DRE Hot Seat: Broker frauds his landlord client and tenant

This article is part of an ongoing series covering violations of real estate law. Here, the Department of Real Estate (DRE) revoked the California real estate license of a broker acting as a property manager who charged the tenant a greater amount than was paid to the landlord.

The California Department of Real Estate (DRE) decided by order hearing to revoke the license of Bruce Orona, a broker since 1985 operating out of San Diego, California. The decision became effective June 2022. Scott Orona, Bruce Orona’s brother and a broker since 2000, also surrendered his license in connection with the disciplinary action taken against him and his brother.

The Oronas provided property management services for an apartment owner in San Diego.

The Oronas entered into a new lease agreement with a tenant, though submitted an agreement containing drastically different terms to the owner.

The Residential Lease Agreement the owner received from the Oronas set the monthly rent amount at $2,150. The rent was to be made payable to the owner. The security deposit was set at $2,150. [See RPI Form 550]

However, the Residential Lease Agreement the tenant received and signed set the monthly rent at $2,300 with a $2,300 security deposit.

In an email to the tenant, the Oronas instructed the tenant to pay the security deposit to Bruce Orona instead of the owner. Further, the Oronas misrepresented to the tenant that they spoke to the owner, and the owner wanted all rental checks to be made out to Bruce Orona until further notice. Thus, the Oronas pocketed the difference from what was charged to the tenant, and what was later disbursed to the owner.

From June 2018 through October 2018, Bruce Orona received $2,300 for each month’s rent. The owner received monthly payments in the amount of $2,150 from July 2018 to September 2018. The Oronas failed to give the owner any of the tenant’s October 2018 rent.

In December 2019, the DRE completed an audit of Bruce Orona’s limited records. During a conference with the auditor, Bruce Orona:

• denied managing the owner’s properties;
• denied having a trust fund account for the owner;
• denied collecting funds for the owner; and
• failed to provide the requested documents for examination.

The DRE found Bruce and Scott Orona violated real estate law, since they:

• made substantial misrepresentations [Business & Professions Code §10176(a)];
• made false promises in attempt to influence, persuade or induce [Bus & P C §10176(b)];
• took secret, undisclosed compensation and failed to reveal the full amount they were compensated to the transaction participant contracting with them [Bus & P C §10176(g)];
• engaged in fraud or dishonest dealing [Bus & P C §§10176(i); 10177(j)];
• willfully disregarded real estate law [Bus & P C §10177(d)];
• demonstrated negligence as a licensee [Bus & P C §10177(g)]; and
• failed to retain records and documents in connection with transactions for which a broker’s license is required. [Bus & P C §10148]

Related article:

DRE Hot Seat: Sitseefly, Inc.

 Trust funds are held in trust for the owner

Any fees or compensation a licensee earns in connection with licensed activities need to be disclosed.

Compensation is typically disclosed on:

• a listing agreement [See RPI Form 102 §3];
• escrow instructions [See RPI Form 401 §1];
• a property management agreement [See RPI Form 590 §4];
• a mortgage loan disclosure statement [See RPI Form 204]; or
• a loan servicing agreement. [See RPI Form 237 §13]

Compensation comes in many forms, including real estate fees, escrow fees, property management fees, mortgage origination and mortgage servicing fees.

DRE auditors often find situations where a licensee has charged clients an excessive amount for costs incurred or where a licensee has benefitted from trust funds, according to the DRE’s Summer 2019 Real Estate Bulletin.

Brokers, while acting on behalf of others in their capacity as agents in real estate transactions, receive funds which are not theirs and are held in trust for the owner of the funds. These trust funds include:

• deposits on offers to purchase and applications to rent or borrow;
• fees advanced for any brokerage services to be provided in the future, called advance fees;
• funds advanced for future costs;
• funds from sellers, borrowers and landlords as reserves to cover future costs;
• rental income and tenant security deposits;
• funding for a mortgage or the purchase of real estate; and
• proceeds from a sale or financing.

Funds received in the form of cash or checks made payable to the broker while acting as an agent need to be:

• deposited into the broker’s trust account;
• held undeposited as instructed; or
• endorsed and handed to others entitled to the funds.

Prior to the end of the third business day following the day the broker receives negotiable trust funds, the broker needs to deposit the funds:

• with the person or escrow depository entitled to the funds (as payee or by endorsement); or
• in a trust account maintained by the broker at a bank or other state-recognized depository.

Trust funds are held by brokers for safekeeping and may not be treated casually. Recordkeeping and accounting requirements are imposed on brokers when they receive, transfer or disburse trust funds. Trust funds received in the form of checks or cash may only be used for expenditures authorized and incurred for the benefit of the owner of the funds. [See RPI e-book Real Estate Principles, Chapter 6]

A broker’s use of trust funds for any reason other than those expressly authorized by the owner of the funds constitutes a conversion of the client’s funds to the broker’s own use.

All trust fund records are required to be retained by the broker for three years after the closing or cancellation of the transaction involving the trust funds. The DRE may audit trust fund accounts. [Bus & P C §10148(a)]

Further, all records of an agent’s activities on behalf of a client are retained by the agent’s broker for three years. [Bus & P C §10148]

The DRE requires brokers to retain real estate documents for three years when the documents were:

• used in a transaction requiring a real estate broker’s license; and
• executed or obtained by the broker or broker’s agent.

Upon notice by the DRE, these records need to be made available for examination, inspection and copying by a DRE representative. [See RPI e-book Real Estate Practice, Chapter 21]

Related article:

DRE Hot Seat: Making substantial misrepresentations constitutes dishonesty