NY State Supreme Court rules municipalities may ban hydrofracking By Anthony Gatto, Esq., NYSAR Legal Counsel

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1 New York State Association of REALTORS LEGALLINES A risk management tool for New York s REALTORS NY State Supreme Court rules municipalities may ban hydrofracking By Anthony Gatto, Esq., NYSAR Legal Counsel FIRST QUARTER 2012 On February 21, 2012, in the case of Anschutz Exploration Corp. v. Town of Dryden, the New York State Supreme Court, Tompkins County, found that a municipality s ban on hydrofracking was not preempted by the Oil, Gas and Solution Mining Law (OGSML). The lawsuit was initiated by Anschutz, an entity that owns gas leases for 22,000 acres in Dryden, NY (accounting for one-third of all land in Dryden). On August 2, 2011, the Town of Dryden amended a provision of the Dryden Zoning Ordinance to ban all activities related to the exploration for, and production or storage of, natural gas and petroleum (amendment). At the time of the amendment, Anschutz had invested approximately $5.1 million in activities related to those items banned by the amendment. On September 16, 2011, Anschutz filed an Article 78 proceeding and a declaratory judgment action against the Town of Dryden and the Dryden Town Board (town). In the lawsuit, Anschutz sought to have the amendment invalidated on the basis that the OGSML preempted the amendment. The town in turn moved to have the lawsuit dismissed and to have the amendment ruled valid. The court accepted numerous individuals and entity s amicus curiae briefs both in support of and opposed to the amendment. One amicus curiae brief was submitted by Assemblywoman Barbara S. Lifton. In the introduction of the amicus curiae brief, the assemblywoman explains why she supports the amendment: Assemblywoman Barbara Lifton has represented the 125th New York Assembly District, comprising of Tompkins New York News and most of Cortland counties since The assemblywoman submits this amicus brief to provide the court with information about state law regarding the zoning authority of municipalities with respect to establishment of permissible uses within zoning districts. The assemblywoman has looked at this issue for several years and sponsors a bill in the New York State Assembly which seeks to clarify current law via New York Court of Appeals case law precedent. The assemblywoman has heard from many local municipal officials, and has seen growing statewide concern about the need for home rule authority over where and if natural gas drilling may take place in a community. She is concerned about the See Hydrofracking, page 4 Federal Trade Commission s Business Opportunity Rule now in effect The Federal Trade Commission s (FTC) Business Opportunity Rule (BOR) is an outgrowth of the FTC s Franchise Rule. A business opportunity is typically offered as a turnkey business, where the tools needed to operate the business are provided to the buyer by the seller in return for a payment. While the BOR isn t likely to affect the operations of most real estate brokerages, brokerages that actively recruit salespeople need to be familiar with the BOR. The BOR took effect on March 1, Business Opportunity Rule A business opportunity has three elements: first, a seller must solicit a prospective purchaser to enter into a new business; second, the purchaser must make a required payment; and third, the seller must promise to provide one of the three types of business assistance set forth in the BOR. If the BOR applies, then the prospective seller must provide an FTC-mandated one-page disclosure form that is attached to the BOR. Visit REALTOR.org to download the BOR and the required disclosure form. Examples provided by the FTC as to what constitutes a business opportunity are vending machine/rack displays, workat-home businesses, medical billing, and multilevel marketing (i.e., Amway-type operations). These transactions usually involve a fairly simple contract that does not require the extensive disclosures needed in a franchise situation. A brokerage that needs to comply with the BOR will need to closely review the BOR s disclosure requirements, and it is recommended that the brokerage work with legal counsel when making these disclosures. The required disclosure form contains the following information: the seller s identifying information; whether the seller makes an earnings claim (if so, the brokerage will need to provide additional information to support the claims); any legal actions brought against the seller; the seller s refund or cancellation policies; and list of purchas- See FTC Business Opportunity Rule, page 8

