Zinneman v. Bagnol

Opinion

The Real Estate Recovery Program (Bus. & Prof. Code,^[1] § 10470 et seq.) allows persons who have been defrauded by a real estate licensee to recover from a state monitored account, funded from real estate license fees (the Recovery Account). To be eligible to recover, an applicant must have obtained a final judgment against the licensee for fraud or conversion of trust funds arising directly from a transaction in which the

In 1994 the Allison Claimants submitted an application to the Commissioner for payment from the Recovery Account for their losses caused by Montross, Barber, and MBI. Other groups of defrauded investors filed similar applications, and still other groups had outstanding lawsuits, bringing the aggregate claims against the licensees to millions of dollars. In 1997 the Commissioner initiated a proration proceeding in San Francisco Superior Court to obtain a judicial determination of how the $100,000 account for each licensee should be divided.^[2]

Initially, the Commissioner sought proration based on the assumption that each investor had a judgment against both Barber and Montross. The Commissioner’s motion for summary judgment and for an order directing payment was opposed by a group of investors in the Sunnyside Terrace Estates project (the Bagnol Group). The Bagnol Group argued that the Recovery Accounts for Barber and Montross should not be aggregated, that recovery from the Recovery Account for Barber should be limited to those claimants who actually have a valid judgment against Barber, and that the Bagnol Group was then in litigation to obtain such a judgment. The Commissioner then withdrew its motion as no longer ripe for decision and further agreed with the Bagnol Group that applicants could recover only if they had a judgment against the licensee.

In February 1999 the Bagnol Group obtained a judgment from the bankruptcy court, finding Barber liable for fraud and conversion in the amount of $431,000 and declaring such judgment nondischargeable. The Bagnol Group then submitted an application for payment from the Recovery Account for Barber, asserting that it was the only group of claimants with a judgment against Barber, that all other claims had been discharged in Barber’s bankruptcy in 1995.

In October 1999 the Commissioner moved for an order determining eligibility to participate in the Recovery Account proration. With respect to

In response to this challenge, the Allison Claimants asserted that they had never received notice of Barber’s bankruptcy. They also impliedly acknowledged the defect in the clerk’s default judgment, and they returned to the San Mateo Superior Court and applied for a new default judgment against Barber by the court. After a hearing to establish damages, the San Mateo Superior Court entered a default judgment in November 1999 in favor of the Allison Claimants and against Barber for $943,113 plus interest based on fraud and breach of fiduciary duty.^[3]

Within the proration proceeding, the Commissioner then argued that the 1999 replacement judgment satisfied the requirements for recovery by the Allison Claimants. The Bagnol Group objected, asserting that the 1999 judgment was a subterfuge to get around the bankruptcy discharge. The trial court ruled, however, that both the Allison Claimants and the Bagnol Group were entitled to a pro rata distribution from Barber’s Recovery Account. The court directed the Commissioner to ascertain the identities of the persons eligible, to compute the pro rata share of each claimant, and to apply to the court for approval of the proposed proration.

The Bagnol Group moved for reconsideration, arguing that the new 1999 judgment did not qualify the Allison Claimants for recovery. The Bagnol Group presented a copy of the schedule of creditors filed in Barber’s 1995 bankruptcy, showing the Allison Claimants listed as unsecured creditors. The motion for reconsideration was denied. The Bagnol Group appealed the order determining eligibility, but we held the appeal was premature as no final order of proration had yet been entered. (Zinnemann v. Bagnol (Mar. 22, 2001, A089756) [nonpub. opn.].)

Meanwhile, Barber moved in the San Mateo Superior Court to declare the 1999 default judgment void on the ground that the initial 1993 judgment had been discharged in bankruptcy. The Allison Claimants removed the matter to the bankruptcy court for decision on that motion, and the matter was dropped

Also while the previous appeal was pending, the trial court determined the pro rata payment to be made to the numerous applicants from the Recovery Account for Montross. The Allison Claimants received a total of $23,709.10 (to be allocated among the 36 claimants).

Once this court dismissed the appeal of the Bagnol Group, the Commissioner sought an order for payment to the Allison Claimants and the Bagnol Group from the Recovery Account for Barber. The Bagnol Group opposed the motion, arguing, in part, that the Allison Claimants were ineligible for recovery as their claims had been discharged in bankruptcy. The trial court ordered pro rata payment from the Barber Recovery Account of $62,895.62 to the Allison Claimants and $37,104.38 to the Bagnol Group. The Bagnol Group now appeals.

Discussion

In the previous appeal by the Bagnol Group, we held that the trial court’s order determining eligibility was not a final order and the appeal was premature. Now that a final order of pro rata payment has been entered, we may properly review the trial court’s determination of the Allison Claimants’ eligibility to participate in a distribution from Barber’s Recovery Account.

