STATE OF NEW YORK
DEPARTMENT OF STATE
OFFICE OF ADMINISTRATIVE HEARINGS
62 DOS 99
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DIVISION OF LICENSING SERVICES,
Complainant,
-against-
ABSOLUTE AUCTION AND REALTY INC.,
Real Estate Broker,
ROBERT A. DOYLE
Real Estate Broker,
and Representative Real Estate Broker,
JOHN P. LYNCH,
Associate Real Estate Broker,
Respondents.
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Administrative Law Tribunal
270 Broadway, New York, NY 10007
Before: Felix Neals, Supervising Administrative Law Judge
_________________________________________
HEADNOTES
1. Where the sellers, the principals, hired the real estate broker for a fee to conduct a single transaction, the auction sale, the broker was a special agent in a fiduciary relation that consisted of three relations with legal consequences - between principal and agent, between principal and third party, and between agent and third party.
2. The law of agency imposed upon the real estate broker the fiduciary obligations of: good faith and undivided loyalty, full and fair disclosure, reasonable care, skill, diligence, and judgment, obedience, confidentiality, and to account.
3. Each fiduciary duty imposed on a real estate broker by the law of agency: (1) addresses an aspect of the broker's relationship with the principals and the subject matter of the agency; and (2) seeks to insure that the real estate broker has a fair understanding of and acts in accordance with each fiduciary obligation in forming and in performing the agency agreement. Under the law of agency, any duty that the real estate broker, as sellers’ agent, owes a third party to the agency transaction arises from and through a duty owed by the principals to the third party.
4. Real Property Law, §443, amplifies the fiduciary obligations of an agent by prescribing a real estate licensee's disclosure in real estate agency relationships by requiring that “real estate licensees who are acting as agents of buyers or sellers of (real) property. . . advise potential buyers or sellers with whom they work of the nature of their agency relationship and the rights and obligations it creates.”
5. The provisions of the law of agency and of Real Property Law, §443, must be equiponderated and linked with their purposes for intelligent and logical application to specific facts for legitimate operational achievements: the force of the laws should operate to exact from real estate licensees the statutorily prescribed behavior.
6. To comply with the aim of the law of agency and of Real Property law, §443, in a regulated, real estate transaction - to have the real estate licensee act in accordance with the legally imposed obligations in forming and performing agency agreements - a real estate licensee's contractual and rational duties owed to a principal must be balanced with the duties owed to third parties to the agency business. In an auction sale, the contractual and fiduciary obligations owed to the principals, the sellers, by the real estate broker must be balanced against the broker's statutory duties owed to third parties, the registered bidders who were prospective purchasers.
7. Employed as a special agent by the sellers to conduct an auction sale of an interest in the residential property, the real estate broker was obligated: (1) to act in accordance with the fiduciary duties imposed; (2) to fulfill the contractual obligations to conduct the auction (a) in accordance with the publicized and announced auction terms and conditions and (b) with a full, fair, and free opportunity for competition among the bidders; and (3) in compliance with the policy of New York State that a fair price be received by the seller of property sold by auction, to insure that a fair price was not prevented by the stifling of competition among
bidders (7 NY Jur 2d, Auction and Auctioneers, III. Conduct of Sale) .
8. In the context of the contractual and rational duties of the real estate broker in an auction sale, the broker's knowledge is important only in determining the inference to be drawn as to the
existence of the knowledge in the environment of the public auction: The existence of the facts known to the real estate broker that represented the sellers must be so consequential that the failure of the real estate broker to inform registered bidders of these facts prior to the auction sale either prevents or ,stifles full, fair, and free competition among the registered bidders in the public auction?
9. In the auction sale, the real estate broker fulfilled both the contractual and the rational obligations owed to the principals, the sellers, where the sellers: understood and accepted the agency contract, including the terms of compensation both of the commission and of the buyer's premium; was fully aware of and consented to the bidding at the auction as a bona. fide, potential buyer the corporation of which employees of the real estate broker were officers and employees.
