Rules. The investigation then takes one of the following paths:
(E) The ALJ’s findings and conclusions are merely advisory. This is not an actual judge with power to issue judgements or orders. Instead, the ALJ’s recommendations are reviewed by the Commissioner, who may either adopt, modify, or reject the findings and conclusions. The Commissioner then enters a Commissioner's Order against the licensee.In issuing an order, the Commissioner may take any one or a combination of the following actions:
(F) Appeal to Court: If the licensee disagrees with the Commissioner’s decision, she or he has the right to appeal it to Court, where a Judge will here the case and either accept, reject, or modify the Commissioner’s Order. This is essentially a civil lawsuit where the licensee is the Plaintiff and ADRE is the defendant. In this class, we will be examining several of these lawsuits. When the ADRE’s administrative decision is appealed to the court, the court decides whether ADRE’s action was “illegal, arbitrary or capricious or an abuse of discretion”. The Court determines whether there was substantial evidence to support ADRE’s decision against the licensee. Practice Pointers: Be sure your response is organized, professional, and polished. For example, if you have included documentary exhibits, you should label them in a chronological order. If a complainant is attempting to paint you as being unethical or unprofessional, then your best defense will be to present a professional and thorough response which is neither evasive nor disorganized. If you have any witness statements, be sure to include them. Witnesses might include principal parties to the transaction, vendors such as escrow agents, your broker, other agents in the transaction, or anybody else who has first-hand knowledge of what transpired, and is willing to jot down a short statement of their recollection. When writing your response, discern between criticizing the complaint (which is fine) and criticizing ADRE or the Rules (which is not fine). If you believe the complaint includes information which is in any way misleading, incomplete, out of context, dishonest, inaccurate, or the result of ulterior motives, then fully explain your position and attack the complaint that has been made against you. However, avoid making statements which could be construed as attacking the Rules or the Department. For example, avoid making statements such as, “This is not ADRE’s business,” “I shouldn’t have to answer this letter”, “That Rule is not fair and therefore it doesn’t matter that I may not followed it”, “I didn’t even know that Rule and therefore it’s excusable that I might not have followed it”. ADRE wants to see that you respect the Department and that you respect the investigations process. Upon submitting your response, confirm that it was received by sending it either via certified mail, or by hand-delivery with a signature by the recipient. This ensures that if an ADRE staffer loses or misplaces your response, you will be able to prove that you sent it within the deadline. In most cases (although not always), the ALJ’s recommendation and the Commissioner’s order will follow what the initial investigator recommended (in cases where the licensee did not reach an agreement for a consent order). This makes any decision to move to the administrative-hearing stage a gamble on the part of the licensee. Therefore, you should seriously consider whether you can live with a consent order, if one is proffered at the conclusion of the investigation. Most importantly, establish a professional and courteous relationship with the investigator from the outset, so that you will be in the best position to negotiate terms for a fair consent order. Brown v. Arizona Dept. of Real Estate (A) Parties: Plaintiff is real estate broker Mr. Brown, and Defendant is ADRE. (B) Factual Background: Brown agreed to act as the ranch Owner’s agent for the sale in return for a $750,000 commission. Tracy obtained an option to purchase the ranch from the Owner for $26,500,000. Negotiations with the Nation for the ranch occurred while Tracy had an option to purchase it, but the Owner still held its title. Prompted by the tribal Chairman, the Nation paid Tracy a non-refundable down payment of $500,000. Brown received $50,000 of the down payment and from those monies paid the tribal Chairman $5,000. The sale and resale of the ranch occurred over a two-day period. On July 8, 1987, Tracy purchased the ranch for $26,500,000. The next day he sold it to the Nation for $33,417,386, for a $7 million profit. Brown's portion of the profit was to be $3 to $4 million, which he agreed to share with the tribal Chairman. Brown subsequently paid off a $25,000 bank note owed by the tribal Chairman. Tracy wired the bank $25,000 and charged it off as an expense of the ranch purchase. Brown also leased a BMW for the tribal Chairman with a $3,000 down payment check from Tracy. Tracy made the lease payments on the automobile. Brown made additional cash payments to the tribal Chairman, usually in $5,000 increments. Shortly after the sale of the ranch, the federal government happened to launch a criminal prosecution against the tribal Chairman. ADRE learned of the transaction, and launched its own investigation of Brown. ADRE found that Brown had essentially employed and paid compensation to the tribal Chairman, an unlicensed salesperson, which is a violation of the Commissioner’s Rules. ADRE also found that Brown had failed to deal fairly with all sides to the transaction. Accordingly, ADRE revoked Brown’s license and levied $11,000 in fined against him. He appealed to the Courts, claiming that ADRE lacked sufficient evidence to revoke his license, and also claiming the $11,000 fine was excessive. (C) Issues:
