ALJDEC decisions subject to certification as final

18F-DI-364-REL-RES-3 · Department of Real Estate · 2019-07-31

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: June 5, 2019 APPEARANCES: Darrell W. Small on his own behalf; Deian Ousounov, Esq. for the Department of Real Estate ADMINISTRATIVE LAW JUDGE: Thomas Shedden FINDINGS OF FACT 1. On April 25, 2019, the Arizona Department of Real Estate (“Department”) issued a Notice of Hearing and Complaint setting the above-captioned matter for hearing on June 5, 2019 at the Office of Administrative Hearings in Phoenix, Arizona. 2. The Notice of Hearing provides that the hearing was being held to determine whether grounds exist to revoke or suspend Respondent Darrell W. Small’s License No. BR557024000 and whether grounds exist to impose against Mr. Small a civil penalty of up to $1000 per violation as provided for in Ariz. Rev. Stat. section 32-2160.01. 3. Also pending is Mr. Small’s Motion to Dismiss in which he argues that the Department did not comply with Ariz. Rev. Stat. section 41-1092.05 that requires contested cases to be conducted within sixty days of an agency’s request for a hearing. 4. The Department presented the testimony of investigator Linda Bevins and it called Mr. Small to testify; Mr. Small also presented evidence on his own behalf. 5. Mr. Small is the designated broker for Small Time Investments LLC; his license expires on September 30, 2020. 6. The Department’s Complaint is based on two complaints it received about the sale of a house located at 7669 Hazelwood Street in Scottsdale for which Mr. Small was the listing agent/broker. These complaints were filed by the buyer and her licensed agent, but neither complainant was called by the Department to testify. Ms. Bevins was not the Department’s investigator in this matter and she based her testimony on a review of the file. Consequently, the only witness with personal knowledge of the sales transaction at issue was Mr. Small. 7. At the outset of the hearing, the Department withdrew its factual allegations found at paragraphs 19 through 25 (inclusive) of the Complaint. 8. The Department originally alleged that Mr. Small violated Ariz. Rev. Stat. sections 32-2153(A)(1), (A)(3), (A)(4), (A)(21), (B)(3) and (B)(7), and Ariz. Admin. Code sections R4-28-502(C) and (E), R4-28-1101(A), (B) and (E), and R4-28-1103(C). 9. At the outset of the hearing, the Department withdrew its allegations that Mr. Small had violated Ariz. Rev. Stat. sections 32-2153(A)(4) and (A)(21), and Ariz. Admin. Code sections R4-28-502(C) and (E). 10. The Complaint contains allegations against Mr. Small related to a roof-leak and dry rot, roof repairs, and an Environmental Report that was prepared on April 20, 2018. The Department presented no substantial evidence about these allegations at the hearing and did not address these issues in its written closing argument. 11. The factual allegations that are issue can be summarized as: (1) Mr. Small failed to disclose that he and family members had an interest in the property because they are member-managers of LLCs that owned and sold the property at issue, and (2) Mr. Small failed to disclose that a putative second bedroom did “NOT have an AC/Heat source and may not be considered a bedroom/livable area by federal housing standards.” 12. Through its written closing argument, the Department alleges that Mr. Small committed three violations: (1) he failed to inform all parties that he and his immediate family had an interest in the property; (2) he misrepresented certain aspects of the property and he did not describe material aspects of the property (i.e., that the property had two bedrooms and that the second bedroom lacked direct ventilation from the central air conditioning unit); and (3) his behavior was as a broker and licensed agent in this transaction was dishonest and untruthful. The sale at issue 13. Mr. Small was the listing agent for the house at 7669 Hazelwood Street in Scottsdale, with the owner being 7669 Hazelwood LLC. The house at the property was built in 1962. 14. After 7669 Hazelwood LLC purchased the property, it paid licensed contractors to perform certain work, including putting up doors to close-in an area that the LLC then considered to be a second bedroom. In the Multiple Listing Service, Mr. Small identified the property as a two bedroom unit. 15. As pertinent to this matter, that second bedroom did not have a vent for the air conditioning. 