ALJDEC

98A-H1962-REL · Department of Real Estate · 1999-04-28

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: November 18, 19, 1998; December 16, 1998; and February 12, 1999. Followed by post-hearing memoranda and motions. APPEARANCES: Michael T. Denious, Assistant Attorney General, appeared representing the Arizona Department of Real Estate. Gregory G. McGill appeared representing Mitchel D. Gladstone, Respondent.

ADMINISTRATIVE LAW JUDGE: Kip M. Micuda _____________________________________________________________________ The hearing in this matter was held for the purpose of determining both whether Respondent violated state law as alleged by the Arizona Department of Real Estate (“Department”) and whether grounds exist allowing the Department to take disciplinary action against Respondent. Evidence and testimony were presented and, based upon the entire record, the following Findings of Fact, Conclusions of Law, Order, and Recommended Decision are made:

FINDINGS OF FACT 1. The Department issued Respondent a real estate broker license on September 21, 1991. From that date until June 1, 1995, Respondent served as the designated broker and Director of Marketing of Laurelcrest Homes (“Laurelcrest”). 2. Laurelcrest was a partnership holding a real estate broker’s license issued by the Department on June 14, 1991. The partnership was in the business of building and selling new homes in several subdivisions in the greater Phoenix area: Pecan Groves Village II, Pecan Groves Village III, Park Promenade, Traditions East, Desert Breeze, Miralago at the Foothills, Oasis at the Foothills, and Palmia at the Foothills. Genesis S. W., Inc. (“Genesis”), an Arizona corporation, was the general partner of Laurelcrest. William Dykes served as president of Genesis[1], Richard Presley served as vice-president, and Steve Turkal served as secretary. Mr. Dykes and Mr. Presley were the principals of Laurelcrest. Jeri Irwin served as Laurelcrest’s designated broker before Respondent. R. David Maddux, Mr. Dykes son-in-law, replaced Respondent as Laurelcrest’s designated broker in June 1995 and served until November 1995. Laurelcrest ceased operations in November 1995, after constructing and building more than 500 homes. Laurelcrest subsequently filed for bankruptcy protection. As a result of Laurelcrest ceasing operations, numerous buyers filed complaints with the Department seeking refunds of deposits and other payments. 3. The evidentiary record indicates that Respondent was appointed “Assistant Secretary” of Genesis in September 1992. However, the record is void of direct, credible evidence that the appointment was more than a mere ministerial title. 4. This matter arises out of the Department’s investigation, which began late-1995, of Laurelcrest and its operations, focusing on three subdivisions: Pecan Groves Village III, Park Promenade, and Traditions East. As a result of the investigation, Laurelcrest, Mr. Dykes, and Mr. Presley entered into a Consent Order with the Department. In the order, Laurelcrest, Mr. Dykes, and Mr. Presley admit to violations of this State’s real estate statutes and rules, including misrepresentation (A.R.S. §§32- 2153(A)(1), (A)(25), and (B)(4)), failing to advise purchasers of Laurelcrest’s inability to perform (A.A.C. R4-28-803(B)(2)), and failing to obtain purchasers’ initials or signatures indicating approval of Laurelcrest’s use of earnest monies for general operations (A.A.C. R4-28- 803(D)). The order also includes the following findings of fact: 5. In 1994, Laurelcrest began experiencing financial difficulties. These problems persisted and grew worse until, by early 1995, Laurelcrest was experiencing difficulty in either starting or finishing construction on homes within agreed upon time frames. Subcontractors were not always being paid and some homes were liened for non-payment of subcontractor services and/or other disputes.

6. By mid-1995, numerous home buyers were complaining to Laurelcrest of non-performance, often waiting months for construction to even begin. Many of these purchasers tried to cancel their purchases, and although Laurelcrest agreed to refund deposits to many of these purchasers, often the promised refunds never materialized. Laurelcrest ceased sales and home building operations altogether in November 1995.

The order compelled restitution payments for the benefit of certain buyers. It is worth noting, however, that Respondent was not a party to the Consent Order nor are the above findings products of an independent, formal administrative hearing. 5. While Respondent was part of the Department’s investigation of Laurelcrest and its principals, the Department refrained from formally charging Respondent with any violation of state law, for his involvement with Laurelcrest, until July 17, 1998. Upon completion of the hearing in this matter, the Department summarized its allegations against Respondent: 1. Laurelcrest and Respondent failed to obtain purchasers’ signatures or initials on a contract provision authorizing Laurelcrest to use earnest monies in its general account rather than in an escrow account.

