DEPARTMENT OF STATE 

OFFICE OF THE SECRETARY OF STATE

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In the Matter of

            AARON C. DEPASS,

                                    Respondent-Appellant,                        DECISION ON APPEAL

                                                                                                              05 DOS APP 10

                        - against -  

            DEPARTMENT OF STATE

            DIVISION OF LICENSING SERVICES,

                                    Complainant-Respondent.

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            Aaron C. DePass, Esq. (Appellant) has appealed to the Secretary of State from a determination of the Office of Administrative Hearings (360 DOS 09). In a decision issued April 15, 2009, Administrative Law Judge (ALJ) Roger Schneier determined that Appellant “engaged in fraudulent practices and demonstrated untrustworthiness” (360 DOS 09, at p. 4). Specifically, the ALJ found that Appellant failed to account for real property sale proceeds of $123,346 to his client Emily Chisolm from the sale of her real property to Micheline Boursiquot and that he participated in a fraudulent mortgage transaction. Pursuant to Real Property Law § 441-c, the ALJ ordered that Appellant’s license as a real estate broker be deemed revoked, effective immediately.

            Appellant has filed a memorandum of appeal with the Secretary of State. Respondent has filed a memorandum in opposition to the appeal.

PROCEDURAL HISTORY

            On December 22, 2004, Emily Chisolm filed a preliminary statement of complaint with Respondent Division of Licensing Services against Appellant, real estate broker Winston Anderson and Sir Winston Realty (State’s Exhibit 3). Thereafter, an investigation was commenced by Respondent. Following the investigation, Respondent issued a formal Complaint charging Anderson, Sir Winston Realty, and Appellant with, among other things, demonstrating untrustworthiness, in violation of Real Property Law section 441-c, as well as failing to cooperate with an investigation, in violation of Real Property Law sections 441-c and 442-e (State’s Exhibit 1).

            A hearing was scheduled for May 24, 2007 (15 DOS APP 08). On March 1, 2007, Notices of the hearing along with copies of the Complaint were sent to Anderson, Sir Winston Realty and Appellant’s addresses as filed with Respondent (id.). Thereafter, the scheduled May 24, 2007 hearing was adjourned at Appellants’ request, to provide Appellants with an extended opportunity to obtain counsel (id.). The hearing was then calendared for 10:00 AM on September 27, 2007 (id.). The hearing was held, despite Appellant’s and Anderson’s absence (id.).

            On November 29, 2007, ALJ Schneier rendered a determination finding that Anderson, Sir Winston Realty, and Appellant violated Real Property Law § 441-c(1) and § 441-e(5) due to their involvement in and orchestration of a failed mortgage foreclosure rescue scheme and subsequent failure to cooperate with the Department of State’s ensuing investigation (see 2206 DOS 07). On appeal, the First Deputy Secretary of State vacated the ALJ’s decision with regard to Appellant DePass, finding that he had not received proper notice of the hearing date after the adjournment was granted, and remanded the matter for further proceedings at which Appellant DePass would have the opportunity to appear and present evidence before the ALJ (15 DOS APP 08).

            On November 6, 2008 and March 19, 2009, a new hearing was held at which Appellant DePass appeared pro se (Transcript, at p. 3). Notice for the hearing was served with a copy of the Complaint (State’s Ex. 1). The Complaint charged Appellant with demonstrating untrustworthiness by failing to disclose to Ms. Chisolm that he “was an associate broker with [Sir Winston Realty]” and “failing to account for $123,346 in sale proceeds ... [and] by failing to provide an answer to her inquiries about the missing money and by failing to explain to Ms. Chisolm why the purchaser received a credit, termed a ‘sellers’ concession’ of $25,000" (State’s Ex. 1). The Complaint also charged Appellant DePass with failing to cooperate with the Division of Licensing Services investigation (State’s Ex. 1).

