ZAMBRANO v. EDMONDS (1988)

Everardo and Esperanza Zambrano contend the trial court erred in denying their application for an order directing payment from the state's Real Estate Recovery Account.  (Bus. & Prof.Code, §§ 10471, 10472.) ¹  We affirm.

I.

In 1980, the Zambranos paid $50,000 for an interest in Futures Unlimited, a limited partnership formed for the purpose of purchasing real property.   In November 1981, they initiated an action against Norma Emslie, one of the two general partners.   Their complaint sought a dissolution of the partnership, an accounting, appointment of a receiver, and $8,000 due on an unpaid promissory note.

In March 1982, Emslie filed a bankruptcy petition in the United States Bankruptcy Court.   Her schedule of creditors having “unsecured claims without priority” listed “Mr. & Mrs. Sam Zambrano, property partnership, $50,000.”   The Zambranos elected not to file a claim to determine the debt's dischargeability, and the debt was ultimately discharged.   The order of discharge of debtor filed July 23, 1982, provided, in part:  “Any judgment heretofore or hereafter obtained in any court other than this court is null and void as a determination of the personal liability of the debtor with respect to ․ debts not excepted from discharge․”

In May 1984, with knowledge of Emslie's bankrupt status and that their debt had been discharged, the Zambranos filed an amended complaint adding causes of action for fraud and conversion.   It alleged Emslie had induced them to invest $8,000 in second trust deeds and $50,000 in a real estate partnership, and sought compensatory damages of $58,000 and punitive damages of $200,000.   Emslie's default was entered in November 1984, and a judgment was rendered the following April, awarding to the Zambranos the principal sum of $58,000 together with interest of $22,610.   A statement of decision, setting forth the basis for the court's ruling, was also prepared and filed.

In May 1985, the Zambranos applied, pursuant to section 10471, for an order directing payment to them from the state's Real Estate Recovery Account.   At that time,² section 10471, subdivision (a) provided, in pertinent part:  “When an aggrieved person obtains a final judgment in a court of competent jurisdiction against a defendant based upon the defendant's fraud, misrepresentation, deceit, or conversion of trust funds arising directly out of any transaction in which the defendant, while licensed under this part, performed acts for which that license was required, the aggrieved person may, upon the judgment becoming final, file an application with the Department of Real Estate for payment from the Recovery Account․”  Pursuant to subdivision (c)(6), the applicant was required to represent he or she had complied with all pertinent requirements, the judgment underlying the claim met the requirements of subdivision (a), and he or she had made diligent efforts to satisfy the judgment.

The Zambranos' application alleged, among other things, they were prevented from pursuing their remedies against Emslie because Emslie had been released in bankruptcy from all dischargeable debts;  thus, the judgment they had obtained was not collectible.   They also asserted it would have been futile to pursue the debt in the bankruptcy court because their lawyer had ascertained there were no assets in the estate.

The Real Estate Commissioner opposed the application on four separate grounds:  (1) the Zambranos did not have a valid judgment;  (2) a portion of their claim involved a loan which was not a transaction requiring a real estate license;  (3) the recovery fund was not liable for acts of Emslie outside the scope of her license;  and (4) the Zambranos failed, as required by statute, to pursue all persons liable in the transaction.

A hearing was ultimately held January 22, 1987.   The court took the matter under submission, and on February 23rd denied the Zambranos' application.   It found “the judgment relied upon ․ does not comply with the requirement of Business and Professions Code Section 10471(a) that the aggrieved person have obtained a ‘final judgment’ since the judgment in question was obtained after defendant Emslie had obtained a final discharge in bankruptcy.”   This appeal followed.   The sole issue presented is whether the Zambranos obtained a “final judgment” entitling them to payment from the Recovery Account.

II.

“Section 10471 is a remedial statute intended to protect the public against loss resulting from misrepresentation and a breach of fiduciary duty by licensed real estate personnel who are unable to respond to damage awards.   Consequently, it is to be given a liberal construction to promote its purpose and protect persons within its purview.  [Citation.]  As such, it has been held that relief will be granted under section 10471 unless to do so is clearly forbidden by statute.  [Citation.]  ‘[Section 10471] will be construed when its meaning is doubtful so as to suppress the mischief at which it is directed, to advance or extend the remedy provided, and to bring within the scope of the law every case which comes clearly within its spirit and policy.   [Citations.]’  [Citation.]”  (Vinci v. Edmonds (1986) 185 Cal.App.3d 1251, 1256, 230 Cal.Rptr. 308.)

Relying on the foregoing language, the Zambranos contend they should be allowed to pursue their claim because they substantially and in good faith complied with the statute's requirements.   They insist Emslie's bankruptcy is irrelevant to the fund's purpose, and a final judgment is required solely “to assure that the issues are litigated and a final decision is issued on the merits.”

The commissioner urges, and we agree, “the remedial nature of the Recovery Account provisions should not be stretched to sanction the disregard for the processes and orders of other courts” demonstrated here.   Indeed, that is not what the Legislature intended in establishing the fund.

As noted above, section 10471 was amended in 1987.  (Stats.1987, ch. 535, § 3, pp. 461–462.)   In so doing, the Legislature acknowledged the valuable service provided by the Real Estate Recovery Program but declared certain changes were required to permit its continued effectiveness.   An independent study had determined the program was insolvent.   This was attributable, in part, to the fact the program had in recent years been “subject to 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.”   The Legislature concluded “action is necessary to provide sufficient funding ․ so that future claims within the intended scope of the program and diligently pursued by aggrieved parties may be paid in a prompt and timely fashion.”  (Stats.1987, ch. 535, § 1, p. 461.)

Thus, section 10471 now requires a representation by the claimant “[t]hat 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.”  (§ 10471, subd. (c)(7)(F).)   Further, “the 1987 legislation amending section 10471 includes a requirement that an applicant be given notice of his or her obligation to protect the judgment from being discharged in bankruptcy (§ 10471, subd. (d))․”  (Real Estate Commissioner v. Augustyn (1988) 198 Cal.App.3d 465, 471, 243 Cal.Rptr. 673.)

Here, the Zambranos amended their complaint to allege fraud and conversion for the express purpose of satisfying section 10471's requirement the applicant have obtained a judgment based upon the defendant's fraud, misrepresentation, deceit, or conversion.   And they did so after their debt had been discharged and without making any effort to protect their rights in the bankruptcy court.   This appears to be what the Legislature had in mind when it criticized “cases brought by claimants who have employed judicial procedures designed solely to assure access to the Recovery Account.”

We realize section 10471 did not, at the time the Zambranos made their application, specifically preclude recovery where the underlying judgment had been discharged in bankruptcy.   There is no question, however, that is what the Legislature always intended.

Order affirmed.   Respondent to receive costs.

FOOTNOTES

1.   All statutory references are to the Business and Professions Code unless otherwise specified.

2.   Section 10471 was amended in 1987.   See section II, post.

SONENSHINE, Associate Justice.

SCOVILLE, P.J., and CROSBY, J., concur.