2. Laurelcrest and Respondent used purchase contract amendments which misrepresented that earnest monies would be placed in escrow. Contrary to these amendments, earnest deposits were not placed in escrow, except in limited cases.

3. Laurelcrest and Respondent failed to advise buyers of Laurelcrest’s potential inability to follow through on its contractual agreements, i.e., the risk that houses may not be completed, and the risk that Laurelcrest would be unable to refund earnest deposits, where owned.

(Department’s Closing Memorandum at 2). 6. In the course of conducting its business of building and selling new homes, Laurelcrest utilized numerous forms. The complete record clarifies that much of the language in the forms was adopted from earlier forms. In any event, the evidentiary record is void of direct, credible evidence that Respondent actually created, materially altered, or formally approved any of the Laurelcrest forms at issue in this matter. (See Respondent’s Exhibits 19-24, 26-27). Indeed, the preponderance of the evidence establishes that Laurelcrest adopted these forms prior to employing Respondent as its designated broker. 7. The standard Purchase Contract and Escrow Instructions (hereinafter “Purchase Contract” or “Contract”) Laurelcrest utilized states the following in paragraph 2-A, near the top of the page, conspicuously entitled “Earnest Money”: Except as provided in paragraph 2-B for VA Buyers, upon acceptance of contract, the earnest deposit and other payments by Buyers will be deposited by Seller in Seller’s general account until close of escrow. At the close of escrow, Buyer will be credited with all deposits made directly to Seller by Buyer. By signing this agreement, Buyer indicates a complete understanding and approval of the foregoing.

(Respondent’s Exhibit 19). Unlike other provisions of the Contract, paragraph 2-A is unaccompanied by signature or initial lines for the buyer to specifically acknowledge the paragraph. Indeed, the preponderance of the evidence establishes that neither signatures nor initials were obtained from buyers corresponding to this provision. Consistent with the language of the provision, Laurelcrest generally placed earnest deposits and other payments in its general operating account prior to close of escrow. At closing, all such deposits were credited to the buyer. Mr. Turkal served Laurelcrest as its controller and, therefore, handled the partnership’s general operating account. The preponderance of the evidence demonstrates that Respondent lacked authority over Laurelcrest’s general operating account and checking accounts. 8. In addition, the Purchase Contract provides certain parameters for the cancellation of the Contract and refund of earnest deposits and other payments. (Id. at paragraph 9). Specifically, Laurelcrest could cancel the Contract on several grounds, including rejection by a lender of a buyer’s loan application and lack of approval of a buyer’s loan application within 60 days after the date of the agreement. (Id.). Upon such circumstances, Laurelcrest would need to refund all sums it received from a buyer pursuant to the agreement, including earnest deposits, with the exception of several costs. (Id.). 9. The Purchase Contract also provides that the “[s]eller agrees to cause the house to be erected within a period of two years from the date of [b]uyer’s execution of” the Contract. (Id. at paragraph 10). 10. At the bottom of the Purchase Contract, above the signature lines, the following statement appears: THE BUYER MUST BE GIVEN A COPY OF THE PUBLIC REPORT ISSUED BY THE ARIZONA STATE REAL ESTATE DEPARTMENT PRIOR TO EXECUTION OF THIS DOCUMENT.

(Respondent’s Exhibit 19). (Emphasis in original). The preponderance of the evidence demonstrates that Laurelcrest honored this requirement of the Contract; indeed, Laurelcrest had each buyer sign a form entitled “Required Receipt for Public Report.” (See, e.g., Respondent’s Exhibit 26). 11. The preponderance of the evidence establishes also that Stewart Title, with direct input from Mr. Dykes, assembled the relevant information the Department required for each Application for Public Report Laurelcrest solicited. Stewart Title then submitted each application to the Department. The evidentiary record is void of direct, credible evidence that Respondent actually participated in any significant way in the preparation or submission of any of the applications. 12. Attached to most, if not each, of Laurelcrest’s applications, is a copy of Laurelcrest’s Purchase Contract in issue here, as well as other forms, including several amendment forms. In addition, section 32(b) of each application states the following questions and responses by Laurelcrest: Where will purchaser’s deposits and earnest monies be deposited and held? Subdivider’s general account, except VA purchaser’s funds held in neutral title-company escrow account. i. Can such monies be used? Yes, except VA purchaser’s funds. ii. When and under what conditions will such monies be released? Upon deposit, except VA purchaser’s funds released upon close of escrow.