10. In the auction sale, the real estate broker fulfilled the contractual and rational obligations owed to registered bidders where each registered bidder received a bidder's packet of
information that contained: (1) the proposed contract for purchase and sale of the real estate; and (2) a terms and conditions agreement for real estate auction (a) that included the terms of compensation of both the fee and the buyer's premium and a statement that the real estate broker represented the seller only, and (b) that was signed by each registered bidder.
11. In an auction sale regulated by Real Property Law, Article 12-A, the law of agency does not oblige, statutory law does not compel, and case law does not impose a duty on a seller's real estate agent to disclose to registered bidders prior to the auction sale that employees of the sellers' real estate agent are stockholders and officers of a registered, corporate bidder that is a bona fide, potential purchaser.
STATE OF NEW YORK
DEPARTMENT OF STATE
OFFICE OF ADMINISTRATIVE HEARINGS
62 DOS 99
----------------------------------------------------------------------------X
DIVISION OF LICENSING SERVICES,
Complainant,
-against-
ABSOLUTE AUCTION AND REALTY INC.,
Real Estate Broker,
ROBERT A. DOYLE
Real Estate Broker,
and Representative Real Estate Broker,
JOHN P. LYNCH,
Associate Real Estate Broker,
Respondents.
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Administrative Law Tribunal
270 Broadway, New York, NY 10007
Before: Felix Neals, Supervising Administrative Law Judge
_________________________________________
The respondents, Absolute Action and Realty Inc., Mr. Robert A. Doyle, and Mr. John P. Lynch, 348 Main Street, P.o. Box 658, Beacon, NY 12508, were represented by Patrick F. Moore, Esq., 299-301 Main Mall, P.o. Box 891, Poughkeepsie, NY 12602.
The complainant, the Division of Licensing Services, was represented by Scott L. NeJame, Esq., 84 Holland Avenue, Albany, NY 12208.
ISSUE
Under the provisions of Real Property Law, §441-e, State Administrative Procedure Act, Articles 3 and 4, and 19 New York Codes, Rules and Regulations, Part 400, the State charges that the respondents engaged in fraud and fraudulent practice and demonstrated untrustworthiness and incompetence.
The novel issue posed is the following: In an auction sale of an interest in real property is a seller's real estate agent legally required to disclose to all registered bidders the stockholder interests and official positions of the agent's employees in a corporation that bids at the auction as a potential purchaser.
Specifically, the Division of Licensing Services' complaint alleges that Absolute Auction and Realty Inc., the corporate real estate broker, Mr. Robert A. Doyle, the representative broker, and Mr. John P. Lynch, the associate broker: (1) breached the fiduciary duties of full and fair disclosure, of good faith and undivided loyalty, and of reasonable care, skill, diligence and judgment; (2) became a principal and an agent in the same real estate transaction without making a full and proper disclosure; (3) failed to disclose to the principals, the sellers, the amount of commission could be renegotiated and that payment of a commission may not be necessary;
(4) failed to disclose to the principals, the sellers, that as principal and agent in the same transaction, the respondents would have to disclose their potential interest in bidding on the property to potential purchasers and the possible effect and consequence that the respondent's bidding would have on the prospective bidders and bids at the auction; (5) failed to disclose to potential purchasers (a) that the respondents or someone affiliated with them or their agency would be bidding on the property and (b) that compensation was to be received from both the sellers and the ultimate purchaser; (6) failed to make it clear to all parties as to which party the broker was representing, a violation of 19 New York Codes, Rules and Regulations, §175.7; and (3) failed to deal openly, honestly, and fairly with a member of the public; and (7) failed to obtain the prospective buyer's signature on a disclosure form in violation of Real Property Law, §443.
PROCEDURAL ACTION
The tribunal took official notice of the licensure records of the Division of Licensing Services which note that Absolute Auction and Realty Inc. renewed its corporate real estate license for the term January 25, 1999, through January 25, 2001, with Mr. Robert A. Doyle as the licensed representative real estate broker.
The parties completed submission of post-hearing law memoranda on March 24, 1999.
