128 DOS 93

Issued: November 23, 1993

STATE OF NEW YORK

DEPARTMENT OF STATE

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DIVISION OF LICENSING SERVICES,

                      Complainant,

            -against-

                                               DECISION

NUE VUKSANAJ,

Real Estate Broker

d/b/a Gun Hill Realty Company

and d/b/a/ Belmont Realty Company,

and Representative Real Estate Broker of

North East West South Realty Corp.,

                       Respondent.

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Administrative Law Tribunal

270 Broadway, New York, N.Y. 10007.

Held: June 24, 1993.

Before: Felix Neals, Administrative Law Judge.

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The respondent, Mr. Nue Vuksanaj, 287 East Gun Hill Road, Bronx, N.Y. 10467, appeared pro se.

The complainant, the Division of Licensing Services, was represented by A. Marc Pellegrino, Esq., 162 Washington Avenue, Albany, N.Y. 12231.

ISSUES

This proceeding was brought pursuant to the provisions of Real Property Law, §441-e, the State Administrative Procedure Act, Article 3, and 19 New York Codes, Rules and Regulations, Part 400, to determine if the respondent demonstrated untrustworthiness and incompetence.

Essentially, the complainant alleges that the respondent: (1) Acted as undisclosed double agents in a real estate transaction by

representing simultaneously the diverse interests of both a landlord and a prospective tenant; (2) breached the fiduciary duties of full and fair disclosure and of good faith and undivided loyalty owed to a principal; (3) failed to make it clear to the prospective tenant as for whom the broker was acting as agent in the transaction, a violation of the provisions of 19 New York Codes, Rules and Regulations, §175.7; (4) failed to maintain a special bank account for deposits exclusively of escrow funds, as mandated by the provisions of 19 New York Codes, Rules and Regulations, §175.1; and (5) collected and retained an illegal commission in violation of the New York City Rent Stabilization Law.

AMENDMENT OF PLEADINGS

Upon motion by the complainant, the pleadings were amended to conform to the proof and to encompass the charge that the respondent engaged in the practice of real estate under an unlicensed name, in violation of the provisions of Real Property Law, §§440-a and 441(1). The tribunal determined: (1) That had the charge of the use of an unlicensed name been stated in the complaint, additional evidence would not have been forthcoming (Tollin v Elleby, 77 Misc 2d 708, 354 NYS 2d 856 [Civil Ct. N.Y. County, 1974]); and (2) that the issue raised in the proof, was actually litigated by the parties, and was within the broad framework of the original pleadings (Cooper v Morin, 91 Misc 2d 302, 398 NYS 2d 36, 46 [Supreme Ct. Monroe County, 1977], modified on other grounds 64 AD 2d 130, 409 NYS 2d 30 [1978], aff'd. 49 NY 2d 69, 424 NYS 2d 168 [1979]).

FACTS

On April 17, 1990, Mr. Concepcion Hernandez signed both an apartment rental agreement and a commission contract with Belmont Realty for a commission of 10% of the annual rent of any apartment obtained through the services of "Prime Realty Realty". On April 18, 1990, a two-year lease agreement for the rental of a one-bedroom, rent stabilized apartment was executed by Mr. Hernandez as tenant and by Mr. Vuksanaj for Egidio Realty Corp. as landlord. Two days later, in the evening of April 20, 1990, Mr. Hernandez gave the broker $1,600 ($500 first month's rent, $500 security deposit, and $600 commission). During the morning of April 21, 1990, Mr. Hernandez went to the office of Belmont Realty, refused the one-bedroom rental, and demanded that the $1,600 payment be returned. The broker returned $1,000 and retained $600 as a brokerage fee.

Mr. Hernandez sent a written complaint about the transaction to the Division of Licensing Services on June 2, 1990. During the ensuing investigation of the matter, an investigator of the Division of Licensing Services, Mr. Vito Abate, wrote a letter dated January 18, 1991, asking six questions of Mr. Vuksanaj, who responded in a letter dated February 11, 1991. The questions and answers are as follows:

QUESTIONS:

1. What, if any, "Law of Agency" disclosure did you make?

2. If yes, when was the disclosure made and was it in writing or oral?

3. Was the apartment offered to complainant rent stabilized?

4. Is any company or companies for which you are the representative real estate broker exclusive rental agent for Egidio Realty Corp.?

