Supervisory Lapses as Fraud: Third Department Holds Broker’s Failure to Supervise Can Constitute “Fraudulent Practices” Under RPL § 441‑c, Independent of RPL § 442‑c’s Knowledge Requirement

Introduction

In Matter of Malul v. New York Department of State (2025 NY Slip Op 06110, Appellate Division, Third Department, Nov. 6, 2025), the court affirmed a disciplinary determination by the Special Deputy Secretary of State revoking petitioner Amnon M. Malul’s real estate licenses—both his limited liability company (LLC) broker license and his associate real estate broker license. The case arises out of a 2018 Queens rental transaction involving six college students and reveals a stark failure of supervisory oversight at Wyckoff Realty LLC, where two licensed salespersons, Alexander Malakov and Eldad Amrani, were associated.

The New York Department of State, Division of Licensing Services (DLS), charged Malul with “fraud and fraudulent practices” and “untrustworthiness and incompetency” under Real Property Law (RPL) § 441‑c, premised on his admitted noninvolvement in Wyckoff’s day-to-day operations and failure to supervise associated salespersons as required by RPL and regulation (19 NYCRR 175.21[a]). Although the Administrative Law Judge (ALJ) initially found no personal fraudulent acts by Malul and revoked only his LLC broker license, the Special Deputy Secretary of State concluded the failure to supervise enabled deliberate unlicensed real estate activity and itself constituted “fraudulent practices” warranting revocation of both licenses.

On Article 78 review (transferred under CPLR 7804[g]), the Third Department upheld the agency’s findings and penalty, clarifying two important points: (1) a broker may be disciplined for the broker’s own failure to supervise, notwithstanding the actual-knowledge limitation in RPL § 442‑c applicable to vicarious liability for a salesperson’s violations; and (2) in the licensing context, “fraud or fraudulent practices” under RPL § 441‑c extends beyond intentional, common-law fraud to encompass dishonest or misleading conduct—here, supervisory abdication that effectively lent a broker’s license to unlicensed activity.

Summary of the Opinion

• The court applies the substantial evidence standard to uphold the Special Deputy Secretary’s determination after an evidentiary hearing (citing Matter of ExceedLLC, LLC v Department of State, Div. of Licensing Servs., 233 AD3d 1392 [3d Dept 2024]).
• RPL § 442‑c’s “actual knowledge” protection for brokers is inapplicable because Malul was sanctioned for his own conduct—his failure to supervise—not vicariously for a salesperson’s statutory violations (citing and aligning with Matter of Roberts Real Estate v NYS Dept. of State, Div. of Licensing Servs., 80 NY2d 116 [1992]).
• “Fraud or fraudulent practices” under RPL § 441‑c includes dishonest or misleading acts in the regulatory setting, not only intentional fraud; here, the failure to supervise facilitated unlicensed practice and misrepresentation of legitimate broker oversight (citing People v Federated Radio Corp., 244 NY 33 [1926]; Matter of Allstate Ins. Co. v Foschio, 93 AD2d 328 [2d Dept 1983]; DOS decision, Division of Licensing Servs. v Flagship Marketing Group Inc., 7 DOS 00 [Feb. 2, 2000]; and Matter of Solk v Department of State of State of N.Y., 286 App Div 178 [1st Dept 1955]).
• Revocation of both licenses (LLC broker and associate broker) is not so disproportionate as to shock the judicial conscience under the familiar penalty review standard (citing Matter of Butterly & Green v Lomenzo, 36 NY2d 250 [1975]; Matter of Shane v NYS Dept. of State Div. of Licensing Servs., 135 AD3d 866 [2d Dept 2016]).
• Petitioner’s failure to appear at the administrative hearing did not waive his arguments on substantial evidence or fraud, although those arguments failed on the merits (citing Matter of Reid v Venettozzi, 224 AD3d 1037 [3d Dept 2024]).

Background and Key Facts

• Licenses: In 2018, Malul held licenses as an associate real estate broker and an LLC real estate broker, allowing him to engage in sale and rental transactions (RPL § 440[1], [2]). Salespersons must work under and be supervised by a licensed broker (RPL § 440[3]; § 441[1]; 19 NYCRR 175.21[a]).
• Transaction: Six college students leased a Queens property after dealings with salesperson Alexander Malakov, who advertised under “Step 1 Properties.” The students’ agent negotiated a deal and collected a commission; when seeking to remit the agreed share to Malakov’s broker, Malakov refused to identify a broker and demanded direct payment.
• Licensing irregularities: Investigators found neither Malakov nor “Step 1 Properties” were licensed brokers; Malakov was related to the owner and performed work requiring a broker’s license.
• Supervision failures: Malul told investigators he had no knowledge of personnel at Wyckoff and that Amrani ran day-to-day operations; he had never met Malakov. Amrani said Malakov had merely “parked” his salesperson license with Wyckoff and did no real estate work there during the period.
• Administrative path: DLS charged multiple respondents, including Malul, with misconduct. Malul failed to appear. The ALJ revoked Malul’s LLC broker license for untrustworthiness/incompetency based on failure to supervise, but did not address his associate broker license. On DLS’s appeal, the Special Deputy Secretary found the conduct also constituted “fraudulent practices” and revoked both licenses.

