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  Los Angeles Lawyer
The Magazine of the Los Angeles County Bar Association

January 2011     Vol. 33, No. 10


MCLE Article: Brokers' Fate

The Department of Real Estate has wide-ranging powers to discipline brokers who violate the public trust

By Amelia V. Vetrone

Amelia V. Vetrone is a real estate counsel with the California Department of Real Estate. She thanks Assistant Chief Real Estate Counsel Darlene Averetta and Real Estate Counsels James Demus, Elliott MacLennan, and Martha Rosett for their contributions to this article.

By reading this article and answering the accompanying test questions, you can earn one MCLE credit. To apply for credit, please follow the instructions on the test.

Roy Snyder, a truck driver, decided to take out a loan on his mother's unencumbered home to pay some bills. He wanted to borrow approximately $4,000, and he had his mother's authorization to use the property as security for the loan. At the time the loan was made, a loan broker's commission on loans up to $4,999.99 was limited by law. Snyder's loan officer talked him into borrowing $5,250, thereby avoiding the limit on the broker's commission. The higher loan amount was achieved by selling credit life insurance and disability insurance to Snyder for $1,117.20, which Snyder was informed he had to buy to receive the loan. The insurance company was owned by one of the loan brokers, his sister, and the sister's husband. As a commission, the brokers took a second trust deed on Snyder's mother's property for $2,500.

In total, Snyder incurred an indebtedness of $7,750 and received $3,874.60, while the brokers amassed $3,875.40. If Snyder's loan had been under the statutory limit of $4,999.99, the brokers' maximum commission would have been $750. This fact was never disclosed to Snyder.

The California Department of Real Estate became aware of the brokers' activities involving Snyder. After an investigation and the required procedures, the DRE revoked the brokers' real estate licenses, along with the licenses of their salesmen. The DRE did so based on the brokers' violations of Business and Professions Code provisions addressing misrepresentation, fraud, and dishonest dealing.1

This scenario of self-dealing took place in 1967, when loan money was tight and real estate brokers often resorted to creative ways to earn commissions. Some of those methods were unlawful, as in the case involving Snyder. Now, once again, in another distressed real estate market, the DRE finds itself with a surge of real estate law violations involving many old tricks as well as new ones in the areas of loan modification, foreclosure rescue, and short sale fraud activity. Practitioners representing real estate brokers or parties seeking redress for questionable broker practices need to become aware of the DRE's mandate, scope, and disciplinary procedures.

The DRE is a licensing, regulatory, and enforcement agency. Its legislative mandate is to protect the public regarding transactions for the purchase, sale, and lease of real property, business opportunities, common interest developments, time shares, mobile homes affixed to the land, and loans secured by real property. Those seeking to represent parties in these transactions must obtain a license from the DRE as either a real estate broker or salesperson, except for attorneys rendering services to a client.2 Engaging in the transactions covered by the DRE's mandate without a real estate license can result in criminal liability. The authority for the DRE's operations is the Real Estate Law, which is codified in the Business and Professions Code,3 and the Regulations of the Real Estate Commissioner, which are codified in the California Code of Regulations.4

Created in 1919, the DRE's purpose has always been to require that brokers and salespeople be honest and trustworthy, as they generally act in a confidential and fiduciary capacity with the public.5 The DRE achieves this goal not only through licensing but also through disciplinary actions against licensed brokers and salespersons. Conduct that violates the Real Estate Law will result in formal disciplinary action against a licensed real estate broker--whether the broker was acting on behalf of others or as a principal, and whether or not the conduct occurred in the context of a real estate transaction.

In addition to revocation of a real estate license, the types of discipline imposed by the DRE include revocation of the plenary license and issuance of a restricted license6; suspension of the license with or without a monetary penalty (up to $10,000); restitution to the victim; educational course completion and ethics testing; trust fund reporting requirements; chargeable audits; criminal arrest reporting requirements; order of debarment "from any position of employment, management, or control"7; and desist and refrain orders.8

Until a formal pleading is filed against a licensee or applicant, the DRE's investigative review process is completely confidential. When a consumer files a complaint against a real estate broker, only the party who made the complaint and the party against whom the complaint was made will be aware that the DRE is conducting an investigation. Once the department makes a determination that the broker's conduct warrants formal disciplinary action, it files an Accusation against the broker's license and assigns an H number--a case designation that begins with the letter "H." Filed hearing documents are public records, and H numbers appear on a broker's public records license page on the DRE's Web site.

