KENTUCKY REAL ESTATE COMMISSION AND DAVID L. JONES v. AARON MILGROM
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RENDERED:
OCTOBER 7, 2005; 2:00 P.M.
TO BE PUBLISHED
Commonwealth Of Kentucky
Court of Appeals
NO. 2004-CA-001513-MR
KENTUCKY REAL ESTATE COMMISSION AND
DAVID L. JONES
APPEAL FROM CLARK CIRCUIT COURT
HONORABLE WILLIAM T. JENNINGS, JUDGE
ACTION NO. 00-CI-00363
v.
AARON MILGROM
AND
APPELLEE
NO. 2004-CA-001540-MR
DAVID L. JONES AND
KENTUCKY REAL ESTATE COMMISSION
APPELLANTS
APPEAL FROM CLARK CIRCUIT COURT
HONORABLE WILLIAM T. JENNINGS, JUDGE
ACTION NO. 00-CI-00363
v.
AARON MILGROM
APPELLEE
OPINION
REVERSING
** ** ** ** **
BEFORE:
APPELLANTS
MINTON, SCHRODER, AND TAYLOR, JUDGES.
SCHRODER, JUDGE:
These are two appeals from an opinion and
order reversing a decision of the Kentucky Real Estate
Commission (“KREC”) disciplining a broker licensee/buyer for
failing to set up and retain certain funds in an escrow account
and for misrepresenting that he had a line of credit and was
holding the funds in an escrow account.
The circuit court held
that the KREC did not have the statutory authority to discipline
the licensee/buyer because he was acting in his individual
capacity when he agreed to set up the escrow account.
Because
the licensee/buyer was the owner of the property which was sold
and for which the escrow account was to be set up, he was
subject to discipline by the KREC pursuant to KRS 324.020(3).
On March 12, 1998, appellant, David Jones entered into
a written contract with the Milgrom Group, Inc. (Milgrom Group)
whereby Jones agreed to sell the Milgrom Group an apartment
complex in Lexington.
At the time the contract was made, the
agency disclosure form indicated that appellee, Aaron Milgrom, a
licensed broker in Kentucky, would be the buyer’s agent.
Prior
to the closing, it was discovered that the property violated
several provisions of the local building code which required
certain repairs in order to bring the property into compliance.
Jones agreed to make the repairs at his expense.
On March 30,
1998, the parties agreed that $30,000 of the purchase price
would be withheld from the closing to assure that sufficient
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monies were available to cover the cost of the repairs.
The
written agreement signed by both Jones and Milgrom stated as
follows:
Sellers agree to cause all repairs to be
brought into compliance with code
enforcement and has escrowed $30,000 with an
escrow agent acceptable to buyer and with
terms acceptable to buyer.
Sellers’ liability is to bring property into
compliance and will pay any extra required.
Buyer will return unused sums to seller.
A handwritten notation next to the seller’s signature stated,
“To be escrowed with closing attorney Dan Rose.”
Sometime prior to the closing, the Milgrom Group
assigned its rights to purchase the property to Aaron Milgrom
and his then wife, Maralyn Milgrom.
Approximately six weeks
after closing, Milgrom confirmed to Jones by letter that he was
holding the $30,000 in escrow.
The letter, dated May 14, 1998
stated, “Please advise on the progress of the electrical and
structural repairs for which we are holding an escrow.”
When
the electrical repairs were completed in July of 1998 and the
bill was presented to Milgrom for reimbursement, he paid half of
the repairs and indicated by letter that he would pay the
balance some time the following month after he had collected
rent from his tenants.
On August 3, 1998, Jones’ attorney wrote
Milgrom demanding that the balance of the escrow account be
established as per the agreement between Milgrom and Jones.
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It
is undisputed that Milgrom never established the escrow account,
but instead used the $30,000 to purchase a shopping center
because of potential tax consequences.
According to Milgrom, because of the possibility of
these tax consequences, Milgrom and Jones agreed at the closing
that Milgrom would not set up an escrow account, but rather
Milgrom would establish a line of credit to cover the repairs.
Jones maintains that Milgrom further agreed to deposit $30,000
into Milgrom’s own brokerage escrow account to pay off the line
of credit.
In any event, it is undisputed that Milgrom never
established a line of credit to cover the repairs.
On September 28, 1998, Jones filed a complaint with
the KREC alleging violations of various real estate license
laws.
A hearing was held on these allegations on February 1,
2000.
On July 5, 2000, the KREC adopted in full the hearing
officer’s recommended findings of fact, conclusions of law and
order, finding that:
Milgrom violated KRS 324.160(1)(h) for
failing to account for or remit, within a reasonable time,
monies belonging to another; Milgrom violated KRS 324.160(1)(r)
for conduct which constitutes improper, fraudulent or dishonest
dealing; and Milgrom violated KRS 324.111 for failing to set up
an escrow account into which monies belonging to another would
be placed.
