Undisclosed dual agency may cost broker $577,500 commission

Transcription

1 New York State Association of REALTORS LEGALLINES A risk management tool for New York s REALTORS Undisclosed dual agency may cost broker $577,500 commission By Anthony Gatto, Esq., NYSAR Legal Counsel FIRST QUARTER 2008 In the case of Sotheby s International Realty, Inc. v. Black (United States District Court for the Southern District of New York) the plaintiff may lose an earned commission due to their failure to comply with an agent s fiduciary duty to disclose a dual agency situation. According to the facts presented in the opinion of the court, Sotheby s was the agent of the seller, Conrad M. Black, who was listing his Park Avenue condominium for sale. Black s attorney is arguing that no commission is due to Sotheby s since Sotheby s: did not properly disclose dual agency; did not obtain consent to act as a dual agent; and breached its fiduciary duty and duty of loyalty (since the property was a condominium, the agency disclosure form was not required). Sotheby s contends that dual agency was disclosed through a document it faxed to Black s real estate attorney prior to signing the contract (Sotheby s argues that information received by an attorney is imputed to the client. This point is not one that is central to the main issue of the case). This document contained contact information for individuals involved in the transaction and listed Sotheby s International Realty as the broker for both Black and the purchasers. Sotheby s argues that this was sufficient to satisfy their duty of disclosure. The court stated that in the context of a real estate transaction, a broker may not act as agent for both seller and purchaser of property unless the broker first obtains the consent of both principals given after full knowledge of the facts. To establish the requisite consent for dual agency, an agent must demonstrate that both principals are fully informed of every fact material to their interests and that they consent freely in the presence of such knowledge. An agent s disclosure of its dual agency may not be indefinite or equivocal; rather, if dual interests are to be served, the disclosure to be effective must lay bare the truth, without ambiguity or reservation, in all its stark significance. Similarly, proof of consent by a principal to dual agency must be exacting. The court goes on to state that a conscientious fiduciary does not make disclosure by incorporating information in the fine print of a document provided for some other purpose; neither a deliberate effort at a blow-by nor a casual or inadvertent reference to a crucial fact constitutes a disclosure to the principal. Sotheby s attorney pointed out that there is no requirement that Sotheby s disclose dual agency in writing and further stated that it is the custom in New York City to disclose dual agency orally. The court found no evidence in the record that Sotheby s made any oral disclosure as to dual agency. Furthermore, Black s attorney argues that assuming the contact sheet faxed to Black s attorney was sufficient by itself to provide effective disclosure of Sotheby s dual agency to Black, no one at Sotheby s ever asked her, or, to her knowledge, Black, for consent to represent Buyer s agent has no cause of action against seller for unpaid commission By Anthony Gatto, Esq., NYSAR Legal Counsel The Supreme Court of New York, Appellate Division, Third Department heard the case of Valdina v. Martin et al. The case addresses the rights of a selling broker to recover commissions when they procure a ready, willing and able buyer. In this case, Old Ghent Realty had an exclusive right to sell agreement with sellers Patricia Martin and Joan Mackey. The listing agreement agreed to pay Old Ghent Realty a commission if the sale or exchange of [such] property is made or effected or agreed upon. Eric Valdina, the plaintiff, is a broker, who brought an offer from a buyer for the subject property. The sellers agreed to the offer and subsequently signed a binder that included contingencies for various inspections and the requirement of a formal contract. The sellers attorney drafted the contract. The contract was signed by the buyers and returned to sellers attorney with a good faith deposit as required under the contract. The sellers decided See Undisclosed page 2 that they did not want to sell the property, refused to sign the contract and returned the good faith deposit to the buyers. Valdina then initiated a legal proceeding to recover the compensation offered to the selling agent claiming he procured a ready, willing and able buyer for the property. The sellers and Old Ghent Realty filed a motion for summary judgment dismissing the complaint. The Supreme Court, Columbia County, granted the motions and dismissed See Commission, page 2 LL_1q2008.indd 1 2/28/2008 2:08:16 PM

