Many California consumers do not know that their state, like a number of others, has a Real Estate Recovery Fund. The Recovery Fund is, so to speak, a court of last resort, not first or anywhere in between. It is designed to bring some financial relief to those who (1) have been victimized by the fraudulent actions of a real estate licensee, (2) who have won a judgment in court, and (3) who have been unable to collect from the guilty defendant because that party is bankrupt, insolvent, deceased, or otherwise uncollectible.
The California Real Estate Recovery Fund was established in 1964. It is funded both from a portion of real estate license fees and also from fines collected by the Department of Real Estate (DRE). Since its inception, the fund has paid out more than $38 million. California Business and Professions Code #10456.6 calls for 12% of license fees collected to be credited to the Recovery account. If the account's balance exceeds $3.5 million, any excess in fees collected are credited to a general real estate fund. A successful applicant to the Recovery Fund may be paid up to a statutory maximum of $50,000 per transaction, with a possible total aggregate maximum of $250,000 per licensee.
The first thing to note about the California Recovery Fund is that a qualified claimant must have been the victim of either deliberate fraud or a conversion of trust funds (stealing a client's money). So, for example, someone who lost money because of an agent's incompetence or negligence will not qualify for Recovery Fund payment.
Neither will a person who lost money dealing with a real estate agent when the agent was acting as a principal. A qualified claim must result from fraud committed when the guilty party was engaged in behavior for which a real estate license is required. You don't have to have a license to act as a principal. So, if a licensee, acting as a principal, bamboozled you, you won't be eligible to tap the fund.
Before applying to the Recovery Fund, the victim must have won a judgment in court, through arbitration, or in a bankruptcy proceeding. Also, the applicant must have made a diligent effort to collect and must be able to demonstrate that the licensee, and all other entities found liable, did not have assets sufficient to satisfy the judgment.
A recent California appellate case (Worthington v. Davi, as Real Estate Commissioner, Fourth Appellate District, August 7, 2012) provides insight into the application of Recovery Fund law.
The Worthingtons acted as buyers in a series of four real estate transactions where a real estate agent clearly caused them to lose a lot of money because of a variety of the agent's fraudulent inducements and representations. Their case was arbitrated and they prevailed. When the Worthingtons discovered the defendants' assets were insufficient to cover the judgment (approximately $280,000), they filed an application with the Department of Real Estate Recovery Account. The Real Estate Commissioner granted part of their application, awarding $50,000 for one of the transactions.
However, he denied recovery on the other three transactions because the judgment on those claims was based on breach of the broker's fiduciary duty rather than "fraud, misrepresentation, or deceit" as required by section 10471 of the code.
The Worthingtons took the Real Estate Commissioner to trial. The trial court said, "The purpose of the Recovery Fund is to satisfy certain types of judgment against licensed real estate brokers and agents… Courts have said that [the law] is to be given a liberal construction to promote its purpose and protect persons within its purview." The trial court then found that, in at least two more of the transactions, the breach of fiduciary duty arose out of deliberate fraud, and, therefore, the Fund should pay the Worthingtons. The Worthingtons were awarded the statutory limit for three of the four transactions. The DRE appealed.
The Appellate Court agreed with the trial court. In layman's language, they said that the Real Estate Commissioner was trying to avoid payment by appealing to a technicality. The Appellate Court quoted an earlier court saying that a statute such as this one should be "construed when its meaning is doubtful so as to suppress the mischief at which it is directed, to advance or extend the remedy provided, and to bring within the scope of the law every case which comes clearly within its spirit and policy."
There's been a lot of real estate fraud perpetrated within the state of California during the past few years. By the time cases are concluded, it is likely that a number of defendants will be insolvent. We should hope that the Recovery Fund will be adequately stocked.
Published: November 6, 2012
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