The DRE's disciplinary procedures are conducted pursuant to the Administrative Procedure Act.9 Licensees have the right to a hearing before an administrative law judge. The process has its own rules of procedure, discovery, and evidence10 that differ from rules applicable in criminal prosecutions or civil court actions. Following the hearing, the ALJ issues a Proposed Decision. The California Real Estate Commissioner has the discretion to accept or reject the ALJ's decision, and the commissioner's decision is final and given an effective date. The commissioner's decision may be overturned only by a request for reconsideration made directly to the commissioner11 or a writ of mandate filed in superior court.12

Since violators of the Real Estate Law may be subject to criminal penalties, the DRE coordinates its investigative efforts with other law enforcement agencies. Prosecutions are pursued by county, state, or federal prosecutorial officials depending on the type of violation. If another administrative agency has prosecuted a broker or salesperson before the DRE commences its action, the department's ultimate disciplinary action may include, or be based on, the other agency's findings and results. A licensed real estate broker will be subject to discipline if his or her conduct demonstrates a lack of honesty and integrity--whether that determination has been made by the DRE alone, by some other agency, or by the court.13

All real estate broker applicants must provide a fingerprint sample to the DRE so the department can conduct a criminal records background investigation prior to the issuance of a license. Once the license is issued, the fingerprint database remains active. The California Department of Justice notifies the DRE whenever a real estate licensee has been arrested or convicted of a crime. The DRE then will file formal disciplinary proceedings against any licensee who has entered a plea of guilty or nolo contendere to, or been found guilty of, or been convicted of, a felony or a crime "substantially related" to the qualifications, functions, or duties of a real estate licensee.14

Revocation after Judgment by Others

The DRE's formal disciplinary proceedings will arise even when the crimes committed by the licensee do not directly involve real estate. The DRE will examine the conduct at issue to determine whether it is substantially related to the standard of conduct for a real estate licensee.

For example, Arneson v. Fox15 involved a real estate broker who was found guilty in U.S. district court of participating in a scheme to make false land sales to straw buyers or shell corporations. The aim of the scheme was to boost the financial statements of a real estate development company. The broker set up various shell corporations that purchased property from the development company in paper deals devised to appear as if they were arm's-length transactions. In fact, the development company or its officers actually provided the funds for the purchases to increase the company's stock price and thereby create the impression that the development company was extremely profitable. Following the broker's felony conviction, the DRE revoked the broker's real estate license.

The DRE also revoked the license of the real estate broker in Robbins v. Davi.16 In Robbins, the real estate broker managed over 20 properties consisting of more than 1,000 residential apartments. He was found guilty of misdemeanor violations of the Los Angeles Municipal Code relating to fire prevention and safety. While the court of appeal held that the broker's criminal conviction alone was insufficient to support the revocation of his real estate license, it noted that the DRE was authorized to look to the underlying circumstances to determine the degree of discipline or to ascertain whether the violations were substantially related to the qualifications, functions, or duties of a real estate licensee.

The broker's conduct in Robbins entailed an unlawful act with the intent of conferring a financial or economic benefit upon him or with the intent or threat of doing substantial injury to the person or property of another. This constituted a violation of Business and Professions Code Section 10177(b) and California Code of Regulations Title 10, Section 2910. The DRE's action was based on the broker's conviction of three misdemeanor violations of the fire protection and prevention provisions of the Los Angeles Municipal Code. However, the broker previously was convicted of 50 municipal code violations in the period between 1986 and 1995. In upholding the DRE's revocation of the broker's license, the court of appeal noted that the broker's activities in ignoring fire code laws involved an intent to confer a financial benefit by reducing operating expenditures while simultaneously risking the safety of the apartment tenants.

