ALJDEC

99F-O989251-BFS · Department of Building and Fire Safety · 1999-05-10

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: May 7, 1999 at 1:30 p.m. APPEARANCES: Complainant appeared through its attorney, Victoria M. Mangiapane, Esq., Assistant Attorney General; Respondent appeared through its attorney, Robert H. Schlosser, Esq. ADMINISTRATIVE LAW JUDGE: Diane Mihalsky _____________________________________________________________________

The parties presented evidence, testimony, and legal argument regarding whether Respondent violated A.R.S. §§ 41-2180(D), 41-2186(1) or (6) in various transactions. Based upon the entire record, the undersigned makes the following Findings of Fact, Conclusions of Law, and Recommended Order. FINDINGS OF FACT The Assistant Director of the Office of Administration of the Department of Building and Fire Safety (“the Office”) issued license number 6282, Class D- 8, to Respondent Capital Mobile Home Sales, a master dealer of manufactured homes. Respondent’s qualifying party testified that, although it had hired a woman who had worked at the Department of Motor Vehicles to process title transfers, at the beginning of her employment she was involved in a serious automobile accident and missed substantial time from work to convalesce. As a consequence, Respondent got behind in processing title transfers for manufactured homes it sold in 1998. On or about December 10, 1998, the Office’s investigator Carla Anderson conducted an audit of Respondent’s trust or escrow account pursuant to A.R.S. § 41-2180(A). Investigator Anderson randomly selected 24 reported sales transactions to audit, which resulted in 104 charged violations. Because many of the charged violations arose from transactions having similar factual circumstances, which the parties do not dispute, similar transactions are described together below. A. Installment Payments Made Before Transfer of Title (Counts I and II) Customers Ferry, Townsend, Lamb, Miller, Tittle, and Raddatz paid at least a portion of a previously agreed-to down payment,[1] signed a “Buyers Statement of Settlement” and a promissory note in which they agreed to make monthly payments in exchange for Respondent’s promise to convey possession of and title to a specified manufactured home. Respondent deposited into its trust or escrow account, issued receipts for, and did not disburse until after transfer of title down payments these customers made prior to or at the time of closing.[2] At some point before these customers made their first promised monthly payment, they received keys to and could have or actually did move into and take possession of the manufactured home they had purchased. Before title was transferred to these customers, Respondent received monthly payments from Ferry (8 payments of $254.80 each), Townsend (9 payments of $284.43 each), Lamb (9 payments of $197.60 each), Miller (4 payments of $290.74 each), Tittle (6 payments of $206.16 each), and Raddatz (7 payments of $282.29 each) pursuant to the promissory note in which these customers undertook to make monthly payments. Respondent did not deposit into its trust or escrow account or issue a receipt for any of the monthly payments that these customers made before title to the manufactured home they had purchased was transferred to them. B. Payments Received Pursuant to Promissory Note for Unpaid Balance of Down Payment before Transfer of Title (Counts I and II)

Customers Forbis and Tittle agreed to make a down payment in a certain amount when negotiating the terms of the sale, but could pay only a portion of the previously agreed-to down payment at the time of closing. Respondent nonetheless proceeded with these sale transactions and took unsecured promissory notes for the unpaid balance of the agreed-to down payment. Respondent deposited into its trust or escrow account and issued a receipt for the amounts of the down payments made prior to closing. The customers took possession of or moved into the manufactured homes they had agreed to purchase. Before title to the manufactured homes that the customers had purchased was transferred, Respondent received an additional $800.00 from Forbis and $200.00 from Tittle as payment on the promissory note for the unpaid balance of the agreed-to down payment. Respondent did not deposit into its trust or escrow account or issue a receipt for these payments made after the customers took possession of their homes but before they obtained title. C. Clerical Error (Count II) On or about January 23, 1998, Respondent received $900.00 from customer Nixon and, on or about that same date, deposited this amount into its trust or escrow account. Through an oversight, Respondent’s bookkeeper did not issue a receipt for this amount. The receipt number shown on Respondent’s ledger for Nixon’s account in fact was issued to another customer in a different amount. D. Failure to Identify Home Purchased or Payee’s Relationship to Transaction for which Funds Disbursed from Trust or Escrow Account within Ten Days Before Title Transfer (Count III)

