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New Jersey Real Estate Commission v. Tonge

Superior Court of New Jersey, Appellate Division

October 30, 2013

DOUGLAS R. TONGE and JUST NEW HOMES, INC., Respondents-Appellants.


Argued February 8, 2012

On appeal from the New Jersey Real Estate Commission, Department of Banking and Insurance, Docket No. MER-05-018.

Jeffrey S. Mandel argued the cause for appellants (Cutolo Mandel, LLC, attorneys; Mr. Mandel, of counsel and on the brief).

William B. Puskas, Jr., Deputy Attorney General, argued the cause for respondent (Jeffrey S. Chiesa, Attorney General, attorney; Lewis A. Scheindlin, Assistant Attorney General, of counsel; Mr. Puskas, on the brief).

Before Judges Fuentes, Graves and Harris.



Douglas R. Tonge and Just New Homes, Inc. (JNH) appeal from the New Jersey Real Estate Commission's (NJREC or Commission) determination that appellants paid a rebate to homebuyers in violation of N.J.S.A. 45:15-17(k). We affirm.

The undisputed record shows appellants devised a coupon-based marketing scheme to provide a one percent cash-back in the form of a reduction in buyer's closing costs. The buyer, through the internet, would access appellants' website, search for a property of interest, and send their coupon requests to appellants. The coupon was also advertised on the website.

Once registered on appellants' website, prospective buyers were instructed to present the coupon to the builder-seller's representative when visiting the builder-seller's construction site. The coupon notified the builder-seller that JNH was the broker and instructed the settlement agent to apply or rebate one percent of the real estate commission to offset the buyer's closing costs. It is important to note, however, that builder-sellers did not have a contractual listing arrangement with appellants.

The NJREC found appellants' coupon-based approach violated N.J.S.A. 45:15-17(k) as a payment of a rebate to a non-licensed broker. NJREC calculated appellants committed at least 247 violations of the statute. The Commission revoked appellants' real estate broker license for five years and imposed a $123, 500 fine, representing a $500 fine for each violation.

Distilled to its essence, appellants argue that the Commission erred as a matter of law because the undisputed evidence shows appellants merely "offered" a rebate to those potential buyers who visited their internet website. According to appellants, under these circumstances, N.J.S.A. 45:15-17(k) is inapplicable because the statute was intended to prohibit only the "payment" of rebates. We reject this argument as mere sophistry. Appellants' attempt at camouflaging the motivation that drove this rebate/coupon scheme is a specious exercise in semantics, untethered to the then prevailing public policy underpinning this legislative prohibition.

Appellants also argue that the sanctions imposed by the Commission were needlessly punitive, misapplied the factors outlined by the Court in Kimmelman v. Henkels & McCoy, Inc., 108 N.J. 123, 137-140 (1987), and failed to give proper consideration to the recent amendments to N.J.S.A. 45:15-17(k), permitting real estate brokers to offer consumers rebates of a portion of their commission pursuant to specifically described guidelines. Although we recognize that the cumulative monetary sanction is substantial, we reject appellants' argument substantially for the reasons expressed by the Commission in its October 18, 2010 order and supporting memorandum of decision.


Procedurally, this matter began as an order to show cause filed by the Commission charging appellants with violations of N.J.S.A. 45:15-17(k), paying rebates or compensation to persons not licensed by the Commission; N.J.A.C. 11:5-6.4(a), breach of fiduciary duty; N.J.S.A. 45:15-17(e), failing to deal fairly with all parties; and N.J.A.C. 11:5-6.1(r), making false or misleading statements in promotional materials. Appellants denied all of the allegations and the case was transferred as a contested matter to the Office of Administrative Law for evidentiary proceedings before an Administrative Law Judge (ALJ).

Because the salient facts are not disputed, the Commission filed for summary decision on the question of liability. After considering the arguments of counsel for both sides, the ALJ granted the Commission's motion for summary decision. The ALJ made his ultimate legal determinations, which the Commission later adopted, based on the following undisputed record.