SUMMARY OF THE EVIDENCE
Evidence admitted at the hearing includes the following:
A. EXHIBITS.
1. Notice of hearing and complaint.
2. Five certified statements dated May 29, 1998, of the Division of Licensing Services that attest to the licensure histories of Absolute Auction and Realty Inc., and Messrs. Robert A. Doyle and John P. Lynch.
3. Absolute Auction and Realty Inc. listing agreement for sale of real property signed by sellers on September 2, 1994, and signed by buyers on September 16, 1994, for sale of 21 Oak Beach Avenue, Oak Beach, N.Y.
4. Advertisement "Absolute Real Estate Auction 'SUMMER RETREAT"'.
5. Flyer "How to buy real estate at an auction".
6. Absolute Auction and Realty Inc. contract for purchase and sale of real estate dated October 1, 1994, between Damon and Ghnassia, sellers, and Auction Opportunities Inc., buyer.
7. Absolute Auction and Realty Inc. contract for purchase and sale of real estate dated October 1, 1994, between Damon and Ghnassia, sellers, and Robert A. Doyle, buyer.
8. Absolute Auction and Realty Inc. "Buyer Registration" form for bidders numbers 38, 80, 82, 83, and 84.
9. Absolute Auction & Realty Inc. "Terms & Conditions Agreement for Real Estate Auction" dated October 1, 1994, of bidder #83, Frank Graci.
10. Absolute Auction and Realty Inc. promissory note dated October 1, 1994, for $7,500 from Frank Graci to Absolute Auction and Realty Inc.
11. Disclosure regarding real estate agency relationship dated October 1, 1994, signed by Edward Lynch and Jill Dougherty for Absolute Auction & Realty Inc.
12. Letter dated October 13, 1994, from Jeffrey M. Schwartz, Esq., on behalf of Frank Graci, to John Lynch, Absolute Auction and Realty Inc.
13. Letter dated October 17, 1994, from John Lynch, Absolute Auction and Realty Inc., to Jeffrey M. Schwartz, Esq.
14. Letter dated November 30, 1994, Town of Babylon to Ms. Noelle Ghnassia Damon.
15. Absolute Auction and Realty Inc. contract for purchase and sale of real estate dated December 9, 1994, Misses Damon and Ghnassia, sellers, and Town of Babylon, buyer.
16. Residential contract of sale dated January 21, 1998, between Referee, seller, and Frank Graci, buyer.
B. WITNESSES. The State called: (1) Ms. Noelle G. Damon who testified regarding the employment of the real estate broker and the auction held on October 1, 1994; (2) Messrs. Frank Graci and Robert White who attended the auction of October 1, 1994; (3) Mr. Frank Doyle who testified regarding officers and stockholders in Absolute Auction and Realty Inc.
The respondents' witnesses were Messrs. John P. Lynch and Robert A. Doyle who testified regarding the auction conducted on October 1, 1994, and the policies and procedures of Absolute Auction and Realty Inc. .
FACTS
By the substantial evidence, I find the following facts:
From at least November 15, 1993, and for the term January 25, 1999, through January 25, 2001, Absolute Auction and Realty Inc. is licensed as a corporate, real estate broker and Mr. Robert A. Doyle is licensed as the representative, real estate broker. From at least July 21, 1992, until July 21, 1998, Mr. Robert A. Doyle was licensed as an individual, real estate broker.
Mr. John P. Lynch was licensed as the representative real estate broker for Amity Auction Realty Corp. from September 9, 1992, until September 9, 1998, and was licensed as an associate real estate broker of Absolute Auction and Realty Inc. from February 2, 1993, until February 2, 1999.
On September 2, 1994, Misses Noelle G. Damon and Barbara Ghnassia, co-owners, signed an exclusive, right-to-sell, listing agreement for sale of real property. On September 16, 1994, the contract was signed by Mr. John P. Lynch, as broker, and by Ms. Jill Dougherty, as sales agent of Absolute Auction and Realty Inc. The contract provides for a sale by public auction. M-owners of a leasehold interest in the property, Lot 21, Oak Beach, Babylon, N. Y. The property was owned by The Town of Babylon that possessed a right of first-refusal of any price obtained at the auction. Absolute Auction and Realty Inc. scheduled an auction for October 1, 1994, at the premises, and advertised the event by a flyer as a "* no minimum * no reserve *" auction.