(See, e.g., Respondent’s Exhibit 42 at 25). Upon the Department’s review of each application, the Purchase Contract, and other attached forms, the Department issued a public report. Each report contains the following language: Prospective purchasers are advised that earnest money deposits, down payments and other advanced monies will not be placed in a neutral escrow.

Such monies will be paid directly to the seller and may be used by the seller.

This means the purchaser assumes the risk of losing such monies if the seller is unable or unwilling to perform under the terms of the purchase contract.

(See, e.g., Respondent’s Exhibit 51 at 6). (Emphasis added). 13. The preponderance of the evidence indicates that, in most instances, a buyer executed an amendment to the Contract at the same time he or she executed the Purchase Contract. (See 34 Sales Files; Respondent’s Exhibit 24). This Amendment to Purchase Contract and Escrow Instruction form (hereinafter “R-24”) states the following, in part: 3. BUYER UNDERSTANDS EARNEST MONEY CHECK WILL BE CASHED UPON ACCEPTANCE OF CONTRACT. ___________ __________

4. BUYER UNDERSTAND[sic] $ _________ ADDITIONAL EARNEST MONEY WILL BE REQUIRED UPON LOAN PRE-APPROVAL BEFORE CONSTRUCTION WILL BEGIN. AT THE TIME CONSTRUCTION BEGINS ALL EARNEST MONEY WILL BE NON-REFUNDABLE. ___________ __________

This form requires the buyer’s acknowledgment by initials or by signature. (Id).

14. Laurelcrest negotiated its sales through a staff of licensed real estate salespersons. Two of Laurelcrest’s salespeople, Scott Crouch and Lori Crouch, testified credibly during the hearing in this matter. Mr. Crouch and Mrs. Crouch each testified to generally reviewing the Purchase Contract, Public Report, and other forms with each buyer, and informing each buyer that deposits were to be made payable to Laurelcrest. They also testified that no specific provision of any of the documents, including paragraph 2-A of the Contract, was highlighted or emphasized for a buyer. In addition, neither Mr. Crouch nor Mrs. Crouch could recall any buyer, including those represented by an independent real estate salesperson, ever inquiring specifically about the placement of earnest deposits under the Contact. 15. Upon completion of the sales documents with a buyer, Laurelcrest’s salespeople submitted the documentation to Sue Roberts for her review and approval. Ms. Roberts, Laurelcrest’s escrow and closing coordinator, then submitted the documents to the designated broker, Respondent for a period of time, for review and signature. Ms. Roberts credibly testified that neither she nor Respondent actually monitored or negotiated any sales transactions. She also testified that she was responsible for forwarding the documents and all amendments or addenda thereto to the title company and mortgage lender. 16. After reviewing and signing the documents for each sale, Respondent submitted the package of documents to either Mr. Dykes or Mr. Presley for final approval and acceptance on behalf of Laurelcrest. 17. Generally, subsequent to the sales negotiations and execution of the Purchase Contract, buyers deposited additional monies under the Contract and often selected or amended options to be integrated into the new home construction. Laurelcrest utilized several standard forms to effectuate these amendments to the Contract. One form, Amendment to Purchase Contract and Escrow Instructions (hereinafter “R-20”), relates to additional earnest deposits or other payments. (Respondent’s Exhibit 20). The preponderance of the evidence establishes that Laurelcrest adopted this form, prior to Respondent serving as its designated broker, from a form utilized by Homes By Polygon in the early 1990’s. R-20 modifies paragraph of the Purchase Contract, superseding any and all previous amendments to that paragraph: BECAUSE OF ___ ADJUSTMENTS IN CHARGES AS OUTLINED ON THE SCHEDULE A# ___ DATED: __________, AND/OR ___ CHANGES IN THE REQUESTED LOAN AMOUNT, THE CONTRACT SHALL BE AMENDED TO READ: 2. Buyer agrees to pay a total purchase price of $ __________ to (a) $ _______ earnest money deposit received herewith evidenced by check to be placed in escrow. (b) $ _______ additional earnest money to be deposited in escrow on or before ___________ and; (c) $ _______ additional earnest money to be deposited in escrow on or before ___________ and ; (d) $ _______ on or before compliance date by __ certified check or proceeds of a __ VA __ FHA203B __ FHA245 __ Conventional mortgage loan.