Beginning in 1999, appellants began operating as licensed real estate brokers primarily over the internet. Through their internet website, a prospective client had access to search open-listed, newly-constructed properties. Appellants' website permitted these potential cyber-clients to electronically transmit their requests for information on a particular listing to appellants. The legal questions in contention arise from the following statement displayed on appellants' website:

Get 1% cash back on your new home purchase! Just New Homes is FREE, EASY, and offers homebuyers a 1% CASH-back bonus!
Get a Contribution Toward Your Closing Costs Just for Buying a New Home Using the Just New Home Guide for New Home Buyers. Wouldn't it be great to receive something back for buying a new home? At Just New Homes that's just what you can do! . . . You can get 1% of your new home base price, directly back at closing. For example, if you buy a home from our new home guide that costs $300, 000, you can get a $3, 000 contribution toward either your closing costs or the price of your new home; the choice is yours!

As noted, the system devised by appellants required the prospective client to visit the site and identify a home of interest. Appellants would then fax a "Client Registration" to the builder-seller. Despite the absence of any prior contractual arrangement with the builder-seller, appellants provided this registration certificate to the buyer/cyber-client to present to the builder-seller. This Client Registration form "notif[ied] the builder-seller of [appellants'] involvement to entitle [them] to a commission." According to appellants, it was "VERY IMPORTANT" for the buyer to tell the builder-seller's sales representative that JNH was the buyer's real estate broker. Appellants expected the buyer to make this clear in the builder-seller's guest registration book or marketing survey.

The buyers would receive the one percent "cash-back" or reduction in appellants' commission at the closing of title. The website "requested" the builder-seller to reduce the commission paid to appellants and direct the settlement agent, in most cases the attorney for one of the parties, to apply the credit to the buyer's closing costs. The website also informed the buyer that appellants would review the contract and suggest amendments where necessary. Appellants made clear, however, that neither Tonge or any representative from JNH would ever accompany the buyers to the construction site or visit the location of their new home.

Appellants emphasized that the builder-seller may not pay a commission to JNH unless, on the buyers' very first visit to the construction site, they register, identify, and disclose appellants as the buyers' broker. The one percent commission "rebate" or "credit" was also contingent upon appellants receiving at least one and one-half percent commission. If the commission was less than one and one-half percent, the buyers would only receive a credit equal to half of appellants' total commission.

Although appellants acknowledged before the Commission that certain builder-sellers had a policy of not paying a commission unless the buyers' broker physically accompanied the clients to the construction site, they did not disclose this possibility on their website. In fact, certain builder-sellers had a policy of not paying any commission to appellants under any circumstances. Again, appellants failed to disclose this material information on their website.

This case was not the first time the Commission found Tonge's marketing innovations ran afoul of regulations restricting the conduct of licensed real estate brokers. In 2000, the Commission charged Tonge with violating the regulation prohibiting brokers from offering or paying rebates of their commission as an inducement. On March 7, 2001, through negotiations with Commission representatives and his attorney at the time, Tonge admitted to committing this kind of regulatory infraction and paid a $500 fine.

Tonge argued before the ALJ that the plan under review in this case, which the Commission now claims violated the rebate proscription in N.J.S.A. 45:15-17(k), was specifically approved by the NJREC's "chief of investigation" who prosecuted the case against him in 2001. The following excerpt from Tonge's testimony before the ALJ captures the essence of his claim:

They called me into a hearing with my attorney, my partner at the time, the chief of investigation, and some assistant, which they have yet to supply the name of that assistant. I'm not sure who that was. It was a female. We sat in the room, and the chief of investigation said, "You can't say what you say on the website, because that would constitute a rebate." Had I known what I know now back then, I would have said no, that's not it, but being intimidated by the Real Estate Commission who controls my license, I said, "All right. What can we do to settle this?" My attorney offered his help.
Mr. Stout, the chief of investigation, said — and this is almost a quote almost word for word, "You can't say that you will give people money, but what you could do is offer to reduce your commission and have the seller pay it, " which is a perfectly legal transaction. It's done every single day in the real estate business. It's called a "seller concession." Sellers are giving buyers whatever concession they need to make the deal work.

Because Tonge did not produce any evidence to corroborate his testimony, the ALJ declined to consider this assertion as a valid defense to the charges in this case. Specifically, the ALJ found Tonge neither sought nor received "any clear representation in writing" from the Commission approving the internet rebate scheme under review here. In rejecting Tonge's claim, the ALJ emphasized that "[a] determination that the Commission has at some time in the past granted approval to the [appellant] to operate in the fashion which the Commission now charges is illegal must be based on concrete evidence of such a definitive approval."