Milgrom then filed a petition for relief from the
KREC’s order in the Clark Circuit Court.
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On July 14, 2004, the
Clark Circuit Court entered its opinion and order reversing the
decision of the KREC, adjudging that the KREC acted outside its
statutory authority in disciplining Milgrom because Milgrom was
acting in his individual capacity as a buyer and not in his
capacity as broker when he agreed to set up the escrow account.
Jones and the KREC both filed appeals from that order.
Jones and the KREC both argue that the circuit court
erred in reversing the KREC’s decision because the decision was
not arbitrary and was supported by substantial evidence.
Judicial review of an administrative agency’s decision is
limited to the question of whether the agency’s action was
arbitrary.
Liquor Outlet, LLC v. Alcoholic Beverage Control
Bd., 141 S.W.3d 378 (Ky.App. 2004).
In determining whether the
agency’s action was arbitrary, the reviewing court must
consider:
1) whether the administrative agency acted within its
statutory powers; 2) whether due process was afforded; and 3)
whether the decision reached was supported by substantial
evidence.
Hougham v. Lexington-Fayette Urban County Government,
29 S.W.3d 370, 373 (Ky.App. 1999) (citing American Beauty Homes
Corp. v. Louisville and Jefferson County Planning and Zoning
Commission, 379 S.W.2d 450, 456 (Ky. 1964)).
The circuit court
in the case at bar reversed the KREC’s decision based on the
first factor, determining that the KREC acted outside its
statutory authority in disciplining Milgrom.
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An administrative body’s powers are defined and
limited by the agency’s enabling statute.
Public Service
Commission of Kentucky v. Attorney General of the Commonwealth,
860 S.W.2d 296 (Ky.App. 1993).
An agency may not assume any
power not expressly granted to it by the general assembly.
GTE
v. Revenue Cabinet, Commonwealth of Kentucky, 889 S.W.2d 788,
792 (Ky. 1994).
The enabling legislation for the KREC is
contained in KRS Chapter 324.
KRS 324.281 provides for the KREC
and sets out its duties, including “hold[ing] disciplinary
hearings concerning matters in controversy as provided by this
chapter.”
KRS 324.281(5).
KRS 324.150(1) states:
The commission or its staff may on its own
initiative investigate the actions of any
licensee or any person who acts in that
capacity. On the verified written complaint
of any person, the commission shall
investigate the actions of any person who
assumes to act in that capacity, if the
complaint, together with any evidence
presented in connection with it, alleges a
prima facie case that a violation set out in
KRS 324.160 has been committed. After the
investigation, the commission may order a
hearing and, in appropriate cases, take
disciplinary action against any licensee who
is found in violation of KRS 324.160.
KRS 324.160(4) to (7) lists the various conduct that
is subject to sanctions by the KREC “against a licensee”, and
KRS 324.160(1) sets out the sanctions that can be imposed by the
KREC for said violations, including license suspension, license
revocation, probation, and fines.
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It is undisputed in the present case that Milgrom was
a licensed real estate broker pursuant to KRS 324.010(10) and
KRS 324.046(1) when he entered into the contract with Jones to
purchase the property at issue.
Nevertheless, the circuit court
found that Milgrom was acting in his individual capacity as a
buyer when he agreed to set up the escrow account for the repair
funds.
The court relied on Leishman v. Goodlett, 608 S.W.2d 377
(Ky.App. 1980) in reaching that conclusion.
In Leishman, the licensee obtained a loan for himself
to build a house based on a fraudulent misrepresentation that he
owned the property on which the house was being built, which
property was security for the loan.
When the licensee defaulted
on the loan, it was discovered that he never owned the property
pledged as security.
KREC.
The lender filed a complaint with the
After a hearing, the KREC dismissed the complaint,
concluding that the licensee was not acting in his capacity as a
broker or salesman, but as a builder-developer, when he obtained
the loan.
The circuit court reversed.
This Court agreed with
the KREC’s dismissal of the complaint, adjudging that the
licensee was acting in his private capacity when he obtained the
loan and that the KREC cannot discipline licensees acting in
their private capacity:
The purpose of the act [KRS Chapter 324] is
to protect the public from unscrupulous
brokers and salesmen. Sims v. Reeves, Ky.,
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261 S.W.2d 812 (1952). The obvious intent
is to protect the public from unscrupulous
acts committed by realtors in their capacity
as brokers and salesmen, not in their
private capacity.
Leishman, 608 S.W.2d at 378.
The circuit court in the case at bar looked at the
following definition of “real estate brokerage” in KRS
324.010(1) in determining that Milgrom was likewise acting in
his private capacity:
"Real estate brokerage" means a single,
multiple, or continuing act of dealing in
time shares or options, selling or offering
for sale, buying or offering to buy,
negotiating the purchase, sale, or exchange
of real estate, engaging in property
management, leasing or offering to lease,
renting or offering for rent, or referring
or offering to refer for the purpose of
securing prospects, any real estate or the
improvements thereon for others for a fee,
compensation, or other valuable
consideration.