Detailed Analysis

Precedents and Authorities Cited

• Matter of ExceedLLC, LLC v Department of State, Div. of Licensing Servs., 233 AD3d 1392 (3d Dept 2024) and Matter of Cornell Assoc. Realty v Shaffer, 210 AD2d 537 (3d Dept 1994): Articulate the substantial evidence standard—administrative determinations are upheld if supported by substantial evidence in the record as a whole, even if contrary evidence exists.
• Matter of Reid v Venettozzi, 224 AD3d 1037 (3d Dept 2024): Failure to appear does not necessarily waive arguments on review; the court reached the merits of Malul’s substantial evidence and fraud arguments.
• Real Property Law § 442‑c and Matter of Roberts Real Estate v NYS Dept. of State, Div. of Licensing Servs., 80 NY2d 116 (1992), modifying 171 AD2d 217 (3d Dept 1991): A broker’s license cannot be revoked for a salesperson’s violation absent the broker’s actual knowledge or retention of benefits from the transaction. However, Roberts also recognizes that a broker’s independent failure to supervise can itself be disciplined as untrustworthiness/incompetency under RPL § 441‑c.
• RPL § 441‑c(1)(a) and 19 NYCRR 175.21(a): Authorize discipline for “fraud or fraudulent practices” and impose a nondelegable supervisory duty on brokers over associated salespersons.
• People v Federated Radio Corp., 244 NY 33 (1926) and Matter of Allstate Ins. Co. v Foschio, 93 AD2d 328 (2d Dept 1983): In the regulatory sphere, “fraud” encompasses dishonest and misleading practices beyond common-law elements of intentional fraud.
• Division of Licensing Servs. v Flagship Marketing Group Inc., 7 DOS 00 (Feb. 2, 2000): Agency precedent that enabling unlicensed real estate activity by misrepresenting broker status or adequate supervision constitutes fraudulent practices.
• Matter of Solk v Department of State of State of N.Y., 286 App Div 178 (1st Dept 1955): Upholds discipline for fraudulent practices under the licensing laws, supporting broad regulatory reading of “fraud.”
• Matter of Butterly & Green v Lomenzo, 36 NY2d 250 (1975) and Matter of Shane v NYS Dept. of State, Div. of Licensing Servs., 135 AD3d 866 (2d Dept 2016): Penalty review standard—courts will not disturb an agency’s chosen sanction unless it “shocks the judicial conscience.”

Legal Reasoning

1. Substantial evidence supports untrustworthiness/incompetency and failure to supervise.
   • The court credited undisputed admissions: Malul professed having “no knowledge of any personnel hiring or working in the office,” had never met Malakov, and ceded day-to-day operations to Amrani, despite bearing a statutory duty to supervise associated salespersons (19 NYCRR 175.21[a]).
   • This proof meets the threshold for “untrustworthiness and incompetency” under RPL § 441‑c(1)(a) and aligns with Roberts and other supervision cases.
2. RPL § 442‑c’s actual-knowledge requirement does not shield Malul where the misconduct is his own.
   • Section 442‑c bars revocation based solely on a salesperson’s violation unless the broker had actual knowledge or retained benefits. The court emphasized Malul was disciplined for his direct dereliction—failure to supervise—not for vicarious responsibility for Malakov’s violations. Thus § 442‑c is not implicated (Roberts, 80 NY2d at 122).
3. Supervisory abdication can constitute “fraud or fraudulent practices” under RPL § 441‑c in the regulatory sense.
   • Drawing on Federated Radio and Allstate, the court reaffirmed that “fraud” in licensing contexts extends to dishonest or misleading practices that undermine regulatory schemes. Here, Malul’s abdication allowed Malakov and Amrani to “avail themselves of his status as a licensed broker” and to engage in unlicensed real estate activity while holding out as properly supervised—a misleading state of affairs.
   • The court cited DOS’s Flagship Marketing decision: misrepresenting broker status or supervision to facilitate unlicensed regulated activity is fraudulent. By parity of reasoning, Malul’s failure to supervise—while maintaining broker licensure—functioned as a “license lending” or “window dressing” that misled the public and counterparties.
   • This satisfies RPL § 441‑c’s “fraudulent practices” prong without requiring proof of intentional, common-law fraud elements (scienter, reliance, damages).
4. Penalty: revocation of both licenses is not “shocking.”
   • Given the seriousness of enabling unlicensed practice and the breadth of the supervision lapse (no knowledge of personnel; never meeting an associated salesperson), the agency’s decision to revoke both the LLC broker and associate broker licenses is within its discretion under Butterly & Green and Shane.
   • The ALJ’s omission to address the associate broker license was corrected by the Special Deputy Secretary; the court found no abuse of discretion in revoking both.