(See, e.g., Respondent’s Exhibit 20). 18. The preponderance of the evidence establishes that Respondent reviewed and signed many amendments utilizing form R-20. (See, e.g., 34 Sales Files). 19. The preponderance of the evidence establishes further that initial and subsequent earnest deposits and other payments were actually placed in Laurelcrest’s general operating account. 20. Respondent, Ms. Roberts, Mr. Crouch, and Mrs. Crouch each testified that Laurelcrest utilized R-20 to reveal a change in the total purchase price, Laurelcrest’s actual receipt of additional earnest deposits, the sum and due date of future deposits, and a change in the amount the buyer must finance. In other words, the form was used to reflect certain changes in the Contract, as well as stand as a receipt for deposits a buyer made after execution of the Purchase Contract. Accordingly, the form was utilized also by lenders to determine whether a buyer qualified for a loan. The foregoing witnesses’ testimony with respect to the actual purpose and use of R-20 is found to be credible. 21. Moreover, while form R-20’s language indicates that earnest deposits will be “placed in escrow,” contrary to paragraphs 2 and 2-A the Purchase Contract itself, the Department’s charge that Respondent intended, by his or his staff’s use of this form, to mislead buyer’s is found to be unsubstantiated. The upper section of the form states plainly that it is a restatement of paragraphs 2 and 4 of the Purchase Contract. However, the restatements are inaccurate; language to the effect that deposits will be placed in escrow is completely absent from the Purchase Contract, except as to any Veteran buyer. Nevertheless, the record is void of evidence that Laurelcrest’s use of the form was intended to mislead buyers. Rather, the preponderance of the evidence reveals that Laurelcrest merely adopted the form from Homes By Polygon. The inaccuracies were carried over to the middle section of R-20, the actual amendment to the Contract, where the Department focuses its attention. While the Department clings to the specific language of the form calling for placement of earnest deposits in escrow, it is illogical that Laurelcrest would initially represent in the Purchase Contract that a buyer’s earnest deposits will be deposited in Laurelcrest’s general operating account, thus the reason for a buyer making his or her initial deposit directly payable to Laurelcrest, and then misrepresent subsequently in an amendment that such deposits will be placed in a neutral escrow account. Any benefit to Laurelcrest by the subsequent misrepresentation is tenuous at best. Reverse the order of the representations, and a motive for the amendment is manifest: coax the buyer into a contract under the security of a neutral escrow account and subsequently change the contract to provide that deposits be made to the builder’s operating account. Laurelcrest’s adoption and use of the R-20 form alone does not demonstrate an intent to deceive or misrepresent. Rather, the preponderance of the evidence convinces this Judge that such actions were remiss. Notwithstanding this finding, it is worth noting that the Department had many opportunities to review this form before issuing the public reports Laurelcrest requested. The Department also overlooked the inconsistencies between the form and the Purchase Contract. Furthermore, the preponderance of the evidence fails to establish that any buyer was denied a proper credit for deposits, whether deposits were actually placed in Laurelcrest’s operating account, in a neutral escrow account, or otherwise. Once again, the form was used to reflect certain changes in the Contract, as well as stand as a receipt for deposits a buyer made after execution of the Purchase Contract. The Department’s position here, that Respondent intended, by his or his staff’s use of form R-20, to mislead buyer’s, is unsupported by a preponderance of credible evidence. Moreover, the preponderance of the evidence fails to establish that Respondent concealed anything. 22. During the hearing in this matter, Respondent testified at length about the operations of Laurelcrest and his role in the operations. He testified that his role was limited to supervising Laurelcrest’s sales staff, reviewing proposed transactions, presenting all transactions to either Mr. Dykes or Mr. Presley for final approval, and coordinating Laurelcrest’s sales and marketing activities. In particular, Respondent emphasized that he had no actual, significant role in creating, materially altering, or formally approving any of the Laurelcrest forms at issue in this matter. (See Respondent’s Exhibits 19-24, 26-27). Respondent’s above testimony is corroborated by Ms. Roberts, Mr. Crouch, and Mrs. Crouch, and is found to be credible. 23. Respondent testified also that he was unaware of Laurelcrest’s financial status while he served as its designated broker and that Mr. Dykes did not share such information with him. Uncontroverted affidavits by Mr. Turkal and Mr. Presley and Ms. Roberts’s testimony corroborate Respondent’s testimony. Despite evidence of construction delays, the preponderance of the evidence fails to establish either that Respondent knew or should have known that Laurelcrest would be unable to perform some of its contractual obligations to buyers due to insolvency or otherwise. 24. Respondent added during his testimony that he continually stressed proper transaction completion with Laurelcrest’s sales staff. The testimony of staff that appeared in this matter, corroborates Respondent’s testimony. Indeed, Mr. Crouch, as well as Mr. Dykes, testified that Respondent was extremely detail oriented with respect to transactions being completed properly. This testimony adds to Respondent’s credibility in this matter. 25. Respondent admitted also, however, that he was unaware of the legal requirement that buyers be required to sign or initial any provision providing that a down payment or earnest money deposit be paid directly to a seller, and not placed in a neutral escrow depository. (See A.A.C. R4-28- 803(D)). 26. The Department called a number of individuals, who contracted with Laurelcrest for new homes, to testify during the hearing in this matter. The gist of the testimony is that many believed—or rather assumed-- that their initial deposits would be placed in a neutral escrow account. However, none of these witnesses testified to either being told or reading that initial deposits would be placed in a neutral escrow account. Indeed, none of these witnesses testified specifically to actually reading the relevant deposit provisions in the Contract or any public report. In several instances, witnesses merely relied on their own real estate agent to examine the documents carefully, who failed to raise any issue.[2] In addition, none of the witnesses testified to questioning Laurelcrest about its placement of initial deposits. While this Judge has little doubt that these witnesses testified truthfully, the weight given their testimony is minimized. For the most part, each witness’s concerns about his or her initial deposits could have been avoided by a responsible review of the documents in issue before entering an agreement. The preponderance of the evidence from these witnesses shows that each failed to undertake a responsible review of the documents at issue before entering an agreement, as several witnesses admitted during their testimony. 27. More than five weeks after the adjournment of the hearing in this matter, the Department moved to admit two additional exhibits (letters) relating to the present status of Mr. Dykes’s restitution obligation to the Department under the consent agreement between the two. Respondent objects to the admission of the documents, arguing, in part, that the motion is untimely, unduly prejudicial, and without good cause. 28. On June 25, 1999, Respondent moved to supplement the record with recent legal authority from the state court of appeals. The Department did not oppose the supplement, although it argued that the authority is irrelevant. 29. To the extent a contention was asserted during the hearing and is not specifically addressed above, either the preponderance of the evidence fails to support the contention or there is insufficient evidence of the contention, or its relevance, to make it particularly noteworthy.