On October 1, 1994, Ms. Jill Dougherty, real estate salesperson associated with Absolute Auction and Realty Inc., acted as auctioneer. Just prior to the auction, Ms. Jill Dougherty told Ms. Damon that because a house auctioned in the area just one hour before by Absolute Auction and Realty Inc. had been sold at a great loss, the broker, through a company, Auction Opportunities Inc., would be bidding on the property as a purchaser at the auction to insure that the owners did not "end up with nothing." Ms. Damon consented.
Prospective bidders who attended the auction received a bidder's package of information that included the following: (1) a flyer, "How to buy real estate at an auction"; (2) an agreement, "Terms & Conditions Agreement for Real Estate Auction" that each bidder was required to sign, that provided for a paYment of a 10% buyer's premium by the successful bidder, and that required each bidder to register on a "Buyer Registration" form on which a bidder was assigned a bidder number.
Among the prospective bidders who registered by signing the required bidder's form and were assigned bidder numbers were Messrs. Frank Graci (#83), John Duca (#84), Charles Hackett (#80), and James O'Neill (#38), and AOI Inc. (Auction Opportunities Inc. #82).
All officers and stockholders of Auction Opportunities Inc., Mr. Robert A. Doyle, president, Mr. George Hazzard, secretary, and Mr. Vincent St. George, vice president, were associated at that time wi th Absolute Auction and Realty Inc.: Mr. Doyle as representative broker, Messrs. Hazzard and St. George as real estate salespersons. Mr. Hazzard participated in the auction as a bidder representing Auction Opportunities Inc.
The stockholder and officiary interests of Messrs. Doyle, Hazzard, and St. George in Auction Opportunities Inc. were not disclosed to prospective bidders at the auction.
At the opening of the auction, Ms. Jill Dougherty informed the prospective bidders of the bidding terms and conditions. During the auction, the bidding was primarily between Mr. Hackett, whose highest offer was $36,000, and Mr. Graci who stopped bidding at $37,000 when the auctioneer stated that she had two bids of $38,000 and $39,000 and refused to identify to Mr. Graci the party who bid those amounts. Mr. Graci ceased bidding and stated that he was not going "to bid against a ghost". The auctioneer struck the property "sold" at Mr. Hazzard's bid of $39,000 as the high bid, and Auction Opportunities Inc. was considered the successful bidder. At a total price of $42,900 ($39,000 plus the 10% buyer's premium), a contract for purchase and sale of real estate dated October 1, 1994, was executed between the sellers (Misses Damon and Ghnassia) and Auction Opportunities Inc. That contract was replaced by a second contract
for purchase and sale of real estate also dated October 1, 1994, executed between the sellers and Mr. Robert A. Doyle, as purchaser, because the Town of Babylon refused to recognize a corporation as a property owner.
On November 30, 1994, after the contract for purchase and sale between the sellers and Mr. Doyle had been presented to the Town of Babylon for approval, the Town elected to take the property at the same terms and conditions expressed in that agreement. A contract for the purchase and sale of real estate dated December 9, 1994, was executed between the sellers and the Town of Babylon; the agreement contained the same terms and conditions set forth in the two, prior contracts for purchase and sale of real estate dated October 1, 1994. The Town of Babylon did not purchase the property. Absolute Auction and Realty Inc. did not receive a commission from any of the parties to the transaction and incurred a loss of $2,500 spent in
advertisements of and preparation for the auction.
On January 21, 1998, Mr. Frank Graci purchased the property for a purchase price of $45,000 from a court-appointed referee.