16. Teresa Wickersham and her licensed agent toured the property on March 20, 2018. 17. Ms. Wikersham made a cash offer and a purchase contract was signed on March 21, 2018. The contract listed 7669 Hazelwood LLC as the owner, which LLC also signed the contract using e- signature. 18. Through the purchase contract the buyer acknowledged that she was holding harmless the broker for any defects or conditions that could have been discovered by inspection or investigation. 19. In her complaint, the buyer’s agent informed the Department that before her client made an offer on the property, the listing agent (Mr. Small) informed her that a previous sale had fallen through because the appraiser had determined that the unit could only be classified as a one-bedroom unit, but the property owners had done the work required to make the property a two- bedroom unit. Alleged failure to disclose an interest in the property 20. 7669 Hazelwood LLC was formed on March 14, 2016, Mr. Small is the statutory agent, and the members are Robert Belica who is licensed by the Department, and Pinnacle REIT LLC. 21. Pinnacle REIT was formed in 2012 and its member managers include Mr. Small and Megan Small, Drake Perrior-Small and Andrew T. Perrior-Small. The latter two are Mr. Small’s adult sons, but Mr. Small is unrelated to Megan Small. 22. Mr. Small did not disclose that he or his family members had any interest in the Hazelwood property. 23. Mr. Small submitted to the tribunal statements from Ms. Small and his two sons (all of which were prepared after the hearing date) showing that neither Mr. Small nor Pinnacle REIT LLC had a financial or ownership interest in 7669 Hazelwood LLC or the property at issue. These statements also show that the LLC’s members’ ownership in any given project or property varied. Alleged misrepresentations 24. The buyer and her agent were at the property on March 20, 2018. On that date they observed evidence of the roof leak and alerted Mr. Small. 25. Mr. Small told the agent to include that information in the purchase offer, which she did, and Mr. Small arranged for a roofer to go to the property. 26. Hazelwood LLC wanted to do delay the deal to allow time for the roofing problem to be assessed. The buyer wanted to move forward looking to close in fifteen days. Mr. Small informed the buyer’s agent that he had a SPDS dated September 24, 2017 and offered to send it to her. The buyer signed that SPDS on March 28, 2018. 27. On March 26, 2018, the buyer had an inspection done at the property. The inspection report included a finding that the “south bedroom does NOT have an AC/Heat source and may not be considered a bedroom/livable area by federal housing standards.” The report recommend further evaluation of the federal housing regulations or evaluation by a licensed contractor. 28. It was not until after the after the home-inspection report was completed that the buyer’s agent raised with Mr. Small the issue of whether the second bedroom required a vent. According to Mr. Small, this is when first he learned that the lack of a vent in the room raised an issue. 29. Mr. Small’s position is to the effect that he relied on the licensed contractors that performed the work at issue to properly close-in the room. 30. According to Mr. Small, a contractor informed him that any ductwork required to add a vent to the room could be installed for a few hundred dollars. 31. Ms. Bevins testified to the effect that based on the home inspector’s report, she had reviewed information from the Federal Housing Authority, and she had also looked at City of Scottsdale Ordinance No. 4284. 32. Ms. Bevins’s opinion was that the lack of a vent in the second bedroom might affect the affect the financing for some mortgage lenders, and consequently, she was of the opinion that Mr. Small should have disclosed that the second bedroom did not have a vent. 33. The Department submitted to the tribunal a portion of the FHA Single Family Housing Policy Handbook and the City of Scottsdale Ordinance No. 4284 that Ms. Bevin’s used as “guiding principle[s]” in forming her opinions. 34. The portion of the FHA handbook that Ms. Bevins relied on shows that it is addressing appraisers. The handbook does not specifically address bedrooms, but rather addresses “livable space.” 