2 PAGE 2 Commission continued from page 1 the complaint. Plaintiff appealed the Supreme Court decision. The Appellate Division affirmed the decision of the Supreme Court, and stated that the plaintiff had no contractual privity, expressed or implied, between him and the sellers. As a result, plaintiff has no claim for lost commission against the sellers. The sellers contract was with Old Ghent Realty, and the listing agreement stated that the commission was to be paid to Old Ghent Realty, not the plaintiff. The Appellate Division also found that plaintiff had no claim against Old Ghent Realty. The court stated that the only time one broker is entitled to receive a commission from Undisclosed continued from page 1 the purchasers in the transaction. Sotheby s opines that since Black never objected to the dual agency set forth in the contact sheet that Black essentially did consent. As such, the court found that at the very least, a genuine issue of material fact exists as to whether Black s inaction, by itself, constitutes the kind of exacting proof of consent to dual agency required under New York law. Just because the statutory agency disclosure form is not required for condominiums, cooperative apartments, commercial or vacant land, it does not mean that an agent wishing to memorialize the disclosure of an agency relationship cannot utilize the form to satisfy their duty under 19 NYCRR and their fiduciary duty. Had the agent of Sotheby s utilized some type of formal written agency disclosure, Sotheby s would not be in the situation they are in now, fighting to recover a $577,500 commission. NYSAR will continue to monitor this case and report any updates if and when they become available. Sotheby s International Realty, Inc. v. Conrad M Black, 2007 U.S. Dist. LEXIS 92168, (S.D.N.Y. 2007) [This is a citation to a Lexis document. Lexis is a subscription, online legal research service.] another broker based on an agreement to divide commissions is when the commission was actually received by the broker whom it is sought to charge with liability. Old Ghent Realty presented evidence that it was its practice to split a commission with a selling broker such as the plaintiff upon the closing of the transaction and the payment of the commission to Old Ghent. Furthermore, Old Ghent claimed that they rarely pursue commissions from its client when a sale is not finalized. Since Old Ghent received no commission, there can be no liability to the plaintiff. Eric Valdina v. Patricia Martin et al., 2008 NY Slip Op 410 (3d Dept. 2008) LL_1q2008.indd 2 2/28/2008 2:08:17 PM

3 PAGE 3 Lead paint disclosure requirements: The EPA is at the door By John Dolgetta, Esq. The Environmental Protection Agency (EPA) reports that it has been investigating real estate agents for the past seven years and for the most part has found the agents to be in compliance with the requirements of the Residential Lead-Based Paint Hazard Reduction Act. In some instances, there are agents who have not been in full compliance. The public s attention to lead paint has been heightened by incidents unrelated to the EPA (i.e., imported toys and other products containing lead-based paint). Noncompliance by agents of the EPA regulations, although infrequent according to the EPA, can produce harsh consequences and burdensome fines. Real estate licensees must become aware of the EPA s stance and the severe penalties, both civil and criminal, that can be imposed as a result of non-compliance. After speaking with an inspector for the EPA s Division of Enforcement and Compliance Assistance, we have been advised that compliance officers and field investigators are sent out to ensure that agents are following the law. The Residential Lead-Based Paint Hazard Reduction Act The act, known as Title X, was signed into law in 1992 and did not become effective until 1996, when the required rules and regulations were promulgated by the Department of Housing and Urban Development (HUD) and the EPA. While most agents recognize that the act exists and that lead paint disclosure is important, few real estate licensees appear to be strictly complying with the requirements of the act. The act focuses on target housing, which the EPA defines as most private housing, public housing, housing receiving federal assistance and federally owned housing built before The act applies in all situations that involve the sale or lease of target housing, which also includes the sale of individual cooperative apartments and condominium units. The agent s responsibilities under the act It is clear that sellers are required to comply with the act. However, the act goes even further and provides that whenever a seller or lessor has entered into a contract with an agent for the purpose of selling or leasing a unit of target housing, the regulations promulgated under this section