5. Is any company or companies for which you are the representative real estate broker, managing agent for Egidio Realty Corp.?

6. Do you maintain an escrow account for Belmont Realty? If yes, it's location?

ANSWERS:

1. No Law of Agency disclosure was discussed, due to the fact that the disclosure must be made when the Broker works and gets paid from both parties. I did not get paid from Egidio Realty Company, nor was I employed by Egidio Realty Company to rent apartments.

2. N/A

3. Apartment offered was rent stabilized.

4. No, we are not.

5. Yes.

6. No, I did not. Reason: I have never had the occasion of holding anyone's money in escrow for any length of time, but I will, if the need arises.

The respondent, Mr. Vuksanaj, testified as follows: He misunderstood the question that asked if he was the managing agent of Egidio Realty; he was not the managing agent for Egidio Realty Corp.; he signed the lease contract on behalf of and with the landlord's oral consent, because the landlord was not available, and Mr. Hernandez did not have an abode and needed an apartment immediately; in April 1990, he maintained a special bank account in the name of Gun Hill Realty Co. for the exclusive deposits of escrow funds. The broker also stated that he was never licensed to do business under the trade name of Prime Realty, a name he had intended to use until denied use by the Division of Licensing Services because of prior approval for use of that name by another licensee. The record does not disclose the extent of use by the broker of the commission form bearing the Prime Realty name; all other documents bear the licensed name Belmont Realty Company.

Mr. Abate, the investigator, testified that he spoke with Mr. Egidio Lombardi, the landlord, who stated both that Mr. Vuksanaj was and was not the managing agent for property owned or managed by Egidio Realty Corp. Mr. Lombardi did not testify. Other than the use of the term "managing agent" and the signature of the real estate broker on the lease on behalf of the landlord, neither oral nor documentary evidence offered defines the term or describes

what managerial duties, if any, did the broker perform in the operation of the property.

OPINION

1. To be valid, an authorization to execute an agreement on behalf of an owner for the rental of real property must be in writing (General Obligations Law, §5-703). A real property lease executed on behalf of a landlord by a real estate broker not empowered in writing to act on the landlord's behalf is void from the inception

(Forbes v Estate of Magoon, 160 AD 2d 756, 553 NYS 2d 475 [2nd Dept. 1990]). The rental contract executed by the real estate broker on behalf of the landlord with the landlord's oral consent was void from the beginning. The invalidity of the contract precluded achievement of the agency purpose and negated any claim of a contractual right to a brokerage fee.

2. The issue of an undisclosed double agency raises the primary question of what legal relationships were created among the parties. To have acted as an undisclosed double agent, the licensed real estate broker would have to had represented legally and simultaneously the adverse interests of both the prospective tenant and the landlord in negotiations for the rental of the housing accommodation without the principals' informed consent.

Agency, a consensual relationship, is created by operation of law when two factual elements, consent and control, are present in a transaction. The elements of consent and control may be actual or inferential, from words or from conduct. The agency is brought into being whether the parties intend it, understand it, mislabel it or affirmatively disavow it (Garcia v Herald Tribunes Fresh Air Fund Inc., 51 AD 2d 977, 380 NYS 2d 676 [1st Dept. 1976]; Department of State v Jayson Realty Co., 21 DOS 88 [1988]; Department of State v Rumsey, 41 DOS 88 [1988]; Department of State v Berlow Real Estate, 37 DOS 89 [1989]). Compensation is not a prerequisite to the creation of an agency, and an agent acting gratuitously is bound by the laws that govern an agency relationship (Restatement [Second] of Agency, §16; Department of State v Granick, 49 DOS 89 [1989]). However, one cannot properly appoint an agent to do an illegal act; an act is illegal if the agreement to do the act or the doing of the act would be criminal, tortious or otherwise opposed to public policy (Restatement [Second] of Agency, §19). Illegality is that "... which is contrary to the principles of law as contradistinguished from mere rules of procedure." Black, Law Dictionary (5th ed. 1979).