Real estate brokers frequently hold other professional licenses in addition to a real estate license. Also, real estate brokers engaged in mortgage loan activities often are licensed in more than one state. A broker's real estate license will be subject to suspension or revocation if another licensing agency within California or in any other state suspends or revokes that broker's other license based on acts that would also constitute a violation of the Real Estate Law.17

In some cases, the DRE's discipline might be more severe. For example, in Herrera v. Department of Real Estate18 the department revoked the real estate broker license of a lawyer whose law license was merely suspended by the State Bar of California. The State Bar found that Herrera had received client funds without notifying the client and then misappropriated the client's funds for his own use. As punishment, the State Bar suspended Herrera's law license for 60 days, with one year of probation. The DRE's revocation of Herrera's real estate broker's license was grounded on the suspension of Herrera's law license. Indeed, Herrera's misappropriation of trust funds was conduct that would have warranted the revocation if it had occurred in the context of a real estate transaction. The suspension would have been grounds to deny the issuance of a real estate license if Herrera had applied for a license after the State Bar's action.19

The DRE's "substantially related" standard also applies to brokers who have incurred civil liability. The DRE will accept the findings of a civil court, even though the civil standard of proof is not as high as the DRE's administrative standard of proof--which is clear and convincing to a reasonable certainty. A real estate broker's license will be subject to discipline after a final civil court judgment that is related to a real estate matter and is based on the grounds of fraud, misrepresentation, or deceit.20 The ground for discipline is the issuance of the judgment, so civil cases, like criminal cases, will not be relitigated in the administrative proceeding.

An illustrative case is Denny v. Watson,21 in which a group of real estate brokers had their licenses revoked following a civil judgment against them for fraud. The court found that the brokers together secured the deed to a motel from one of their clients for no money down. The brokers promised that they would 1) not record the deed until they had sold the property, 2) make the payments on the trust deeds and liens against the property, 3) manage the property, and 4) when they sold it, pay the client $5,500, clear of the debts. Instead, the brokers recorded the deed, failed to make the necessary trust deed payments, permitted the property to be sold under power of sale in one of the trust deeds, and, through a confederate, purchased the property for themselves at the trustee's sale for a reduced price. The seller sued the brokers and obtained a civil judgment for fraud. The DRE revoked the brokers' licenses based on the judgment.

The DRE's disciplinary actions are completely independent of the civil remedies that a consumer may pursue against a real estate broker based on the same activity. A civil judgment for fraud is only one ground upon which a broker's activities--conduct that resulted in harm to a consumer--could result in the revocation of that broker's license.

Investigations by the Department

In addition to accepting the findings of other agencies and tribunals, the DRE conducts its own investigations into alleged real estate broker misconduct. A real estate broker's license will be subject to discipline for violations of the Real Estate Law or state regulations promulgated to address or prevent direct losses to the public as the result of misrepresentation, fraud, dishonest dealing, negligence,22 unlicensed activity,23 trust fund mishandling,24 and lack of broker supervision.25

In keeping with the DRE's mandate to protect the public, a real estate broker's license will be subject to disciplinary action whether the broker was acting on behalf of a client or as a principal. When a broker's wrongful conduct occurs during the course of performing licensed real estate activities, Business and Professions Code Section 10176 governs the discipline for that conduct. Section 10177 provides for discipline of a broker's wrongful conduct that is not strictly within the course and scope of real estate activity.26

For example, in Realty Projects v. Smith,27 the case involving overcharged borrower Roy Snyder, the brokers' licenses were revoked for violations of Sections 10176(a) (making any substantial misrepresentation), 10176(i) (conduct that constitutes fraud or dishonest dealing), 10177(d) (willfully disregarding or violating the Real Estate Law), 10177(j) (conduct that constitutes fraud or dishonest dealing), and 10177(f) (conduct supporting license denial). The disciplinary proceedings against the brokers and their sales agents were based on the Section 10176 requirement of fair and honest dealing while acting as mortgage loan brokers, but Section 10177 was applied to the manner in which they dealt with Snyder and others before the execution of loan agreements and the performance of real estate activities.28

Brokers also can be disciplined for their conduct as a party to a transaction, not just when they are serving as a representative for another party. In Small v. Smith,29 the court of appeal upheld the DRE's action to revoke a real estate broker's license for violating Section 10177(j). Acting as a principal in the transaction, a real estate broker purchased 20 acres of land through an installment sales contract. At the time of the down payment, 10 acres were immediately conveyed to the broker, and the other 10 were to be conveyed when the sale price had been fully paid. The broker sold part of the unconveyed 10 acres to a third party in an installment sale. After a few months, the broker stopped making his installment payments to the original seller but continued to collect payments from his subsequent buyer--even after the broker was issued a notice of forfeiture. The original seller foreclosed on the broker's contract, while the broker continued to collect payments from his uninformed buyer. The broker's buyer did not know about the broker's forfeiture until after the land was resold to someone else, and he received nothing. The broker refused to issue a refund to his buyer.

