Facts: A real estate broker represented an investor in their purchase of two single family residence (SFR) properties. The broker set up two shared-equity investment plans with prospective homebuyers for each SFR the agent located. The agent knowingly misrepresented the homebuyers’ solvency to the investor. Based on the agent’s assurances, the investor purchased the investment properties on behalf of the prospective buyers. The buyers defaulted on their payments as agreed in the shared-equity plan. As a result, the investor suffered a loss. The investor sued the agent and was awarded money losses for breach of the agent’s duty. The agent did not have the funds to pay the awarded judgment. The investor applied to the California Bureau of Real Estate (CalBRE) Recovery Fund. The CalBRE rejected the claim as not covered by the Recovery Fund.
Claim: The investor claimed the agent’s breach of fiduciary duty rose to the level of fraud entitling the investor to recover on the judgment from the CalBRE Recovery Fund since the agent intentionally misrepresented the homebuyers’ solvency to defraud the investor.
Counterclaim: The CalBRE claimed it was not required to cover the awarded judgment since the CalBRE Recovery Fund does not cover claims based on breaches of fiduciary duty.
Holding: A California court of appeals held the investor was entitled to recover the judgment awarded by the court from the CalBRE Recovery Fund since the agent intentionally misrepresented the solvency of the homebuyers to defraud the investor and the CalBRE Recovery Fund covers claims under judgments based on fraud. [Worthington v. Davi (2012) 208 CA4th 263]
What is the CalBRE Recovery Fund?
The Real Estate Recovery Fund is available to persons who are awarded a court judgment or an arbitration award which includes findings of fact and conclusions of law against a real estate licensee for fraud, conversion of trust funds or criminal restitution.
Persons may apply for payment of money judgments when they are unable to recover from the licensee and all other methods of recovery, such as recovery under title or errors and omissions (E&O) insurance, have been exhausted.
Persons are only able to apply for recovery of judgments based on:
- fraud, misrepresentation or deceit with intent to defraud;
- criminal restitution; or
- conversion of trust funds. [Calif. Business and Professions Code §10471]
Consider a broker-seller who owns a property in violation of safety requirements for occupancy due to defects in the foundation known to the broker. The broker sells the property to a buyer and does not disclose the defects. Out of the proceeds the broker receives on closing the sale, the broker-seller pays themselves a brokerage fee, stating they as a broker exclusively represent themselves (a legal impossibility).
Later, the buyer discovers the defects and is required to demolish the residence and rebuild it with a proper foundation. The buyer files suit against the broker and is awarded a money judgment. The broker is unable to pay the money judgment and the buyer seeks payment from the CalBRE Recovery Fund.
Here, the CalBRE pays the awarded judgment since the broker held themselves out as acting as a real estate broker in a transaction in which they (wearing both hats) defrauded the buyer by knowingly misrepresenting the condition of the property. The broker’s licensed is suspended until they are able to reimburse the CalBRE Recovery Fund. [Prichard v. Reitz (1986) 178 CA3d 465]
Now consider an owner of an apartment complex. The owner hires a real estate agent as a nonresident property manager, an activity which requires a broker license.
Later, the agent converts funds for the operations of the apartment complex for personal use.
The owner files suit against the agent. The owner is awarded a money judgment for losses incurred due to the agent’s intentional misrepresentation, breach of fiduciary duty and conversion of money. The agent is unable to pay the judgment and the owner applies to the CalBRE for payment from the Recovery Fund.
Is this owner entitled to money from the Recovery Fund?
No! The CalBRE denied recovery from the Recovery Fund since the owner had employed the agent for an illegal purpose. Here, the agent’s employment went beyond the scope of the agent’s license. Further, the owner was aware of the agent’s licensee status as a sales agent, not a broker as required of a property manager. [Merrifield v. Edmonds (1983) 146 CA3d 336]
For causes of action arising before January 1, 2009, the maximum recoverable is:
- $20,000 for each transaction; and
- $100,000 for any one licensee.