(D) Governing Rules: (1) Brown's Employment of the tribal Chairman A broker shall employ and pay only legally licensed salesmen, and a salesman shall accept employment and compensation as such only from the legally licensed broker to whom the salesman is licensed or from the licensed corporation of which the salesman is an officer and shareholder. A.R.S. § 32-2155(A). The commissioner may suspend or revoke a license, deny the issuance of a license or deny the renewal or the right of renewal of a license issued under the provisions of this chapter if it appears that the holder or applicant, while a licensee under this chapter, within five years immediately preceding, in the performance of or attempt to perform any acts authorized by such license or by this chapter, has: (6) Employed any unlicensed salesperson. A.R.S. § 32-2153(A)(6). Brown argued that he neither employed nor paid compensation to the Chairman. However, the Court agreed with ADRE that Brown's agreement with the Chairman to sell the ranch to the Nation and share his commissions with the Chairman constitutes employment and compensation within the meaning of A.R.S. section 32-2155(A). If the commissioner finds that a broker has employed an unlicensed salesperson, that broker's license may be suspended or revoked pursuant to A.R.S. section 32-2153(A)(6). Since there was substantial evidence to support the Commissioner’s decision to revoke, and revocation was one of the permissible dispositions authorized by the statute, the court affirmed the Commissioner's decision to revoke Brown's broker's license. (2) Brown's Failure to “Deal Fairly” Arizona Administrative Code (A.A.C.) R4-28-1101provides as follows: Duties to Client: A. A licensee owes a fiduciary duty to his client and shall protect and promote the interests of the client. The licensee shall also deal fairly with all other parties to a transaction. ADRE concluded that Brown violated his duty to “deal fairly” with the Nation and with the ranch Owner. Brown asserts that because Tenneco and the Nation were not his clients, he did not owe them a duty of fairness. However, the Court held that the law requires that a licensee deal fairly with all parties to a transaction, not only with a licensee's clients. Brown's statutory obligation was to notify both the original ranch owner and the Nation in writing that he was an indirect principal to the transaction. The ranch owner (the seller) had only learned of the double escrow from the title company, not from Brown. Brown's substantial financial interest in the transaction was material information, and the duty of fairness required him to reveal this information to the ranch owner. Brown owed the same duty of fairness to the Nation. His failure to disclose to the Nation that he was an indirect principal and that Tracy did not own marketable title (only a purchase option) during the negotiation process. The Court affirmed ADRE's findings that Brown failed to deal fairly with both the seller and buyer of the ranch. (3) Excessive or Redundant Fines The commissioner is authorized to assess civil penalties of up to $1,000 for each infraction of any statute, rule, regulation or order under A.R.S. section 32-2160.01, which provides: ADRE imposed eleven fines of $1,000.00 each. The ADRE found that Brown made substantial and discrete misrepresentations and that his conduct constituted dishonest dealings establishing that he did not act as a person of honesty, truthfulness and good character. Brown asserts that fines of $11,000 imposed by the commissioner are excessive and redundant and that the violations charge him more than once for the same offense. The court held that Brown engaged in a series of discrete, fraudulent steps that took place over many months and involved a series of separate misrepresentations to different entities. Each of the 11 fines rests on separate conduct. The same conduct has not been used twice by the ADRE to support more than one violation. (E) Case Outcome: The court affirmed ADRE's order revoking Brown's license and imposing $11,000.00 in fines against him. (F) Practice Pointers: Avoid becoming involved with overly complicated deals which do not pass “the smell test”. Avoid deals which involve convoluted mechanisms that yield profit to third parties such as mortgage lenders, referral sources, or others. Remember that you owe a duty to all parties, not just to your principal.