2 PAGE 2 Federal court dismisses antitrust allegations against MLS and association A federal court has considered whether or not there was a restraint of trade by an association and a Multiple Listing Service (MLS) over ethics complaints filed against a member. Keith Castonguay (owner) is the owner of the real estate brokerage firm MLSonline. com, Inc. (brokerage). The owner started the firm in 2001 with a business model that focused on Internet marketing. In addition to operating his own website, he also purchased a number of domain names containing MLS and used these to drive traffic to his own website. National Case In 2004, Edina Realty (Edina), another real estate firm operating in the same market as the brokerage, brought a lawsuit against the brokerage over its purchase and use of Edina Realty as a keyword in search results. The parties entered into a settlement that established how the brokerage could use the words Edina Realty in future online marketing. Following the settlement, the Regional Multiple Listing Service (RMLS), a MLS in which both the brokerage and Edina participated, enacted a rule which prohibited its members from using the term MLS or multiple listing service in its name or website name because it could mislead consumers. The brokerage filed a lawsuit against RMLS. The parties settled this lawsuit, which allowed the brokerage to continue using MLS in its name and domain names so long as it was made clear to consumers that it was not a multiple listing service. In 2010, Henry Brandis and Aaron Dickinson filed an ethics complaint against the owner, alleging that he violated Article 12 of the National Association of REALTORS Code of Ethics. Article 12 (amended in 2008) requires REALTORS to present a true picture in their advertising and other representations. Standard of Practice (SOP) provides REALTORS with the obligation to present a true picture to their advertising and representations to the public including the URLs and domain names they use, and prohibits REALTORS from: Engaging in deceptive or unauthorized framing of real estate brokerage websites. Manipulating (e.g., presenting content developed by others) listing content in any way that produces a deceptive or misleading result. Deceptively using metatags, keywords or other devices/methods to direct, drive, or divert Internet traffic, or to otherwise mislead consumers. SOP further provides: REALTORS shall not: Use URLs or domain names that present less than a true picture. Register URLs or domain names which, if used, would present less than a true picture. The Minnesota Association of REALTORS (association) heard the complaint in a bifurcated proceeding and concluded that the owner had violated the Code of Ethics. The association imposed a fine, issued a threeyear letter of reprimand, and ordered the owner to take certain classes. Following the disciplinary sanctions, the brokerage continued to use the same business name and website. In June 2011, Brandis and Dickinson filed a second ethics complaint against the owner making the same allegations. The association informed the owner that it was planning to conduct a second hearing. The owner filed a lawsuit against the MLS, association, Edina, and several individuals, alleging that the prior settlement agreements were violated, and also alleged that the other parties were conspiring together to restrain trade. All the defendants filed motions to dismiss the lawsuit. See Antitrust allegations, page 4 New York State Association of REALTORS Listen. Call. Learn NYSAR Radio Get answers to your legal questions. Visit NYSAR.com for air times and details.

3 PAGE 3 NYSAR Legal Hotline call report 2011 year in review HOTLINE ISSUES COMMISSION 12% 13% LICENSE LAW FAIR HOUSING 2% 2% 2% 3% 3% 7% 13% 2% CONTRACT DISCLOSURE AGENCY DOS REFERRALS ARBITRATION 11% 17% CODE OF ETHICS BOARD/ASSOCIATION 13% MLS OTHER HOTLINE ISSUE ISSUES COMMISSION % LICENSE LAW % FAIR HOUSING 70 2% CONTRACT % DISCLOSURE % AGENCY % DOS 96 3% REFERRALS 86 3% ARBITRATION 71 2% CODE OF ETHICS 62 2% BOARD/ASSOCIATION 66 2% MLS 233 7% OTHER HOTLINE ISSUES % TOTAL ISSUES 3320 Average length of call: 11 minutes Average calls per day:16 The NYSAR Legal Hotline is available to members by calling Monday through Thursday from 9 a.m. to 1 p.m.