            Following the hearing, the ALJ determined that Respondent did not prove that Appellant DePass failed to properly disclose his relationship with Anderson and Sir Winston Realty to Chisolm, and dismissed that charge (360 DOS 09, at p. 3). The ALJ also found that Appellant DePass did not fail to cooperate with the investigation conducted by the Division of Licensing Services, dismissing that charge as well (360 DOS 09, at p. 3). The ALJ determined that Appellant had demonstrated untrustworthiness, however, by failing to account for and properly explain the financial aspects of the property transaction to Chisolm (360 DOS 09, at p. 4). In addition, the ALJ amended the pleadings to conform to the proof and determined that Appellant DePass “engaged in fraudulent practices and demonstrated untrustworthiness” by “participating in the fraudulent transaction and allowing it to proceed” (360 DOS 09, at p. 4). As a result, the ALJ deemed Appellant’s license as a real estate broker revoked (id.). Appellant now appeals, claiming that the Department of State lacks jurisdiction, that the ALJ improperly amended the pleadings to conform to the proof, and that substantial evidence does not support the ALJ’s determination.

FINDINGS OF FACT

            From May 31, 2002 through May 31, 2004 and from November 3, 2004 through November 3, 2006, Appellant was licensed as an associate real estate broker affiliated with Sir Winston Realty, which was operated by Corporate Broker Winston Anderson (State’s Exhibit 2). Appellant was also licensed as a Trade Name Broker for Wisdom Realty from April 6, 2005 through April 6, 2007 (State’s Exhibit 2).

            In September 2004, Emily Chisolm was having difficulty meeting her mortgage payment obligations with regard to her property located at 20 Patchen Avenue, Brooklyn, New York and was in danger of having the property foreclosed upon (Transcript, at p. 8). Winston Anderson met with Chisolm for the purpose of arranging a mortgage foreclosure rescue transaction (State’s Exhibit 3; Transcript, at 8). In describing the proposed foreclosure rescue scheme, Anderson explained to Chisolm that her property (a 1-4 family house located at 20 Patchen Avenue, Brooklyn, New York) could be saved from foreclosure by conveying it to a third party, Micheline Boursiquot, who would obtain a mortgage with more favorable terms and then reconvey the property to Chisolm six-months later, so long as Chisolm made all mortgage payments while title was held by Boursiquot (Transcript, at 9). The underlying purpose of the transaction was to prevent Chisolm’s property from being foreclosed upon, allow Chisolm to rebuild her credit while making the mortgage payments under the more favorable mortgage terms provided by the lender to Ms. Boursiquot, and to have ownership of the property conveyed back to her from Boursiquot at a later date (Transcript, at p. 167-171, 192).

            Thereafter, Chisolm hired Anderson and Sir Winston Realty to serve as her broker and hired Appellant as her attorney to represent her at the closing (Transcript, at 10). In September of 2004, Chisolm, represented by Anderson as broker, signed a contract to convey her property to Micheline Boursiquot, for a purported purchase price of $645,000 (State’s Ex. 11; see also State’s Ex. 4; State’s Ex. 7). Based upon a purported sale price of “$645,000,” Boursiquot obtained a mortgage for $483,750 through Fremont Investment & Loan (State’s Ex. 10).

            On October 14, 2004, the closing took place (State’s Ex. 7; State’s Ex. 8), and Appellant served as seller’s counsel representing Chisolm for the sale of her real property to buyer Boursiquot (State’s Ex. 7; Transcript, at 179). Although Appellant understood that Anderson had assured Chisolm that the transaction would ultimately result in the re-conveyance of Chisolm’s property six months from the date of closing, no provision for such reconveyance was placed in the contract, the closing documents, or any other written agreement related to the transaction (State’s Ex. 4; State’s Ex. 7; Transcript, at 167-170, 181). The closing statement indicated that Chisolm was to receive $169,611.46 in cash (State’s Ex. 7). On the date of the closing, Boursiquot drafted checks for $45,000 and $116,250 made payable to Chisolm (State’s Ex. 12). Only the $45,000 check, however, was provided to Chisolm at the closing (Transcript, at p. 26). As part of the foreclosure rescue arrangement, the parties agreed that Chisolm would not actually negotiate the checks or attempt to collect any of the funds purported to be transferred to her by the Boursiquot (Transcript, at p. 167-170, 192). After the closing, Appellant received a fee of $1,250 for his services (Transcript, at p. 173, 181).

