Feature
by The California Department of Real Estate
The Department of Real Estate’s Recovery Account is a victim’s fund, that began operating on July 1, 1964. The purpose of the Recovery Account is to provide limited reimbursement to consumers for losses sustained in real estate transactions because of the dishonesty of licensed real estate brokers or salespersons. The Recovery Account is funded from a portion of the license fees paid to the Department of Real Estate by brokers and salespersons. Between July 1, 1964, and June 30, 2004, the Recovery Account has paid out $35,450,491 to 1,768 victims.
In general, an applicant for payment from the Recovery Account must obtain a final judgment against a person who was licensed by the Department of Real Estate at the time of the transaction that resulted in the loss. That judgment must be based on intentional fraud or conversion of trust funds. The transaction in which the victim was defrauded must have been one involving the licensee who was doing something that required a real estate license. In other words, the licensee must have been acting as an agent between an independent buyer and seller, borrower and lender, or property owner and lessee. If the licensee was acting as a principal in the transaction—for example, the licensee was the seller of the property or the borrower of the funds—he or she did not really require a real estate license to participate in the transaction. In this case, he or she was not acting as a licensee or as an agent but as a party to the transaction.
The victim, now a judgment creditor or applicant, must then make reasonable efforts to collect on the judgment against all defendants and other persons liable in the transaction. At a minimum, this requires the applicant to demonstrate that the licensee, now a judgment debtor, and all other persons liable do not have an interest in any real property within California with sufficient equity, that could be attached by proper court processes. The applicant must also serve a copy of the entire recovery account application on the judgment debtor/licensee by methods prescribed in California’s Business and Professions Code. Last, the application must be received by the Department of Real Estate no later than one year after the qualifying judgment became final. This calculation requires an understanding of the specific time limits for that particular judgment to be appealed. These time limits differ from state courts to federal courts, including bankruptcy court.
As a general rule, each application for payment is different. However, in 1987 the law defining a qualifying judgment was amended to include a criminal restitution order. If a criminal case against a licensee for fraud or embezzlement results in a sentence that includes restitution to one or more of the licensee’s victims, that part of the sentence is known as a criminal restitution order.
Over the past several years, the Department’s Recovery Account Unit has received an increasing number of applications from victims who have been awarded restitution in criminal cases. In one case currently pending, there are approximately 75 victims included in a criminal restitution order against a real estate broker convicted of fraud. The total amount of restitution ordered is approximately $2,200,000. Since the Recovery Account’s limit of liability to one licensee is only $100,000, those funds must be prorated among all the victims who submit timely qualifying applications. Those victims who want to participate in any proration of funds may have to pay additional court filing fees if there is a determination that a formal court proration action is required. However, if the number of victims is manageable, all the otherwise qualifying victims may agree to limit their aggregate claims to no more than $100,000 and, thereby, preclude a formal proration action in court. When an application for payment from the Recovery Account is granted, any current license or license rights held by the licensee / judgment debtor will be suspended immediately upon payment and will remain suspended until the amount paid from the Recovery Account is paid back with 10% interest.
The staff of the Recovery Account Unit is located in the department’s Sacramento office. Their task is to process and track applications and to make sure that each applicant provides all the information required by law to qualify for payment. If the requirements are met, the commissioner will grant the application up to a maximum of $20,000 for one transaction, and possibly up to a maximum of $100,000 per licensee, if there are multiple qualifying transactions.
Reprinted courtesy of the California Department of Real Estate’s Real Estate Bulletin.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. Further information about the Recovery Account is available at www.dre.ca.gov (click on Consumers, Recovery Account Information and Forms). If you have more questions about the Recovery Account, please call 916-227-0789. Copyright © 2005 by Real Estate Bulletin. All rights reserved.