Legal Memorandum LT01

DISCIPLINE OF REAL ESTATE BROKERS AND SALESPERSONS
FOR UNTRUSTWORTHY CONDUCT

Article 12-A of the Real Property Law grants to the Department of State the authority to regulate real estate brokers and salespersons. Real Property Law §441-c provides, in part, that the Department of State may revoke, suspend, fine or reprimand a real estate broker or salesperson if that licensee is found to have, among other things, violated any provision of Article 12-A of the Real Property Law, engaged in fraud or fraudulent practices, or demonstrated untrustworthiness or incompetency. As the Court of Appeals stated in Matter of Gold v. Lomenzo, 29 NY2d 468, 329 NYS2d 805, 811 (1972), "the Legislature intended the Secretary of State to be vested with a wide discretion in determining what should be deemed untrustworthy conduct."

In fact, even if a licensee engages in conduct unrelated to its activities as a real estate broker or salesperson, that conduct can still act as the basis for and be considered by the Department of State in bringing a disciplinary proceeding against that licensee for engaging in untrustworthy behavior.

For example, in Eich v. Shaffer, 136 AD2d 701, 523 NYS2d 902 (2nd Dept. 1988), the Department of State held, after a disciplinary proceeding, that a finding by the New York State Department of Insurance petitioner violated his duties as an insurance broker and thereby demonstrated untrustworthiness and incompetency, was a sufficient basis for determining petitioner guilty of untrustworthiness with reference to his license as a real estate broker. In confirming that determination, the Appellate Court stated that it was "proper for the [Secretary] of State to base her determination that the petitioner was untrustworthy to act as a real estate broker within the meaning of Real Property Law §441-c on his misdeeds as an insurance broker." Eich, 523 NYS2d at 904.

Eich followed the holding in Dovale v. Patterson, 85 AD2d 602, 444 NYS2d 694 (2nd Dept. 1981), in which the Court stated that "[a]lthough the actions underlying the disciplinary charges are not acts for which petitioner's license as a real estate broker was required, they may be considered in determining petitioner's untrustworthiness and incompetency as a broker." Dovale, 444 NYS2d at 695. In Dovale, the Court upheld the Department of State's revocation of petitioner's real estate broker's license based upon his regularly engaging in the practice of submitting fraudulent contracts and loan applications to banks in order to obtain larger mortgages than might otherwise be available.

Finally, in Fogel v. Department of State, 209 AD2d 615, 619 NYS2d 104 (2nd Dept. 1994), the Court held that the Department of State properly denied the renewal of petitioner's real estate salesperson's license and properly denied him a real estate broker's license based upon his prior criminal conviction for sexual misconduct.

However, the manifest purpose of Real Property Law §441-c is the protection of the general public. It follows from this that when the conduct of the real estate broker or salesperson has no adverse effect on the public at large, the Department of State generally has no jurisdiction to intervene. Typically, such cases involve isolated disputes between a real estate broker and its salesperson or between two real estate brokers. In Stowell v. Cuomo, 52 NY2d 208, 437 NYS2d 270 (1981), a dispute arose between real estate salespersons Terry and Dianna Elich ("the Elichs") and petitioner real estate broker Lawrence Stowell ("Stowell"). The Elichs had earned commissions before leaving Stowell's employ. Stowell attempted to deduct certain expenses from those commissions and the Elichs refused to accept the reduced amounts offered to them. The Court of Appeals held that the Department of State did not have jurisdiction to discipline the broker based solely upon a simple contractual dispute between the broker and his sales personnel because the Department of State failed to point to any supportable adverse effect upon the public. Stowell, 437 NYS2d at 271.

The Court of Appeals cautioned, however, that "there may be situations in which, for example, a broker's 'business practices' or 'business methods' (see Real Property Law §442-e, subds. 5, 6) with regard to his salespersons are so devious as to indicate clearly that he would not deal fairly with the public and, therefore, disciplinary action under section 441-c of the Real Property Law for demonstrating 'untrustworthiness' might be warranted..." Id. Clearly, if a real estate broker repeatedly engages in unethical conduct relative to its sales staff or to other brokers, the Department of State would have jurisdiction to commence a disciplinary proceeding against that broker for demonstrating untrustworthiness pursuant to Real Property Law §441-c.