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FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018
NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021
Attorney Work Product | Privileged & Confidential
November 1, 2021
SUPREME COURT OF THE STATE OF NEW YORK
COUNTY OF WESTCHESTER
PAMELA GOLDSTEIN,
ELLYN & TONY BERK as Administrators
of the Estate of Winifred Berk, and PAUL Index No. 60767/2018
BENJAMIN, on behalf of themselves and
all others similarly situated, Hon. Linda S. Jamieson
Plaintiffs, AFFIDAVIT OF TOM CUSACK
v.
HOULIHAN/LAWRENCE INC.,
Defendant.
STATE OF NEW YORK )
) SS:
COUNTY OF ERIE )
TOM CUSACK, being duly sworn, deposes and says:
1. I am the owner and operator of the Cusack Center for Professional
Development, in Williamsville, New York, through which I have conducted New
York State Department of State (“DOS”) accredited qualifying and continuing
education courses for real estate brokers and salespersons for three decades. My
curriculum vitae is attached.
2. Plaintiffs allege that between 2011 and 2018, Houlihan Lawrence
(“HL”) acted as an undisclosed, non-consensual dual agent in approximately 10,000
transactions. Plaintiffs’ counsel asked me to evaluate whether during that time
(a) HL’s leaders demonstrated a proper understanding of the risks and downsides of
dual agency; (b) HL gave agents the training and other guidance necessary to
inform consumers about dual agency; and (c) HL maintained policies and practices
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that promoted undisclosed, non-consensual dual agency. Also attached is a list of
the documents that I reviewed in reaching my opinions.1
A. Qualifications
3. Since 1979, I have conducted DOS-accredited qualifying and
continuing education courses, teaching real estate license law, agency disclosure,
and the ethical operation of a residential brokerage firm.
4. Prior to 1990, I taught these courses at Canisius, Daemen, and
Medaille Colleges. Since then, I have taught them at the Cusack Center.
5. I am experienced in the operation and management of a brokerage
firm, having served from 1973 to 1990 as a branch manager for Potter Realty
(Western) and Century 21 (Central New York).
B. Compensation
6. I am being paid $350 per hour for my work on this matter.
C. The “Risky Business” of dual agency
7. A broker owes its clients a fiduciary duty of undivided loyalty.
Because a broker who acts on behalf of the buyer and seller in the same transaction
“must necessarily be unfaithful to one or the other,”2 eight states prohibit dual
agency. New York strongly discourages it by requiring brokers to make “nothing
1 Exhibits cited in this motion are attached to the Affidavit of Jeremy Vest (“Vest”),
filed herewith. All citations to “Ex. __” are to the Exhibits to the Vest affidavit.
2 Hasbrouck v. Rymketvitch, 25 A.D.2d 187, 188 (3d Dep’t 1966)
2
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less than full and complete disclosure”3 and obtain both clients’ “informed consent
in writing”4 before acting as a dual agent.
8. RPL § 443 codified New York common law and added a requirement
that brokers use a state-mandated form (the “Form”). New York enacted § 443 to
address widespread undisclosed, non-consensual dual agency, a “paramount
concern” for DOS,5 who opposed “legitimization of [even disclosed] dual agency as a
regular business practice.”6 Consistent with its “longstanding disdain” for dual
agency,7 DOS used to urge consumers to make brokers take “The Pledge” never to
practice dual agency,8 and still today warns them to “Be Wary of Dual Agency.”9
9. Dual agency is “ ”10 because most agents are incapable of
making the required disclosures. DOS says that agents “seldom realize the
inherent problems” of dual agency.11 HL itself recognized that
3 TPL Assocs. v. Helmsley-Spear, Inc., 146 A.D.2d 568, 70 (1st Dep’t 1989)
4 Real Property Law (“RPL”) § 443
5 Rivkin v. Century 21 Teran Realty LLC, 10 N.Y.3d 344, 353 (2008)
6 Ex. 101, Memo from DOS to Counsel to the Governor, July 1991 at 2
7 Ex. 102, Edward Sumber, Mutually Dependent Transactions, Real Estate In-
Depth, Mar. 2009
8 Ex. 103, DOS, A Home Buyer’s Guide to Selecting Real Estate Services
9 Ex. 92, DOS Legal Memorandum LI12 (“LI12”), Be Wary of Dual Agency
10 Ex. 21
11 Ex. 92, LI12
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10. Brokers who routinely practice dual agency have a heavy burden,17
because those who fail to give their agents rigorous training and close supervision
engage in widespread undisclosed, non-consensual dual agency by default.
D. The “crippling” loss of undivided loyalty
11. New York recognizes two dual agency relationships: “Dual Agent” and
“Dual Agent with Designated Sales Agents.” In the former, the broker and a single
12 Ex. 17 at 66
13 Ex. 107
14 Ex. 21
15 Ex. 40
16 Ex. 20
17 19 NYCRR §175.21
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agent act on behalf of both parties; in the latter, two agents are involved. Neither
the broker nor its agents provide undivided loyalty in either relationship.18
12. For many years, HL policy did not permit “Dual Agency.”19 HL rightly
regarded it as:
18 Id.; see also Ex. 39 at 911 (HGAR: “
.”)
