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Fox v. Real Estate Agency

Court of Appeals of Oregon

June 20, 2018

Christopher FOX, Petitioner,

          Argued and submitted August 2, 2017

          Real Estate Agency 2011492

          Michael F. Gordon argued the cause for petitioner. With him on the briefs was Gordon Law Offces.

          Judy C. Lucas, Assistant Attorney General, argued the cause for respondent. With her on the brief were Ellen F. Rosenblum, Attorney General, and Benjamin Gutman, Solicitor General.

          Before Lagesen, Presiding Judge, and DeVore, Judge, and James, Judge.

         Case Summary:

         Petitioner seeks judicial review of a final order in a contested case revoking petitioner's Real Estate Principal Broker license. In revoking petitioner's license, the Real Estate Commissioner (commissioner) found that petitioner had provided materially misleading information in connection with the sale of residential real property and that petitioner had done so with the intent to mislead. In making those findings about petitioner's intent, the commissioner altered contrary findings made by an administrative law judge (ALJ), who instead found that petitioner had acted carelessly and had made mistakes. Petitioner assigns error to the commissioner's modification of the ALJ's findings regarding petitioner's mental state and the damages suffered as a result of petitioner's conduct. He also asserts that the commissioner erred in concluding that his conduct violated ORS 696.805(2)(c) and in concluding that the progressive discipline rule only applies to conduct occurring after January 1, 2006. Held: The commissioner erred in modifying one of the ALJ's findings and concluding that the rule for progressive discipline did not apply to petitioner's case. On de novo review of the altered findings, the Court of Appeals determined that petitioner's misleading statements were more likely the product of carelessness or mistake than an intent to deceive, which invalidated one of the commissioner's violation [292 Or.App. 430] conclusions. However, the court upheld the commissioner's fndings that petitioner acted recklessly and that his conduct resulted in "substantial economic damages." Petitioner's argument regarding ORS 696.805(2)(c) was unpreserved and therefore rejected. Further, the rule for progressive discipline applies whenever an investigation of a licensee's conduct takes place after January 1, 2006. The commissioner erred in concluding otherwise and must apply the rule for progressive discipline when assessing the appropriate sanction for petitioner on remand.

         Reversed and remanded.

         [292 Or.App. 431] LAGESEN, P. J.

         This is a proceeding for judicial review under ORS 183.482 of a final order in a contested case revoking petitioner's Real Estate Principal Broker license. In revoking petitioner's license, the Real Estate Commissioner, carrying out the duties of the Real Estate Agency, found that petitioner provided materially misleading information in connection with the sale of residential real property, and that petitioner did so with the intent to mislead. In making those findings about petitioner's intent, the commissioner altered findings to the contrary by an administrative law judge (ALJ), who was not persuaded that petitioner possessed the intent to deceive but instead found that he had acted carelessly and made mistakes. On de novo review of the altered findings under ORS 183.650(4), [1] we, like the ALJ, are not persuaded that petitioner's misleading statements were the product of an intent to mislead and find that they more likely were the product of carelessness. We therefore reverse and "remand the matter to the [commissioner] for entry of an order consistent with the court's judgment, " as further elaborated below. ORS 183.650(4).

         I. BACKGROUND

         A. Substantive Facts

         Apart from the factual dispute about petitioner's state of mind, most of the facts that led to this proceeding are not disputed. In accordance with our standard of review, as noted, we draw the facts from the unchallenged findings in the order. Augustus v. Board of Nursing, 284 Or.App. 420, 421 & n 2, 392 P.3d 788 (2017).

         Petitioner has held an Oregon real estate license since 1988 and has been licensed in Oregon and Washington for more than 20 years. Petitioner's background in real estate extends back farther. He began working with his father in his father's Corvallis real estate company when he was 15 years old. His father's business specialized in income properties, as has petitioner's. Petitioner primarily buys, [292 Or.App. 432] sells, and manages income property and, in the course of that business, does not regularly represent other buyers or sellers, or engage in property development.

         In 2004, petitioner purchased a 65-acre parcel of property from one of his former clients, Radke. The property is on Skyline Boulevard in Portland, is flat, and has views of the Columbia River and the Cascades. The property consists of three tax lots; petitioner bought them in a single transaction. The property has a house, a storage and shop building, and several other storage units. At the time of petitioner's purchase, it was zoned CFU (commercial forest use) 1.

         Radke had acquired the bulk of the 65-acre property in 1966. It consisted of two separate tax lots at the time, and there had been a house on the property since at least 1942. The next year, Radke built a new house on the property approximately 100 feet away from the original home site. In subsequent years, Radke added the shop and storage structures.