4 PAGE 4 Antitrust allegations continued from page 2 The United States District Court for the District of Minnesota dismissed the federal antitrust claims and relinquished jurisdiction over the remaining state law claims. In order to bring an antitrust complaint, a party must demonstrate an antitrust injury, which is the type of injury that the antitrust laws are designed to prevent and flows from the defendant(s) conduct. The court ruled that the owner had failed to demonstrate an antitrust injury and so dismissed the antitrust allegations. In order to allege an antitrust claim, a party must allege a contract, combination in the form of a trust or otherwise, or conspiracy, in restraint of trade or commerce. The owner alleged that the defendants had entered into a group boycott. However, the owner had failed to show that the alleged group boycott had an anticompetitive effect in the relevant market. The antitrust laws require a showing of harm to competition, not merely harm to a competitor. Since the allegations of the owner centered on alleged harms his business would suffer, the court dismissed, with prejudice, the antitrust allegations for failing to demonstrate an antitrust injury. The antitrust claims were the only federal claims in the owner s lawsuit. Therefore, the court declined to exercise jurisdiction over the remaining state law claims and dismissed those allegations without prejudice, allowing the owner to file a new lawsuit bringing those claims in state court. TheMLSonline.com, Inc. v. Reg l Multiple Listing Serv. of Minnesota, Inc., CIV RHK/SER, 2012 WL (D. Minn. Hydrofracking continued from page 1 possibility of state law compelling gas drilling in neighborhoods where such activity is in contravention of zoning regulations or a comprehensive plan. Such preemption of home rule authority is, however, not supported by New York case law. The assemblywoman s role as a public representative, along with significant public interest in the outcome of this litigation, and the question of upholding long-standing legal principles which allow a community to decide its own course of development and foster its own identity, character, and livelihood as a valid exercise of police power, compels the assemblywoman to file this brief as special assistance to the court. As can be seen by Assemblywoman Lifton s introduction, she fully supports the ability of municipalities to determine whether or not hydrofracking should be permitted. Jan. 5, 2012). [This is a citation to a Westlaw document. Westlaw is a subscription, online legal research service. If an official reporter citation should become available for this case, the citation will be updated to reflect this information]. of REALTORS. The court dismissed Anschutz Article 78 proceeding and focused on the validity of the amendment. The court found that one provision of the amendment that invalidated any state issued permit was preempted by the OSGML and was, therefore, unenforceable. The court then ruled that just because one part of the amendment was invalid, it did not require the court to invalidate the entire amendment. The court ruled that the OSGML did not preempt the amendment and municipalities have the right to ban hydrofracking and those activities related to hydrofracking. As this issue develops, it is likely that many municipalities will enact similar measures under pressure from their residents. New York State Association of REALTORS Visit the all-new NYSAR.com Your 24/7 industry and association resource.

5 PAGE 5 Maine s highest court affirms arbitration award Maine s highest court has considered a challenge brought by the nonprevailing party in an arbitration proceeding conducted by the Bangor Board of REALTORS (association). David Sleeper (prevailing party) filed a lawsuit seeking confirmation of an arbitration award he received in a proceeding conducted by the association that the non-prevailing party, Scott Ruffner (challenger), refused to pay. The challenger sought to have the award vacated, claiming that: first, he was not allowed to submit certain procuring cause factors promulgated by the National Association of REALTORS (NAR); second, the hearing chair s comments about statements by the buyers impacted this exhibit; and DOS publishes fourth quarter ALJ decisions The Department of State, Division of Licensing Services (DOS) receives complaints about real estate licensees. The DOS investigates the complaints and if they are found to have merit, a licensee may be subject to a hearing before an administrative law judge (ALJ) to determine whether the licensee violated any law, rule, regulation or other duty expected of a licensee. The following citations refer to DOS decisions before an administrative law judge. Each decision provides a brief description regarding the subject matter of the violation(s) being heard before the administrative law judge. NYSAR is providing this information to REALTORS in an effort to better educate our members as to what constitutes a violation, and how to avoid having a complaint filed against you. Full copies of the decisions are available in the Legal Resources section of NYSAR.com via the court and DOS decisions link. 4th quarter DOS decisions 396 DOS 11 continuing education 400 DOS 11 unlicensed activity, fee from non-broker, agency disclosure, ownership interest, failure to cooperate with DOS finally, he claimed that he was denied the right to have counsel represent him at the hearing. The Maine arbitration statute has six grounds for overturning an arbitration award. The trial court ruled that the challenger had failed to allege a sufficient basis to overturn the award, and so entered an order confirming the award. The challenger appealed the trial court ruling. The Maine