OPINION
The first- impression issue posed is, what, if any, New York Laws are violated in an auction sale governed by Real Property Law, Article 12 -cA, where the following facts exist: (1) The representative broker and salespersons associated with the real estate broker that represents the. sellers are stockholders and officiaries of a corporation that bids as a bona fide, prospective buyer in the auction sale. (2) The sellers know of the stockholder and officiary interests of the real estate broker's employees and consent to the corporate bidder as a prospective buyer. (3) The corporate bidder is a registered bidder at the auction. (4) The other registered bidders are not informed of the stockholder-officiary interests of the real estate broker's employees in the corporate, registered bidder. (5) A condition of the auction is "without reserve," whereby the seller enters into a collateral contract with bidders at the auction that the property will not be withdrawn from sale regardless of how low the highest bid might be; and the highest, bona fide bidder at the auction may insist that the property be sold to him or her. (6) The corporation in which the real estate broker's employees have stockholder-officiary interests is the high bidder. (7) The auction sale required both the auctioneer's acknowledgment of the high bid and a subscribed memorandum of the sale between the sellers and the high bidder.
The sellers, the principals, hired the real estate broker for a fee to conduct a single transaction, the auction sale; and, therefore, the broker was a special agent in a fiduciary relation that consists of three relations with legal consequences - between principal and agent, between principal and third party, and between agent and third party.
The relation between the sellers and the real estate broker was both contractual and relational. The broker's duties included the performance of any contractual obligations; and the broker's failure to perform those obligations, if without excuse, could have been a breach of contract and could have subj ected the broker to tort liability.
The law of agency imposed upon the real estate broker the fiduciary obligations of: good faith and undivided loyalty that prohibited the broker from advancing any interest adverse to the interests of the principals; full and fair disclosure that imposed an affirmative duty on the broker to make timely, full disclosure to the principals of all information, known or acquired by the broker that might affect the principals' interest in the agency transaction; reasonable care, skill, diligence, and judgment that required the broker to protect the principals from foreseeable risks of harm, to exercise that care, skill, and competence necessary to insure the transaction of the business of the agency to the best advantage of the principals, and to recommend that the principals obtain expert advice when the information or advice needed is outside of the broker's scope of expertise; obedience that directed the broker to act only within the scope of authority given by the principals and to obtain and follow lawful instructions of the principals; confidentiality that prohibited the broker from using or communicating information confidentially given or acquired in the course of the agency relationship; and to account that demanded the broker to promptly report to the principals all money and property received and paid out on behalf of the principals, to render an accounting, and to timely deliver to the principals all money and property owed to the principals.
Each fiduciary duty: (1) addresses an aspect of the broker's relationship with the principals and the sUbject matter of the agency; and (2) seeks to insure that the real estate broker has a fair understanding of and acts in accordance with each fiduciary obligation in forming and in performing the agency agreement. Under the law of agency, any duty that the real estate broker, as sellers' agent, owed to a registered bidder, a third party to the agency transaction, arose from and through a duty owed by the principals to the registered bidder.
Real Property Law, §443, amplifies the fiduciary obligations of an agent by prescribing a real estate licensee's disclosure in real estate agency relationships as follows:
1. states that "real estate licensees who are acting as agents of buyers or sellers of (real) property.. .advise potential buyers or sellers with whom they work of the nature of their agency relationship and the rights and obligations it creates."
2. requires that a seller's agent "In dealings with the buyer. . . should (a) exercise reasonable skill and care in performance of the agent's duties; (b) deal honestly, fairly and in good faith; and (c) disclose all facts known to the agent materially affecting the value or desirability of property, except as otherwise provided by law."
3. further requires that a buyer's agent “In dealings with the seller...should (a) exercise reasonable skill and care in performance of the agent's duties; (b) deal honestly, fairly and in good faith; and (c) disclose all facts known to the agent materially affecting the buyer's ability and/or willingness to perform a contract to acquire seller's property that are not inconsistent with the agent's fiduciary duties to the buyer.”
The prescriptions of Real Property Law, §443(4): (1) supplement - do not supplant or compromise the contractual or rational duties owed primarily to the principal by a real estate licensee; and (2) seeks to prevent a real estate licensee's fraudulent or other unlawful act in forming and in performing an agency contract.
The provisions of the law of agency and of Real Property Law, §443, must be equiponderated and linked with their purposes for intelligent and logical application to specific facts for legitimate operational achievements: the force of the laws should operate to exact from real estate licensees the statutorily prescribed behavior.