Respondent purchases used manufactured homes with funds obtained from approximately 100 private, third-party investors and, once the homes have been reconditioned, [3] arranges sales to customers. Although the investors hold liens for the homes financed, customers pay Respondent directly. Respondent’s name appears in the space for “Creditor and/or Assignee (Seller)” on the document entitled “Truth in Lending Negotiable Promissory Note” that customers sign to evidence their agreement to make monthly payments for the unpaid balance of the purchase price of the manufactured homes plus interest. Once title is transferred, liens securing the purchase price are held by the individual investors, not a financing company or lending institution. Customers Ferry, Townsend, Lamb, Miller, Tittle, Montag, and Raddatz purchased homes in transactions financed by individual investors. Respondent’s qualifying party testified that each customer’s file would have contained a copy of the title to the home showing as lienholder the name of the individual investor who was providing financing for the transaction. Within ten days before the date title was transferred to these customers, Respondent issued checks drawn on its trust or escrow account made payable to Arizona Escrow & Financial, the title company the investors use in these kinds of transactions to protect themselves. Although a notation was written on the checks identifying Respondent’s inventory number, neither the home itself nor the lienholder/ investor was identified on the check. In addition, although the record contains no documents regarding the circumstances of the sale transactions involving Customers Scantilin and Carey/Fox, Investigator Anderson testified that, within ten days before the date title was transferred to these customers, Respondent issued checks drawn on its trust or escrow account. From her review of the sales contracts, listing contracts, offers to purchase, receipts, deposit slips, statements of settlement, and other documents contained in Respondent’s files, Ms. Anderson testified she could not identify the relationship of the payee to the transaction or the particular home for which payment was made. A typographical error on page six of the Citation and Complaint alleged that title was transferred and the transaction involving customers Carey/Fox was consummated on December 24, 1998. Instead, this date should have been December 24, 1997. The disbursement date shown of December 23, 1997, was therefore within ten days of the date title was transferred. Respondent’s qualifying party testified that this typographical error prevented Respondent from preparing or presenting an effective defense to this alleged violation. E. Funds Disbursed from Trust or Escrow Account more than Ten Days Before Title Transfer (Count III)

Customer Wymer purchased a home in a transaction involving a bona fide lender, Associates Housing Finance, which is located outside Arizona. More than ten days before the date title was transferred to Customer Wymer, Respondent issued a check drawn on its trust or escrow account made payable to Associates Housing Finance. Respondent’s qualifying party testified at the hearing that it is not uncommon for out-of-state lenders to cash checks drawn on the trust or escrow account two or three months before they return the paperwork required to transfer title to the customer. Unfortunately, Respondent cannot do anything under such circumstances to hasten out-of-state lenders’ processing of paperwork. F. Funds Disbursed from Trust or Escrow Account to Private Sellers within Ten Days before Title Transfer (Count III)

Customers Bilbrey and Santorella purchased homes from private sellers, respectively, Snyder and Walkinshaw, in transactions in which Respondent acted as broker. Because the owners would not sign over the titles to the homes unless they received payment, within ten days before the title was transferred to Bilbrey and Santorella, Respondent issued checks drawn on its trust or escrow account made payable to Snyder and Walkinshaw. G. Failure to Provide Evidence that Appropriate Party (Seller, Lienholder, etc.) Was Paid before Disbursing Funds from Trust Account (Count IV)