APPLICABLE LAW The purpose of this State’s real estate broker licensing statutes is to regulate real estate activities so as to protect the public. Arizona State Real Estate Department v. American Standard Gas & Oil Leasing Service, Inc., 119 Ariz. 183, 186, 580 P.2d 15 (Ariz. 1978); cf. Whitaker v. Arizona Real Estate Board, 26 Ariz. App. 347, 349, 548 P.2d 841 (Ariz. App. 1976). Indeed, the interests of the public should be paramount in applying and enforcing this body of law. Cf. Red Carpet-Barry & Assoc. v. Apex Associates, 130 Ariz. 302, 305, 635 P.2d 1224 (Ariz. App. 1981). Particularly with respect to the subdivision disclosure statutes. Alaface v. National Investment Company, 181 Ariz. 586, 597, 892 P.2d 1375 (Ariz. 1994). Real estate agents and brokers owe a duty of good faith and loyalty to their principal, and must exercise reasonable due care and diligence. Haldiman v. Gosnell Development Corp., 155 Ariz. 585, 588, 748 P.2d 1209 (Ariz. 1987). Designated brokers and employing brokers assume additional responsibilities. Specifically, a designated broker of a licensed partnership “shall assume responsibility for the acts of the partnership, the associate brokers, salespersons and employees of the partnership.” Arizona Administrative Code (“A.A.C.”) R4-28-304(D); see Arizona Revised Statutes (“A.R.S.”) §32-2125 and A.A.C. R4-28-303(H). A number of statutory provisions are particularly important in this matter. Section 32-2153(A) provides, in part: The commissioner may suspend or revoke a license, deny the issuance of a license or deny the renewal or the right of renewal of a license issued under the provisions of this chapter if it appears that the holder or applicant, while a licensee under this chapter, within five years immediately preceding, in the performance of or attempt to perform any acts authorized by such 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. xxx 3. Disregarded or violated any of the provisions of this chapter or any rules adopted by the commissioner. xxx 16. Commingled the money or other property of the licensee’s principal or client with the licensee’s own or converted that money or property to the licensee or another. xxx 21. As a licensed broker, failed to exercise reasonable supervision over the activities of salespersons, associate brokers or others under the broker’s employ or failed to exercise reasonable supervision and control over the activities for which a license is required of a corporation, limited liability company or partnership on behalf of which the broker acts as designated broker under §32-2125. 22. Demonstrated negligence in performing any act for which a license is required.