shall require the agent, on behalf of the seller or lessor, to ensure compliance (emphasis added) with the requirements of this section. Section of the regulations defines agent as follows: Agent means a party that enters into a contract with a seller or lessor, including any party that enters into a contract with a representative of the seller or lessor, for the purpose of selling or leasing target housing. This term does not apply to purchasers or any purchaser s representative who receives all compensation from the purchaser. (Buyer brokers who are paid by the buyer are therefore exempted.) The EPA and HUD explain that any party entering into a contractual relationship directly with the seller or lessor (or indirectly with a representative of the seller or lessor) for the purpose of selling or leasing the target housing, is an agent for purposes of this rule. The regulations further explain that [a]s a consequence, listing agents, selling agents and buyer agents (if paid by the seller or through a cooperative brokerage agreement with the listing agent), are agents and are responsible for ensuring compliance under the rule. A buyer s agent, however, who is paid solely by the buyer, is not considered an agent under the rules. The typical real estate licensees in a transaction are therefore given the responsibility to inform the seller or lessor of their obligations under the act and ensure that each of them complies with the requirements. The seller s responsibilities under Section 1018 Both sellers and agents of sellers are required to comply with the various provisions of the act. Sellers and their agents are required to complete several steps before a purchaser is bound under a contract of sale or a tenant is bound under a lease agreement. Although failure to comply with the act does not invalidate or nullify the contract or the lease, sellers and agents must comply with the requirement or subject themselves to harsh civil and criminal sanctions, penalties and fines. Section 1018(a)(1)(B) of the rules requires that before the purchaser or lessee is obligated under any contract to purchase or lease the [target] housing,...the seller or lessor shall...disclose to the purchaser or lessee the presence of any known lead-based paint or any lead-based paint hazards, in such housing, and provide any lead hazard evaluation report available to the seller or lessor. A seller or lessor is deemed to have complied with the act provided the following items are completed: 1. The seller or lessor must provide a prospective purchaser or tenant with the pamphlet titled Protect Your Family From Lead In Your Home. The pamphlet, which is published by the EPA, the United States Consumer Product Safety Commission and HUD, can be downloaded from the EPA s website. In addition to the standard English version, the pamphlet is also available in a variety of other languages including Spanish, Arabic, Russian and Somali. The EPA recommends that the appropriate language version of the pamphlet should be utilized in each particular circumstance. 2. The sellers and lessors must disclose, based on actual knowledge, not constructive knowledge (constructive knowledge applies when the seller knew or should have known ), whether the target housing is known to contain lead-based paint and/or lead-based paint hazards. A seller or lessor must disclose to the purchaser or tenant information that is in his or her possession, or of which he or she actually has knowledge, relating to the existence of lead paint hazards. See Lead-based paint, page 4 LL_1q2008.indd 3 2/28/2008 2:08:17 PM

4 PAGE 4 Lead-based paint continued from page 3 3. Section 1018(a)(1)(B) further requires that sellers and lessors must provide to the purchaser or lessee any lead hazard evaluation report available to the seller or lessor. The commentary contained in the regulations indicates that the EPA and HUD have interpreted available evaluation reports to mean records and reports that pertain to lead-based paint and/or leadbased paint hazards in the target housing and that are in the possession of the seller or lessor or that are reasonably obtainable by the seller or lessor at the time of the disclosure. Basically, sellers or lessors must, at the very least, make an attempt to locate a report that may have been conducted by them previously or, if no longer in their possession, try to obtain a copy of it from the company that the seller or lessor may have used to conduct such an inspection. The regulations explain that the term reasonably obtainable is not intended to impose an obligation on the seller or lessor to conduct further evaluation or inspection of the target housing. Sellers of target housing must provide a purchaser with a 10-day period within which to conduct an inspection or risk assessment for lead-based paint or lead-based paint hazards. While the