The facts disclose clearly an agency relationship between the tenant and the broker. The commission contract describes the conditions and the purpose of the agency -- the location and

renting of a suitable apartment by the broker for the tenant. The tenant's employment of the licensed real estate broker as an agent to perform that agency purpose is allowed by both agency law and licensing law (Real Property Law, §440).

In determining what legal relationship existed between the landlord and the broker, the landlord's appointment of the broker to execute the rental contract that was void in the inception must be considered. The first question to be answered is whether either the agreement to execute or the execution of the contract by the broker was illegal. It is beyond the power of a principal under

agency law to appoint an agent to do an illegal act. The provisions of Real Property Law, §440-a, enable a licensed real estate broker to rent or to negotiate the rental of real property for another. Agency law principles permit a landlord to appoint an agent to execute an agreement on the landlord's behalf for the rental of real property. Thus, neither an agreement to do the act nor the doing of the act of renting real property is itself illegal. The landlord's oral authorization of the broker (who agreed) to execute the rental contract rendered the act of the broker void, but not illegal. Consequently, the agreement of the landlord and the broker for the broker to execute the rental contract on the landlord's behalf created an agency relationship between those parties; at that time, the broker became a double agent and represented the diverse interests of both the prospective tenant and the landlord.

The question ensuing is whether the double agency was undertaken with or without the prior informed consent of both principals, landlord and prospective tenant. As a double agent acting simultaneously for the adverse interests of both the prospective tenant and the landlord, the fiduciary duties of an agent were imposed by law upon the real estate broker (Greenfield v Bausch, 238 AD 52, 263 NYS 19 [1st Dept. 1933]; Goldstein v Department of State, supra). Those duties include two fundamental obligations: (1) of full and fair disclosure which imposes an affirmative duty upon the licensee to fully and fairly disclose to the principals every fact known to the licensee that might affect the principals' interests in the agency (L.A. Grant Realty, Inc. v Cuomo, 58 AD 2d 251, 396 NYS 2d 524 [4th Dept. 1977]); and (2) of good faith and undivided loyalty which prohibits the real estate licensee from advancing any interest adverse to the interests of the principals without the principals' informed consent. Informed consent is consent freely given by the principals after the licensee's duty of full and fair disclosure has been satisfied. "...(T)he disclosure to be effective must lay bare the truth without ambiguity or reservation, in all its stark significance...Only by...uncompromising rigidity (in the enforcement of the standard of disclosure) has the rule of undivided loyalty been maintained against disintegrating erosion." Wendt v Fisher, 243 NY 443, 444 (1926).

Consequently, the real estate broker must prove that prior to undertaking to act either for adverse interests or as a double agent, the broker first made a full and complete disclosure to all principals and then obtained the consent of the principals to proceed in the undertaking. Here, the broker denied that he represented both parties and admitted that he did not inform the principals of the meaning and implications of representing the various diverse and competing interests involved in the transaction. Where the standard of effective disclosure is not met, the meaningful and informed consent of principals cannot be obtained by an agent to proceed to represent diverse interests or to act as a double agent in a real estate transaction (Department of State v Century 21 R.A. Janes Real Estate Inc., 11 DOS 89 [1989], modified on other grounds Ralph A. Janes Jr. Century 21 R.A. Janes Real Estate Inc. v Department of State, 167 AD 2d 960, 561 NYS 2d 1021 [4th Dept. 1990]).

The real estate broker acted as an undisclosed double agent for adverse interests in the transaction in that he did not obtain the prior informed consent of the principals, before proceeding as an agent to represent simultaneously the interests of both the tenant and the landlord.