Section 32-2153(B) adds, in part: The commissioner may suspend or revoke a license, deny the issuance of a license or deny the renewal or the right of renewal of a license issued under the provisions of this chapter when it appears that the holder or applicant therefor has:

3. Made any substantial misrepresentation. xxx 7. Not shown that he is a person of honesty, truthfulness and good character.

In addition, §32-2151.01(F) adds, in part: Sales transaction folders shall include: 1. Confirmation that the earnest monies or other monies handled by or through the broker were handled according to instructions given by or agreed to by the parties to the transaction.

Also relevant is §32-2164: It is unlawful for a licensed real estate broker or salesperson to assist a subdivider or agent of such subdivider in the offer, sale or lease of a subdivision lot or parcel in violation of any provision of this chapter or any rule adopted or order issued by the commissioner if the licensee knew or should have known of the violation.

Similarly, several provisions of the Arizona Administrative Code are particularly relevant here. Rules and regulations of the Department have force and effect of law. Red Carpet-Barry & Assoc., 130 Ariz. at 304. A.A.C. R4-28-803(D) states: Any agreement or contract for the purchase or lease of subdivided lands or unsubdivided lands where a down payment or earnest money deposit is paid directly to the seller, and not placed in a neutral escrow depository, shall conspicuously disclose this fact within the document, and the purchaser shall be required to sign or initial this provision indicating approval thereof.

R4-28-1101, which outlines a licensee’s duties to a client, adds: A. A licensee owes a fiduciary duty to his client and shall protect and promote the interests of the client. The licensee shall also deal fairly with all other parties to a transaction. B. Each licensee participating in a real estate transaction shall disclose to all other parties to the transaction any information which the licensee possesses which materially and adversely affects the consideration to be paid by any party to the transaction, including, but not limited to, the following matters: xxx 2. Any information that the buyer or lessee is, or may be, unable to perform due to insolvency or otherwise.

For any violation of the above provisions, the Commissioner may assess a civil penalty against a licensee “in an amount not to exceed one thousand dollars for each infraction.” §32-2160.01(A).

