In the course of representing and negotiating for the interests of their clients, real estate brokers are often privy to sensitive or confidential information. Whether buying or selling, residential or commercial, super-luxe or no-frills space, it’s absolutely crucial that brokers put the interests of their clients first–not only for purely ethical reasons, but to avoid career-killing legal imbroglios like the one that recently ended with a Staten Island broker being stripped of her license.
Under the Real Property Law, the Department of State is responsible for regulating the conduct of real estate brokers. The purpose of state oversight is to protect the public by ensuring the trustworthiness and competence of brokers. If a broker acts fraudulently or otherwise demonstrates untrustworthiness or incompetence, the Department of State can suspend, fine or reprimand the broker. As illustrated by a decision issued late last year in the Matter of Department of State Division of Licensing Services v. Turyan, in extreme cases, the Department of State will even revoke the broker’s license.
The Exclusive Listing To Sell
The Turyan case began in May 1999 when the Cataneos–owners of a medical office management and billing services company–decided to sell their business. The Cataneos then met with Turyan, a licensed real estate broker. At first, Turyan told the Cataneos that she was interested in becoming their partner in the business. However, the Cataneos told Turyan that they simply wanted to sell the business and were not interested in a partnership. The Cataneos then entered into an exclusive right-to-sell agreement with Turyan. Although the asking price for their business was listed as $295,000, the Cataneos told Turyan that they would accept $200,000.
Turyan Ends Up Buying the Business
Several weeks later, Turyan met with a potential buyer and his agent. The potential buyer was apparently ready to offer $250,000 for the Cataneos’ business. However, instead of trying to obtain the highest price for the Cataneos, Turyan decided to become the potential buyer’s partner. Turyan and the potential buyer agreed that they would offer only $170,000–obviously, a figure well below the $295,000 listing price or the Cataneos’ $200,000 bottom-line. Turyan then called the Cataneos and told them that the potential buyer had offered $170,000 for the business. Turyan did not mention her "partnership" with the potential buyer or her interest in the transaction. When the Cataneos rejected the $170,000 offer, Turyan told them that the potential buyer was unqualified and offered to buy the business from them. In July 1999, the Cataneos sold Turyan their business for $190,000.
The Plot Unravels
Shortly after the sale was completed, the rejected buyer’s broker informed the Cataneos that Turyan had partnered with the potential buyer and prevented the Cataneos from obtaining a $250,000 offer. The broker recommended that the Cataneos file a complaint against Turyan with the Department of State.
When the Cataneos confronted Turyan, she claimed that they had defrauded her by selling her a worthless business. Turyan then refused to pay the Cataneos the $95,000 balance of the purchase price and sued them in New York State Supreme Court for allegedly defrauding her into buying a worthless business. The Cataneos counter-sued Turyan for the unpaid balance of the purchase price and for breaching her fiduciary duties. Many of Turyan’s claims were dismissed, and the Cataneos were awarded summary judgment on their claim for the unpaid purchase price balance.
The State Revokes Turyan’s License
Shortly after Turyan began her lawsuit, the Cataneos filed a complaint against her with the Department of State. After conducting an extensive hearing, an administrative law judge concluded that Turyan had breached her fiduciary duties to and defrauded the Cataneos by disclosing their bottom line price to the potential buyer, by not informing them of her partnership with the potential buyer, and by not informing them of her interest in the transaction. Consequently, the judge ordered the immediate revocation of Turyan’s license.
Finally, it appears that Turyan may have objected to the hearing on the grounds that the negotiation for and sale of the Cataneos’ business did not technically involve a regulated real estate activity under the Real Property Law. The judge rejected this argument, however. He pointed out that the Department of State has a "legislative mandate" to protect the public by ensuring the "trustworthiness and competence" of brokers. The focus of that mandate is determining whether the conduct directly relates to the broker’s "trustworthiness and competence," not whether the broker’s conduct concerned a regulated real estate activity.
The Turyan matter is an extreme case. Nevertheless, the public policy concerns cited by the judge apply across the board. In light of the decision made against Turyan, it might be a good time for brokers to refresh themselves on the nature and extent of their fiduciary duties of good faith and fair dealing, full and fair disclosure and undivided loyalty to their clients.
Mr. Finkelstein is a partner with the Manhattan law firm of Itkowitz & Harwood, where he specializes in general commercial and real estate-related litigation and mediation.