What This Decision Changes or Clarifies

• Affirmative holding that a broker’s failure to supervise—when it enables unlicensed practice or misrepresents supervision—can be treated as “fraud or fraudulent practices” under RPL § 441‑c, not merely as “untrustworthiness or incompetency.”
• Clear separation between:
  • Vicarious liability for a salesperson’s violation (limited by RPL § 442‑c’s actual-knowledge rule), and
  • Direct liability for the broker’s own supervisory failings (fully sanctionable under RPL § 441‑c).
• Confirmation that DOS may revoke all real estate licenses held by a licensee based on the same misconduct—here, both the LLC broker and associate broker licenses—when the conduct demonstrates untrustworthiness or fraudulent practices in the individual’s capacity as a “broker.”

Impact and Practical Implications

• Heightened exposure for “paper brokers” and “license lending”: Brokers who lend their credentials without genuine oversight risk having their conduct deemed “fraudulent practices,” inviting maximum sanctions, including revocation.
• Associate brokers are not insulated: Even when also holding an associate broker license (as distinct from a principal broker role), supervisory dereliction tied to one’s status as a broker can jeopardize all broker-level licensure.
• Agency charging strategies: DLS can frame supervisory failures as both untrustworthiness/incompetency and fraudulent practices, expanding disciplinary flexibility and penalty severity.
• Compliance expectations:
  • Active, documented supervision of salespersons (onboarding, training, policy enforcement, deal review).
  • Eliminate “parked” licenses: Ensure every associated salesperson is known, actively overseen, and properly using the broker’s brand and license.
  • Advertising controls: Prevent salespersons from advertising under unlicensed trade names or suggesting independent broker status.
  • Commission flows: Require commission payments to the supervising broker, not directly to individual salespersons, consistent with licensing rules.
• Litigation posture: While nonappearance at an administrative hearing does not, by itself, waive judicial review arguments, it leaves the agency’s record unrebutted. Respondents should appear and build a robust evidentiary record.

Complex Concepts Simplified

• Broker vs. Salesperson:
  • A real estate broker (including an associate broker) is licensed to engage in brokerage activities and, crucially, must supervise associated salespersons.
  • A real estate salesperson must work for and under the supervision of a licensed broker; they cannot independently act as a broker.
• “Parking” a license: A colloquial term for a salesperson affiliating on paper with a broker without engaging in supervised brokerage at that firm. This arrangement is inconsistent with supervisory obligations and can mask unlicensed or unsupervised activity.
• Substantial evidence: The minimal evidentiary threshold for upholding an agency’s finding—“such relevant proof as a reasonable mind may accept as adequate,” even if competing inferences exist.
• Regulatory “fraudulent practices” vs. common-law fraud:
  • Common-law fraud typically requires intentional misrepresentation, reliance, and damages.
  • Regulatory “fraudulent practices” (RPL § 441‑c) is broader: dishonest or misleading conduct that undermines the regulatory scheme suffices, even without intent to defraud in the classic sense.
• Penalty review—“shocks the conscience”: Courts defer to agency choice of penalty unless the sanction is so disproportionate to the offense that it shocks the judicial conscience. Revocation is a frequent and acceptable sanction for serious licensing violations.

Conclusion

Matter of Malul cements an important doctrinal clarification in New York real estate licensing law: a broker’s failure to supervise—especially where it enables unlicensed practice or misleads the public about broker oversight—can itself be “fraudulent practices” under RPL § 441‑c, not merely a species of negligence. This holding sits comfortably with RPL § 442‑c, which limits vicarious broker liability for a salesperson’s violation absent actual knowledge; Malul was disciplined for his own dereliction, not for a salesperson’s misconduct.

The decision’s practical message is unambiguous. Brokers (including associate brokers) must actively, demonstrably supervise associated salespersons. “Parking” arrangements, abdication of day-to-day oversight, and tolerance of shadow brands or unlicensed entities are not merely untrustworthy—they can be deemed fraudulent practices, warranting the profession’s harshest sanction. Expect DLS to rely on Malul to pursue revocation in similar supervisory failure cases, and plan compliance accordingly.

Key Takeaways

• Failure to supervise can be charged and sustained as both untrustworthiness/incompetency and “fraudulent practices” under RPL § 441‑c.
• RPL § 442‑c’s actual-knowledge protection for vicarious liability does not bar discipline for a broker’s own supervisory failures.
• Agencies may revoke all broker-level licenses held by the same individual for supervisory dereliction tied to any broker capacity.
• Documented, active supervision is essential; avoid “parked” licenses and unlicensed trade names that suggest independent broker operations.
• Revocation will be sustained unless it “shocks the conscience”—a demanding standard rarely met where public protection is implicated.