19 Compare Ex. 45 at 47 and Ex. 46 at 78
20 Ex. 48; see also Ex. 49 (Bronxville manager:
); and Ex.
104, Landis Dep. at 170:8-10 (“Landis”) (“
”)
21 Ex. 51 at 13
22 Ex. 52 at 34; see also Ex. 53 (Irvington manager: “
”); Ex. 105 (Bronxville
manager: Dual Agency “
”)
23 Ex. 52 at 34
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In 2015, however, HL
13. In 2007, New York amended § 443 to recognize Dual Agency with
Designated Sales Agents, which had been an industry practice. In a major victory
for consumer advocates, § 443 declared that Designated Sales Agents cannot
provide “undivided loyalty,” overruling then-Secretary of State, Alexander
Treadwell (R), who had opined that Designated Sales Agents were “single agents.”27
14. As late as 2011, however,
24 Ex. 106 at 315
25 Ex. 47 at 84; see also Ex. 73 (Bronxville manager:
”)
26 Ex. 108
27 Ex. 109; see also id. at 42
28 Ex. 22; see also Ex. 2, Dalton Dep. at 140:21-141:2 (“Dalton”)
29 Ex. 110; see also Ex. 111 at 42-43 (HL handout asserting that
”)
30 Ex. 112
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15.
.
16.
31 Eleventh Report and Recommendation, William P. Harrington (Dkt. 672), May
19, 2021 at 1
32 Ex. 113
33 Ex. 2, Dalton at 154:9-23
34 Ex. 2, Dalton at 146:2-12; see also Ex. 19, Arlt Dep. at 69:15-20 (“Arlt”)
35 Ex. 2, Dalton at 150:6-12; see also Ex. 114 and Ex. 24
36 Ex. 25
37 Ex. 54 (referring to “ .”)
38 Id. (emphasis in original)
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17. In reality, § 443 provides that Designated Sales Agents can never
provide undivided loyalty because,
41 Furthermore, as DOS recognized
shortly after the 2007 amendment took effect, agents “have some loyalty to their
broker and through him or her to the other side,” and therefore “may consider or
recommend a course of negotiation which is more directed at compromise than they
otherwise might do.”42
18. In 2014,
39 Ex. 25
40 Ex. 115 at 100
41 See Ex. 60 and Ex. 61
42 Ex. 62, Memo from DOS, Feb. 16, 2007; compare Ex. 116 (Arlt instructing that
“[i]t would be illogical and counter-intuitive for a designated agent to advocate for
anything but the best interest of his or her client.”)
43 Ex. 59
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19.
44 Ex. 21
45 Ex. 117, It’s Risky Business – Dual Agency, Don Cummins, Mar. 23, 2015 at 58:30
46 Ex. 115 at 112
47 Ex. 19, Arlt at 79:13-23
48 Ex. 118
49 Ex. 56
50 Ex. 55; see also Ex. 58 (Arlt:
”); Ex. 118 (Education Director
”)
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51 Ex. 57
52 Ex. 58
53 See Ex. 116, Ex. 119, and Ex. 120
54 Appendix A
55 Ex. 121 at 58
56 Ex. 57
57 See, e.g., Ex. 121 at 58; Ex. 55; and Ex. 57
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E. Inadequate training, script and other “model disclosures”
23. The Form provides only a brief legalistic introduction to complex
concepts, many unique to real estate. It is merely the beginning of full disclosure.
Even sophisticated consumers need agents to explain the consequences and
implications of dual agency.60 Because few agents are competent to do so, industry
practice is for brokers to standardize their agency disclosure, which becomes a habit
for agents who must give every consumer the same information.61
24. It was particularly important for HL agents to be able to explain dual
agency because HL used an industry-standard listing agreement62 that did not
materially expand on the Form and suffered from many of the defects discussed
58 See Ex. 122 (“
”); and Ex. 57 (“
”)
59 Ex. 121 at 58
60 Decision and Order, Hon. L. Jamieson (Dkt. 370), Apr. 8, 2018 at 8-10
61 See Ex. 123, Bello Dep. at 166:3-6 (Sept. 2, 2021) (“Bello (II)”) (
)
62 See Ex. 124, Ex. 125, and Ex. 126
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below. HL rarely entered into a written contract with buyers,63 making HL even
more dependent on agents to fulfill its agency disclosure obligations with them.
1. Script
25. NYSAR recommended that member brokers standardize their agency
disclosure by using its forms to fill the gap left by the Form and industry-standard
listing agreement when seeking consent to dual agency,64 but
63 Ex. 52 at 34
64 See Ex. 127, NYSAR, “Advance Informed Consent to Dual Agency;” and Ex. 128,
NYSAR, “Advance Informed Consent with Designated Sales Agents”
65 Ex. 12, Chrystal Dep. at 423:17-23 (August 25, 2021) (“Chrystal (II)”)
66 Ex. 12, Chrystal (II) at 330:18-331:8
67 Ex. 129
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26.
68 Ex. 19, Arlt at 48:2-14, 58:3-59:23
69 Ex. 130 at 56
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2. Training and talking points
28.