CONCLUSIONS OF LAW 1. The Department has jurisdiction over Respondent and the subject matter of this case under A.R.S. §32-2108, et seq. 2. The Department has the burden of demonstrating by a preponderance of the evidence that it may take disciplinary action against Respondent. Cf. Culpepper v. State of Arizona, 187 Ariz. 431, 437-38, 930 P.2d 508 (Ariz. App. 1996). Proof by “preponderance of the evidence” means that the evidence is sufficient to persuade the finder of fact that the proposition is “more likely true than not.” In re Arnold and Baker Farms, 177 B.R. 648, 654 (9th Cir. BAP (Ariz.) 1994). It “is evidence which is of greater weight or more convincing than the evidence which is offered in opposition to it; that is, evidence which as a whole shows that the fact sought to be proved is more probable than not.” Black’s Law Dictionary 1182 (rev. 6th ed. 1990). 3. The Department voluntarily dismisses its charge that Respondent fails to show that he is a person of honesty, truthfulness, and good character under A.R.S. §32-2153(B)(7). This Judge concludes, nevertheless, that Respondent demonstrates himself to be a person of honesty, truthfulness, and good character. 4. With respect to Respondent’s alleged failure to require buyers to sign or initial any provision providing that a down payment or earnest money deposit be paid directly to a seller, and not placed in a neutral escrow depository, the Department sustains its burden of demonstrating a technical violation of A.A.C. R4-28-803(D). As a direct consequence of this conclusion, the Department sustains also its burden of demonstrating violations of A.R.S. §§32-2153(A)(3), (21), and (22), and §32-2164. 5. With respect to Respondent’s alleged intent, by his or his staff’s use of form R-20, to mislead buyer’s, the Department fails its burden of demonstrating a violation. “’Misrepresentation’ entails concealment of what is true as well as what is false.” Sigmen v. Arizona Department of Real Estate, 169 Ariz. 383, 387, 819 P.2d 969 (Ariz. App. 1991). The preponderance of the evidence fails to establish that Respondent concealed anything. 6. However, the preponderance of the evidence establishes that Respondent allowed Laurelcrest’s use of form R-20 while he served as Laurelcrest’s designated broker and that Laurelcrest should not have utilized the form for the purpose it intended. (See Findings of Fact paragraph 21). Respondent tacitly approved use of the form. Consequently, Respondent’s actions/omissions concerning Laurelcrest’s use of form R-20 while he served as Laurelcrest’s designated broker, outlined in the Findings of Fact above, constitute violations of A.R.S. §§32-2153(A)(3), (21), and (22), and §32-2164. 7. With respect to Respondent’s alleged violations of A.R.S. §§32- 2153(A)(1), and (16), §32-2153(B)(3), and §32-2151.01(F)(1), as well as A.A.C. R4-28-1102(A) and (B)(2), the Department fails its burden of demonstrating such violations. 8. In mitigation, the principals of Laurelcrest devised and organized the partnership, as well as its means of conducting business, before employing Respondent as Laurelcrest’s designated broker. However, once Respondent assumed the role of designated broker, he assumed certain responsibilities, one being to ensure that the transaction forms strictly complied with state law, regardless of who created the forms or implemented their use. As a consequence of Respondent’s failure to scrutinize the forms critically upon accepting his role as designated broker, numerous transactions were executed utilizing forms that did not accurately reflect Laurelcrest’s intent or comply strictly with state law. 9. With respect to the Department’s motion to admit two additional exhibits, the motion is untimely and lacks sufficient cause, given the imbalance between the probative value of the documents and the undue prejudice they present, to allow post-hearing admission. 10. With respect to Respondent’s June 25, 1999, motion to supplement the record with legal authority, legal authority is not “evidence” and is, therefore, not relevant to this Tribunals’ determination of the facts in this matter. Furthermore, this Tribunal is not bound to apply only that legal authority the parties present; indeed, this Judge routinely conducts his own research for legal authority. At any rate, while unnecessary, the motion to supplement is unopposed.

ORDER IT IS ORDERED that the Department’s motion to admit two additional exhibits is denied. IT IS FURTHER ORDERED that Respondent ‘s motion to supplement the record with legal authority is granted.

RECOMMENDED DECISION In view of the foregoing, it is recommended to the Director that he impose a civil penalty against Respondent for the total sum of $2,000.00: $1,000.00 for each for the categories of acts described in paragraphs 4 and of the Conclusions of Law above. In addition, as a result of Respondent’s conduct, in part, in posing unnecessary, financial risk to numerous buyers, this Judge feels compelled to recommend that the Department suspend Respondent from the practice of real estate for a period of 5 business days. Done this day, July 14, 1999.

______________________________________ Kip M. Micuda Administrative Law Judge

Original transmitted by mail this ____ day of ____________, 1999, to:

Department of Real Estate Mr. Jerry Holt ATTN: Bonnie Hollon 2910 North 44th Street, Ste. 100 Phoenix, AZ 85018

By ___________________________

----------------------- [1] During 1990 and 1991, Mr. Dykes severed as president of Homes By Polygon, another residential home builder. [2] It is worth noting that the record is void of evidence that the Department took disciplinary action against any of these agents for their failure to present this issue to a buyer.

-----------------------

Office of Administrative Hearings 1400 West Washington, Suite 101 Phoenix, Arizona 85007 (602) 542-9826