            Following the conveyance of title to Boursiquot, Chisolm attempted to obtain copies of the closing documents from Appellant in order to know exactly what she would have to pay to Boursiquot to cover the new mortgage on the property, but no copies were sent (State’s Exhibit 6). As a result, Chisolm did not pay the mortgage on the property, which was no longer hers (Transcript, at p. 80, 92). Thereafter, reconveyance of the property to Chisolm did not occur (State’s Exhibit 7; Transcript, at 12, 19). In July of 2005, the doors to the premises were chained and locked, and Chisolm was denied access to the property (State’s Exhibit 13; Transcript, at p. 81-82).

OPINION

I.         The Department of State acted within its jurisdiction and may alter the status of Appellant’s license. At the time the closing was held for the subject property, Appellant was not a licensee of the Department of State (State’s Ex. 2). Appellant did not act as a real estate broker or salesperson during the course of the real property transaction involving Sir Winston Realty and Ms. Chisholm, but, rather, acted solely as an attorney. Appellant claims that his involvement in the transaction as an unlicensed person should divest the Department of State from having any jurisdiction over his behavior. However, at the time the original complaint in this matter was issued and served upon Appellant, Appellant was a licensed real estate broker (State’s Ex. 2).

            Real Property Law, Article 12-A, expresses a legislative mandate to the Department of State to guard the public from incompetent and untrustworthy licensees (see Small v Marchese, 98 Misc.2d 295 (1st Dept., 1978)). A licensed real estate broker or salesperson must demonstrate and maintain trustworthiness of character to hold and continue to hold such license (see Real Property Law § 441-c). Where a licensee has, prior to licensure, engaged in acts that demonstrate a lack of trustworthiness or a lack of fitness to meet the responsibilities of the licensed occupation, the Department may seek revocation of the later-issued license (see Division of Licensing Services v. Conciatori, 10 DOS APP 03 (2003); Division of Licensing Services v. Samarel, 86 DOS 97 (1997); see also 1947 Op. Atty. Gen., at p. 271-272). Thus, this disciplinary action is well within the authority of the Department of State to protect the public against untrustworthy brokers and salespersons.

            Appellant is not now licensed, having allowed his license to expire by its terms and having not sought renewal. Appellant claims that this fact renders the action against him moot. Far from being moot, the penalty of revocation of an expired license has a prospective effect. The penalty of revocation carries with it a statutory one-year waiting period during which the former licensee may not apply for a new license. As such, this action has palpable, relevant consequences and is not moot. The state’s interest and the important administrative purposes fulfilled by disciplinary actions under such circumstances are not eliminated by Appellant’s decision to allow his license to expire by lapse of time.

II.        Substantial Evidence in the Record Supports the ALJ’s Determination.

            Appellant contends that substantial evidence in the record does not support the ALJ’s determination that he failed to properly account to his client, Ms. Chisolm, for the proceeds of the real property transaction. The initiating party in an administrative disciplinary action has the burden of establishing by “substantial evidence” the truth and accuracy of the allegations raised in the complaint (SAPA § 306(1)). Respondent initiated the proceedings and carries the burden of proving, by substantial evidence, the truth of the charges set forth in the complaint. As the finder of fact, an ALJ must weigh the evidence and decide whether “substantial evidence”has been adduced, which “as a burden of proof ... demands only that a given inference is reasonable and plausable, not necessarily the most probable” (Miller v. DeBouno, 90 NY2d 783, 793 (1997); Oglesby v. New York City Housing Auth., 66 AD3d 905, 908 (2d Dept., 2009); see also Borchers, New York State Administrative Procedure And Practice § 3.12, at 55 (1995)). In reviewing a determination of an ALJ, the Secretary of State retains plenary authority to reverse or modify decisions, but accords due deference to the ALJ in terms of factual findings and credibility assessments (see Matter of Simpson v Wolanski, 38 NY2d 391, 394 (1975)).