35. The handbook does not show that a room must have an HVAC vent to be considered liveable space. But rather it shows only that converted space must have a “permanent and sufficient” heat source and that the property must have a permanently installed heating system that “automatically” heats all living areas to a minimum of 50 degrees Fahrenheit. There was no substantial evidence adduced to show that these standards were not able to be met at the property. 36. Neither the Department nor Ms. Bevins identified the particular part of Ordinance 4284 that informed her opinion, nor did either show that a bedroom required a direct connection to the air conditioner in order to comply with the ordinance. 37. The Ordinance does set out performance standards that must be met, but there was no evidence adduced to show that these standards could not be met at the property. Allegation that Mr. Small’s actions were not honest or truthful 38. The Department argues that Mr. Small’s failure to disclose that he and his sons had an interest in the property and his failure to disclose that the second bedroom did not have an air conditioning vent puts his honesty and truthfulness as a broker at issue. 39. The Department alleges that Mr. Small was dishonest in his Answer because the import of paragraph 5 is that the second bedroom was added before 7669 Hazelwood LLC bought the property, whereas Hazelwood LLC added the bedroom, which Mr. Small later acknowledged. 40. Mr. Small explained that when he wrote paragraph 5, he was referring to the outer walls and not the wall or doors that were added to close off the room. This testimony is credible and supported by the fact that in his Answer at paragraph 18 Mr. Small explicitly acknowledged that the LLC added the doors to close off the room. 41. The Department also alleges that Mr. Small was dishonest with regard to Mr. Belica’s role in the LLCs at issue and that he made other false statements during the investigation, but it adduced no substantial evidence to support these other allegations. Requested Relief 42. In its Complaint, the Department request that an $8000 civil penalty be imposed, that Mr. Small’s license be suspended for 90 days, that he be issued a two-year provisional license after the period of suspension ended, that he be required to submit quarterly affidavits for those two years, and that he be required to take an additional eighteen hours of classroom education (beyond the licensing requirements). 43. At the outset of the hearing, the Department modified its requested relief by reducing to $3000 the proposed civil penalty, eliminating the request for a license suspension, and by eliminating the request that Mr. Small be issued only a provisional license. 44. In its written closing argument the Department requested only that Mr. Small be assessed a civil penalty of $3000. Mr. Small’s Motion to Dismiss 45. Prior to requesting that the Office of Administrative Hearings set this matter for hearing, the Department had made three prior requests for a hearing on the same allegations, but in each case it withdrew those requests before it issued a Notice of Hearing. 46. Mr. Small argues that this matter should be dismissed because Ariz. Rev. Stat. section 41-1092.05 requires that the hearing in a contested case is to be conducted within sixty days of the agency’s request for a hearing. 47. The Department argues to the effect that Mr. Small’s motion should be denied because this hearing was conducted within sixty days of its request for this hearing. CONCLUSIONS OF LAW 1. The Department bears the burden of persuasion to show that Mr. Small violated the statutes and rules as alleged. Ariz. Rev. Stat. § 41-1092.07(G)(2). 2. Mr. Small bears the burden to show that his motion to dismiss should be granted. Ariz. Admin. Code § R2-19-119. 3. The standard of proof on all issues in this matter is that of a preponderance of the evidence. Ariz. Admin. Code § R2-19- 119. 4. A preponderance of the evidence is: The greater weight of the evidence, not necessarily established by the greater number of witnesses testifying to a fact but by evidence that has the most convincing force; superior evidentiary weight that, though not sufficient to free the mind wholly from all reasonable doubt, is still sufficient to incline a fair and impartial mind to one side of the issue rather than the other. Black’s Law Dictionary 1373 (10th ed. 2014).