In the Matter of M.C.
(A) Parties: M.C. was a real estate agent. (B) Factual Background: On Aril 26, 2005, the Department issued a Real Estate Salesperson’s License to M.C. On December 1, 2005, the Department received a letter from M.C., disclosing that she had been “convicted of a second offense DUI on October 26, 2005.” On December 6, 2005, the Department acknowledged receipt of M.C.’s letter and requested that she provide additional documentation, as follows: “Before your disclosure is considered complete, you are required to provide the information identified on the Document Checklist, form LI-400, copy enclosed, by the deadline date above:
Once you have provided the required documents, a decision will be made regarding your suitability for continued licensing. Failure to respond may result in administrative action being taken against your license. If you require a 30-day extension to gather all of the documents, please file a written request received or faxed by the deadline date above. No deadline date was set forth on the Department’s December 6, 2005 letter. The Department addressed the letter to M.C. at her address of employment at the residential brokerage where her license was hung. She did not respond to the Department’s December 6, 2005 letter. On February 16, 2006, the Department sent a second request for information to her, again at her address of employment, with a deadline date of March 17, 2006. On March 20, 2006, the Department received a letter from an attorney hired by M.C., requesting a 30-day extension to provide the documents because the certified record would not be available from the court and police department for approximately three weeks. In response, the Department extended the deadline for M.C. to produce the requested documents to April 21, 2006. However, M.C. did not respond and again, did not provide the requested documentation to ADRE. Therefore, on August 1, 2006, the Department sent a fourth letter to M.C, in relevant part as follows: On August 1, 2006, the Department also sent a letter to M.C.’s designated broker, informing him of the pending complaint, M.C.’s failure to respond to the Department’s request for documentation, and his responsibility to supervise his agents. The Department told the broker that it expected to receive his statement concerning whether he had prior knowledge of the complaint no later than August 16, 2006. M.C. did not respond to the Department’s August 1, 2006 letter. However, her broker did, and he informed the Department that his office had made numerous attempts to contact M.C. via e-mail, phone, and written correspondence, but she had failed to respond. As a result, the company had severed her license from the brokerage. (C) Issues: (2) May ADRE revoke an agent’s license for failure to promptly respond to an agency investigation? (D) Governing Rules: (1) DUI Convictions Licensees must “notify the Department in writing within 10 days of any change in the individual’s personal information or qualifications,” along with the documentation. This applies to a conviction of a misdemeanor or felony. Therefore, Licensees must disclose a DUI conviction to the Department within 10 days of its occurrence. A.R.S. § 32-2153(A)(3) and A.A.C. R4-28-301(F) and R4-28-303(D). A.R.S. § 32-2153(B)(7) allows the Commissioner to revoke or otherwise penalize a license if the licensee has “[n]ot shown that [she] is a person of honesty, truthfulness and good character.” ADRE takes the position that, a person who chooses to drive while she is under the effect of intoxicating liquors exhibits poor judgment. A person who has been convicted of DUI demonstrates that she is not a person a good character, at least insofar as she potentially endangers the public with her impaired driving. Therefore, ADRE believes that a second DUI conviction furnishes cause under A.R.S. § 32-2153(B)(7) for the Commissioner to penalize a licensee. However the Maricopa County Superior Court in at least two cases has upheld license applicants’ appeals and rejected the Department’s argument that DUI constitutes a crime of moral turpitude under A.R.S. § 32-2153(B)(2). The weight of legal authority establishes that DUI is not a crime of moral turpitude for purposes of an administrative licensing proceeding in Arizona. Repeated DUIs have been upheld as grounds for ADRE to deny an application for initial licensure, although not to revoke an existing license. Therefore, M.C.’s second DUI conviction does not provide grounds for the Department to penalize her license. (2) Failure to Promptly Cooperate with ADRE Investigation The Department may suspend or revoke the license of a person who has “[f]ailed to respond in the course of an investigation or audit by providing documents or written statements.” A.A.C. R4-28-301. M.C.’s failure to provide any documents that the Department requested for more than a year establishes that she is not amenable to regulation. Revocation of her license is therefore the appropriate