Respondent operates several parks where it rents space to the customers who have purchased manufactured homes through it. Chase Bank repossessed a manufactured home located in one of these parks. Respondent agreed to locate a buyer and act as broker on the sale of the home for a commission of 10% of the purchase price. The commission agreement was oral. Customer Ressinger agreed to purchase the home for $30,000 and gave Respondent a down payment of $2,500. Because Respondent only acted as broker on the sale, it did not obtain any documents evidencing the sale or showing that Chase Bank had transferred title to the home. Nonetheless, Respondent issued a check drawn on its trust or escrow account, made payable to itself, for $2,500.00 as a portion of its commission. Chase Bank later sent Respondent a check for $500.00 for the balance of the commission. Although Respondent requested written proof from Chase Bank that it had transferred title to Ressinger to include in the file, Chase Bank never responded. H. Mitigation Inspector Anderson testified that, when she audited Respondent’s trust or escrow account by comparing the records of pending sales with the balance of the account, she was able to account for all funds. No evidence was presented at the hearing that any customer was harmed by Respondent’s record-keeping or other business practices. CONCLUSIONS OF LAW In this administrative proceeding, the Office bears the burden of proof and must establish statutory violations by a preponderance of the evidence. See A.A.C. R2-19-119; see also Culpepper v. State, 187 Ariz. 431, 438, 930 P.2d 508, 515 (App. 1996). “A preponderance of the evidence is such proof as convinces the trier of fact that the contention is more probably true than not.” Morris K. Udall, Arizona Law of Evidence § 5 (1960). A preponderance of the evidence is “evidence which is of greater weight or more convincing than 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 at page 1064 (6th ed. 1990). A. Respondent’s Failure to Deposit into Trust or Escrow Account or to Issue Receipts for Installment Payments and Remainder of Down Payments Made Before Transfer of Title

Broker-dealers like Respondent are required to deposit into a trust or escrow account and issue a receipt for “all earnest money received for the sale of manufactured homes, mobile homes, or factory-built buildings designed for use as residential dwellings . . . .” See A.R.S. § 41-2180(A) and (D) (emphasis added). “’Earnest monies’ means all monies given by a purchaser or a financial institution to a dealer or broker before consummation of the sale.” A.R.S. § 41-2142(13) (emphasis added). “’Consummation of sale’ means that a purchaser has received all goods and services that the dealer or broker agreed to provide at the time the contract was entered into or the transfer of title.” A.R.S. § 41-2142(8) (emphasis added). The undersigned agrees with the Office that consumers who purchase manufactured homes may reasonably expect that the title to their home will be among the “goods and services” that the dealer agrees to provide at the time of closing. The undersigned also believes this interpretation would better protect purchasers of manufactured homes. The issue here does not concern contract interpretration or abstract public policy, however, but instead concerns interpretation of unambiguous statutory terms. “A cardinal rule of statutory interpretation is to give full effect to each statutory word or phrase so that no part is rendered void, superfluous, contradictory or insignificant.” Westburne Supply, Inc. v. Diversified Design and Construction, Inc., 170 Ariz. 598, 600, 826 P.2d 1224, 1226 (Ct. App. 1992). The Office’s interpretation would render the phrase “transfer of title” following the disjunctive “or” in A.R.S. § 41-2142(8) meaningless or mere surplus. To avoid this result, the undersigned interprets the receipt of goods and services to which A.R.S. § 41-2142(8) refers to mean possession of the manufactured home purchased, but not necessarily actual transfer of title. For the installment payments, described in Findings of Fact 4-6, and payments of the balance of agreed-to down payments, described in Findings of Fact 7-10, to be “earnest monies” as defined by statute, therefore, such payments must have been made at a time when the customers neither had taken possession of the homes they had contracted to purchase nor had obtained title to it. The evidence showed that the customers had taken possession of the manufactured homes they had contracted to purchase when they made the installment payments or payments for the balance of the down payment. Because the Office has not established that the installment payments or balance of down payments constituted “earnest monies,” it has not established that Respondent violated A.R.S. §§ 41-2180(D), -2186(1) or -2186(6)[4] in failing to issue a receipt for or to deposit these payments in its trust or escrow account. B. Respondent’s Clerical Error in Failing to Issue a Receipt for Earnest Monies Respondent conceded that no receipt was issued for earnest money paid by customer Nixon, but argued that the omission was innocent and understandable, as described in Findings of Fact 11 and 12. A.R.S. § 41- 2180(D) unconditionally and unequivocally requires that “[t]he dealer’s or broker’s earnest money receipt book shall reflect all earnest monies received . . . .” (Emphasis added.) Therefore, Respondent’s lack of culpable intent cannot be considered to determine whether Respondent violated the statute because it requires no intent. The Office therefore has established that Respondent violated A.R.S. § 41-2180(D) in failing to issue a receipt for customer Nixon’s earnest money. F. Respondent’s Disbursement of Monies from its Trust or Escrow Account Under most circumstances, a dealer must hold earnest monies in its trust or escrow account until after either “[a]n application for title transfer has been made” or “[t]he transaction involved is consummated or terminated and a complete accounting is made.” A.R.S. § 41-2180(I). Before making a complete accounting or application to transfer title, however, a dealer or broker may release earnest monies from its trust or escrow account to pay “flooring or inventory for the unit that is the subject of the transaction for which the earnest monies were provided” if all three of the following conditions are met: 9. The payment is made no more than ten business days prior to the completion date pursuant to subsection I [quoted above at Conclusion of Law 6].