5. Statutes should be interpreted to provide a fair and sensible result. Gutierrez v. Industrial Commission of Arizona; see also State v. McFall, 103 Ariz. 234, 238, 439 P.2d 805, 809 (1968) ("Courts will not place an absurd and unreasonable construction on statutes."). 6. “Substantial evidence is evidence which would permit a reasonable person to” conclude that the proposed finding should be substantiated. See Sierra Club – Grand Canyon Chapter v. Ariz. Corp. Comm’n, 237 Ariz. 568, ¶ 22, 354 P.3d 1127 (2015 App.)(citing In re Estate of Pouser, 193 Ariz. 574, 579, ¶ 13, 975 P.2d 704 (1999). 7. Ariz. Rev. Stat. section 32-2153 provides in pertinent part: A. The commissioner may suspend or revoke a license, deny the issuance of a license, issue a letter of concern to a licensee, issue a provisional license or deny the renewal or the right of renewal of a license issued under this chapter if it appears that the holder or applicant, within five years immediately preceding, in the performance of or attempt to perform any acts authorized by the license or by this chapter, has:

1. Pursued a course of misrepresentation or made false promises, either directly or through others, whether acting in the role of a licensee or a principal in a transaction. *** 3. Disregarded or violated any of the provisions of this chapter or any rules adopted by the commissioner. *** B. The commissioner may suspend or revoke a license, deny the issuance of a license, issue a letter of concern to a licensee, issue a provisional license or deny the renewal or the right of renewal of a license issued under this chapter when it appears that the holder or applicant has: *** 3. Made any substantial misrepresentation. *** 7. Not shown that the holder or applicant is a person of honesty, truthfulness and good character.

8. Ariz. Admin. Code section R4-28-1101 provides in pertinent part: A. A licensee owes a fiduciary duty to the client and shall protect and promote the client’s interests. The licensee shall also deal fairly with all other parties to a transaction. B. A licensee participating in a real estate transaction shall disclose in writing to all other parties any information the licensee possesses that materially or adversely affects the consideration to be paid by any party to the transaction, including: *** 3. Any material defect existing in the property being transferred; and *** E. A real estate salesperson or broker shall not act directly or indirectly in a transaction without informing the other parties in the transaction, in writing and before the parties enter any binding agreement, of a present or prospective interest or conflict in the transaction, including that the: *** 4. Salesperson or broker, or a member of the salesperson’s or broker’s immediate family, has a financial interest in the transaction other than the salesperson’s or broker’s receipt of compensation for the real estate services.