         Publishers Paper Company owned land adjacent to Radke's 65-acre parcel. In 1981, Radke exchanged with Publishers Paper 17.92 acres of heavily wooded land on the downhill side of his property for 19.3 acres of land that were flat and fronted on Skyline. After deeding the pertinent property to each other, Radke and Publishers Paper executed a cutting boundary agreement. Publishers Paper then logged all 500 acres of its property, including the 17.92 acres it obtained from Radke.

         In 1980, shortly before the trade between Radke and Publishers Paper, Multnomah County changed by map the zoning applicable to the 65-acre parcel, increasing the minimum acreage required for residential use to 80 acres. It confirmed that zoning change by rule in 1982. As a result of that change, the property, as of 1982, was not large enough for a new residential use.

         When petitioner purchased the property from Radke in 2004, he knew that a new residence could not be built on the property because of the zoning. He also knew that the plumbing and electrical systems in the existing residence were not up to code. His plan was to bring the [292 Or.App. 433] existing residence up to code for his own personal use and to address any other compliance issues with the property through the City of Portland's "Get Legal" program. That program assisted owners of property in rural Multnomah County in bringing unpermitted, not-to-code improvements into compliance with city and county codes.

         The property turned out to be more of a project than petitioner had anticipated. Petitioner's interest in the property did not include the logging rights. Approximately two months after petitioner purchased it, the party with the logging rights harvested the timber on the property. This revealed that Radke had disposed of "60 to 70% more waste on the property than was readily apparent prior to the harvest." The additional waste included 30 to 40 barrels of oil or solvents, 30 cars, and years of accumulated waste from apartments and ruined buildings. Then, in December 2004, a windstorm caused significant additional damage to the house and property.

         When petitioner first purchased the property, he hired several people to help clean it up and bring the improvements up to code. One of those people introduced petitioner to Ernie Casella, and petitioner contracted with Casella to perform repair work after the windstorm. Casella told petitioner that he had experience resolving zoning issues with the city and county, and had helped other homeowners address issues similar to petitioner's. Casella had worked on projects in the Pearl District and other areas and, according to petitioner's research, had a reputation in the community for being thorough and professional. Petitioner then decided to hire Casella to resolve the zoning and building code issues with the property.

         In March 2005, petitioner wrote a detailed letter to Casella that outlined the issues with the property and possible solutions. Among other things, he explained that the 19-acre tax lot created as a result of the 1981 land exchange had been red-flagged by the county as illegally created under the zoning at the time. He suggested that one way to solve the problem might be to merge the 19-acre lot with the other two tax lots to recreate the original 65-acre parcel. However, he also asked Casella to look into whether the [292 Or.App. 434] 19-acre parcel could be split off from the other two and sold separately so that he could use the proceeds to keep the balance of the property and finish the work on the house.

         After contracting with Casella, petitioner spent approximately $80, 000 toward resolving the permitting and land use issues with the property. However, the clean up work on the property ultimately used up all of petitioner's funds and he decided to sell the property. Acting under his real estate broker's license, petitioner listed the property for sale on the Regional Multiple Listing Service (RMLS) in August 2005.

         The RMLS listing format included an area for "Remarks" that allows the listing agent to include important information about the property. Petitioner's listing did not include any information about the 1981 land exchange or the zoning issues that arose from that exchange.

         After petitioner listed the property, Maxson, another real estate licensee and petitioner's colleague, thought that the property might interest Donnelly, a friend of Maxson from college. Maxson previously had assisted Donnelly in buying residential and commercial properties. Maxson also knew Casella and his reputation for successful permitting and construction projects, and knew that Casella worked with a particular mortgage broker, Crane. Maxson thought Casella and Crane would be a good fit with Donnelly and introduced them to him for the purpose of considering a joint purchase of the property. They decided to buy the property together for $650, 000.

         In January 2006, Donnelly, Casella, and Crane executed a preprinted form Residential Real Estate Purchase and Sale Agreement with petitioner. Although Donnelly, Casella, and Crane intended to form a limited liability company (LLC) to purchase the property, they signed the agreement in their individual capacities. About a month later, they executed an addendum stating that "[a] 11 parties are aware that Purchasers will create an LLC as the purchasing entity." The form agreement that the parties executed in January contained a section labeled "Seller Representations." That section included the following statements:

[292 Or.App. 435] "(7) Seller has no notice from any governmental agency of any violation of law relating to the Property * * * (9) Seller agrees to promptly notify Buyer if, prior to closing, Seller receives actual notice of any event or condition which could result in making previously disclosed material information relating to the Property substantially misleading or incorrect. These representations are based upon Seller's actual knowledge. Seller has made no investigations. Exceptions to items (1) through (9) are: _ _ _. Buyer acknowledges that the above representations are not warranties regarding the condition of the Property and are not a substitute for, nor in lieu of. Buyer's own responsibility to conduct a thorough and complete independent investigation, including the use of professionals, where appropriate, regarding all material matters bearing on the condition of the Property, its value and its suitability for Buyer's intended use."