Logically, therefore, to comply with the aim of the law in a regulated, real estate transaction - to have the real estate licensee act in accordance with the legally imposed obligations in forming and performing agency agreements - a real estate licensee's contractual and rational duties owed to a principal must be balanced with the duties owed to third parties to the agency business. In the auction sale, the contractual and fiduciary obligations owed to the sellers by the real estate broker must be balanced against the broker's statutory duties owed to third parties, the registered bidders who were prospective purchasers.
Employed as a special agent by the sellers to conduct an auction sale of an interest in the residential property, the real estate broker was obligated: (1) to act in accordance with the fiduciary duties imposed; (2) to fulfill the contractual obligations to conduct the auction (a) in accordance with the publicized and announced auction terms and conditions and (b) with a full, fair, and free opportunity for competition among the bidders; and (3) in compliance with the policy of New York State that a fair price be received by the seller of property sold by auction, to insure that a fair price was not prevented by the stifling of competition among bidders (7 NY Jur 2d, Auction and Auctioneers, III. Conduct of Sale) .
In the context of the contractual and rational duties of the real estate broker in the auction sale, the broker's knowledge was important only in determining the inference to be drawn as to the existence of the knowledge in the environment of the public auction. Accordingly, the issue becomes: Was the existence of the fact alone that officers and stockholders of the corporate bidder were employees of the real estate broker that represented the sellers so consequential that the failure of the real estate broker to inform registered bidders of that fact prior to the auction sale either prevented or stifled full, fair, and free competition among the registered bidders in the public auction? The tribunal thinks not.
The real estate broker fulfilled both the contractual and the rational obligations owed to the principals, the sellers. The sellers: understood and accepted the agency contract, including the terms of compensation both of the commission and of the buyer's premium; was fully aware of and consented to the bidding at the auction as a bona fide, potential buyer the corporation of which employees of the real estate broker were officers and employees.
The real estate broker conducted the auction in accordance with the contractual obligations to expend $2,500 to market the property, to publicly auction the property for sale, and to use its best efforts to obtain the highest available bid at the auction. The broker fulfilled its fiduciary obligations to the sellers to conduct the auction in the best interests of the principals and to inform fully and fairly the principals of any action that the broker intended that could affect the sellers' interest in the agency business.
The real estate broker fulfilled the contractual and rational obligat:j..ons owed to registered bidders. Each registered bidder received a bidder's packet of information that contained: (1) the proposed contract for purchase and sale of the real estate; and (2) a terms and conditions agreement for real estate auction (a) that included the terms of compensation of both the fee and the buyer's premium and a statement that the real estate broker represented the seller only, and (b) that was signed by each registered bidder. Consequently, each registered bidder knew, or should have known, of the terms of compensation and whom the real estate broker represented in the auction sale.
Each registered bidder was a potential purchaser: (1) with the right either to bid or not to bid at the auction; and (2) with the right to have the real estate broker, as sellers' agent, afford a fair, full, and free opportunity for competition among the registered bidders and not to stifle competition among bidders by any unlawful act. At the auction sale, all bids were publicly made by a registered bidder and publicly received arid acknowledged by the auctioneer.
In an auction sale regulated by Real Property Law, Article 12-A, the law of agency does not oblige, statutory law does not compel, and case law does not impose a duty on a seller's real estate agent to disclose (and a bidder's right to a full, free, and fair opportunity for competition among bidders does. not include the right to know) prior to the auction sale that employees of the sellers' real estate agent are stockholders and officers of a registered, corporate bidder that is a bona fide, potential purchaser.
The State's other allegations made in the complaint are superfluous. and not supported by any evidence.
CONCLUSION OF LAW
Based on the foregoing findings of fact and opinion and as a matter of law, I conclude:
The State failed to prove by substantial evidence the allegations made in the complaint.
ORDER
Based on the foregoing findings of fact, opinion, and conclusion of law, and under the provisions of Real Property Law, §441-c:
I ORDER the complaint against the respondents, Absolute Auction and Realty Inc., Mr. Robert A. Doyle, and Mr. John P. Lynch, is dismissed.
SO ORDERED: March 31, 1999.
Felix Neals
Supervising Administrative Law Judge