parties can mutually agree to lengthen or shorten the time for inspection, the sample verbiage contained in the rules, which is provided below, should be included in every real estate contract of sale (but not lease) relating to target housing: This contract is contingent upon a risk assessment or inspection of the property for the presence of lead-based paint and/or lead-based paint hazards at the purchaser s expense until 9 p.m. on the tenth (10 th ) calendar-day after ratification [Insert date 10 days after contract ratification or a date mutually agreed upon]. (Intact lead-based paint that is in good condition is not necessarily a hazard. See the EPA pamphlet Protect Your Family From Lead in Your Home for more information.) This contingency will terminate at the above predetermined deadline unless the purchaser (or purchaser s agent) delivers to the seller (or seller s agent) a written contract addendum listing the specific existing deficiencies and corrections needed, together with a copy of the inspection and/or risk assessment report. The seller may, at the seller s option, within days after delivery of the addendum, elect in writing whether to correct the condition(s) prior to settlement. If the seller will correct the condition, the seller shall furnish the purchaser with certification from a risk assessor or inspector demonstrating that the condition has been remedied before the date of the settlement. If the seller does not elect to make the repairs, or if the seller makes a counteroffer, the purchaser shall have days to respond to the counteroffer or remove this contingency and take the property in as is condition or this contract shall become void. The purchaser may remove this contingency at any time without cause. 5. Sellers and lessors must include specific warning language, which can be found in the act, in every contract of sale and lease and must also attach the executed disclosure form to the contract or lease as well. There are two separate and distinct disclosure forms, one for a sale and one for a lease. The warning language in the lease disclosure form was made less complex than the warning contained in the disclosure form used in connection with a sale of target housing. The forms are available for download at the EPA website ( These forms are also available in Spanish and should be used when appropriate. Agent s responsibility in connection with the sale or lease of target housing In September, 2003, the EPA issued a helpful instruction sheet, which should be utilized and reviewed by all agents. Below is a summary of the requirements contained in these instructions: Step 1 At the time a listing agreement is signed and entered into, the seller should complete the disclosure form by checking both statements under the Seller s Disclosure section of the form. The seller should then sign and date at the bottom of the form under the Certification of Accuracy section. The agent, if there is one, is required to inform the seller or lessor of his or her obligations under the act and the regulations as outlined above. At that point the seller or lessor is required to provide the agent with reports and information relating to the presence of lead paint or lead paint hazards present at or within the target housing. Step 2 The seller s agent, once he or she has informed the seller (the seller can be a natural person, corporation, not-for-profit corporation or any other type of entity that owns or leases target housing) of the obligations under the act, should initial the Agent s Acknowledgement section and sign and date the disclosure form. Again, this should be done at the time the listing agreement is provided to the seller or lessor and signed by him or her, and not at the time of the closing, which frequently occurs. Step 3 The instructions further point out that before a purchaser becomes obligated under any contract of sale or lease agreement, the seller, or the seller s agent, must provide the purchaser, or the purchaser s agent, with the disclosure form, the lead paint pamphlet and any record or reports. The agent for the buyer, if there is one, should then sign and date the form as purchaser s agent where indicated. Once that is done, the buyer should: (1) initial the three statements under the purchaser s acknowledgement; (2) check the appropriate box indicating whether the 10-day inspection opportunity was selected or waived; and (3) sign and date where indicated. Step 4 Once all of the above requirements have been fulfilled and the agent ensures that the seller (or lessor) has complied with all the requirements of the act and the rules, the agent and seller (or lessor) must maintain copies of the completed and fully executed disclosure form and contract addendum or rider containing the required inspection contingency language and warning for a period of three years after the completion of a sale (i.e. the closing date) or the commencement of the lease term under a lease. See Lead-based paint page 5 LL_1q2008.indd 4 2/28/2008 2:08:17 PM