70 See Ex. 131 at 13 (2012); Ex. 132 (2014); and Ex. 115 at 100 (2018)
71 Ex. 133 at 94
72 Ex. 32
73 See Ex. 134; Ex. 51; and Ex. 135
74 See Ex. 45 at 47-52 (2012); Ex. 136 at 84-93 (2016), and Ex. 137 at 72-81 (2018)
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30.
75 See Ex. 29 (2015) and Ex. 30 (2018)
76 See Ex. 138 (2015) and Ex. 139 (2017)
77 Arlt at 82:6-13
78 Ex. 34, Chrystal Dep. at 38:14-18 (Sept. 28, 2020); see also id. at 23:13-15 (“
”)
79 Ex. 19, Arlt at 85:24-86:7, 88:12-23
80 Ex. 132 at 774 and Ex. 115 at 144
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32.
33.
81 Id. at 741 and id. at 109
82 Id. at 744 and id. at 112
83 Id. at 742 and id. at 110
84 Id. at 744 and id. at 112
85 Id. at 741 and id. at 109
86 Id. at 744 and id. at 112
87 Id. at 744 and id. at 112
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3. Handout
36.
88 Id. at 742 and id. at 110
89 Id. at 744 and id. at 112
90 Ex. 29 at 36
91 Ex. 140
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4. Overall
92 See Ex. 140 (Arlt recognizing
”)
93 Ex. 91
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94 Arlt at 105:12-106:8
95 Ex. 12, Chrystal (II) at 302:12-25 (“ ”)
96 Ex. 28, Berry Dep. at 284:3-8 (“Berry”); see also id. at 284:9-12 (confirming
)
97 Ex. 104, Landis at 139:25-140:8; see also id. at 140:9-23 (
)
98 Ex. 123, Bello (II) at 147:9-13; see also id. at 153:10-154:14 (
)
99 Id. at 139:14-142:10
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42. I have seen no evidence that HL agents outperformed the seriously
deficient training and direction HL provided them, and it would be unreasonable to
expect them to have done so. Agents have a duty to follow their broker’s
instructions, but especially with respect to an important and complex matter like
agency disclosure.
F. In-house sales strategy
43. Due to the 2008 housing crisis, HL’s “dollar volume sales dropped 50
percent.”103 HL had to ask itself: “How do we reposition ourselves in the new
100 Id. at 145:9-146:14
101 Ex. 104, Landis at 143:13-21
102 Ex. 141
103 Ex. 63, Chris Meyers: Managing Principal Houlihan Lawrence, REAL Trends,
April 2016 at 13 (“we shifted focus from sales growth to market share growth.”)
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normal?”104 Its answer: “[W]e would have to focus on market-share growth.”105 In
other words, HL shifted to “getting a larger slice of a shrinking pie.”106 In an era of
declining homes sales, the only way for a broker to maintain “dollar volume sales”
was to close more transaction sides. For a broker like HL already with a
substantial listing inventory, that meant keeping more listings in-house.
44. Former owner and Chief Executive Officer, Christopher Meyers,
acknowledged HL’s efforts to do just that:
The firm’s agents analyze internal data and share
inventory with colleagues to help boost “in-house” sales,
says Chief Operating Officer Chris Meyers; the firm can
collect both sides of the commission on such a sale.107
45. HL’s strategy is evident in the attention paid to in-house sales by HL
senior and office managers:
104 Ex. 142, Houlihan Lawrence Looks Forward, HL: Herd
105 Ex. 143, Against All Odds: The Story of How 17 Firms Found a Way to Grow and
Prosper in the Worst of Times, Real Trends, Jan. 2013 at 8
106 Ex. 64, Management Secrets of Top Westchester CEOs: Stephen Meyers,
Westchester Magazine, May 1, 2012
107 Ex. 65, Alyssa Abkowitz, The New Real Estate King Pins, MarketWatch, Jan. 18,
2011
108 Ex. 66; see also Ex. 70 (“
”); Ex. 2, Dalton at 91:3-13 (acknowledging “
)
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46. HL’s strategy depended on hiding the consequences of dual agency
because they have a “chilling effect” on consumers.111 In fact,
DOS has said, “If dual agency is disclosed properly, there isn’t anyone in their right
mind who would agree to it.”112 Others at HL also knew that informed consumers
object to dual agency.113 Yet, HL brokered
109 Ex. 70
110 Ex. 69
111 See Ex. 145, The Agency Mess at 9
112 Ex. 72, Lew Sichelman, A New Era for Realty Agents, Chicago Trib., Aug. 29,
1992
113 See Ex. 146 (Bedford manager acknowledging
); Ex. 147 at 51 (Education Director teaching
)
114 Ex. 90
115 Ex. 148 at 12 (spreadsheet tallying )
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117
47. HL’s unprecedented and unfailing success in brokering in-house deals
confirms the inadequacy of and adherence to HL’s standard disclosure and is
consistent with a scheme to promote undisclosed, non-consensual dual agency
through the following additional policies and practices.
