ADRE Cease and Desist Orders Against Licensees
October 21, 2015
Attorney, Stoops, Denious, Wilson & Murray, PLC
Over the past few years, the Arizona Department of Real Estate (ADRE) has issued several “cease and desist orders” against active licensees and brokerages.1 These orders are publicized in the Department’s “late breaking news” section of their website as well as sent via email to anyone who subscribes to the Department’s “informational alerts.”
What is a “cease and desist order” exactly? The operative statute is A.R.S. § 32-2154, which states:
32-2154. Cease and Desist Orders
A. If it appears to the commissioner that any person has engaged, is engaging or is preparing to engage in any act, practice or transaction that constitutes a violation of this chapter or any rule adopted or order issued by the commissioner, the commissioner may issue an order directing any person to cease and desist from engaging in the act, practice or transaction or doing any act in furtherance of the act, practice or transaction, to make restitution or to take appropriate affirmative action, within a reasonable period of time as prescribed by the commissioner, to correct the conditions resulting from the act, practice or transaction.
A cease and desist order, commonly referred to as a “C&D,” does not put a licensee completely “out of business.” It is not a revocation or suspension of the licensee’s license.2 Rather, a C&D prohibits a licensee from engaging or continuing to engage in any activity that is a violation of the real estate statutes or Commissioner’s Rules. Indeed, the typical C&D will direct the licensee to “immediately cease and desist from engaging in any and all real estate activity as defined by A.R.S. §32-2101 et seq., and property management activity as defined by A.R.S. §32-2171 et seq., in any capacity whatsoever, directly or indirectly within the State of Arizona, without first complying with all applicable laws and rules.” Stated otherwise, you can do legal activities; but you can’t do illegal activities. Simple, right?
However, there is a great deal of confusion on this issue. Licensees who receive C&Ds are typically under the impression, even after speaking with Department representatives, that they are “completely out of business.” This confusion creates a huge problem for the licensee in determining what to do moving forward until the C&D is addressed and resolved. Will the licensee be penalized for continuing activities in the meantime that are in compliance with the law? Is the licensee required to close out all client files, as portions of the C&D may suggest? What is the licensee supposed to say to the hundreds of clients who receive a copy of the C&D and ring the phones off the hook asking for clarification on whether the licensee is still in business?
Wait – the clients – how would the clients know about the C&D right away? Because they will get it “through the grapevine” of other real estate licensees, or in many cases will receive it directly via email from the Department itself (which will often collect client email lists when it does an audit of the licensee). Clients will typically assume that the C&D has put the licensee completely out of business. Clients who contact the Department for an explanation (e.g., is my real estate broker / property manager still in business?) will be given the following statement:
“The Department cannot provide legal advice regarding questions or issues regarding contracts or other dealings with [the licensee or brokerage]. Any questions regarding contracts or other dealings with [the licensee or brokerage] should be directed to [the licensee or brokerage] or to your personal legal representative.”
So – what to do? A licensee who receives a C&D should immediately consult with an attorney familiar with real estate brokerage and licensing issues and file a notice of appeal along with a request for informal settlement conference with the Department. The informal settlement conference, by statute, will be held within 15 days following the filing of the request with the Department, and this conference will be the licensee’s opportunity to speak directly with Department personnel and discuss whether and how the C&D may be lifted or resolved.
The licensee should further, with legal counsel, determine the scope of activities the licensee can legally continue to engage in before the C&D is resolved. In some cases this should be a fairly easy determination, though the licensee needs to understand that the Department’s position may not be clear. In many other cases there is an issue whether a licensee can continue property management activities while there exists any shortage in the licensee’s property management trust account.3
The licensee also needs to be prepared to respond to questions from clients In my experience, the most effective way to do this is to prepare a letter to be emailed to clients advising them of the status and effect of the C&D, the licensee’s plan for resolving the C&D, and what services the licensee will provide in the interim. In some cases, I have provided a legal position letter to the licensee that explains the C&D, the effect on the licensee and what the licensee can continue to do. Obviously, regardless whether the C&D is later resolved, it will be of little help to a licensee or brokerage who has lost its client base in the meantime.
Ideally, the matter will be ultimately resolved via a “consent order” under which the licensee typically admits to certain violations, agrees to certain fines and/or a “provisional license,” along with steps for remediating any prior violations.
Future article – Consent Orders
1 The Department will also issue cease and desist orders against unlicensed individuals or companies who are believed to be engaging in real estate activities without being properly licensed; this article addresses only such orders that are issued against licensees.
2 In contrast, a summary license suspension, which immediately suspends a licensee from engaging in any further business, is subject to separate statutes with additional requirements See A.R.S. § 32-2157; Dahnad v. Buttrick, 201 Ariz. 394, 398, 36 P.3d 742, 746 (App. 2001).
3 The Department has taken the position in many cases that a property management firm that has a shortage in its property management trust account cannot legally engage in any property management activity for any client while the shortage exists.