5 PAGE 5 A brief review: Antitrust and the Real Estate Brokerage Firm The following is a brief excerpt from NAR s publication Antitrust and the Real Estate Brokerage Firm. Fixing Commission Splits A per se illegal price fixing conspiracy can involve not only the prices a firm charges customers or clients, but also the fees it pays for goods and services. In particular, listing brokers may not agree on the commission split to be paid to compensate cooperating Lead-based paint continued from page 4 Confusion in New York: Attorney or agent? While all of this is straightforward, many agents in New York fail to comply with the requirements of the rules. Unlike other states and in northern New York State, attorneys prepare the contracts of sale in the New York City metropolitan area. Many agents believe that since the attorneys prepare the contracts, the attorneys must attach the disclosure form to the contract and include the required warning and contingency language in the contract. Many real estate licensees believe they are not required to do anything. This is not the case. Agents should be obtaining all of this information early on and then should be providing this information to the attorneys along with the memorandum of sale or lease memorandum, as the case may be. Severe penalties result from non-compliance Real estate licensees must follow all of the steps outlined above and must make certain that the sellers are informed of their duties and obligations, and that they comply with them. If the seller s or lessor s agent fails to ensure compliance, and fails to keep adequate records for at least three years, both HUD and the EPA can impose civil monetary fines and penalties of up to $10,000 per violation. In addition, under Section 16(b) of the Toxic Substances Control Act (TSCA), which was amended by the act, any brokers who produce a ready, willing and able buyer for a listed property. Conspiracies among competitors to fix the compensation paid to cooperating brokers may also be deemed per se illegal. For this reason, brokers must determine their cooperative compensation policies in the same unilateral and independent manner that they establish the commission or fees charged to clients. Listing and selling brokers may, of course, have occasion to discuss or negotiate the compensation they will pay to each other person who knowingly or willfully violates Section 409 [of the TSCA] (and thus Section 1018) could, in addition to or instead of any civil penalty, be subject to a fine of not more than $25,000 for each day of violation or to imprisonment for not more than 1 year or both. Thus, a failure or refusal to comply under Section 409 of the TSCA gives the government broad powers to assert penalties and criminal liability. Section 1018(b)(3) of the act further provides that [a]ny person who knowingly violates the provisions of this section shall be jointly and severally liable to the purchaser or lessee in an amount equal to 3 times the amount of damages incurred by such individual. This allows an aggrieved purchaser or lessee the opportunity to seek direct compensation from a seller, lessor or their agent. Section 1018(b)(4) also allows the court to award court costs, reasonable attorneys fees, and expert witness fees to a prevailing plaintiff. Agents must be aware of the requirements of the act, and the rules, and must be sure to follow the steps closely. Investigators will be knocking at your door. Editor s Note: John Dolgetta, Esq. is an Associate Attorney with Edward I. Sumber, P.C, counsel to the Westchester County Board of REALTORS, Inc., and the article as reprinted with permission from Real Estate In-Depth, the newspaper of the Westchester County Board of REALTORS, Inc. in connection with individual transactions. These negotiations, however, generally take place before an offer to purchase has been procured by the cooperating office, and in any event should never include a representative of a third office. Boycotts A practice that is in a sense directly at odds with cooperation is group boycotting. Like price-fixing, group boycotting is generally characterized as a per se violation of the antitrust laws, although certain boycott activities may be addressed under the Rule of Reason. A group boycott is a concerted refusal to deal with a particular party, such as when two or more businesses agree to refuse to deal with another competitor in order to force a change in a competitor s behavior or to attempt to drive the competitor out of business. As with price-fixing agreements, treatment of a group boycott as a per se violation of the antitrust laws results in the alleged conspirators being denied the opportunity to offer