1. In-House Bonus
48. Nothing puts HL’s strategy into starker relief than its “In-House
Bonus” (the “Bonus”).118 When representing sellers, Bonus-eligible agents had an
interest to favor offers by HL buyers. When representing buyers, Bonus-eligible
agents had an interest “to only show Houlihan Lawrence listings,” or to favor those
listings.119 In both situations, they had an incentive to conceal the risks, downsides,
and alternative to dual agency.120
49. Consumers are vulnerable to improper influence by agents, who have
superior knowledge, experience, and emotional detachment from the transaction
116 Ex. 12, Chrystal (II) at 429:19-431:3
117 Ex. 123, Bello (II) at 155:12-16
118 See, e.g., Ex. 149 at 83 (2009); and Ex. 45 at 54 (2012)
119 Ex. 78
120 Ex. 150, Lu Han & Seung-Hyun Hong, Understanding In-House Transactions,
RAND Journal of Economics, Nov. 2015 at 1057-86 (finding that agents are “more
likely to promote internal listings when they are financially rewarded.”)
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that induces reliance on them.121 As HL recognized
”122 Clients cannot account for their agent’s personal
interest unless they know about the Bonus.
121 Ex. 28, Berry at 178:18-23 (acknowledging that sellers “
”)
122 Ex. 1
123 Ex. 19, Arlt at 162:7-11
124 Ex. 83
125 Ex. 19, Arlt at 155:7-158:8
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53. Anonymous letters, including one from a “longtime agent at HL,”
further confirm that the Bonus “provides a strong incentive” to keep deals in-house,
and that in-house deals “pervade” HL’s “corporate culture.”129 A “former Houlihan
Lawrence agent” reported, “You CANNOT believe how many agents are driven by
the extra commission bump.”130
126 Ex. 2, Dalton at 116:22-117:5 (acknowledging
”)
127 Ex. 12, Chrystal (II) at 388:4-389:19 (acknowledging that
)
128 Ex. 19, Arlt at 125:3-17
129 Ex. 77
130 Ex. 78; see also Ex. 79
131 Ex. 82
132 Ex. 80
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54. The Bonus is a de facto policy to favor in-house sales that a reasonable
consumer would consider relevant to their decision whether to consent to dual
agency even if not paid in connection with their transaction. Consumers must
assess the risk that their agent did or will steer them into an in-house deal. As
discussed above, that is the reason for § 443’s declaration that Designated Sales
Agents cannot provide undivided loyalty. HL clients cannot make that assessment
unless informed about the Bonus, which expresses HL’s strong preference for in-
house sales.
2. “False and coercive” mandatory “advance” consent disclosure
55. HL required agents to
:
56. HL did not need consent to dual agency to show a seller’s property to
buyer customers (as opposed to clients) with whom it had no agency relationship.
Customers make up a huge portion of the market for a seller’s property, and include
133 Ex. 71
134 Appendix B
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any unrepresented buyer who visits an open house, responds to an online listing,
walks into an HL office, or cold calls an HL agent. Not giving HL “advance” consent
to dual agency just meant that HL had to show the seller’s property to buyer
customers as a Seller’s Agent rather than convert them into clients and create dual
agency.
136
3. Policy of obtaining untimely consent
57. Prior to 2011, consent to dual agency was strictly “transactional;”137 it
could be sought only in connection with a particular buyer, seller, and property.
That meant that a broker had to obtain written consent from its seller client before
every property showing involving a buyer client. Agents often ignored this
obligation. To streamline the process, § 443 was amended to allow sellers to
consent in advance to in-house property showings, requiring brokers to obtain
135 Ex. 12, Chrystal (II) at 302:15-304:25
136 Ex. 123, Bello (II) at 138:14-142:10; see also id. at 142:18-144:6
137 Ex. 62, Memo from DOS, Feb. 16, 2007 (reiterating view that dual agency is
“transactional,” meaning, “[i]n other words you can’t be a dual agent without a
particular buyer, seller, and property.”)
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“transactional” consent only if the buyer expressed interest in the seller’s property
beyond seeing it.138
58. HL directed agents that
”140 That is well after when
dual agency arises and the moment when consumers are least capable of making an
informed decision about their agency relationship. By that point, the buyer has
already formed a relationship of trust with their agent, revealed their negotiation
position, and committed emotionally and otherwise to the transaction. Raising dual
agency in the heat of negotiations made it a fait accompli, sending clients another
false signal that there is no reason to “Be Wary of Dual Agency,” further advancing
HL’s in-house sales strategy at its clients’ expense.
59. As illustrated below, it is possible to determine whether HL obtained
timely written consent simply by comparing the signature dates on any consent
Form in HL’s transaction file with other documented dates by which HL would have
begun acting as a dual agent:
138 See, e.g., Ex. 151 at 83 (
); and Ex. 40 (
.”)
139 See Appendix C and Appendix D
140 See Appendix E
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60.