Supreme Judicial Court affirmed the trial court ruling. The challenger s first argument that the chair of the arbitration hearing had improperly refused to allow him 401 DOS 11 denial of license 403 DOS 11 agency disclosure, unlicensed activity, offering property without permission of owner, failure to supervise 406 DOS 11 denial of license 425 DOS 11 breach fiduciary duties 427 DOS 11 breach fiduciary duties, failure to cooperate, commingle funds, unlicensed location 428 DOS 11 denial of license 447 DOS 11 failure to deposit escrow funds, unlicensed activity, fee from non-broker, failure to cooperate, misappropriated files of broker 489 DOS 11 unlicensed activity 495 DOS 11 comingle funds 505 DOS 11 denial of license 506 DOS 11 denial of license National Case 518 DOS 11 unlicensed activity, continuing education to include as an exhibit a list of procuring cause factors from as an exhibit; instead, the chair only allowed the challenger to reference the factors during the hearing. The trial court had found that the arbitrators had access to this information in the NAR Code of Ethics and Arbitration Manual. Additionally, Maine law only allows courts to review arbitration proceedings for the six grounds enumerated in the statute and does not allow courts to review alleged errors of law. Therefore, these allegations were not a basis to overturn the arbitration award. Next, the court considered whether the chair s comment that a written statement admitted as an exhibit from the buyer had marginal value. The court listened to the tape from the hearing, and concluded that this statement was simply referring to the fact that the written statement was not as relevant as live testimony. The court ruled that this did not constitute a refusal to hear evidence as that would be the only basis to vacate the award, and so was not a basis to overturn the award. Finally, the court looked at the challenger s argument that he was denied counsel during the hearing. The challenger had received two notices from the association informing him that he was required to designate counsel at least 15 days prior to the hearing. The challenger designated his counsel within the 15- day period, and also did not request a continuance when his appointment for counsel was denied. Therefore, the court ruled that this also did not constitute a basis for vacating the award. Therefore, the court affirmed the rulings of the trial court. Sleeper v. Ruffner, No. Pen (Me. Dec. 6, 2011) (Mem.). [Note: This opinion is not published in an official reporter and therefore should not be cited as authority. Please consult counsel before relying on this opinion.] of REALTORS.

6 PAGE 6 North Carolina court reverses judgement in favor of brokerage A North Carolina appellate court has considered whether a brokerage had a duty to alert the buyer that the firm s principal was in the process of developing a parcel of land that would obstruct the buyer s ocean view. National Case In spring 2005, Roger and Terri Sutton (buyers) began searching for an investment property on Emerald Isle, North Carolina. The buyers contacted Roy Parker of Coastland Realty, Inc. (brokerage). Roy Parker owned the brokerage with his brother Vann Parker (collectively, the Parker brothers), who was the supervising broker for the brokerage. Roy referred the buyers to a salesperson with the brokerage, Wayne Driver (salesperson) (who was also Parker s son-in-law). Meanwhile, the Parker brothers were in the process of purchasing a tract of land known as Block 39 on Emerald Isle. They had formed an LLC to acquire the property with a third person, and had made a $21 million offer for Block 39 in late June As the buyers began looking at properties, they became discouraged and told the salesperson that they were considering ending the search. The salesperson told this to Roy Parker, who advised the salesperson that his neighbors, Henry and Susan Reaves (sellers), might be willing to sell their property. The salesperson contacted the sellers and arranged a showing. The sellers property overlooked Block 39 and so currently had an unobstructed ocean view. During the showing, the buyers asked the salesperson who owned the undeveloped land, and the salesperson allegedly said that the property was owned by a trust and would never be sold. The salesperson did not tell Roy Parker about the buyers questions because he said that he wanted to be able to answer their questions truthfully. The buyers made an offer on June 5 for less than the offering price. The parties entered into a contract and the transaction closed on August 10. The salesperson served as a dual agent in the transaction, making the required statutory disclosures to both parties. The LLC s offer to purchase Block 39 was accepted on July 5, and the LLC filed a petition to rezone Block 39 shortly thereafter. The transaction to purchase Block 39 closed on October 5, and the property was divided into 46 separate parcels. Testimony revealed that the development of Block 39 caused the buyers property to lose $150,000 in value. The buyers filed a lawsuit against the sellers, the salesperson, the brokerage, the LLC, and the Parker brothers individually, alleging fraud, negligent misrepresentation, and violations of the state s consumer fraud statute. The buyers argued that the defendants had conspired to sell them the sellers property without disclosing material facts. The trial court eventually entered judgment in favor of all the defendants, and the buyers appealed. The Court of Appeals of North Carolina partially reversed the trial court and sent the matter back to the trial court for further proceedings. The court first examined the allegations against the brokerage, the Parker brothers and the salesperson. A real estate