(Underscoring in original.)

         Although petitioner knew that the 1981 land exchange had resulted in an illegal division of the property at the time that he signed the agreement, he did not include that information on the form. Petitioner discussed the property with Casella and Crane, but Donnelly did not participate in those discussions. Petitioner's understanding during those discussions with Crane and Casella was that the two of them represented Skyline View, LLC (Skyline View), which was the LLC that Crane, Casella, and Donnelly formed to purchase the property. Petitioner did not know what Casella told Donnelly about the issues with the property.

         In July 2006, petitioner completed a form Seller's Property Disclosure Statement. He checked the box marked "No" next to the question, "Are there any zoning violations or nonconforming uses?" Approximately 10 days later, petitioner signed a warranty deed transferring the property to Skyline View. The warranty deed stated that the property was "free of encumbrances."

         Around the time of purchase, the property was appraised at $1, 250, 000. Donnelly's family LLC, the Chatfield Family LLC, supplied the down payment, loaning it to Skyline View. Neither Casella nor Crane put in any money. Donnelly's objective at the time of the purchase was to [292 Or.App. 436] complete the renovation of the existing house and sell the property, possibly retaining the 19-acre parcel for another residence.

         In 2008, the property was reappraised by a private appraiser at $1, 650, 000. After that appraisal, Skyline View obtained a construction loan that was secured by the property. Part of the loan was used to repay the Chatfield Family LLC for the down payment loan and part was used to pay the balance of the purchase price for the property.

         At some point after Skyline View had started work on renovating the existing house, Multnomah County issued a stop work order to Skyline View. In April 2008, the county notified Skyline View, through Crane and Donnelly, that it had determined that the county's zoning requirements prohibited the project, notwithstanding the permits that the City of Portland had issued allowing the project to proceed. The letter set forth several different pathways through which the violations might be resolved.

         Acting on behalf of Skyline View, Donnelly thereafter initiated an arbitration proceeding against petitioner and two of his companies, alleging that they had engaged in intentional fraud. The arbitration panel found in favor of Skyline View, awarding $666, 450 in damages. Although petitioner was represented by counsel at the arbitration hearing, he was not represented for much of the time leading up to the hearing which, in petitioner's view, affected the arbitration proceeding. Additionally, although Crane had told petitioner that he would appear as a witness at the arbitration and testify to certain facts, Crane failed to appear. Although Crane was reached by telephone and allowed to testify by phone, he testified differently from how he told petitioner he was going to testify. Judgment was entered on the arbitration award against petitioner on March 16, 2010.

         At some point after the arbitration against petitioner, Donnelly sued Crane and Casella for fraud, and obtained money judgments against them. He then used those judgments to have Crane and Casella removed from membership in Skyline View. Skyline View has defaulted on its construction loan and, as a result, is at risk of losing [292 Or.App. 437] the property. Donnelly has not been able to collect on the arbitration judgment against petitioner or on the judgments against Crane and Casella.

         On October 14, 2011, petitioner reported the March 2010 arbitration judgment against him to the Real Estate Agency, as required by the agency's rule, OAR 863-015-0175(4) (2009), which required real estate licensees to report any adverse judgments against them. Because the rule specified that a licensee must report any adverse judgments within 20 days of receiving notice of the adverse decision, petitioner's report was roughly a year and a half late.