pro-competitive or other justifications for the conduct. The typical group boycott allegation in the real estate brokerage business involves a claim that two or more real estate firms have agreed to refuse to cooperate, or to cooperate on less favorable terms, with a third firm. Often the target of the alleged boycott is a broker that employs a discount, alternative, or other non-traditional commission/compensation arrangement with clients. In some cases targets of alleged boycotts are real estate firms that offer non-traditional property marketing services. The purpose of the boycott, either explicitly or implicitly, is to eliminate the firm as a competitor in the market, or to cause the firm to abandon the discount or alternative marketing strategies. The antitrust laws are clearly make boycotts such as these per se illegal. Real estate firms or professionals may also be accused of boycotting service providers to the real estate firms. Such a group boycott may target a supplier or purchaser, rather than a competitor, of the brokers alleged to be the conspirators. Concerted refusals to deal will be See Antitrust review, page 6 LL_1q2008.indd 5 2/28/2008 2:08:17 PM

6 PAGE 6 Antitrust review continued from page 5 treated as per se illegal whenever they involve the purposeful elimination or limitation of competition, regardless of the ultimate motive or objective of the alleged conspirators. Real estate brokers may, for instance, agree not to patronize a provider of goods or services necessary or beneficial to the practice of real estate brokerage. For example, an agreement among several real estate firms not to employ the services of a particular printer to produce marketing materials, or to refuse to purchase advertising in a certain publication, may be an unlawful boycott of this type. The most effective and obvious way to avoid antitrust liability for such boycott activities is for each firm to unilaterally and without consulting any other firm determine the service providers it will use and the terms and conditions of using such suppliers. Real estate brokers or salespeople who act as if there is a conspiracy among competitors not to cooperate with another competitor, or to deal with them only on terms established by the conspirators, are as vulnerable to an antitrust lawsuit as those who actually do conspire. Case law clearly establishes that brokers are free to choose unilaterally to lower the compensation offered to one or more particular firms, including discount or alternative service firms. But, if a broker does so only after discussing the problem, even casually, with other firms, the inference may be drawn that this action was pursuant to a conspiracy to boycott the other firm. This is especially true if, as is often the case, other firms in the market make similar contemporaneous decisions to lower their compensation offers to the same firm. Licensees asked to compare their firm s commission split policies with those of other firms should explain that the amount of cooperative compensation is designed to maximize the incentive of cooperating offices to sell the listing. On the other hand, a licensee who works for a firm which offers a lesser amount to cooperating firms than may be typical for that market must be prepared to explain why this difference will not detract from the objective of attracting the efforts of cooperating brokers and securing a satisfactory transaction in the shortest period of time. The violations, whether per se or Rule of Reason, in nature both carry substantial penalties including, but not limited to, criminal prosecution and monetary damages. Per se violations carry an additional penalty of treble damages or as we like to refer to them triple damages. This means that the monetary damages awarded the party that is the target of the antitrust practices is awarded three times the amount of damages. Agreements that constitute a violation of antitrust laws Particular activities are deemed to be so harmful to competition that engaging in such activities is per se, or strictly, illegal. The Per Se Rule states that these activities are a violation of antitrust laws whether or not they in fact affect competition or even if there is a pro-competitive justification or purpose for them. Per se conduct is subject to criminal prosecution. Agreements among two or more competitors to refuse to cooperate, or to cooperate on less favorable terms with a third party, are per se violations. There is no defense to entering into such agreements. The agreements themselves, whether carried out or not, are illegal. Conduct of more than one competitor that is not a per se violation may nevertheless violate the antitrust laws under the Rule of Reason. Any conduct of more than one competitor that restricts competition may violate the antitrust laws under the Rule of Reason. Courts