Legal Update

DRE TAKES ACTION AGAINST BROKER FOUND LIABLE FOR FRAUD IN MISREPRESENTING THE SQUARE FOOTAGE OF A RESIDENCE

  • July 12th, 2011
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Where a civil judgment for fraud based on misrepresentation of the square footage of a residence was entered in favor of a buyer against his real estate broker the broker’s real estate license may not be suspended by the Department of Real Estate unless the judgment is based on “clear and convincing” proof of fraud. Grubb Company Inc. v. Department of Real Estate 194 CA 4th 1494 (2011).

FACTS:    In July 2002, Buyer entered into a contract with Seller for the purchase of Seller’s home in Piedmont, California. Buyer and Seller were both represented by the same real estate broker acting as a dual agent.  The Buyer was told the house had approximately 5,000 square feet, however the Buyer’s appraisal indicated that its living area was only 2,974 square feet.  The appraiser was not convinced of the legality of an expansion of the structure that occurred without permits in 1998.

The Broker explained to Buyer that the appraiser was wrong and the larger square footage was correct. Buyer was not persuaded.  Buyer sent the Seller a notice of rescission but Seller claimed the notice of rescission was untimely and refused to return the deposit.

Buyer filed a civil complaint against Seller and Broker for intentional and negligent misrepresentation, as well as breach of fiduciary duty, and sought rescission of the contract, as well as compensatory and punitive damages. The jury found that the Broker negligently and either knowingly or recklessly, made a false representation about the square footage of the property to the Buyer, and breached their fiduciary duty to Buyer.  The jury expressly declined to find clear and convincing evidence that the Broker was guilty of malice, oppression, or fraud, which finding would have been necessary to award punitive damages.

After the entry of judgment for fraud against the Broker, the Department of Real Estate (DRE) filed an accusation against the Broker based on the civil judgment.  The DRE alleged the civil judgment for fraud was grounds for suspension or revocation of the Broker’s license under California Business and Professions Code Section 10177.5.  This statute provides that when a final judgment is obtained in a civil action against any real estate licensee upon grounds of fraud, misrepresentation, or deceit with reference to any transaction for which a license is required, the commissioner may, after hearing, suspend or revoke the license of such real estate licensee.

The DRE accusation was heard by an administrative law judge who found the Broker recklessly, but not knowingly, misrepresented the square footage of the house to the Buyer.  The administrative judge declined to suspend the Broker’s license due to the fact that the Broker had no prior history of misconduct.  However the DRE rejected the judge’s decision and determined the original civil judgment itself was sufficient for suspension of Broker’s license for 30 days. The Broker filed a petition for writ of mandate seeking review of the DRE’s decision.

DECISION:  The Court of Appeal reversed the suspension of the Broker’s license.  The Court ruled that the underlying judgment for fraud was entered based on a “preponderance of the evidence” which is not sufficient for the suspension of the Broker’s license.  Suspension is only warranted based on “clear and convincing evidence” that the Broker committed fraud.  There was no such finding in the civil case.

However, it was noted that had the jury awarded punitive damages against the Broker based on clear and convincing evidence of fraud, then suspension of the Broker’s license would have been warranted.

ANALYSIS:   Real estate agents must be aware that when a civil action for fraud is filed against them, there is more at stake than a judgment for money damages (usually covered by insurance). The DRE may very likely also file its own disciplinary action against the agent and seek a costly suspension or revocation of the agent’s license.  However this case holds that a civil judgment for fraud based on a preponderance of the evidence is not enough to support a suspension of the agent’s license.  Under the California Constitution, the suspension or revocation of a professional license must be based on misconduct proven by clear and convincing evidence.  But if punitive damages are awarded, then discipline will surely follow.

Full text of the decision can be found using the following link: http://www.leagle.com/decision/In%20CACO%2020110504020

Mark L. Strombotne, Esq.

Real Estate Transactions and Litigation

MLS@StrombotneLaw.com

 

Strombotne Law Firm

16450 Los Gatos Blvd., Suite #110

Los Gatos, CA  95032

phone:  408-971-9540

www.StrombotneLaw.com

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This case was recently decided and is subject to change by further appellate court review.  You should consult legal counsel to evaluate this legal precedent in the context of your specific facts.  The distribution of Legal Update does not by itself create an attorney-client relationship with the reader.