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Conflicting standards of proof cause reversal of automatic suspension of licensee

A California appellate court held November 21 that the state's Bureau of Real Estate improperly used a civil fraud judgment as a basis to suspend a licensee because such judgments were made under a lesser standard of proof than that required for disciplinary actions.

(Demoff v. Bell)

In 2008, a client sued real estate broker Tanja Demoff for fraud, eventually winning a $1.2 million judgment. Unable to get payment directly from Demoff, the client filed an application with the state’s Consumer Recovery Account, a fund operated by the state’s Bureau of Real Estate that provides money to judgment creditors defrauded by real estate licensees. The client eventually received about $242,000 from the fund.

Under California law, when the Consumer Recovery Account pays out to a creditor, the implicated licensee will be automatically suspended until the amount paid is reimbursed. Accordingly, the Bureau suspended Demoff’s license. She contested the decision by filing for a court order to invalidate the fund’s payment to the client, and her case eventually rose to the state Court of Appeals for the Fourth District.

On appeal, Demoff argued that the payout to the client was improper because the client failed to notify Demoff that she was going to be making a claim on the account, and California law requires that a fund claimant serve the application to the debtor licensee first.

Much of the case revolved around whether this process service had occurred, with Demoff arguing that, because of various address errors, the client did not properly provide service. For a current licensee, service may be made to the last address on file for the licensee with the state’s Bureau of Real Estate, which administers the account.

Day had apparently mailed service to the correct address, with Demoff’s full, correct address on the service mailing’s envelope, but the client made a mistake on some of the documents contained within the mailing, addressing the actual notice of service to “Pacific Coast Hwy” instead of the more correct “E Pacific Coast Hwy. Despite the apparent insignificance of the error, Demoff argued that the mistake nullified the client’s attempt at service and, by extension, her claim on the Account.

The court disagreed, holding that Day’s mailing was sufficient as addressed, despite the error. “Although [statutory law] provides the application should be sent to the judgment creditor at the latest address on file, the statute does not mandate it is the ‘only’ possible address,” Justice Kathleen O’Leary wrote for the court. “The statute, when read in combination with the real estate Commissioner’s regulations regarding CRA applications, permits the [Bureau] to consider any application it determines is in substantial compliance.”

Taken in its entire context–-the envelope and the accompanying certified mail form had the correct address, and postal records indicated that the carrier had actually seemed to locate Demoff’s office—the court held that Day’s service was sufficient.

In his second argument, Demoff argued that the Bureau improperly allowed the client to file her application for funds twice. The client had submitted an earlier application that the Bureau found deficient because the client had not provided sufficient documentation of her claim, and she declined to fix those deficiencies before the Bureau dismissed the claim and the client filed a second.

The court rejected this claim as well, holding that the Bureau’s dismissal of the client’s original claim was not a final judgment of its merits and thus did not prohibit the client from filing another.

Demoff also challenged the Bureau’s decision to pay her client on receipt of the judgment the client obtained against Demoff, arguing that the Bureau’s payment from the Account amounted to a disciplinary action against Demoff’s license, and thus required a standard of proof of “clear and convincing evidence,” higher than the “preponderance of the evidence” standard under which the client had prevailed in her civil suit against Demoff.

Although the Bureau argued that authorizing suspension of a license until an Account payment is reimbursed was not punitive and thus not disciplinary, the court held that “the CRA program is a hybrid of remedial and disciplinary provisions, and because the proceedings implicate a fundamental vested right, the Commissioner and reviewing trial court must apply a clear and convincing standard of proof.”

Demoff had success with this last argument. “Demoff’s due process rights were violated when the trial court used the preponderance of the evidence standard in evaluating the evidence in its de novo review of the Commissioner’s decision,” wrote Justice O’Leary.

The court went further than simply ruling that the Bureau could not suspend Demoff’s license, holding that the client would not even be entitled to payment from the Account unless she could prove her case against Demoff by a clear and convincing standard. “Due to the disciplinary component of the CRA program, the victim is unfortunately burdened with the same standard of proof as the Commissioner pursuing a . . . disciplinary action. We cannot legally justify a lesser standard of proof based on who initiates the disciplinary proceedings.”

The court reversed the lower decisions and remanded the case for a new hearing applying the appropriate standard of proof.