Appellants also argued the "1% Cash-Back Bonus" did not constitute a "rebate" under N.J.S.A. 45:15-17(e), which authorizes the Commission to discipline real estate brokers or salespersons if they engaged in

[a]ny conduct which demonstrates unworthiness, incompetency, bad faith or dishonesty. The failure of any person to cooperate with the commission in the performance of its duties or to comply with a subpoena issued by the commission compelling the production of materials in the course of an investigation, or the failure to give a verbal or written statement concerning a matter under investigation may be construed as conduct demonstrating unworthiness[.]

N.J.S.A. 45:15-17(e) is one item in a statutory menu listing nineteen separate acts or conduct that provide legal grounds for the imposition of disciplinary sanctions against individuals licensed by the Commission. The ALJ found Tonge engaged in the prohibited conduct described in N.J.S.A. 45:15-17(e) because appellants' "website and material did not indicate to prospective clients that under some circumstances the 1% Cash-Back Bonus would not be available[.]" The ALJ also rejected as irrelevant Tonge's proffer to produce testimonials from satisfied customers who would attest that they were not confused or misled by the website's omission in this respect.

It is what [appellants] themselves held out to the public that matters, whether it was a fair representation of the truth or was instead misleading on its face. That some, even that all, were not mislead in fact is besides the point, at least as regards liability for placing facially misleading information where less than sophisticated persons may be deceived. I FIND that the website presented incomplete and misleading information and statements, and as a result, the violation of N.J.A.C. 11:5.6(r)[1] is proven.

Stated differently, the ALJ concluded appellants breached the fiduciary duty they owed to their cyber-customers by misleading them into believing the rebate would be honored in every instance, provided they faithfully followed the clear directions described on appellants' website. The undisputed facts showed otherwise: certain builders-sellers would not honor appellants' guarantees to their customers, under any circumstances. The key stumbling block for many of these builder-sellers was appellants' unwillingness to accompany their customers to the construction sites. The ALJ also concluded that the same facts that supported this violation also constituted sufficient grounds to find appellants violated "their obligation under N.J.A.C. 11:5-6.4(a)[2] and are guilty of unworthiness, incompetency, bad faith and dishonesty and are therefore liable for penalties pursuant to N.J.S.A. 45:15-17(e)."

With respect to the central issue of whether the "1% Cash-Back Bonus" constitutes a rebate prohibited at the time under N.J.S.A. 45:15-17(k), the ALJ found:

[A]s Tonge candidly admitted at oral argument, the arrangement promoted in the 1% Cash-Back Bonus is literally an attempt to get around the statutory prohibition by having a middleman receive and then pay the portion of the commission to the buyer, to use as the [buyer] chooses to either reduce the purchase price of the home or to use to pay a portion of the closing costs. But despite its clever attempt to evade the prohibition, it is exceedingly clear that all that the Cash-Back Bonus involves is the payment of a portion of the [appellants'] lawful commission to the buyer. The money the buyer receives is commission money, nothing else, and allowing that commission to be paid to the buyer, where the buyer is not possessed of a real estate license, is a violation of the law.

After considering the exceptions to the ALJ's Initial Decision filed by the parties, the Commission deliberated and accepted as "appropriate" the ALJ's grant of summary decision because none of the material facts were disputed. With this undisputed record as a foundation, the Commission concluded appellants had committed the licensing infractions outlined in the order to show cause. The Commission formally adopted the ALJ's findings of fact and conclusions of law as expressed in his Initial Decision, "with minor amendments to correct the typographical errors."

Because the record before the ALJ did not include a definitive number "of illegal rebates paid and offered" in violation of N.J.S.A. 45:15-17(k), the Commission gave appellants the opportunity to present evidence on this subject. The Commission made clear, however, that if appellants did not come forward with competent evidence on this matter, "the Commission will conclude that the [appellants] engaged in the prohibited rebate conduct at least 247 times[, ] which is the number of new home communities for which the 1% cash-back was offered by the [appellants] on the 'snap-shot' date of June 8, 2008, as admitted by [appellants]."