10. The payment is made directly to the financial institution or other bona fide lender.

11. The payment is recorded in the dealer’s or broker’s records under this section and documented by a receipt, a payment record or other evidence from the financial institution or lender. . . .

A.R.S. § 41-2180(M) (emphasis added). Although the statutes establishing the Department and regulating master dealers of manufactured homes do not define “financial institution or other bona fide lender,” under statutes relating to banking a “‘[f]inancial institution’ means banks, trust companies, savings and loan associations, credit unions, consumer lenders, international banking facilities and financial institution holding companies under the jurisdiction of the department.” See A.R.S. § 6-101(8). “In a statute, ‘the expression of one or more items of a class indicates an intent to exclude all items of the same class which are not expressed.’” Piper v. Bear Medical Systems, Inc., 180 Ariz. 170, 176, 883 P.2d 407, 413 (App. 1994) (quoting Pima County v. Heinfeld, 134 Ariz. 133, 134, 654 P.2d 281, 282 (1982)). Moreover, “[i]n applying a statute, . . . its words are to be given their ordinary meaning unless the legislature has offered its own definition of the words or it appears from the context that a special meaning was intended.” Mid Kansas Federal Savings and Loan Ass’n of Wichita v. Dynamic Development Corp., 167 Ariz. 122, 128, 804 P.2d 1310, 1316 (1991). As a matter of common sense and ordinary meaning, as well as under the Arizona statutes relating to banking, a title company that does not finance a sales transaction but merely receives trust or escrow monies on behalf of private investors is not “a financial institution or other bona fide lender.” Since neither Arizona Escrow & Financial nor the individual investors on whose behalf it accepted trust and escrow disbursements, as described in Findings of Fact 13-15, is “a financial institution or other bona fide lender,” A.R.S. § 41-2180(M) is inapplicable. Respondent could only have legally made these disbursements if the transactions had been completed by satisfying one of the conditions described in A.R.S. § 41-2180(I). Respondent conceded that it had made no application for transfer of title at the time it made these disbursements from its trust and escrow account. Although Respondent presented evidence that the transactions had “consummated” under the definition set forth in A.R.S. § 41-2142(8), for disbursement to have been proper under A.R.S. § 41-2180(I)(2), a “complete accounting” must also have been made. Respondent did not dispute that its files did not contain information to connect the disbursement to Arizona Escrow & Financial to the investor/lienholder or the specific manufactured home for which the payment was made, but only argued that some of this information could have been gleaned from its files if the Office knew about its business practice of using third-party investors to finance sales transactions. The Office therefore has established that Respondent violated A.R.S. §§ 41-2180(I), -2186(1) and (6) in its disbursements of monies from its trust or escrow account to Arizona Escrow & Financial in sales transactions involving customers Ferry, Townsend, Lamb, Miller, Tittle, Montag, and Raddatz. As to the private sellers involved in the transactions described at Findings of Fact 20-21, Respondent presented no evidence that these sales had consummated or that application for title transfer had been made as of the date of disbursement. Instead, Respondent argued that private sellers who will receive a single lump sum payment are no different than financial institutions or other bona fide lenders and that, therefore, it should be allowed to disburse monies from its trust or escrow account prior to transfer of title, consummation, or a complete accounting in transactions involving private