.141
4. Pressure and incentives to market off the MLS
61. A broker can also boost in-house sales by marketing properties
internally rather than on the multiple listing service (“MLS”). According to one
study, “pocket listings,” as properties sold off the MLS are known in the industry,
are 43% more likely to result in dual agency.142
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FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF WESTCHESTER PAMELA GOLDSTEIN, ELLYN & TONY BERK as Administrators of the Estate of Winifred Berk, and PAUL Index No. 60767/2018 BENJAMIN, on behalf of themselves and all others similarly situated, Hon. Linda S. Jamieson Plaintiffs, AFFIDAVIT OF TOM CUSACK v. HOULIHAN/LAWRENCE INC., Defendant. STATE OF NEW YORK ) ) SS: COUNTY OF ERIE ) TOM CUSACK, being duly sworn, deposes and says: 1. I am the owner and operator of the Cusack Center for Professional Development, in Williamsville, New York, through which I have conducted New York State Department of State (“DOS”) accredited qualifying and continuing education courses for real estate brokers and salespersons for three decades. My curriculum vitae is attached. 2. Plaintiffs allege that between 2011 and 2018, Houlihan Lawrence (“HL”) acted as an undisclosed, non-consensual dual agent in approximately 10,000 transactions. Plaintiffs’ counsel asked me to evaluate whether during that time (a) HL’s leaders demonstrated a proper understanding of the risks and downsides of dual agency; (b) HL gave agents the training and other guidance necessary to inform consumers about dual agency; and (c) HL maintained policies and practices 1 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 that promoted undisclosed, non-consensual dual agency. Also attached is a list of the documents that I reviewed in reaching my opinions.1 A. Qualifications 3. Since 1979, I have conducted DOS-accredited qualifying and continuing education courses, teaching real estate license law, agency disclosure, and the ethical operation of a residential brokerage firm. 4. Prior to 1990, I taught these courses at Canisius, Daemen, and Medaille Colleges. Since then, I have taught them at the Cusack Center. 5. I am experienced in the operation and management of a brokerage firm, having served from 1973 to 1990 as a branch manager for Potter Realty (Western) and Century 21 (Central New York). B. Compensation 6. I am being paid $350 per hour for my work on this matter. C. The “Risky Business” of dual agency 7. A broker owes its clients a fiduciary duty of undivided loyalty. Because a broker who acts on behalf of the buyer and seller in the same transaction “must necessarily be unfaithful to one or the other,”2 eight states prohibit dual agency. New York strongly discourages it by requiring brokers to make “nothing 1 Exhibits cited in this motion are attached to the Affidavit of Jeremy Vest (“Vest”), filed herewith. All citations to “Ex. __” are to the Exhibits to the Vest affidavit. 2 Hasbrouck v. Rymketvitch, 25 A.D.2d 187, 188 (3d Dep’t 1966) 2 2 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 less than full and complete disclosure”3 and obtain both clients’ “informed consent in writing”4 before acting as a dual agent. 8. RPL § 443 codified New York common law and added a requirement that brokers use a state-mandated form (the “Form”). New York enacted § 443 to address widespread undisclosed, non-consensual dual agency, a “paramount concern” for DOS,5 who opposed “legitimization of [even disclosed] dual agency as a regular business practice.”6 Consistent with its “longstanding disdain” for dual agency,7 DOS used to urge consumers to make brokers take “The Pledge” never to practice dual agency,8 and still today warns them to “Be Wary of Dual Agency.”9 9. Dual agency is “ ”10 because most agents are incapable of making the required disclosures. DOS says that agents “seldom realize the inherent problems” of dual agency.11 HL itself recognized that 3 TPL Assocs. v. Helmsley-Spear, Inc., 146 A.D.2d 568, 70 (1st Dep’t 1989) 4 Real Property Law (“RPL”) § 443 5 Rivkin v. Century 21 Teran Realty LLC, 10 N.Y.3d 344, 353 (2008) 6 Ex. 101, Memo from DOS to Counsel to the Governor, July 1991 at 2 7 Ex. 102, Edward Sumber, Mutually Dependent Transactions, Real Estate In- Depth, Mar. 2009 8 Ex. 103, DOS, A Home Buyer’s Guide to Selecting Real Estate Services 9 Ex. 92, DOS Legal Memorandum LI12 (“LI12”), Be Wary of Dual Agency 10 Ex. 21 11 Ex. 92, LI12 3 3 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 10. Brokers who routinely practice dual agency have a heavy burden,17 because those who fail to give their agents rigorous training and close supervision engage in widespread undisclosed, non-consensual dual agency by default. D. The “crippling” loss of undivided loyalty 11. New York recognizes two dual agency relationships: “Dual Agent” and “Dual Agent with Designated Sales Agents.” In the former, the broker and a single 12 Ex. 17 at 66 13 Ex. 107 14 Ex. 21 15 Ex. 40 16 Ex. 20 17 19 NYCRR §175.21 4 4 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 agent act on behalf of both parties; in the latter, two agents are involved. Neither the broker nor its agents provide undivided loyalty in either relationship.18 12. For many years, HL policy did not permit “Dual Agency.”19 HL rightly regarded it as: 18 Id.; see also Ex. 39 at 911 (HGAR: “ .”) 