For causes of action arising on or after January 1, 2009, the maximum recoverable is:
- $50,000 for each transaction; and
- $250,000 for any one licensee. [Bus & P C §10474]
Also, for judgments awarded against a licensee which are paid by the Fund, the licensee’s license will be suspended until the amount paid by the Recovery Fund on their behalf, plus interest, is repaid. [Bus & PC §10475]
Consider an agent who represents to a buyer they are licensed as a broker when in fact they only hold a salesperson license. The agent locates a home for the buyer and accepts a deposit and down payment on the home. The agent converts the money to their personal use. The agent fails to return the money on demand from the buyer.
The buyer sues the agent and is awarded a money judgment for their losses. The agent is unable to pay the money judgment. The buyer applies to the CalBRE Recovery Fund for recovery of the judgment.
Is the buyer entitled to recover on the judgment from the Fund?
No! The buyer may not recover money from the Recovery Fund since the agent was not licensed to act as a broker and was acting outside the scope of a salesperson license. The Recovery Fund only covers losses if the licensee was acting within the parameters permitted by their license. Thus, the buyer isn’t able to recover from the Fund since the agent was acting as a broker, which is beyond the scope of their salesperson license. [Davis v. Harris (1998) 61 CA4th 507]
Who may recover?
Only an aggrieved person who is either a client of the licensee or a member of the general public damaged by a licensee’s actions within the authority extended by their license may recover from the CalBRE Recovery Fund. [Bus & P C §10471; Middelsteadt v. Karpe (1975) 52 CA3d 297]
Consider a mortgage broker who owns an escrow company which handles loan escrow services for owners refinancing their homes. A lender delivers money to the broker’s escrow to fund a loan made for the purpose of discharging an existing lien on a property in exchange for a note and trust deed secured by the same property in the same priority as the satisfied lien.
The lender takes out a title insurance policy to cover any losses for failure of the lender’s trust deed position on title.
Instead of paying off the liens as instructed, the broker embezzles the funds. The title insurance company, on demand from the lender, pays off the liens which impair the lender’s trust deed position under the coverage provided by the title insurance policy it issued.
The insurance policy provides for the lender to assign their right to recover their losses to the title company, called subrogation. Thus, stepping into the shoes of the lender, the title company now holds the lender’s right to recover losses. The title company sues the mortgage broker who embezzled the funds and failed to clear liens as instructed by the lenders.
The title insurance company is awarded money judgment for their losses. The broker is unable to pay the judgment. The title insurance company applies to the CalBRE for recovery of the judgment from the Recovery Fund.
Is the title insurance company entitled to recovery from the Fund?
No! The title insurance company is not entitled to recover from the Recovery Fund. Only an aggrieved person may recover. An aggrieved person is a client or member of the public who lost money when dealing with the licensee in the scope of the licensee’s authority. Here, the title insurance company was neither.
Also, the title insurance company was not assigned a right that entitled them to payment from the Recovery Fund. The lender had no losses to assign. The lender recovered all their losses under the title insurance policies since the title insurance company itself was liable for the lender’s losses. The Fund does not cover third-party guarantors liable for the losses incurred by an aggrieved person. [Stewart Title Guaranty Co. v. Park (9th Cir. 2001) 250 F3d 1249]
Now consider an unlicensed individual working for a broker. The unlicensed individual represents to a buyer they are a licensed sales agent. The buyer and the unlicensed individual enter into a joint enterprise to invest in a restaurant. The unlicensed individual and buyer pool their money in a joint bank account. The individual never invests the money as agreed and converts the funds from the account to personal use.
Later, the unlicensed individual becomes a licensed real estate agent. The agent represents to the buyer that they have sold the restaurant and invested the money from the sale in a different property. However, this property does not exist and the agent continues converting funds from the account.
The agent and the buyer marry. The agent persuades the buyer to co-purchase condominiums with the agent. On acquisition of the property, the agent vests title to the property solely in their own name.
The spouse becomes aware of the agent’s actions and the marriage is annulled due to fraud. The spouse is awarded a money judgment against the agent who is unable to pay the judgment. The buyer applies to the Recovery Fund for payment of the judgment.