penalty. A.R.S. § 32-2160.01(A) provides that “[a]ny broker or sales person who is subject to the jurisdiction of the department and who has violated any provision of this chapter . . . may be assessed a civil penalty by the commissioner, after a hearing, in an amount not to exceed one thousand dollars for each infraction.” The Department argued that the maximum civil penalty allowed of $1,000 should be imposed for each statutory violation. Here, M.C. committed three separate acts that constitute statutory violations: (1) the criminal actions that led to the second DUI conviction on October 26, 2005; (2) her failure to notify the Department within 10 days of the conviction; and (3) her failure to provide the requested documentation. Therefore, the Department has established grounds to assess the maximum civil penalty for each of M.C.’s acts. (E) Case Outcome: M.C.’s license was revoked, and she was assessed a $3,000 penalty. (F) Practice Pointers: Strictly avoid driving if you have consumed any alcohol. Completely avoid use of illegal drugs, or engaging in any other illegal activities (regardless of whether they involve substance abuse). If you have received a complaint letter from ADRE, provide a thorough and punctual response. If your matter is scheduled for an administrative hearing, providing a written response to the hearing officer at least 15 days prior to the hearing date.
Lombardi v. Albertson
(A) Parties: Lombardi was the seller of a house. Albertson was the buyer’s agent. (Names have been changed.) (B) Factual Background: In April 1994, Roberta told her agent, Albertson, that her husband had filed for bankruptcy and was subject to IRS tax liens. She told Albertson she was making the offer to purchase in her name only in the hope that lenders would not make the connection or would extend credit to her only. She told Albertson that she and her husband were going to be a special financing case. Albertson did not tell the Lombardis that Roberta was not an “able” buyer or might be unable to perform the contract due to insolvency or otherwise. Had the Lombardis been told, they would have sought other conditions in the purchase contract, for example, the right to keep the property on the market. Despite several extensions of the closing date, Rodney was never able to close and the Lombardis lost their equity in the property at a trustee's sale. The Lombardos filed a lawsuit against both Roberta and Albertson. The count against Albertson alleges the tort of negligent misrepresentation. It alleges that Albertson failed to disclose material facts about Roberta’s ability to perform that were relevant to the Lombardis' decision to agree to reschedule closing dates and to refrain from terminating the contract. Albertson, in her defense, argued that a buyer's agent owes the seller no legal duty. She argued that a duty to disclose a buyer’s financial problems to the seller would have conflicted with her fiduciary duty to her client (the buyer) to keep confidential her client's confidential information. (C) Issue: Can a seller of property recover damages from the would-be buyer’s agent due to that agent’s failure to inform the seller, during escrow, that the buyer might be unable to perform because of financial difficulties? (D) Governing Rule: The ability of the buyer to perform goes to the heart of the transaction, and thus is not confidential information. But even if it were, an agent is permitted to reveal information that was confidentially acquired by her in the course of her agency, if such a revelation would protect a superior interest of a third person. R4-28-1101(A) provides minimum standards of care in the exercise of the agent's duties. Among these is the duty to disclose any information relating to the seller's or the buyer's inability to perform. The buyer and seller have duties to each other to disclose facts that are material to the transaction. Applying these principles, where a seller knows of facts materially affecting the value of the property and knows that the facts are not known to the buyer, the seller has a legal duty to disclose such facts. For example, the seller has a duty to disclose to the buyer the existence of termite damage whenever it materially affects the value of the property. The duties are not a one-way street. The buyer cannot present himself as a ready, willing, and able buyer if he knows that there is a significant risk that the deal will never close because of his inability to perform. This would violate the buyer's duty to deal fairly. Albertson that a duty to disclose to the seller would conflict with her fiduciary duty not to disclose her client's confidential information. The fallacy in this argument is that the client herself had a duty to the seller to disclose facts critical to her ability to perform. Thus, the financial wherewithal of the buyer to perform the contract is not confidential information (E) Case Outcome: The Lombardis were able to pursue their tort lawsuit against Albertson.