Section 10471 allows a person defrauded by a real estate licensee to recover from the Recovery Account only if the applicant has obtained a personal judgment against the licensee that has not been discharged in bankruptcy. (See generally Armenia v. Edmonds (1988) 201 Cal.App.3d 464

The Legislature added the bankruptcy discharge qualification in 1987 in order to protect the Real Estate Recovery Program from “claims which have exceeded the intended purpose of the program, in certain cases brought by claimants who have employed judicial procedures designed solely to assure access to the Recovery Account.” (Stats. 1987, ch. 535, § 1(d), p. 1830.) In particular, the Legislature added subdivision (c)(7)(F) to section 10471, requiring that the applicant declare that “the underlying judgment and debt have not been discharged in bankruptcy, or, in the case of a bankruptcy proceeding that is open at the time of the filing of the application, that the judgment and debt have been declared to be nondischargeable.”^[5] (Stats. 1987, ch. 535, §3, p. 1831.) Further, the Legislature required that the application form include “a notice to the applicant of his or her obligation to protect the underlying judgment from discharge in bankruptcy.” (§ 10471, former subd. (d), now subd. (e).)

We discern at least two purposes served by imposing these eligibility requirements. First, as long as the judgment has not been discharged in bankruptcy the possibility remains of future repayment to the Recovery Account from the licensee through subrogation.^[6] (§ 10479.) Second, when the licensee remains potentially liable for repayment, the risk is reduced of collusive judgments obtained solely for the purpose of qualifying for the Recovery Account. (See generally Yergan v. Department of Real Estate (2000) 77 Cal.App.4th 959 , 969 [ 92 Cal.Rptr.2d 189 ].)

We recognize, of course, that the bankruptcy court has exclusive jurisdiction to determine the nondischargeability of debts based on fraud ( 11 U.S.C. § 523 (c)(1); 28 U.S.C. § 157 (b)(2)(I); Harris v. U.S. Fire Ins. Co. (Bankr. E.D.Va. 1994) 162 B.R. 466 ) and is authorized to issue declarations permitting a creditor to proceed against a state’s real estate recovery program while insulating the debtor from personal liability. (In re Walker, supra, 927 F.2d at p. 1142, and cases cited therein.) Whether such a decision achieves its intended result and qualifies the creditor to participate in the California Real Estate Recovery Program is, however, a determination properly made by this court, Nothing in our decision impinges upon the bankruptcy court’s determination concerning Barber’s personal liability for the 1999 judgment. In fact, we are simply applying this determination to our own determination of the Allison Claimants’ eligibility under section 10471. We conclude that because Barber no longer has any personal liability on the San Mateo Superior Court judgment, the Allison Claimants do not qualify for participation in the Recovery Account for Barber.

The Allison Claimants asserted below that because they never received notice of the bankruptcy proceeding they were obligated only to reopen the

The Commissioner’s argument fails to distinguish between a determination of eligibility to participate in the Real Estate Recovery Program and a determination of the amount of proration. The trial court’s statutory power to make an “equitable” distribution pertains to the amount of proration. Such pro rata payment is authorized only to aggrieved persons with “valid claims.” (§ 10474.5.) Although the Real Estate Recovery Program is intended to protect the public and should be liberally construed in favor of the victims, nonetheless the statutory eligibility requirements cannot be ignored. (Davis v. Harris (1998) 61 Cal.App.4th 507 , 512 [ 71 Cal.Rptr.2d 591 ]; McGaughey v. Fox (1979) 94 Cal.App.3d 645 , 651 [ 156 Cal.Rptr. 593 ].) The trial court’s obligation to be equitable extends only to those eligible to participate. In the absence of a personal judgment against Barber, the Allison Claimants are not eligible to participate in the Recovery Account.^[8]

The Allison Claimants further argued below and reiterate on appeal that their eligibility should be assessed as of the date of their 1994 application, at which time Barber had not yet filed for bankruptcy. The Allison Claimants contend that they fulfilled the statutory requirements because they accurately stated in their application that their judgment against Barber had not been discharged in bankruptcy.

The argument is not persuasive. The intent of the Legislature in section 10471, subdivision (c)(7), in requiring certain “representations and information from the claimant” was to impose conditions of eligibility, not simply to require certain statements on the application form. The statute imposes an obligation on the claimant to “protect” the judgment from discharge in

Disposition

The order directing payment from the Barber Recovery Account is reversed, and the matter is remanded for entry of an order excluding the Allison Claimants from participation. Costs on appeal are awarded to appellants.

Stevens, Acting P. J., and Gemello, J., concurred.