(Emphasis added.)
The circuit court interpreted the above such
that the licensee must perform the real estate service “for
others”.
The court found that the actions Milgrom was being
disciplined for were actions he was taking for himself as a
private buyer, not for others as a broker:
[T]he Commission based its Order
disciplining Milgrom on its findings that
Milgrom breached duties he owed to Jones to
deposit the $30,000.00 retainage into an
escrow account and to reimburse Jones
promptly upon completion of repairs, and
further that Milgrom misrepresented that he
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had performed his obligation to deposit the
retainage into an escrow account, and stood
ready to perform his obligation to reimburse
Jones promptly. Milgrom owed these
obligations to Jones in his individual
capacity as Buyer under the real estate
purchase contract, and not as a broker
acting on behalf of another.
From our reading of the current version of KRS Chapter
324, a licensee does not always have to be acting for a party
other than himself in order to be subject to the jurisdiction of
the KREC.
Subsequent to this Court’s decision in Leishman, the
Kentucky General Assembly amended KRS 324.020 in 1982 to extend
the provisions of KRS Chapter 324 as follows:
A licensee who is an owner or a builderdeveloper shall comply with the provisions
of this chapter and the administrative
regulations applying to real estate brokers
and sales associates.
KRS 324.020(3).
In Allard v. Kentucky Real Estate Commission, 824
S.W.2d 884 (Ky.App. 1992), it was undisputed that the licensee’s
contractual agreements with the buyers were conducted in his
capacity as developer/builder, and not as a broker.
Thus, the
licensee argued that the KREC had no jurisdiction over his
conduct.
This Court rejected this argument in light of KRS
324.020(2) (now KRS 324.020(3)).
“KRS 324.020(2) was adopted in
1982 to specifically apply the provisions of KRS Chapter 324 to
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a licensee acting in the capacity of an owner or
builder/developer.”
Id. at 886.
The cardinal rule of statutory construction is to
ascertain and give effect to the intent of the General Assembly.
Horn by Horn v. Commonwealth, 916 S.W.2d 173 (Ky. 1995).
From
our reading of KRS 324.020(3) and Allard, it is clear that the
Legislature intended for licensees who are owners or builderdevelopers of property to be bound by the provisions in KRS
Chapter 324 and the regulations promulgated pursuant thereto
when they are conducting transactions relative to those
properties.
As to appellee’s argument that such a reading of
KRS 324.020(3) conflicts with the requirement that the licensee
“act for others” in the definition of “real estate brokerage” in
KRS 324.010(1), we must presume that the Legislature was aware
of the definition of “broker” (now “real estate brokerage”) in
KRS 324.010 when they amended KRS 324.020 in 1982.
v. Jones, 658 S.W.2d 888 (Ky.App. 1983).
See Miller
It is also presumed
that the Legislature has knowledge of court decisions relative
to existing laws (Leishman) at the time they enact new
legislation on the same subject matter.
Commonwealth v.
Boarman, 610 S.W.2d 922 (Ky.App. 1980).
Thus, to the extent KRS
324.010(1) conflicts with KRS 324.020(3), the latter is
controlling.
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As to Milgrom’s argument that he was not acting as
owner or builder/developer when he entered into the agreement
with the seller to set up an escrow account, we deem this
position to be untenable.
In the absence of definition of a
term in a statute (in this case, the definition of “owner” or
“builder/developer”), the term is to be given its ordinary
meaning.
Commonwealth v. Harrelson, 14 S.W.3d 541 (Ky. 2000);
Old Lewis Hunter Distillery Co. v. Kentucky Tax Commission, 302
Ky. 68, 193 S.W.2d 464 (Ky. 1945).
Although the KREC made no
specific finding that Milgrom was an “owner or
builder/developer”, the evidence clearly established that
Milgrom purchased the property for himself, and thus was acting
as an owner of the property when he agreed to set up the escrow
account to cover the repairs to the property.
We would also note that the facts in the case at bar
are easily distinguishable from the facts in Leishman in that
the licensee in Leishman was not buying or selling property, but
was borrowing money to build on the property.
Milgrom was
buying property and executed an agency disclosure form
specifically stating that he was acting as the agent of the
buyer.
And most significant is the fact that Milgrom received a
3% commission ($27,900) on the transaction as the buyer’s agent.
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For the reasons stated above, the judgment of the
Clark Circuit Court is reversed and the decision of the KREC is
hereby reinstated.
ALL CONCUR.
BRIEF FOR APPELLANT KENTUCKY
REAL ESTATE COMMISSION:
Geraldine Lee B. Harris
Louisville, Kentucky
BRIEF FOR APPELLEE:
John B. Park
Lexington, Kentucky
BRIEF FOR APPELLANT DAVID L.
JONES:
Richard E. Vimont
Lexington, Kentucky
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