(F) Practice Pointers: (See next case.)
In the Matter of J.P.
(A) Parties: J.P. was a real estate agent who represented the sellers in the transaction at issue. The Greenways were a couple who had been the buyers, and who filed a complaint against J.P. (B) Factual Background: In April of 2004, the Greenways were looking for a home to purchase in Flagstaff, and they viewed a home that was being listed by J.P. The Greenways’ agent was informed that there had been a “drug bust” at the home. The Greenways’ agent, in turn, told the Greenways about the “drug bust”, and she also contacted J.P. via telephone to clarify whether there had been a methamphetamine lab at the property. J.P. responded that drugs had only been found at the property, but had not been manufactured there. J.P. subsequently issued a letter stating that the sellers had never lived on the property, but their granddaughter had lived there and the police had raided the home and found drugs there. On April 15, the Greenways submitted an offer to purchase the home. On April 19, the sellers issued a SPDS which did not indicate regarding chemical storage or illegal use of the property. Escrow closed on May 28, and the Greenways prepared to move in. On May 30, a neighbor informed the Greenways that there had been a meth lab operating at the property, and that there had been numerous police busts of the meth lab at the property. The neighbor also informed the Greenways that she had contacted J.P. while the house was listed for sale and informed J.P. regarding the meth lab. The Greenways filed a Complaint against J.P. with ADRE. During the course of ADRE’s investigation, it was revealed that J.P. had learned of the meth lab in March. Prior to having entered escrow on the transaction at issue, J.P. telephoned both the Arizona Department of Environmental Quality and the Flagstaff Police Department, had discussed the numerous meth-lab busts with officials at each of those agencies, and had asked those officials regarding her requirements to disclose the meth lab to potential purchasers of the home. In responding to ADRE’s investigation, J.P. tried to argue that she was not under a duty to disclose the existence of a meth lab because she had never seen written, official documents confirming the existence of the lab. She argued that because she had only been told about the lab verbally, and because her clients insisted that no drugs had been manufactured in the home, she had no duty to disclose to the buyers. More specifically, J.P.’s statement read, “I cannot disclose something that I don’t know. No public records that I have reviewed have indicated that a methamphetamine lab was present on the property. The sellers are emphatic that illegal drugs have not been manufactured on the premises.” (C) Issue: If a seller’s agent has been verbally warned that the premises might have been the site of illegal activities or chemicals, must the agent disclose this information to potential purchasers? (D) Governing Rule: R4281101.B. A licensee participating in a real estate transaction shall disclose in writing to all other parties any information the licensee possesses that materially or adversely affects the consideration to be paid by any party to the transaction, including:
(E) Case Outcome: J.P. agreed to a consent order. As part of that agreement with ADRE, she was fined $1,000 and ordered to attend six hours of continuing education. (F) Practice Pointers: When in doubt regarding whether to disclose an issue, always ask your broker. Also, attempt to negotiate a consent order with ADRE, if it is possible to reach a fair agreement. |
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