evaluate such conduct by balancing any anti-competitive effects against any pro-competitive justifications or purposes. Agreements do not need to be memorialized by a writing, nor are they required to be obvious and/or explicit to be illegal. Informal arrangements, conventions, or courses of conduct can constitute an agreement so long as two or more competitors have signaled their willingness or intention to abide by the arrangement (the so-called wink and nod or nudge-nudge agreement). Similar conduct by two or more firms, brokers, or agents, in conjunction with evidence of a general understanding among them, can also be deemed an illegal agreement. Any discussions with competitors (firms, brokers and/or agents) may be linked to a series of other related or non-related events to provide circumstantial evidence that an agreement did exist. Discipline continued from page 8 challenge the association s ethics hearings, absent willful and wanton misconduct. Since there was no evidence or allegations of willful and wanton misconduct by the association, the court ruled that the member had waived the right to challenge the association s disciplinary procedures and could not circumvent the association s process through the filing of a lawsuit. Thus, the court affirmed the trial court. Borland v. W. Michigan Lakeshore Association of REALTORS, No , 2007 WL (Mich. Ct. App. Dec. 11, 2007). ). [This is a citation to a Westlaw document. Westlaw is a subscription, online legal research service. If an Editor s Note: Reprinted with permission from The Letter of the Law, National Association of REALTORS. The NYSAR Media Center at offers audio/video podcasts on legal topics. LL_1q2008.indd 6 2/28/2008 2:08:18 PM

7 PAGE 7 NYSAR funded lawsuit results in reversal of injuction against SIBOR By Anthony Gatto, Esq., NYSAR Legal Counsel In a lawsuit funded in part by the NYSAR Legal Action Fund, the Staten Island Board of REAL- TORS (SIBOR) participated in an appeal from an order of the Supreme Court, Richmond County, in the matter of Mimi Neuhaus, et al., v. Staten Island Board of REALTORS et al. The Supreme Court of New York, Appellate Division, Second Department heard an appeal relating to whether the SIBOR violated its own arbitration rules, and an injunction prohibiting SIBOR from conducting any more arbitrations or ethics hearings. SIBOR conducted an arbitration hearing between Mimi Neuhaus and Neuhaus Real Estate (Neuhaus) and Frank Reali and Safari Real Estate Brokers (Reali). The arbitration was conducted in accordance with those professional standards guidelines established by NAR in the Code of Ethics and Arbitration Manual. At the conclusion of the arbitration, the arbitration panel found that Reali was the prevailing party. Neuhaus, unhappy with the outcome of the arbitration, filed an Article 75 proceeding in the Supreme Court, Richmond County, in an attempt to vacate the arbitration award. In the proceeding, Neuhaus named both Reali and SIBOR in her challenge to the arbitration award. Neuhaus also sought declaratory and injunctive relief against SIBOR based on its arbitration procedures. At the conclusion of the proceeding, the Supreme Court vacated the arbitration award. The Supreme Court declared that SIBOR s arbitration procedures are in violation of its own rules and contrary to the principles of due process and as such, the Supreme Court, through an injunction, prohibited SIBOR from conducting further arbitration or ethics hearings until it brings its procedures in compliance with Professional Standards. SIBOR appealed both the decision to vacate the award and the declaratory and injunctive relief imposed by the Supreme Court against SIBOR. (For unknown reasons, Reali did not appeal). The court found that SIBOR did not have standing to appeal the vacation of the arbitration award since they were not a party to the arbitration (meaning Neuhaus or Reali), they lacked standing to appeal that portion of the Supreme Court s decision. Since Reali did not appeal the vacation of the arbitration, the Appellate Division could not rule on the merits of the vacation of the arbitration and stated that they express no view as to whether the Supreme Court erred in vacating the subject arbitration award. The court did find that SIBOR had standing to challenge the declaratory and injunctive relief imposed by the Supreme Court against SIBOR. The court reasoned that such declaratory and injunctive relief against an arbitral body is not available in the context of an Article 75 proceeding, and the Supreme Court erred in awarding that relief. As a result, the court reversed that portion of the Supreme Court s order relating to SIBOR s arbitration procedures and such declaratory and injunctive relief imposed against SIBOR. Neuhaus v. Staten Island Board of REALTORS, 44 A.D.3d 1054 (2d Dept. 2007) New commission law not