An interesting real estate license discipline case came down from the California Court of Appeals involving Grubb Company, inc. ("Grubb") and one of their real estate licensees.
The Grubb Company, Inc v. California Department of Real Estate, 194 Cal.App.4th 1494 (2011). This is an interesting case wherein Grubb, by and through one of its real estate agents ("Paul") undertook a dual agency position in a real estate transaction. In the case, (Grubb and Paul - collectively "Grubb") represented two sellers of a particular property and after entering into the listing agreement, there was information provided to Grubb from the sellers (who just so happened to be California attorneys) regarding the square footage of the property. Grubb later produced a marketing brochure that appeared to misrepresent and increase the square footage of the property. Grubb later represented a party that became interested in purchasing the property and they undertook the dual agency. A purcahse and sales contract was executed for approximately 1.6 million dollars. A $35,000 earnest deposit was later provided as part of the deal. Thereafter, there was a dispute over termites and repairs that led to the problems. Eventually, not being able to agree on terms, the buyer asked for their $35,000 deposit to be returned. The sellers, through Grubb, declined to return the good faith deposit. As such, the Buyer brought a civil suit alleging causes of action including breach of fiduciary duty, intentional and negligent misrepresentation and fraud. It should be noted that after the suit was filed, the seller offer a refund of the earnest deposit, but by then it was too late and was refused.
The underlying Civil Court action
In the underlying civil case, the case ultimately went to a jury trial. The jury concluded that Defendants had committed fraud, but there was no specific finding that there was "clear and convincing evidence" of fraud, decelt, or malice." Defendants settled the case before the final hearing on the issue of punitive damages.
NOTE: The standard of proof in a civil case is "preponderance of the eivdence" (essentially meaning it is more likely than not that the Defendant committed the complained activity). In some cases, in a civil court - such as proving a party is entitled to punitive damages, a "clear and convincing evidence" stadard may apply as to a given legal issue.
Post judgment, the DRE takes action and files accusation against Grubb
After the civil case was decided, the California Department of Real Estate ("DRE") decided to bring an accusation against Grubb and to seek license discipline gainst Grubb and Paul, the agent (I am assuming the buyer also filed a licensee complaint with the DRE which can often trigger an audit and accusation). The DRE basically based its decision to file the accusation on the grounds that the Civil case had concluded, and that there was a finding of misrepresentation and that this judgement existed by "clear and convincing evidence" which it argued allows them to discpline a license under California Business and Professions Code Section 10177.5. This section states:
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 under this division, the commissioner may, after hearing in accordance with the provisions of this part relating to hearings, suspend or revoke the license of such real estate licensee.
Given this provision and in "connection with" California Business Code Section 10177(d) the DRE felt justified in initiating an administrative action (accusation) to disclipline the license of Paul and Grubb.
Note: Section 10177(d) is a "willful violation" of the real estate law. This section states it is appropriate for the DRE to discpine a license for:
(d) Willfully disregarded or violated the Real Estate Law (Part 1 (commencing with Section 10000)) or Chapter 1 (commencing with Section 11000) of Part 2 or the rules and regulations of the commissioner for the administration and enforcement of the Real Estate Law and Chapter 1 (commencing with Section 11000) of Part 2.
Applying these laws, the DRE figured that since the judgement itself is proven (basically to exist) and that this could be proven by a clear and convincing standard as required under 10177.5, that it was basically a shoe-in to discpline the license of Grubb and Paul. Grubb disagreed and (assuming the case could not be settled with a settlement stipulatoin with the DRE commissioner) took the case to an evidentiary hearing in the Administrative Courts.
California DRE administrative license discipline hearing
At the hearing on the accusation, after hearing both sides, and reviewing the evidence, the Administrative Law Judge ultimately ruled that there was grounds for discpline given the underlying judgement, but that due to "mitigating circumstances" (Grubb and Paul had no prior discpline) that the judge ruled that discplining the licenses was not approrpiate and was not required. As such, the judge issued a final proposed order in that regard.
Note: In a California administrative hearing, the judge hears the evidence and issues a proposed ruling. The decision is then sent to the DRE commissioner who can either adopt, modify, or reject the proposed order of the judge.
Followint the proposed ruling of the administrative law judge, the DRE commissioner in fact, exercised their discretion and rejected the adminsitrative law judges decision. The DRE ordered that the licenses of Grubb and Paul be suspended, with an ability to buy out the supsension with a statutory fine. This was not sufficient to Grubb Company, which was determined to chalenge the ruling and to file for a writ of mandate.
Writ of Mandate in Superior Court
After the DRE's ruling on or around 3/28/07, Gubb filed a petition for administrative "Writ of Mandate" in the Alameda County Superior Court. Ultimately, the Trial Court judge denied the writ forcing Grubb to make further challenges in a civil court if it wanted to challenge the DRE ruling.
DRE case on Appeal
Grubb pushed forward, and filed a formal appeal of the denial of writ of mandate. The appellate court, which is authorized to review cases for errors of law and erroneous legal conclsuions, heard the case and issued the final ruling. The California Appellate court ruled in favor of Grubb holding that the underlying civil action (the one initiated by the buyer of the above property) did not have or contain any specific findings that Grubb (now the appellant) had engaged in any acts of fraud, deceit or misrepresentation by "clear and convincing evidence." It was clear and convincing that there was a judgement, but due process rights require more than just showing there was a prior judgement. Due process under 10177.5 requires a specific showing (the burden is on the DRE) by clear and convincing evidence" that the licensees had engaged in acts of fraud, deceit or misrepresentation for acts requiring and involving a real estate license.
The court's holding was as foloows:
As such, the Court reversed the ruling on the administrative writ of mandate, and ordered the DRE to set aside their Order suspending the license and to have the DRE reconsider its position. Grubb was also awarded costs on appeal, which according to other sources amounted to over $500,000 in attorney fees.
This case should give you a flavor of how the administrative hearing process works in California.
Attorney Steve comments:
(1) This case highlighs that if you are involved in a civil or small claims case involving charges of fraud misrepresentation or deceit, that you need to do what you can to make sure there is no finding by "clear and convincing evidence" that you have engaged in wrongdoing in regard to acts that rquire a real estate license. If such a finding is made, this paves the way for the DRE to make a challenge to your license under Business and Professions Code Section 10177.5. It may be wise to settle these types of cases out rather than allowing them to go to a final judgement after a bench or jury trial.
(2) This also highlights the risks we have discussed before in engaging in the dual representation / dual agency. While financially it is very attractive, you can see what happens when things go wrong and one party wants its earnest deposit money back.
(3) When it comes to marketing a property and addressing square footage of the property, as always you need to be extra careful and take precaution not to misrepresent the square footage of the property. This should probably be confirmed, in writing, that this is something the buyer agrees they have the obligation to confirm through their own agent or appraiser. When things go wrong in a real estate transaction, you can see all the arguments will come out.
(4) If you or a colleague are charged with allegations of wrongdoing, facing license discpline or a DRE accusation arguing that your license should be disciplined based upon a prior judgment for fraud, misrerepsentation, or deceit in another case, you should consider having your case reviewed by a Califonia DRE compliance and defense attorney.
For more information about our services in the area of DRE defense or compliance, please see our DRE Defense and compliance portal. We can also be reached at (877) 276-5084. This blog post is general legal information only and is not legal advice. It may not be accuarte and open to interpretation. For specific problems, contact a California real estate lawyer.