19 Compare Ex. 45 at 47 and Ex. 46 at 78 20 Ex. 48; see also Ex. 49 (Bronxville manager: ); and Ex. 104, Landis Dep. at 170:8-10 (“Landis”) (“ ”) 21 Ex. 51 at 13 22 Ex. 52 at 34; see also Ex. 53 (Irvington manager: “ ”); Ex. 105 (Bronxville manager: Dual Agency “ ”) 23 Ex. 52 at 34 5 5 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 In 2015, however, HL 13. In 2007, New York amended § 443 to recognize Dual Agency with Designated Sales Agents, which had been an industry practice. In a major victory for consumer advocates, § 443 declared that Designated Sales Agents cannot provide “undivided loyalty,” overruling then-Secretary of State, Alexander Treadwell (R), who had opined that Designated Sales Agents were “single agents.”27 14. As late as 2011, however, 24 Ex. 106 at 315 25 Ex. 47 at 84; see also Ex. 73 (Bronxville manager: ”) 26 Ex. 108 27 Ex. 109; see also id. at 42 28 Ex. 22; see also Ex. 2, Dalton Dep. at 140:21-141:2 (“Dalton”) 29 Ex. 110; see also Ex. 111 at 42-43 (HL handout asserting that ”) 30 Ex. 112 6 6 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 15. . 16. 31 Eleventh Report and Recommendation, William P. Harrington (Dkt. 672), May 19, 2021 at 1 32 Ex. 113 33 Ex. 2, Dalton at 154:9-23 34 Ex. 2, Dalton at 146:2-12; see also Ex. 19, Arlt Dep. at 69:15-20 (“Arlt”) 35 Ex. 2, Dalton at 150:6-12; see also Ex. 114 and Ex. 24 36 Ex. 25 37 Ex. 54 (referring to “ .”) 38 Id. (emphasis in original) 7 7 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 17. In reality, § 443 provides that Designated Sales Agents can never provide undivided loyalty because, 41 Furthermore, as DOS recognized shortly after the 2007 amendment took effect, agents “have some loyalty to their broker and through him or her to the other side,” and therefore “may consider or recommend a course of negotiation which is more directed at compromise than they otherwise might do.”42 18. In 2014, 39 Ex. 25 40 Ex. 115 at 100 41 See Ex. 60 and Ex. 61 42 Ex. 62, Memo from DOS, Feb. 16, 2007; compare Ex. 116 (Arlt instructing that “[i]t would be illogical and counter-intuitive for a designated agent to advocate for anything but the best interest of his or her client.”) 43 Ex. 59 8 8 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 19. 44 Ex. 21 45 Ex. 117, It’s Risky Business – Dual Agency, Don Cummins, Mar. 23, 2015 at 58:30 46 Ex. 115 at 112 47 Ex. 19, Arlt at 79:13-23 48 Ex. 118 49 Ex. 56 50 Ex. 55; see also Ex. 58 (Arlt: ”); Ex. 118 (Education Director ”) 9 9 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 51 Ex. 57 52 Ex. 58 53 See Ex. 116, Ex. 119, and Ex. 120 54 Appendix A 55 Ex. 121 at 58 56 Ex. 57 57 See, e.g., Ex. 121 at 58; Ex. 55; and Ex. 57 10 10 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 E. Inadequate training, script and other “model disclosures” 23. The Form provides only a brief legalistic introduction to complex concepts, many unique to real estate. It is merely the beginning of full disclosure. Even sophisticated consumers need agents to explain the consequences and implications of dual agency.60 Because few agents are competent to do so, industry practice is for brokers to standardize their agency disclosure, which becomes a habit for agents who must give every consumer the same information.61 24. It was particularly important for HL agents to be able to explain dual agency because HL used an industry-standard listing agreement62 that did not materially expand on the Form and suffered from many of the defects discussed 58 See Ex. 122 (“ ”); and Ex. 57 (“ ”) 59 Ex. 121 at 58 60 Decision and Order, Hon. L. Jamieson (Dkt. 370), Apr. 8, 2018 at 8-10 61 See Ex. 123, Bello Dep. at 166:3-6 (Sept. 2, 2021) (“Bello (II)”) ( ) 62 See Ex. 124, Ex. 125, and Ex. 126 11 11 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 below. HL rarely entered into a written contract with buyers,63 making HL even more dependent on agents to fulfill its agency disclosure obligations with them. 1. Script 25. NYSAR recommended that member brokers standardize their agency disclosure by using its forms to fill the gap left by the Form and industry-standard listing agreement when seeking consent to dual agency,64 but 63 Ex. 52 at 34 64 See Ex. 127, NYSAR, “Advance Informed Consent to Dual Agency;” and Ex. 128, NYSAR, “Advance Informed Consent with Designated Sales Agents” 65 Ex. 12, Chrystal Dep. at 423:17-23 (August 25, 2021) (“Chrystal (II)”) 66 Ex. 12, Chrystal (II) at 330:18-331:8 67 Ex. 129 12 12 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 26. 68 Ex. 19, Arlt at 48:2-14, 58:3-59:23 69 Ex. 130 at 56 13 13 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 2. Training and talking points 28. 70 See Ex. 131 at 13 (2012); Ex. 132 (2014); and Ex. 115 at 100 (2018) 71 Ex. 133 at 94 72 Ex. 32 73 See Ex. 134; Ex. 51; and Ex. 135 74 See Ex. 45 at 47-52 (2012); Ex. 136 at 84-93 (2016), and Ex. 137 at 72-81 (2018) 14 14 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 30. 