            Real Property Law § 441-c states in relevant part that “the Department of State may revoke the license of a real estate broker or salesperson . . . if such licensee has been guilty of fraud or fraudulent practices, or for dishonest or misleading advertising, or has demonstrated untrustworthiness or incompetency to act as a real estate broker or salesperson.” It is a demonstration of incompetency and untrustworthiness to have knowingly participated “in a fraudulent scheme in which a straw purchaser acquired title to certain property . . . for the purpose of obtaining mortgage financing, on the understanding that (1) the straw purchaser would hold title for six months and then convey the subject property to [the seller], and (2) [the seller] would make the mortgage payments in the meantime” (Olisa v. Division of Licensing Services, 69 DOS APP 09, at p. 1).

            At the hearing, Appellant admitted that he was apprised prior to the closing that the intent of the transaction was to allow Chisolm to convey her property to a straw buyer who would subsequently reconvey the property to Chisolm after obtaining more favorable mortgage terms (Transcript, at 125-127, 148-149, 167-170, 192). The record establishes that Appellant was aware that the transaction he assisted in carrying out was for the purpose of conveying ownership of Chisolm’s home to a business associate of Anderson’s based on oral assurances that ownership of the home would be ultimately reconveyed to Chisolm at the end of six months and that such a transaction would save her home from imminent foreclosure (Transcript, at p. 148-149).

            Appellant admitted at hearing that he was aware that the property Settlement Statement at closing showed a contract sale price of $645,000 for the property with a bottom-line stating that $169,611.46 would be received by Chisolm at the closing, and that the buyer was receiving a $483,000 mortgage from the lender (State’s Ex. 7; Transcript, at p. 167-168, 214). Appellant further admitted that he knew that Chisolm did not receive that amount, or anything close to it, at the closing (Transcript, at p. 168, 192).

            Appellant testified that he was aware that Chisolm had agreed with Boursiquot that although checks would be drafted indicating that $169,611.46 was exchanged, such funds would not actually be exchanged between the parties and the checks would not be negotiated (Transcript, at p. 169-170, 192). Appellant admitted that he knew that the purpose of the agreement between Chisolm and Boursiquot to feign payment was to satisfy the bank’s requirement that the mortgage issued on the property represent an acceptable “ratio” in relation to the arms-length value of the subject property (Transcript, at p. 167-170, 178). Thus, checks needed to be written by Boursiquot, but not negotiated, giving the appearance that $169,000 had been exchanged between seller and buyer (Transcript, at p. 169-170). Appellant, armed with that knowledge, facilitated the closing without objection and made no attempt to apprise the lender of the true arrangement (Transcript, at p. 169-170, 178, 192, 205-206).

            Appellant claims that there was nothing illicit about the underlying arrangement. However, to falsely state that a property is being sold for a certain amount of money with a specific portion of that amount to be paid in cash, knowing that no such payments would actually be made, for the purpose of obtaining financing from a lender relying on the truth of that statement, is to commit a fraud upon the lender. To knowingly participate in such an arrangement is a demonstration of untrustworthiness. Appellant admitted at the hearing that he knew of the agreement between Boursiquot and Chisolm, participated as the seller’s attorney with that knowledge and in that capacity helped facilitate the transaction (Transcript, at p. 167-170). Thus, substantial evidence supports the ALJ’s finding that Appellant demonstrated untrustworthiness and engaged in fraudulent practices.

            The record additionally establishes that Appellant did not “account” for the funds that the closing documentation purported his client was to receive, because allowing the transfer of funds from Boursiquot to Chisolm in form but not substance was necessary to effect the mortgage foreclosure rescue scheme. The ALJ was correct to find such conduct, undertaken in his capacity as an attorney, so untrustworthy as to warrant revocation of his license as a real estate broker. Therefore, substantial evidence in the record supports the ALJ’s determination.