Appellants did not produce any evidence to refute the Commission's approach and ultimately it found that appellants were liable for 247 counts of violating N.J.S.A. 45:15-17(k). The Commission concluded that appellants' "business model" was a scheme to circumvent the statutory prohibition of rebates and that the material information on the website was "misleading and deceptive because it did not indicate to prospective clients that under some circumstances the 1% cash-back bonus would not be available, in violation of N.J.A.C. 11:5-6.1(r)." This conduct also violated appellants' fiduciary duty, N.J.A.C. 11:5-6.4(a), and "demonstrated incompetency, bad faith, dishonesty, and unworthiness for licensure under N.J.S.A. 45:15-17(e)."

After conducting a comprehensive review and analysis of the relevant statutory standards, the Commission applied the factors discussed by the Supreme Court in Kimmelman, supra, 108 N.J. 137-139, and in an order dated October 18, 2010: (1) revoked appellants' real estate licenses for five years; (2) imposed a $500 fine for each of the 247 violations under N.J.S.A. 45:15-17(k), for a total monetary sanction of $123, 500; (3) directed appellants to pay the fines within one year of the final order;[3]and (4) conditioned the restoration of appellants' licenses upon the completion of the five-year revocation period and the full payment of all monetary sanctions.


On appeal from a final agency determination, we can intervene only in those rare circumstances in which an agency action is arbitrary, capricious, or unreasonable, or are otherwise not supported by substantial credible evidence in the record. Brady v. Bd. of Review, 152 N.J. 197, 210-11 (1997). Under the arbitrary, capricious, and unreasonable standard, our scope of review is guided by three major inquiries: (l) whether the agency's decision conforms with relevant law; (2) whether the decision is supported by substantial credible evidence in the record; and (3) whether, in applying the law to the facts, the administrative agency clearly erred in reaching its conclusion. Township Pharm. v. Division of Med. Assistance & Health Servs., __ N.J.Super. __, __ (App. Div. 2013), slip op at __ (internal citations omitted).

Here, the undisputed record supports the Commission's findings that appellants violated the then prevailing law prohibiting the offering or payment of sales commission rebates to persons not licensed by the Commission. Appellants' clever yet transparent attempt to circumvent these restrictions was simply unavailing. We are also in complete agreement with the Commission's application of the Kimmelman factors to determine the appropriate sanction in this case.

In the interest of clarity and uniformity, the Court in Kimmelman outlined the following seven factors to guide the agency in making this type of disciplinary determination: (1) the individual's good or bad faith; (2) his or her ability to pay; (3) amount of profits derived from the illegal activity; (4) injury to the public; (5) duration of any conspiracy; (6) existence of criminal penal consequences or availability of treble damages or other forms of exemplary relief; and (7) a history of similar transgressions. Kimmelman, supra, 108 N.J. at 138-39. This approach requires a fact-sensitive analysis to avoid any undue harshness and prevent any penalties assessed from being unduly punitive or oppressive. Id. at 139.

Against this analytical backdrop, appellants argue the Commission misapplied the Kimmelman factors because the evidence shows Tonge conceived and implemented this internet-based marketing campaign under the good-faith belief it was consistent with the suggestions or recommendations made by the Commission's chief investigator in the 2001 disciplinary action. Appellants also emphasize that the Commission did not have any evidence of appellants' financial status at the time it issued its final decision, and thus was not legally competent to determine whether they had the ability to pay the inordinate aggregate fine levied against them.

We agree this paucity of information concerning appellants' finances would equally taint any determination the Commission may have made about "profits" derived by appellants from commissions generated exclusively from sales in which the "1% cash-back" coupon was honored by a builder-seller. In fact, Tonge testified that he was at the time "indigent"; his social security benefits constituted his only source of income.

In furtherance of this line of reasoning, appellants also argue the Commission misapplied our holding in Coldwell Banker Residential Real Estate Services, Inc. v. New Jersey Real Estate Com., 242 N.J.Super. 354 (App. Div. 1990). The issue in Coldwell Banker concerned a coupon program we determined constituted a prize in violation of N.J.S.A. 45:15-17(g). Specifically, we upheld the Commission's decision finding real estate brokers who were associated with Sears violated N.J.S.A. 45:15-17(g) by offering discount coupons for Sears merchandise to home buyers who listed their homes for sale. Coldwell Banker, supra, 242 N.J.Super. at 357. Here, appellants argue in contrast to the clear cut, facial violation of N.J.S.A. 45:15-17(g) involved in Coldwell Banker, their internet-based "1% cash-back" is a good-faith attempt to remain faithful to and comply with the restrictions against rebates in N.J.S.A. 45:15-17(k), while offering consumers a means of reducing their closing costs.