75 See Ex. 29 (2015) and Ex. 30 (2018) 76 See Ex. 138 (2015) and Ex. 139 (2017) 77 Arlt at 82:6-13 78 Ex. 34, Chrystal Dep. at 38:14-18 (Sept. 28, 2020); see also id. at 23:13-15 (“ ”) 79 Ex. 19, Arlt at 85:24-86:7, 88:12-23 80 Ex. 132 at 774 and Ex. 115 at 144 15 15 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 32. 33. 81 Id. at 741 and id. at 109 82 Id. at 744 and id. at 112 83 Id. at 742 and id. at 110 84 Id. at 744 and id. at 112 85 Id. at 741 and id. at 109 86 Id. at 744 and id. at 112 87 Id. at 744 and id. at 112 16 16 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 3. Handout 36. 88 Id. at 742 and id. at 110 89 Id. at 744 and id. at 112 90 Ex. 29 at 36 91 Ex. 140 17 17 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 4. Overall 92 See Ex. 140 (Arlt recognizing ”) 93 Ex. 91 18 18 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 94 Arlt at 105:12-106:8 95 Ex. 12, Chrystal (II) at 302:12-25 (“ ”) 96 Ex. 28, Berry Dep. at 284:3-8 (“Berry”); see also id. at 284:9-12 (confirming ) 97 Ex. 104, Landis at 139:25-140:8; see also id. at 140:9-23 ( ) 98 Ex. 123, Bello (II) at 147:9-13; see also id. at 153:10-154:14 ( ) 99 Id. at 139:14-142:10 19 19 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 42. I have seen no evidence that HL agents outperformed the seriously deficient training and direction HL provided them, and it would be unreasonable to expect them to have done so. Agents have a duty to follow their broker’s instructions, but especially with respect to an important and complex matter like agency disclosure. F. In-house sales strategy 43. Due to the 2008 housing crisis, HL’s “dollar volume sales dropped 50 percent.”103 HL had to ask itself: “How do we reposition ourselves in the new 100 Id. at 145:9-146:14 101 Ex. 104, Landis at 143:13-21 102 Ex. 141 103 Ex. 63, Chris Meyers: Managing Principal Houlihan Lawrence, REAL Trends, April 2016 at 13 (“we shifted focus from sales growth to market share growth.”) 20 20 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 normal?”104 Its answer: “[W]e would have to focus on market-share growth.”105 In other words, HL shifted to “getting a larger slice of a shrinking pie.”106 In an era of declining homes sales, the only way for a broker to maintain “dollar volume sales” was to close more transaction sides. For a broker like HL already with a substantial listing inventory, that meant keeping more listings in-house. 44. Former owner and Chief Executive Officer, Christopher Meyers, acknowledged HL’s efforts to do just that: The firm’s agents analyze internal data and share inventory with colleagues to help boost “in-house” sales, says Chief Operating Officer Chris Meyers; the firm can collect both sides of the commission on such a sale.107 45. HL’s strategy is evident in the attention paid to in-house sales by HL senior and office managers: 104 Ex. 142, Houlihan Lawrence Looks Forward, HL: Herd 105 Ex. 143, Against All Odds: The Story of How 17 Firms Found a Way to Grow and Prosper in the Worst of Times, Real Trends, Jan. 2013 at 8 106 Ex. 64, Management Secrets of Top Westchester CEOs: Stephen Meyers, Westchester Magazine, May 1, 2012 107 Ex. 65, Alyssa Abkowitz, The New Real Estate King Pins, MarketWatch, Jan. 18, 2011 108 Ex. 66; see also Ex. 70 (“ ”); Ex. 2, Dalton at 91:3-13 (acknowledging “ ) 21 21 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 46. HL’s strategy depended on hiding the consequences of dual agency because they have a “chilling effect” on consumers.111 In fact, DOS has said, “If dual agency is disclosed properly, there isn’t anyone in their right mind who would agree to it.”112 Others at HL also knew that informed consumers object to dual agency.113 Yet, HL brokered 109 Ex. 70 110 Ex. 69 111 See Ex. 145, The Agency Mess at 9 112 Ex. 72, Lew Sichelman, A New Era for Realty Agents, Chicago Trib., Aug. 29, 1992 113 See Ex. 146 (Bedford manager acknowledging ); Ex. 147 at 51 (Education Director teaching ) 114 Ex. 90 115 Ex. 148 at 12 (spreadsheet tallying ) 22 22 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 117 47. HL’s unprecedented and unfailing success in brokering in-house deals confirms the inadequacy of and adherence to HL’s standard disclosure and is consistent with a scheme to promote undisclosed, non-consensual dual agency through the following additional policies and practices. 1. In-House Bonus 48. Nothing puts HL’s strategy into starker relief than its “In-House Bonus” (the “Bonus”).118 When representing sellers, Bonus-eligible agents had an interest to favor offers by HL buyers. When representing buyers, Bonus-eligible agents had an interest “to only show Houlihan Lawrence listings,” or to favor those listings.119 In both situations, they had an incentive to conceal the risks, downsides, and alternative to dual agency.120 49. Consumers are vulnerable to improper influence by agents, who have superior knowledge, experience, and emotional detachment from the transaction 116 Ex. 12, Chrystal (II) at 429:19-431:3 117 Ex. 123, Bello (II) at 155:12-16 118 See, e.g., Ex. 149 at 83 (2009); and Ex. 45 at 54 (2012) 119 Ex. 78 120 Ex. 150, Lu Han & Seung-Hyun Hong, Understanding In-House Transactions, RAND Journal of Economics, Nov. 2015 at 1057-86 (finding that agents are “more likely to promote internal listings when they are financially rewarded.”) 