III.       The ALJ possessed the authority to amend the pleadings to conform to the proof.

            Appellant contends that it was improper for the ALJ to amend the pleadings to conform to the proof adduced at the hearing and encompass a charge which was not stated in the complaint, namely, a charge “that [Appellant] participated in a fraudulent mortgage transaction” (see 360 DOS 09, at pp. 3-4). In an administrative proceeding, the ALJ may amend the pleadings sua sponte to conform to the proof, so long as the matters relating the newly included charges were litigated by the parties and fall within the broad framework of the original complaint such that the amendment does not cause undue surprise or prejudice to any party (see Town of Lumberland v. NYS Div. of Human Rights, 229 AD2d 631, 633 (3d Dept., 1996); Harbor Associates, Inc. v. Asheroff, 35 AD2d 667 (2d Dept, 1970), appeal denied 27 NY2d 490 (1970); see also Diemer v. Diemer, 8 NY2d 206, 212 (1960)). “As long as the papers in the case advised the other side sufficiently of the transaction, occurrence, or event out of which the claim or defense arises—to such an extent that a diligent lawyer could be deemed to have been on notice that the matter now sought to be changed or added by amendment could reasonably have been expected to arise at the [hearing]—the purpose of the rule is fulfilled and the amendment is permissible” (Siegel, New York Practice § 404, at 683 (4^th ed)).

            The Preliminary Statement of the Complaint alleged that Anderson, Sir Winston Realty, and Appellant DePass engaged in “fraud and misrepresentation” (State’s Ex. 1). The Complaint also specifically stated that “by failing to account for $123,346 in sale proceeds made payable to Ms. Chisolm at the closing, but never delivered to her, by failing to answer her inquiries about the missing money and by failing to explain to Ms. Chisolm why the purchaser received a credit, termed a ‘sellers’ concession’ of $25,000 [Appellant] breached the fiduciary duties owed Ms. Chisolm of reasonable care, good faith, full and undivided loyalty, full and fair disclosure and an obligation to account and demonstrated untrustworthiness and/or incompetency pursuant to RPL 441-c” (State’s Ex. 1). Further the “General Allegations” numbered 1 through 14 within the Complaint, describe the facts underlying the specific allegations as one wherein Chisolm agreed to “a fraudulent scheme which would result in Chisolm retaining her property [by] transfer[ing] the subject property ‘temporarily’ to a third party for a period of six months after which time the subject property would be transferred back to Ms. Chisolm” (State’s Ex. 1).

            The purpose of taking action to conform the pleadings to the proof, upon such terms as may be just, is to “have the final judgment dictated by what the evidence actually reveals at [the hearing] rather than by what the pleadings ... alleged it would be” (Lombardo v. Mastec North America, Inc., 12 Misc.3d 1242(A), 2009 NY Slip Op. 52554(U), 2009 WL 4878439 (Sup. Ct., Kings County, Dec. 17, 2009)). The Complaint made it clear that the allegations at the focus of the administrative hearing would revolve around and involve the allegedly fraudulent mortgage foreclosure rescue scheme. Appellant was specifically apprised by the Complaint that the fact that he oversaw, as attorney for Ms. Chisolm at the closing, the failure to of the parties to transfer to Chisolm the full amount of funds stated in the closing documents in exchange for the transfer of ownership of the subject property. 

            As the hearing record demonstrates, Appellant did not object at the closing because he understood and assisted in the furtherance of the mortgage foreclosure rescue scheme on behalf of his client and the parties involved. Appellant’s direct examination narrative delivered to the ALJ fully addressed his understanding of the property transaction and his role in that event (Transcript, at p. 167-171). Viewing the Complaint in its totality, and considering the proof submitted and issues addressed at the hearing, it is apparent that Appellant had adequate notice of Respondent’s intent to present evidence addressing his involvement in the alleged mortgage foreclosure rescue scheme and ample time to prepare and properly defend himself. Thus, the ALJ’s decision to conform the pleadings to the proof under the circumstances presented was warranted and will not be disturbed.

DETERMINATION

            The determination of the Administrative Law Judge (360 DOS 09) is hereby affirmed in its entirety.

So ordered on: January, __ 2010                    __________________________________________

                                                                                    Daniel E. Shapiro

                                                                                    First Deputy Secretary of State