3. By acting as the undisclosed double agent for both the prospective tenant and the landlord in the negotiations for the rental of the apartment, the real estate broker necessarily failed to make it clear to all parties as for which party the broker was acting as an agent, a violation of the provisions of 19 New York Codes, Rules and Regulations, §175.7. The regulation imposes an affirmative duty on a real estate broker to make it clear to all parties to a real estate transaction as for which party the broker is acting as an agent. Ralph A. Janes Jr. Century 21 R.A. Janes Real Estate Inc. v Department of State, supra; Department of State v Jacobson, supra.

4. To prove that a licensed real estate broker is a managing agent of property located in New York City and subjected to the provisions of the Rent Stabilization Code (9 New York Codes, Rules and Regulations, §2525.1), the evidence must establish that the real estate broker: (A) had a financial or ownership interest in or with the owner of the property; or (B) was employed to perform managerial duties in the operation of the property (Matter of Thurcon Properties Ltd., District Rent Administrative Order Number CDR 04,350 [1958], Division of Housing and Community Renewal; Department of State v Manhattan Apartments, Inc., 9 DOS 92 [1992]; Department of State v Jacobson, 82 DOS 92 [1992]). Evidence proving that a licensed real estate broker is an agent of a landlord is insufficient to prove that the broker acts as the landlord's managing agent in the operation of real property within New York City.

The evidence failed to establish that the real estate broker was employed to perform managerial duties in the operation of the property within New York City or that the broker had a financial or ownership interest in or with the owner of the property located within New York City and subjected to the provisions of the Rent Stabilization Code.

5. The complaint asserts that the real estate broker did not maintain an escrow account for the deposit of trust funds of clients. The evidence does not prove that the respondents failed to establish an escrow account for the deposit of the funds of customers.

A separate, special bank account for the deposit of escrow funds is required to be maintained by a real estate broker who receives and holds funds on behalf of clients (19 New York Codes, Rules and Regulations, §175.1). An escrow account is required when needed, when escrow funds are received and held by a broker on behalf of others; an escrow account is not required to be maintained at all times by a real estate broker who does not receive and hold escrow funds in the conduct of the real estate brokerage business. The purpose of the rule is to assure that the rights of the lawful owners of escrow funds are not jeopardized by an agent's mismanagement of funds entrusted to the agent's care (Cf. Black v Cuomo, 65 AD 2d 845, 410 NYS 2d 158 [3rd Dept. 1978]; Levine v Shaffer, 97 AD 2d 765, 468 NYS 2d 397 [2nd Dept. 1983]) The rule is not intended to place a duty on a real estate broker to maintain at all times an escrow account that is not used in the real estate business activities of the broker (Department of State v Bon Chateau Realty Corp., 60 DOS 93 [1993]).

Furthermore, the potential tenant delivered the money to the broker during the evening of April 20, 1990, and in the morning of the next day, April 21, 1990, $1,000 of the money was returned after demand by the tenant. The $600 retained by the broker after April 21, 1990, were considered by him as a commission and not as trust funds. The circumstances do not indicate that within a reasonable duration of time, the broker failed to deposit escrow funds entrusted to his care. The broker stated under oath that he did maintain an escrow account in the name of a licensed real estate company other than Belmont Realty.

6. The respondent engaged in the practice of real estate under an unlicensed name, in violation of the provisions of Real Property Law, §§440-a and 441(1). The statutes prohibit a licensee from engaging in the brokerage business in New York without first procuring a license as a real estate broker (§440-a), and prescribes that any person desiring to act as a real estate broker must file an application for licensure containing the name in which and the address where the brokerage business is to be conducted (§441[1]). The rule, 19 New York Codes, Rules and Regulations, §175.18, prohibits the licensee's use of a trade or corporate name that, in the opinion of the Division of Licensing Services, will cause confusion to the public due to similarity with any other such name.

The apparent purposes of the law and regulation are: To prevent the conduct of brokerage activity under an unlicensed name; to prevent the concealment of the true identity of the licensee from the public; and to prevent the intentional or unintentional misleading of the public by a licensee's use of a trade or corporate name (Department of State v Lombardo, 30 DOS 86 [1986]; Department of State v Prater, 29 DOS 88 [1988]; Department of State v Unique Homes Realty Inc., 15 DOS 90 [1990]).