professional in North Carolina owes its client a fiduciary duty to make full and truthful disclosure of all known or discoverable material facts. The Parker brothers were the broker/owners of the brokerage, and so were also responsible for disclosing material facts to the buyers. Therefore, if the plan to develop Block 39 was a material Visit the Legal section of NYSAR.com for the Brokers Reference Manual and Legal Compendium. fact that would affect the buyers decision to buy the property, then there was a duty to disclose this fact. The court stated that it was irrelevant that the Parker brother s development plans were undertaken for a separate business entity; the only question was whether this was a material fact that was required to be disclosed. The court also rejected the argument that the for sale sign on Block 39 should have alerted the buyers that the property was available for sale, as the salesperson allegedly told the b uyers that the property was not going to be sold. Therefore, the court sent the case back to the trial court for the jury to consider the allegations against these defendants. Finally, the court considered the allegations against the sellers. While the court stated that the fraud allegations could proceed against the sellers because the principal can be liable for the conduct of its agents, the sellers could not be liable for deceptive trade practices because they were not acting in commerce when the alleged fraud occurred. Therefore, the court affirmed the dismissal of the consumer fraud allegations, but sent the other allegations against the sellers for the jury to consider. The court also affirmed the dismissal of the allegations against the LLC, as it had no role in the alleged misconduct. Sutton v. Driver, 712 S.E.2d 318 (N.C. Ct. App. 2011). of REALTORS.

7 PAGE 7 Court awards association damages for member s violation of court order A Pennsylvania court has considered the amount of damages that a REALTOR association could receive for a member s violation of a prior court order. In 2007, Thomas Wilkins (broker) filed a lawsuit against the Pike/Wayne Association of REALTORS (association) after the association removed some of the broker s listings from the association s multiple listing service (MLS) that were from non- MLS participants. The parties entered into a settlement agreement (stipulation) that the parties filed with the court. In the stipulation, the broker agreed to: abide by the MLS s rules; provide the association with verification of listing agreements; and would only place listings secured on behalf of the broker into the MLS. Following the stipulation, the association believed that the broker was once again submitting listings of non-members. When he submitted these listings, he listed himself as the co-listing agent and refused to provide copies of the listing agreements to the association. When the association began deleting these listings from the MLS, the broker filed a motion seeking to enforce the terms of the stipulation. In response, the association filed a motion seeking judgment in its favor as well as enforcement of the stipulation. The Court of Common Pleas of Pike County, PA ruled in the association s favor and ordered the enforcement of the settlement agreement. The court rejected the broker s argument that because he owned the firms from which he submitted listings, he therefore owned the listings and could submit the listings even though the actual listing broker had not paid subscriber fees. The broker was not the listing agent for those listings, and only listings from subscribers could be submitted to the MLS. Instead, the court found that the stipulation required the broker to abide by the MLS rules. Since the MLS rules barred the submission of listings from non-members, the broker had violated the MLS rules and so violated the stipulation. Therefore, the court ordered the enforcement of the stipulation against the broker. In a subsequent hearing, the court considered the amount of damages that the association was entitled to receive for the broker s contempt of the stipulation. First, the court awarded the association its actual costs incurred for the breach of the stipulation as follows: $5,200, an amount estimated to equal the amount of staff time incurred investigating the matter; $301, fees incurred for investing for such things as copying; and $3,005, for cost incurred for staff attending court proceedings. Next, the court considered the other damages that the association was entitled to receive for the breach of the stipulation. The court looked at the listings that violated the stipulation. The broker claimed that the submission of three of the 13 listings in question was due to clerical error. For the remaining 10 listings, the court assessed damages of $140 per listing for each of the listings, or a total of $1,400 in damages. The court also assessed damages of $750 in attorney fees for the amount incurred by the association s attorney in investigating and prosecuting the breach of the stipulation. Therefore, the court awarded the association $10,656 in damages. Wilkins v. Pike/Wayne Assoc. of REAL- TORS, No CIVIL-2007 (Pa. Ct. of C.P., Pike Cty. Jan. 11, 2012). [Note: This opinion is not published in an official reporter and therefore should not be cited as authority. Please consult counsel before relying on this opinion. Editor s Note: NAR Legal Affairs would like to thank Janet Gallagher, the association executive for the Pike/Wayne Association of REALTORS, for alerting NAR to this decision. of REALTORS. Visit NYSAR.com for webinars covering key legal topics including: Complying with the Commission Escrow Act Do-Not-Call compliance The duty to disclose a stigmatized property And much more Visit today.