sellers. Because A.R.S. § 41-2180(M) only allows early disbursement to “financial institutions or bona fide lenders,” however, not to private sellers, to infer that the legislature meant to include private sellers in the exception created by this statutory subsection would violate a basic canon of statutory interpretation. See Piper, 180 Ariz. at 176, 883 P.2d at 413. Private sellers are not subject to the same regulations and oversight as financial institutions and other bona fide lenders, moreover, and treating them differently does not lead to any absurd result. Cf. Op. Atty. Gen. I81-135.[5] The Office therefore has established that Respondent violated A.R.S. §§ 41-2180(I) and (M), -2186(1) and (6) in disbursing monies from its trust or escrow account to private sellers in the sales transactions involving customers Bilbrey and Santorella. The Office has not established that Respondent violated A.R.S. §§ 41- 2180(I) and (M), -2186(1) and (6) in disbursing monies from its trust or escrow account to Associates Housing Finance in the sales transaction involving customer Wymer more than ten days before title was transferred. Subsection (M)(1) allows disbursement to a bona fide lender within ten days of when an application for title of transfer is made or the transaction is consummated and a complete accounting is made. Because the Office does not complain that it could not identify the specific unit sold or verify that the disbursement had been made to a lienholder in the transaction involving Wymer, the undersigned infers that the sale had consummated and a complete accounting had been made made within ten days of the disbursement from the trust and escrow account to Associates Housing Finance. Although it is a close question, given the paucity of evidence presented by either party regarding the sales transaction involving customer Scantilin, the Office by presenting Investigator Anderson’s testimony that she could not identify the relationship of the payee to the transaction or the particular home for which Respondent disbursed funds from its trust or escrow account established that Respondent violated A.R.S. §§ 41-2180(I) and (M), -2186(1) and (6) in this transaction. Because of the typographical error on the Citation and Complaint, however, the Office did not provide adequate notice of the alleged violation in the transaction involving customer Carey/Fox to allow Respondent to defend itself. The undersigned therefore does not make any recommendation with respect to this violation. Finally, the Office has established that Respondent violated A.R.S. §§ 41- 2180(I), -2186(1) and (6) in disbursing $2,500.00 from its trust or account to itself for its commission in the transaction involving customer Ressinger. Overall, Respondent evidenced a cavalier attitude toward statutory requirements. Its accounting procedures for its trust account or escrow seem calculated more to protect its own profits and investors than to comply with statutory requirements enacted to protect consumers. See Laws 1986, Ch. 330, §§ 1 and 67. As a dealer, Respondent is required to hold earnest monies in its trust or escrow account until it can provide to the Office either proof that it has applied for transfer of title or a complete accounting. The repossesser/seller’s refusal to cooperate with Respondent’s attempts to comply with statutory mandates does not excuse Respondent’s noncompliance. RECOMMENDED ORDER In view of the foregoing, it is recommended that the Assistant Director of the Office of Administration of the Department of Building and Fire Safety find that Respondent has committed eleven statutory violations, as described above in

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/ / / / Conclusions of Law Nos. 10, 11, 13, and 15, and impose under A.R.S. § 41- 2193(F) a civil penalty of $750.00 per violation, for a total penalty of $8,250.00. Done this day, May 18, 1999.