applicable to REALTORS who are independent contractors By Anthony Gatto, Esq., NYSAR Legal Counsel A new section of New York State Labor Law is not applicable to REALTORS who are independent contractors. There has been some degree of confusion regarding a new requirement under New York State Labor Law 191(1)(c) that requires commission salespersons to be paid commissions within a certain timeframe and the agreed terms of employment of how wages, salary, drawing account, commissions and all other monies earned and payable shall be calculated and must be reduced to writing. For the reasons set forth below, this section is not applicable to independent contractors and brokers should not be following this section unless licensees with the brokerage are employees. Labor Law 190(6) defines commission salesperson as an employee whose principal activity is the selling of any goods, wares, merchandise, services, real estate, securities, insurance or any article or thing and whose earnings are based in whole or in part on commissions. Labor Law 190(2) states Employee means any person employed for hire by an employer in any employment. Furthermore, the particular section in question is found under Article 6 of the Labor Law. In order to state a claim under Article 6, a plaintiff must first demonstrate that he or she is an employee entitled to its protections. Although the definition of employee is broad, independent contractors are not included (see, Labor Law 190 (2): Di Lorenzo v Sbarra, 124 AD2d 466, 1986). Since many brokerages utilize independent contractors as licensees rather than employees, the statute is entirely inapplicable to real estate licensees that are independent contractors. Questions concerning this or any other legal issue should be forwarded to the NY- SAR Legal Hotline. The hotline is available Monday-Thursday from 9 a.m.-1 p.m at NYSAR offers a variety of legal resources online. Visit the members section at to learn more. LL_1q2008.indd 7 2/28/2008 2:08:18 PM

8 PAGE 8 Court affirms association s discipline process A Michigan court has considered a member s challenge to a REALTOR association s imposition of discipline on him for his actions in a leasing transaction for vacation properties. Dean Borland (member) is a licensed real estate professional who is a member of the West Michigan Lakeshore Association of REALTORS (association). The member had a vacation property leasing business. In 2005, a family who rented a vacation home from the member filed a complaint with the association against the member. The association held a hearing on the complaint and decided to reprimand the member. The member filed a request for procedural review, but the appeal was denied. The member filed a lawsuit against the association, claiming that the association exceeded its authority in disciplining him for his personal transactions. He also claimed that leasing vacation homes did not constitute a transaction in real estate, and the association only had the power to discipline him for transactions involving his conduct involving the sale of real estate where he represented a party to the transaction. The trial court ruled in favor of the association, and the member appealed. The State of Michigan, Court of Appeals, affirmed the judgment in favor of the association. The association argued that the member agreed to abide by the Code of Ethics when he joined the association and the Code of Ethics gives the association the power to discipline its members for actions involving real estate-related activities, such as renting a vacation home. The association also argued that the waiver provision in the Code of Ethics barred the member from challenging the association s disciplinary process. The court determined that the waiver provision barred the member s lawsuit. The waiver provision, in relevant part, states that [e]very member, for and in consideration of his right to invoke arbitration proceedings and to initiate complaints under the Code of Ethics as a member of the National Association of REALTORS, hereby waives any right of action against the board arising out of any decisions, determinations, or other action taken or rendered under these procedures in the absence of willful and wanton misconduct. The member agreed to be bound by the Code of Ethics when he joined the association, and the Code of Ethics specifically provides that the member waived the ability to See Discipline, page 6... New York State Association of REALTORS 130 Washington Avenue Albany, NY LEGALLINES... In This Issue Undisclosed dual agency may cost broker $577,500 commission... Page 1 Buyer s agent has no cause of action against seller for unpaid commission... Page 1 Lead-paint disclosure requirements: The EPA is at the door... Page 4 Presorted Std. U.S. Postage P A I D Albany, NY Permit No. 203 LL_1q2008.indd 8 2/28/2008 2:08:18 PM