The broker's position all through the case was that he was under no duty to inform his buyer of the foreclosure and that he should have been entitled to keep the money he collected. The court of appeal gave short shrift to this argument: "How his silence and inaction in this respect after his own default can constitute a good faith claim to receive payments for property he did not own and could never convey is beyond comprehension."30

In affirming the license revocation, the court reiterated that the object of an administrative proceeding aimed at revoking a license is to protect the public--that is, to determine whether a licensee has exercised his or her privilege in derogation of the public interest, and "to keep the regulated business clean and wholesome."31 When a real estate broker's misconduct shows a complete lack of honesty and trustworthiness, it renders that broker unfit to hold the unique position of trust that real estate licensees are given by members of the public.

Unlicensed Activity

Consumers all too frequently suffer losses when they deal with unlicensed representatives in connection with real estate activities. With some exceptions, a real estate license generally is required for 1) buying, selling, or listing real property or a business opportunity, 2) managing rental property, 3) applying for the purchase or lease of government property, 4) handling loans secured directly or collaterally by liens on real property or on a business opportunity, and 5) buying, selling, or exchanging notes secured by real property or a business opportunity for another person.32 Disciplinary issues arise when a licensee compensates an unlicensed person for performing activities that require a real estate license or when a salesperson accepts compensation for real estate activities from someone other than the broker under whom the salesperson is licensed.33 The payment or collection of compensation for unlicensed real estate activity is a crime punishable by a fine up to $20,000, imprisonment up to six months in jail, or both.34

Under the Real Estate Law, a salesperson who is not working under the auspices of a licensed broker is not licensed to conduct real estate activities. In Grand v. Griesinger,35 a real estate salesperson operated a company that listed rental properties. He formed a partnership with a real estate broker for 25 percent of the net profits. The broker had no ownership in the company and no responsibilities. Moreover, the broker did no work for the company except to allow the salesperson to register the name of the company as a fictitious business under the broker's license. The DRE refers to this type of uninvolved broker as a "rent-a-broker." The salesperson involved his whole family in the business, including his father and wife, who were also licensed salespersons. The salesperson's father proceeded to open his own company with his own rent-a-broker. The salesperson licenses of the real estate salesperson, his father, and his wife were all revoked because their real estate activities were conducted without actual supervision by the broker under whom they were licensed at the time or without their being licensed under any broker.

Unlicensed activity is usually uncovered after repeated losses by consumers based on the actions of the unlicensed individuals, who do not have the same training, experience, and responsibility normally attributed to real estate brokers. The Grand court explained that brokers and salespersons belong in distinctly different categories. Brokers are supposed to have superior knowledge, experience, and proven stability, and that is why the state authorizes them to conduct business dealings with the public involving contracts and the collection of money. A salesperson is not presumed to possess that same level of expertise and trustworthiness.36

A recent DRE license revocation of two mortgage loan brokers shows the interplay of trust fund mishandling, in violation of Section 10145, with unlicensed activity causing a direct loss to a consumer. In the case, In the Matter of the Accusation of Charles Louis Tosti,37 a real estate broker operated two mortgage loan companies. The broker's husband was a real estate salesperson whose license had expired long before. The unlicensed husband solicited a consumer to provide funds to be used as hard money loans secured by real property. In exchange for checks totaling $150,000, which the consumer obtained by taking out equity loans against her home, the consumer was given deeds of trust for two different properties.

The consumer/lender later learned that the deeds of trust were completely false. In one deed of trust, signed by the unlicensed husband as purported "attorney in fact" for the owner, the property was not owned by the person who was named as the owner in the deed of trust. The other deed of trust was for a residential property that the broker and her husband were renting as their home for a few months. The consumer's checks were deposited in the general bank accounts of the two mortgage loan companies, and the funds were converted by the broker and her husband to their own personal use. Outgoing company checks were signed by the couple's son, who had no real estate license. Moreover, the designated officer of the company that had received the bulk of the funds was a rent-a-broker living in a nursing home in a remote part of the state.