8 PAGE 8 FTC Business Opportunity Rulecontinued from page 1 ers who acquired the opportunity within the prior three years. BOR s impact on real estate brokerages As stated above, the BOR will impact brokerages that actively solicit salespeople and thus satisfy the BOR first prong. If a brokerage satisfies the solicitation prong, it will need to review the other two prongs to determine if it is subject to the BOR. The assistance prong is the most important consideration for brokerages that actively solicit salespeople. The relevant assistance section states that the BOR is triggered when the solicitation promises assistance to the buyer (in this case, the salesperson) in return for a payment. Business assistance constitutes providing accounts, including but not limited to, Internet outlets, accounts, or customers for prospective purchaser. The BOR also states that advertising and general advice about business development and training shall not be considered as providing the assistance triggering the BOR. A brokerage that does not want to trigger the BO R needs to be careful about the tangible assistance it promises to provide to salespeople, such as a customer list or other tangible support. The BOR is designed to cover a business model where the buyer purchases all of the tools needed to enter the business. Salespeople are traditionally left to develop their own real estate business, and so brokerages do not usually provide the assistance required by the BOR. However, if the necessary tools to enter the business are promised to a salesperson in a solicitation, then the BOR may be triggered. Examples of the types of assistance that may trigger the BOR would be the promise of a client list or other types of lead assistance, such as promising a salesperson all the leads from a property development. Another type of support that could qualify as assistance would be the promotion of a training program as leading to the success of salespeople. While the rule excludes general advice, advertising and training from its definition, the BOR could apply if certain representations are made about any of those elements in the solicitations it makes to salespeople, such as the example above about the training program. The more assistance that a brokerage promises to the salesperson in its solicitation in return for joining the brokerage (and also a payment), the more likely the BOR could be triggered. The required payment section is another prong in the test. If a brokerage has solicited a salesperson, promised tangible assistance covered by the BOR, and then requires a direct payment to the brokerage, the brokerage would be covered by the BOR. It is less clear whether a brokerage would need to make the required disclosures if it met the other two prongs, but didn t require a direct payment in return for the assistance promised but instead simply retained a portion of all the salesperson s commissions. The commentary accompanying the BOR does not elucidate whether the required payment element would be satisfied in the traditional brokerage arrangement, where the broker receives all of the salesperson s commissions and provides a prearranged payment split to the salesperson. Therefore, a brokerage seeking to avoid making the BOR s required disclosures should focus on the assistance promised in its solicitation, as that is the clearest way for a brokerage to avoid triggering the BOR. Penalties Failure to comply with the BOR s disclosure requirements within seven calendar days of the earlier date of the buyer signing the contract or making a payment to the seller constitutes an unfair or deceptive trade practice. The FTC can seek civil penalties of up to $16,000 a day per violation, which adjusts periodically to account for inflation. However, in addition to seeking civil penalties, the agency can also seek equitable monetary relief for consumer redress or the disgorgement of ill-gotten gains. Conclusion The BOR impacts any brokerage that actively solicits salespeople and offers tangible assistance to the salesperson in return for a required payment. Brokerages should review their recruiting solicitations to determine if they are impacted by the BOR. of REALTORS. NYSAR offers a variety of legal resources at NYSAR.com. Visit the Legal section for the Brokers Reference Manual and Legal Compendium.