Is the buyer entitled to recover on the judgment from the CalBRE Recovery Fund?
No! The buyer is not entitled to recovery for fraud committed during the marriage period. A principal may not recover for the actions of their spouse and the condominium transaction was entered into after the marriage date, but prior to the annulment.
Further, losses may only be recovered from the Fund for actions committed by a licensee acting within the scope of that license. The agent’s fraud regarding the restaurant investment was committed prior to the agent’s licensing and is unrecoverable from the Fund. Any actions the agent took to continue the fraud (representing to invest the earlier funds in real estate) are considered a single act of fraud, which was committed prior to the agent’s licensing.
Also, the Fund only applies to fraud committed by a licensee for transactions for which that license is required. Thus, the joint investment was not an action that requires licensing and was not a transaction for which the aggrieved person may recover from the Recovery Fund. [Powers v. Fox (1979) 96 CA3d 440]
Settlement v. Arbitration
Another distinction in recovering from the Recovery Fund is whether judgments are awarded on trial in court, by arbitration or in a settlement agreement.
Consider an agent who defrauds a buyer. The buyer sues the agent and is awarded a money judgment for their losses in a judicially ordered non-binding arbitration. The agent requests a court trial. Prior to trial, the buyer and agent enter into a settlement agreement to terminate the dispute. The agent, as agreed, enters into a stipulated money judgment awarding the buyer their losses.
The agent is unable to satisfy the judgment. The buyer applies to the Recovery Fund for payment of the unsatisfied judgment. The judgment does not specify a cause of action, but the buyer presents evidence to the CalBRE of the agent’s fraudulent actions in the application for recovery. The CalBRE Recovery Fund covers the judgment and the agent files suit against the CalBRE for covering the judgment from the Fund for activities not reference in the judgment.
Does the CalBRE have jurisdiction when approving a claim for recovery to look beyond a settlement agreement or judgment to evidence of facts establishing licensee fraud?
Yes! The cause of action in the buyer’s application for recovery listed fraud and deceit and the buyer provided evidence that the agent had committed fraud, which lead to the judgment. The CalBRE may look beyond the judgment if the cause of action is not clearly indicated in the judgment. [Doyle v. Department of Real Estate (1994) 30 CA4th 893]
Now consider an agent who represents a buyer in multiple purchases of investment properties. The agent uses funds provided by the buyer to purchase several properties. One of the properties is a multi-family residence. The agent acts as the property manager for the property without receiving authorization from the buyer. The agent converts rental monies to personal use. All of the properties are lost to foreclosure. The buyer sues the agent for recovery of their losses.
The agent and the buyer reach a settlement agreement and enter into a stipulated judgment stating the agent breached their fiduciary duty. The settlement agreement calls for the award of a money judgment for the losses and states that the buyer cannot pursue any further claims against the agent arising from the settled claims.
The agent is unable to satisfy the judgment. The buyer applies to the CalBRE Recovery Fund for the payment of the money judgment.
Is the buyer entitled to recovery from the Recovery Fund?
No! The CalBRE Recovery Fund does not cover judgments based on breaches of fiduciary duty. While the agent did commit fraudulent actions, the settlement agreement the buyer entered into was based on breaches of fiduciary duty and stated the buyer was barred from pursuing losses for fraud. Thus, the buyer was unable to recover on the judgment from the Fund since the judgment was exclusively for a breach of fiduciary duty. [Yergan v. Department of Real Estate (2000) 77 CA4th 959]
In Worthington v. Davi, supra, the arbitrated judgment was for breaches of fiduciary duty. However, unlike in the Yergan case, the buyer and agent did not mutually agree to bar any claims beyond breaches of fiduciary duty. Also, in an arbitrated judgment with factual findings and conclusions of law, the CalBRE is to look to the findings to determine whether the judgment awarded is to be recovered from the Fund.
As the findings showed in Worthington, the agent intentionally defrauded the investor by misrepresenting the solvency of prospective buyers. Thus, the CalBRE paid the judgment covering the transactions.