While a licensed real estate broker may solicit funds for use as loans secured by real property, the funds received must be treated as trust funds. Funds acquired for the benefit of others that are not immediately placed into a neutral escrow depository or into the hands of the broker's principal must be deposited into a trust fund account maintained by the broker in a bank or recognized depository in the state.38 The broker must be a signatory to the trust fund account, with other signatories limited to those who possess a real estate license or fidelity bond coverage.39

For proper trust fund handling, the chronological control record must be reconciled with the separate record and with the bank statement.40 In the DRE license revocation action, one check was written to the consumer/lender as a partial repayment of the loan by one of the mortgage loan companies. The check was signed by the broker's unlicensed son and was returned by the bank for insufficient funds. If the original funds had been held in trust as required, and properly reconciled, the consumer would not have received a worthless check. The DRE revoked the licenses of the real estate corporations, the broker, and the rent-a-broker for multiple violations of the Real Estate Law, including trust fund mishandling and fraud.

Brokers also may be subject to license discipline for failure to exercise reasonable supervision over their corporation, employees, or salespersons.41 The supervising broker's responsibility is to secure full compliance with the Real Estate Law and regulations by the corporation for which the broker is the designated officer and by the salespersons licensed under that broker.

While it may never be known whether the broker in the recent DRE license revocation case actually instructed her unlicensed husband to solicit funds from the consumer, the failure of the broker and the rent-a-broker to provide adequate supervision over the husband's conduct as well as the mortgage loan brokerage activities of the two corporations led to disastrous consequences for the affected consumer/lender and, ultimately, for the brokers' futures as real estate licensees.



1 Realty Projects, Inc. v. Smith, 32 Cal. App. 3d 204 (1973).
2 Bus. & Prof. Code §10133(a)(3). While attorneys engaging in real estate activities are exempt from DRE jurisdiction if those activities are part of services on behalf of a client, they may come within the reach of the DRE's unlicensed activity prohibition if they are acting outside the attorney-client relationship. For example, loan modification is a real estate activity that requires a DRE license. Many attorneys without a real estate license were subject to DRE enforcement actions for collecting advance fees for loan modification from "clients" they had never even met.
3 Bus. & Prof. Code §§10000-11288.
4 Cal. Code Regs. tit. 10, ch. 6, §§2705 et seq. (the Regulations of the Real Estate Commissioner).
5 Riley v. Chambers, 181 Cal. 589 (1919).
6 Bus. & Prof. Code §§10156.5-10156.7.
7 Bus. & Prof. Code §10087.
8 Bus. & Prof. Code §10086.
9 Gov't Code §11340; Cal. Code Regs. tit. 1, div. 2, ch. 1, §§1000 et seq.
10 Gov't Code §§11500-11522.
11 Gov't Code §11521.
12 Gov't Code §11523.
13 Bus. & Prof. Code §§490, 10177(b), 10177(f), 10177.5.
14 Bus. & Prof. Code §490, 10177(b); Cal. Code Regs. tit. 10, ch. 6, §2910.
15 Arneson v. Fox, 28 Cal. 3d 440 (1980).
16 Robbins v. Davi, 175 Cal. App. 4th 118 (2009).
17 Bus. & Prof. Code §10177(f).
18 Herrera v. Department of Real Estate, 88 Cal. App. 4th 776 (2001).
19 Berg v. Davi, 130 Cal. App. 4th 223 (2005).
20 Bus. & Prof. Code §10177.5.
21 Denny v. Watson, 114 Cal. App. 2d 491 (1952).
22 Bus. & Prof. Code §§10176-10177.
23 Bus. & Prof. Code §10131.
24 Bus. & Prof. Code §10145.
25 Bus. & Prof. Code §10159.2, 10177(h); Cal. Code Regs. tit. 10, ch. 6, §2725.
26 See, e.g., Bus. & Prof. Code §10177(j).
27 Realty Projects, Inc. v. Smith, 32 Cal. App. 3d 204 (1973).
28 Id. at 210.
29 Small v. Smith, 16 Cal. App. 3d 450 (1971).
30 Id. at 455.
31 Id. at 457.
32 Bus. & Prof. Code §10131.
33 Bus. & Prof. Code §10137.
34 Bus. & Prof. Code §10130.
35 Grand v. Griesinger, 160 Cal. App. 2d 397 (1958).
36 Id. at 406.
37 In the Matter of the Accusation of Charles Louis Tosti et al., DRE Admin. Proceeding Case No. H-36132 LA (2010).
38 Bus. & Prof. Code §10145.
39 Cal. Code. Regs. tit. 10, ch. 6, §§2832(a), 2834(a)-(b).
40 Cal. Code Regs. tit. 10, ch. 6, §2831.2.
41 Bus. & Prof. Code §§10159.2, 10177(h).


By reading this article and answering the accompanying test questions, you can earn one MCLE credit.


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