We reject appellants' arguments attacking the monetary sanctions substantially for the reasons expressed by the Commission in its final decision dated October 18, 2010. R. 2:11-3(e)(1)(D). We add only the following brief comments. The Commission's ignorance of appellants' financial status is due exclusively to appellants' failure to respond to the Commission's requests for information concerning the manner in which the "1% cash-back rebate" scheme operated, including the number of actual sales in which builder-sellers actually recognized and honored appellants' demand for a sales commission. Appellants cannot use their untenable recalcitrance as an appealable issue against the Commission. The balance of appellants' argument lacks sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E).

Finally, appellants note, with great irony, that the Legislature has amended N.J.S.A. 45:15-17(k) to permit sales commission rebates to consumers under the following circumstances:

Paying any rebate, profit, compensation or commission to anyone not possessed of a real estate license, except that: (1) free, discounted or other services or products provided for in subsection g. of this section shall not constitute a violation of this subsection; and (2) a real estate broker may provide a purchaser of residential real property, but no other third party a rebate of a portion of the commission paid to the broker in a transaction, so long as: the broker and the purchaser contract for such a rebate at the onset of the broker relationship in a written document, electronic document or a buyer agency agreement; the broker complies with any State or federal requirements with respect to the disclosure of the payment of the rebate; and the broker recommends to the purchaser that the purchaser contact a tax professional concerning the tax implications of receiving that rebate. The rebate paid to the purchaser shall be in the form of a credit, reducing the amount of the commission payable to the broker, or a check paid by the closing agent and shall be made at the time of closing[.]
[N.J.S.A. 45:15-17(k) (emphasis added).]

The Legislature approved these amendments on January 17, 2010, to "take effect immediately." P.L. 2009, c.273, §5. Thus, appellants argue the Commission should have applied these amended standards when it issued it final decision on October 18, 2010. This argument misapplies well-settled principles of statutory construction and ignores the fact that appellants' rebate scheme predated the adoption of these amendments by nearly five years.

Absent a clear indication from the Legislature as to the effect of a statutory amendment, it is a long-established judicial policy to construe statutory amendments to apply prospectively. Phillips v. Curiale, 128 N.J. 608, 615 (1992); Gibbons v. Gibbons, 86 N.J. 515, 521 (1981); Olkusz v. Brown, 401 N.J.Super. 496, 498 (App. Div. 2008). This approach disfavoring retroactivity absent express language directing otherwise is predicated on the notion that "the Legislature 'is presumed to be aware of judicial construction of its enactments.'" Johnson v. Scaccetti, 192 N.J. 256, 276 (2007) (quoting DiProspero v. Penn, 183 N.J. 477, 494 (2005)).

There are also "sound public policy considerations underpinning this preference for prospective application." Olkusz, supra, 401 N.J.Super. at 502. As the Supreme Court explained in Cruz v. Cent. Jersey Landscaping, Inc., 195 N.J. 33, 45-46 (2008), prospective application of legislative enactments is consistent with fundamental notions of fairness and due process. Conversely, retroactive application is disfavored because it carries with it the potential for great unfairness. As we explained in Serrano v. Gibson:

There is general consensus among all people that notice or warning of the rule should be given in advance of the actions whose effects are to be judged by them. The hackneyed maxim that everyone is held to know the law, itself a principle of dubious wisdom, nevertheless presupposes that the law is at least susceptible of being known. But this is not possible concerning law that has yet to exist.
[304 N.J.Super. 314, 318 (App. Div. 1987) (internal citations omitted).]

Mindful of these constitutional and public policy considerations, the Supreme Court has recognized three circumstances where retroactive application of a statute may be warranted: (1) where expressly or implicitly directed by the Legislature; (2) to ameliorate or cure a judicial misinterpretation of a legislative enactment; or (3) to fulfill or carry out the parties' reasonable expectations. Gibbons, supra, 86 N.J. at 522-523. None of these factors are relevant or applicable here.

The Legislature's January 17, 2010 amendments to N.J.S.A. 45:15-17(k), permitting the payment of rebates under certain specified circumstances, do not retroactively legalize appellants' conduct in 2005.


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