         B. Procedural Facts

         The Real Estate Agency began investigating the matter and, in July 2012, issued a notice of intent to revoke petitioner's license. The notice alleged that petitioner's acts of (1) failing to reference the zoning issues in the RMLS listing; (2) failing to complete the Residential Real Estate Sale Agreement in a way that disclosed the zoning issues; (3) answering "no" to the question about whether there were zoning or nonconforming issues; and (4) signing a warranty deed representing that there were no encumbrances on the property each constituted "fraud or *** dishonest conduct substantially related to the fitness of the licensee to conduct professional real estate activity" under ORS 696.301(14).[2]The notice further alleged that petitioner's failure to identify the zoning issues in the RMLS listing constituted the "know-ing[] orreckless[] publi[cation] of materially misleading or untruthful advertising, " in violation of ORS 696.301(4), [3] as well as the failure to "disclose material facts known by [petitioner], " as a real estate agent, "which are not apparent or readily ascertainable to a party in a real estate transaction" in violation of ORS 696.805(2)(c).[4] It alleged that petitioner's [292 Or.App. 438] failure to indicate the zoning issues on the sales agreement and his "no" answer to the zoning question on the seller disclosures also violated ORS 696.805(2)(c). Finally, the notice alleged that petitioner's failure to timely report the arbitration judgment violated OAR 863-015-0175(4) (2009).[5] The notice proposed that revocation of petitioner's license was the appropriate discipline for his conduct.

         Petitioner requested a contested case hearing, and the case was referred to the Office of Administrative Hearings (OAH) for a hearing before an AL J. At the hearing, petitioner generally did not dispute that his conduct violated the agency rules. That is, petitioner did not dispute that he should have included information about the zoning issues in the RMLS listing, that he should have identified the zoning issues on the purchase and sale agreement and on the seller disclosures, that he should not have signed a warranty deed that stated that the property had no encumbrances, and that he should have reported the arbitration judgment within 20 days of the date that he knew of it. Instead, the main focus at the hearing was whether petitioner had acted with an intent to mislead or defraud Donnelly. Petitioner testified at the hearing that he did not have the intent to defraud or hurt Donnelly, that his conversations about the sale had been with Casella and Crane, and that Casella knew all about the zoning issues at the time Skyline View purchased the property. Petitioner explained that Casella told him at the time of the sale that he had been in touch with the county and that his plan, once Skyline View purchased the property, was to complete the renovation of the house through the "Get Legal" program that the City of Portland was operating on behalf of the county.

         The ALJ ultimately credited petitioner's testimony and found that petitioner's omissions and misleading statements regarding the zoning issues with the property were the result of mistakes and carelessness rather than the intent to mislead. Based on her finding about petitioner's [292 Or.App. 439] mental state, the ALJ concluded that the agency had not demonstrated that petitioner "[c]ommitted an act of fraud or engaged in dishonest conduct substantially related to the fitness of the applicant or licensee to conduct professional real estate activity" in violation of ORS 696.301(14), and rejected all of the agency's allegations that petitioner had violated ORS 696.301(14). The ALJ also rejected the agency's allegation that petitioner violated ORS 696.301(4) when petitioner did not include information about the property's zoning issues in the RMLS listing, finding that petitioner had not acted knowingly or recklessly in publishing the misleading RMLS listing.

         The ALJ did find, however, that petitioner violated ORS 696.805(2)(c), that is, that petitioner failed "to disclose material facts of which he was aware and which were not readily apparent or readily ascertainable to a party in a real estate transaction, " through the RMLS listing, the purchase and sale agreement, and the seller disclosures when petitioner failed to supply accurate information about the zoning issues with the property. The ALJ also found that petitioner violated ORS 696.301(3) (requiring a real estate licensee to comply with agency rules) and OAR 863-015-0175(4) (requiring reporting of adverse decision against licensee).

         After considering the factors in the agency's rule governing progressive discipline, OAR 863-027-0020(2), the ALJ recommended a one-year suspension of petitioner's real estate license, together with a period of probation. In reaching that conclusion, the ALJ explained that she was not persuaded by the evidence in the record that Donnelly had been significantly harmed by petitioner's conduct because the appraisals in the record suggested that the property was worth a lot more than Skyline View had paid for it. The ALJ also concluded that petitioner's lack of prior disciplinary issues during his lengthy career, his reputation in the community for "ethics and knowledge, " and his cooperation with the agency throughout the investigation all weighed in favor of a sanction of suspension rather than revocation.

         The commissioner modified the ALJ's order, including some of the ALJ's key factual findings. Most significantly, [292 Or.App. 440] the commissioner found that petitioner had the intent to mislead each time he failed to supply accurate information regarding the zoning issues in the RMLS listing, the purchase and sale agreement, the seller disclosures, and the warranty deed, and that those misrepresentations were not the product of petitioner's mistakes or carelessness, as the ALJ had found. Based on those modified findings about petitioner's mental state-that petitioner possessed the intent to mislead or deceive-the commissioner concluded, contrary to the ALJ, that petitioner violated ORS 696.301(14) by engaging in fraudulent or dishonest conduct on multiple occasions. The commissioner also found that, in publishing the RMLS materials without supplying the information about the zoning issues, petitioner had both knowingly and recklessly published materially ...

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