9. A licensee who violates the applicable statutes or rules is subject to a civil penalty of up to $1000 for each violation. Ariz. Rev. Stat § 32-2160.01. 10. The preponderance of the evidence shows that Mr. Small violated Ariz. Admin. Code section R4-28-1101(E) by failing to disclose that he was a manager and member of Pinnacle REIT LLC, which is also a violation of Ariz. Rev. Stat. section 32- 2153(A)(3). Although Mr. Small presented information showing that he may not have had a direct financial interest in the property, the rule is not limited solely to disclosure of financial interests and his involvement as a member-manager in the LLC should have been disclosed. 11. The Department alleges that by failing to disclose that the second bedroom did not have an air conditioning vent and by listing the property as having two bedrooms, Mr. Small violated Ariz. Rev. Stat. section 32-2153(B)(3) and Ariz. Admin. Code section R4-28-1101(B). The Department has not proven this allegation because the Department has not shown that the south (or second) bedroom is not a bedroom or liveable space under federal housing standards or under the City of Scottsdale Ordinance. 12. In addition, the lack of a vent would be an obvious condition that the buyer and her agent could have observed when they inspected the property before making an offer. Moreover, before the buyer made her offer, her agent was aware that there previously had been an issue regarding as to whether the house had two bedrooms. 13. Mr. Small was unaware that the lack of a vent was an issue until the inspection report was issued, and apparently so was the buyer’s agent or she would have raised the issue during her tour of the property. 14. Although Ms. Bevins was of the opinion that the lack of a vent might materially affect the price offered for the property or the ability to obtain a loan, the Department did not establish by a preponderance of the evidence that either possibility was true. 15. The Department alleges that Mr. Small made statements that show he was clearly being dishonest, in violation of Ariz. Rev. Stat. section 32-2153(B)(7), but it has failed to prove this allegation. 16. Regarding the failure to disclose his interest in 7669 Hazelwood LLC, the evidence shows only that Mr. Small did not understand the requirements of section R4-28-1101(E) and there was no substantial evidence adduced to show that he was deliberately being dishonest when he failed to disclose this information. 17. Regarding Mr. Small’s listing the property as being two bedrooms, the Department did not show that this was in error, and so this is not proven to be a dishonest statement. And even if the Commissioner rejects that finding, there is no substantial evidence to show that Mr. Small’s actions were deliberately dishonest. To the contrary, the evidence shows that he was unaware that the lack of a vent posed any issue and that he relied on the licensed contractors who did the work (which the home inspector’s report indicates was appropriate). In addition, apparently neither the buyer’s agent nor Ms. Bevins had any knowledge independent of the home inspector’s report that the lack of a vent presented a possible issue (i.e., it appears that this issue is not one that is typically within the scope of a licensee’s knowledge). 18. Regarding Mr. Small’s statement in paragraph 5 of his answer, Mr. Small’s answer at paragraph 18 shows clearly that the room at issue was closed-in after Hazelwood LLC bought the house, and he provided credible testimony showing that he was referring to the outer walls in paragraph 5. Consequently, the Department has not proven that Mr. Small made a dishonest statement in his answer. 19. The Department makes other (somewhat vague) allegations that Mr. Small was dishonest, but it has not proven that he was so. 20. The Department also alleges that Mr. Small violated Ariz. Admin. Code section R4-28-1103 (Broker Supervision and Control) at subsection C, but it presented no substantial evidence in support of that allegation and has not proven it by a preponderance of the evidence. Mr. Small’s Motion to Dismiss 21. Mr. Small has not met his burden to show that this matter should be dismissed based on the fact that the Department previously requested hearings on the same allegations that are at issue in this matter without conducting the hearing within sixty days of the request for each of those hearings. 22. Although Ariz. Rev. Stat. section 41-1092.05 does appear to require contested cases to be heard within sixty days of the agency’s request for a hearing, that statute does not provide any remedy for any breach. As such, the statute’s language must be considered aspirational, not directive. E.g., Arizona Downs v. Arizona Horsemen's Foundation, 130 Ariz. 550, 554, 637 P.2d 1053, 1057 (1981)(use of the word “shall” can indicate desirability, preference, or permission)(citations omitted). 23. In considering the appropriate civil penalty for Mr. Small’s violation of R4-28-1101(E), that the Department apparently “over-charged” Mr. Small as evidenced by its withdrawal of multiple allegations during the hearing and its failure to present evidence on other allegations, weighs against a severe penalty because Mr. Small was required to spend time and effort to prepare to defend against those allegations. 24. Also weighing against a severe penalty is the fact that the Department proved only one violation, not the eight or more it originally alleged. 25. Considering the facts and circumstances of this matter, a civil penalty of $250 is appropriate. ORDER IT IS ORDERED that within fifteen days of the final Order in this matter, Darrell W. Small must pay to the Department of Real Estate a civil penalty of $250. In the event of certification of the Administrative Law Judge Decision by the Director of the Office of Administrative Hearings, the effective date of the Order is five days after the date of that certification.

Done this day, July 31, 2019.

/s/ Thomas Shedden Thomas Shedden Administrative Law Judge

Transmitted electronically to:

Judy Lowe, Commissioner Arizona Department of Real Estate

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Office of Administrative Hearings 1740 West Adams Street, Lower Level Phoenix, Arizona 85007 (602) 542-9826