23 23 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 that induces reliance on them.121 As HL recognized ”122 Clients cannot account for their agent’s personal interest unless they know about the Bonus. 121 Ex. 28, Berry at 178:18-23 (acknowledging that sellers “ ”) 122 Ex. 1 123 Ex. 19, Arlt at 162:7-11 124 Ex. 83 125 Ex. 19, Arlt at 155:7-158:8 24 24 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 53. Anonymous letters, including one from a “longtime agent at HL,” further confirm that the Bonus “provides a strong incentive” to keep deals in-house, and that in-house deals “pervade” HL’s “corporate culture.”129 A “former Houlihan Lawrence agent” reported, “You CANNOT believe how many agents are driven by the extra commission bump.”130 126 Ex. 2, Dalton at 116:22-117:5 (acknowledging ”) 127 Ex. 12, Chrystal (II) at 388:4-389:19 (acknowledging that ) 128 Ex. 19, Arlt at 125:3-17 129 Ex. 77 130 Ex. 78; see also Ex. 79 131 Ex. 82 132 Ex. 80 25 25 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 54. The Bonus is a de facto policy to favor in-house sales that a reasonable consumer would consider relevant to their decision whether to consent to dual agency even if not paid in connection with their transaction. Consumers must assess the risk that their agent did or will steer them into an in-house deal. As discussed above, that is the reason for § 443’s declaration that Designated Sales Agents cannot provide undivided loyalty. HL clients cannot make that assessment unless informed about the Bonus, which expresses HL’s strong preference for in- house sales. 2. “False and coercive” mandatory “advance” consent disclosure 55. HL required agents to : 56. HL did not need consent to dual agency to show a seller’s property to buyer customers (as opposed to clients) with whom it had no agency relationship. Customers make up a huge portion of the market for a seller’s property, and include 133 Ex. 71 134 Appendix B 26 26 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 any unrepresented buyer who visits an open house, responds to an online listing, walks into an HL office, or cold calls an HL agent. Not giving HL “advance” consent to dual agency just meant that HL had to show the seller’s property to buyer customers as a Seller’s Agent rather than convert them into clients and create dual agency. 136 3. Policy of obtaining untimely consent 57. Prior to 2011, consent to dual agency was strictly “transactional;”137 it could be sought only in connection with a particular buyer, seller, and property. That meant that a broker had to obtain written consent from its seller client before every property showing involving a buyer client. Agents often ignored this obligation. To streamline the process, § 443 was amended to allow sellers to consent in advance to in-house property showings, requiring brokers to obtain 135 Ex. 12, Chrystal (II) at 302:15-304:25 136 Ex. 123, Bello (II) at 138:14-142:10; see also id. at 142:18-144:6 137 Ex. 62, Memo from DOS, Feb. 16, 2007 (reiterating view that dual agency is “transactional,” meaning, “[i]n other words you can’t be a dual agent without a particular buyer, seller, and property.”) 27 27 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 “transactional” consent only if the buyer expressed interest in the seller’s property beyond seeing it.138 58. HL directed agents that ”140 That is well after when dual agency arises and the moment when consumers are least capable of making an informed decision about their agency relationship. By that point, the buyer has already formed a relationship of trust with their agent, revealed their negotiation position, and committed emotionally and otherwise to the transaction. Raising dual agency in the heat of negotiations made it a fait accompli, sending clients another false signal that there is no reason to “Be Wary of Dual Agency,” further advancing HL’s in-house sales strategy at its clients’ expense. 59. As illustrated below, it is possible to determine whether HL obtained timely written consent simply by comparing the signature dates on any consent Form in HL’s transaction file with other documented dates by which HL would have begun acting as a dual agent: 138 See, e.g., Ex. 151 at 83 ( ); and Ex. 40 ( .”) 139 See Appendix C and Appendix D 140 See Appendix E 28 28 of 42 FILED: WESTCHESTER COUNTY CLERK 11/01/2021 11:04 PM INDEX NO. 60767/2018 NYSCEF DOC. NO. 694 RECEIVED NYSCEF: 11/01/2021 Attorney Work Product | Privileged & Confidential November 1, 2021 60. .141 4. Pressure and incentives to market off the MLS 61. A broker can also boost in-house sales by marketing properties internally rather than on the multiple listing service (“MLS”). According to one study, “pocket listings,” as properties sold off the MLS are known in the industry, are 43% more likely to result in dual agency.142