The evidence does not show the intent of the respondent to mislead, conceal from or to confuse the public. It appears that the only document containing a reference to an unlicensed name and used in the brokerage business by the broker was the form commission agreement with a reference to Prime Realty in the middle portion of printed terms. Those factors are considered in assessing penalty.

7. The respondent demanded and retained an unearned commission. "A commission paid (by a principal) to a real estate broker must be relevant to and represent charges for some legitimate services performed by the broker on behalf of the principal." (Department of State v Goldstein, 7 DOS 87 [1987], confirmed Goldstein v Department of State, 144 AD 2d 463, 533 NYS 2d 1002 [2nd Dept. 1988]). Here, the broker did not perform the agency purpose; a valid rental agreement was not obtained; a fee was not earned. The wrongful conduct of the respondent, a licensed real estate broker, resulted in money being improperly received and retained by the licensee; consequently, in addition to a statutory penalty, both a penalty of restitution and reasonable conditions upon reinstatement to licensure may be imposed (Kostika v Cuomo, 42 NY 2d 673, 394 NYS 2d 862 [1977]; Beirne v Paterson, 86 AD 2d 947, 448 NYS 2d 594 [3rd Dept. 1982]; Department of State v Eisenhauer, 102 DOS 93 [1993]).

CONCLUSIONS OF LAW

1. The sufficient evidence proves that the respondent: (A) Acted as an undisclosed double agent by representing simultaneously the diverse interests of both the landlord and the tenant; (B) breached the fiduciary duties of full and fair disclosure and of good faith and undivided loyalty owed to the prospective tenant/ principal; (C) failed to make it clear to the tenant/principal as for which party the broker was acting as agent in the transaction, a violation of the provisions of 19 New York Codes, Rules and Regulations, §175.7; and (D) demanded and retained an unearned commission of $600 from the prospective tenant.

2. The evidence is insufficient to prove that the respondent failed to maintain a special bank account for the exclusive deposit of escrows monies of clients, as mandated by the provisions of 19 New York Codes, Rules and Regulations, §175.1

3. The wrongful conduct of the respondent, a licensed real estate broker, resulted in money being improperly received and retained by the licensee; consequently, a statutory penalty, a penalty of restitution, and reasonable conditions upon reinstatement to licensure are imposed.

DETERMINATION

IT IS DETERMINED, according to the foregoing and pursuant to the provisions of Real Property Law, §441-c, that the respondent, Mr. Nue Vuksanaj, real estate broker and representative real estate broker, has demonstrated untrustworthiness and incompetence; and the respondent shall pay a fine of $1,000 to the Division of Licensing Services on or by January 31, 1994. In the event that the fine is not timely paid, all licenses issued to the respondent pursuant to the provisions of Real Property Law, Article 12-A, shall be suspended for a three-month duration of time, beginning February 1, 1994, and ending April 30, 1994.

IT IS FURTHER DETERMINED, according to the foregoing and pursuant to the provisions of Real Property Law, §441-c, that the respondent, Mr. Nue Vuksanaj, real estate broker and representative real estate broker, collected and retained an unearned commission of $600 from Mr. Concepcion Hernandez; and the respondent is ordered to pay to Mr. Concepcion Hernandez on or by January 31, 1994, the sum of $600 plus interest from April 21, 1990, at the legal rate for judgments, currently 9% annually. In the event that the sum ordered is not timely paid, all licenses issued to the respondent pursuant to the provisions of Real Property Law, Article 12-A, shall be suspended indefinitely beginning February 1, 1994, and shall continue until the respondent presents proof satisfactory to the Division of Licensing Services that the sum has been fully paid by the respondent as herein ordered.

From the testimony and evidence produced at the hearing, the above findings of fact, opinion, conclusions of law, and determination

are made, and the adoption of this decision is recommended.

                                    Felix Neals

                               Administrative Law Judge

Concur and So Ordered on: GAIL S. SHAFFER

11/23/93 Secretary of State

                                    By:

                                     James N. Baldwin Executive Deputy Secretary of State