______________________________________ Diane Mihalsky Administrative Law Judge

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

Department of Building & Fire Safety N. Eric Borg, Director E. Virginia, Suite 100 Phoenix, AZ 85004 ATTN: Michelle M. Castañeda

By ___________________________

----------------------- [1] The term “down payment” is used instead of “earnest money” because the latter is a statutory term of art whose definition is at issue in this matter. For purposes of this recommended decision, “down payment” means an amount that the customer agrees to pay as part of the sale transaction before he or she takes possession or title to the manufactured home.

[2] The term “closing” is used to mean Respondent’s execution of documents promising to sell and the customers’ execution of documents agreeing to buy a specified manufactured home and promising to comply with certain payment terms. [3] Respondent’s manager, Don Purse, testified at the hearing that the reconditioning involves installation of smoke detectors, painting, cleaning and other work for which, in his opinion, a license is not required. Because the Citation and Complaint in this matter did not allege that Respondent performed activities beyond the scope of its license and the parties did not dispute the facts giving rise to the charged offenses, the precise nature of Respondent’s reconditioning activities was not developed at the hearing. [4] A.R.S. § 41-2180(D) is quoted in relevant part at Conclusion of Law No. 2. A.R.S. § 41-2186(1) and (6) authorize the Assistant Director to temporarily suspend, permanently revoke, impose an administrative penalty against, or place on probation any licensee who fails in any material respect to comply with or does a wrongful or fraudulent act in violation of statutory provisions governing licensees. [5] That opinion advised that a person who had retained a broker to sell a manufactured home could recover from the Consumer Recovery Fund under the predecessor to A.R.S. § 41-2190. At the time the opinion was rendered, the predecessor to A.R.S. § 41-2180(J) only required a broker, upon completion of the sales transaction, to convey earnest money deposits to “the lending institution or the dealer, broker or purchaser, whichever is applicable.” The Attorney General noted:

For no discernible reason, the legislature did not include persons using brokers to sell their manufactured home. In this instance, the purpose of [the predecessor to A.R.S. § 41-2180] would be served by extending protection to such persons. The trust account recovery fund . . . provides protection to “any person” damaged as a result of a violation of [the predecessor to A.R.S. § 41-2180]. Since [the predecessor to A.R.S. § 41- 2180] covers brokered transactions, it is logical to conclude that the legislature intended [the predecessor to A.R.S. § 41- 2190] to apply to sellers relying on brokers. Otherwise, [the predecessor to A.R.S. § 41-2180] requires brokers to disburse earnest money deposits to buyers but not to sellers. There is no logical basis for such discrimination against sellers. . . .

Although [the predecessor to A.R.S. § 41-2180(J)] can be read to apply only to lending institutions, dealers, brokers and buyers, a literal reading of the statute leads to an absurd result. The statute requires the deposit of all earnest monies in an escrow or trust account. A literal reading of the statute, excluding a seller employing a broker would prohibit disbursement of the seller’s share of the earnest money. The disbursement of earnest monies to the seller could, under a literal reading, constitute a [statutory violation]. Thus, by disbursing funds to the seller, the broker could risk a license revocation. That result is absurd.

“It is well established that when the literal language of a statute will result in an absurdity, an impossibility or a meaning which from the general context of the statute, is clearly at variance with the legislative intent, courts may and will alter modify or supply words to the statute in order to give effect to the manifest intention of the legislature.” Keller v. State of Arizona, 46 Ariz. 106, 117, 47 P.2d 442 (1938). The only way to remedy the absurdity is to supply the phrase “seller of a used manufactured home” to [the predecessor to A.R.S. § 41-2180(K)] to give effect to the presumed intent of the legislature.

Perhaps in response to this opinion, the legislature amended the statute to allow a broker or dealer after completion of the transaction to convey earnest money deposits to “the lending institution or the dealer, broker, purchaser, seller, manufacturer or lienholder, whichever is applicable.” (Emphasis added.) The legislature did not amend the statute, however, to allow disbursement of earnest money to a seller before completion of the transaction. See A.R.S. § 41-2180(M).

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