DEAS v. KNAPP (1980)

This case stems from an action brought by certain named plaintiffs (originally Charles Deas and later Norma and Jimmie Rines as well), on behalf of themselves and others similarly situated, against Charles Knapp, a licensed real estate broker who engaged in the business of a mortgage loan broker negotiating loans secured directly or collaterally by liens on real property. In that proceeding, which we will refer to as the “underlying proceeding,” the trial court found that Knapp had charged the named plaintiffs and members of the class (hereinafter referred to collectively as plaintiffs) certain expenses, charges, and costs, including brokerage and commission charges for arranging and negotiating loans, in excess of the amount permitted by law. As regards plaintiff Deas, the court found that Knapp had structured a single loan as two loans “in order to avoid and evade the requirements of . . . Article 7 of the Business and Professions Code, and in order to charge a higher brokerage and commission and other charges than permitted by law.” As regards the members of the class generally, the court found that in negotiating loans to each of the plaintiffs Knapp falsely represented himself as a loan broker when in truth and in fact he was the lender, in violation of Business and Professions Code section 10241, subdivision (j);¹ and that he required each plaintiff not only to execute notes at 10 percent secured by deeds of trust but also to pay certain charges, including brokerage and commission charges, which were in excess of the amount permitted by law for such loans. In connection with at least one of the transactions, the court found that the payees of the notes were alter egos and agents of Knapp; and it found that Knapp performed all of the described acts in conspiracy with others, including said payees. The final judgment awarded $1,389 to plaintiff Deas, $1,525 to the plaintiffs Rines, an aggregate sum of $34,271.26 to the other members of the class, plus $12,500 in fees for plaintiffs' attorneys.

No appeal was perfected from the judgment in the underlying proceeding. Plaintiffs were unable to satisfy the judgment against Knapp, however, and accordingly made application for payment from the Real Estate Education, Research and Recovery Fund pursuant to section 10471 for the total sum awarded by the trial court plus interest. The matter was tried before the same judge who tried the underlying proceeding, and judgment was entered directing payment to plaintiffs and their attorney from the fund in the total amount of $20,000 plus costs in the amount of $226.17. We now confront the following appeals: (1) by Knapp, from the entire judgment except for the pro rata portion of plaintiff Deas; (2) by plaintiffs (a cross-appeal) who contend that a larger amount should have been awarded; and (3) by the real estate commissioner, who contends that the court erred in awarding costs in addition to the $20,000. We will consider the appeals in that order.

1. Knapp's Appeal.

Knapp contends that the underlying judgments for usury are invalid as a matter of law for the reasons that (1) fees charged by brokers for negotiating loans are not “interest,” and there is no substantial evidence of Knapp's bad faith to support the judgments of usury; (2) Knapp's “interim funding” procedures constituted “loans for use,” and not “loans for interest” subject to the usury laws; and (3) Knapp was denied a fair trial by the misuse of the class action device in the underlying action. He contends also that there is no evidence supporting the court's finding in the subsequent proceeding against the fund that the underlying judgments were based on fraud, misrepresentation, or deceit. Plaintiffs oppose these contentions on the ground, among others, that they constitute an impermissible attack upon the underlying judgment. Evaluation of the issue posed by that opposition requires, preliminarily, an analysis of the statutory scheme.

During the period this matter was litigated in the trial court there existed a separate fund known as the Real Estate Education, Research and Recovery Fund. (Stats.1956, ch. 4, s 43, amended Stats.1967, ch. 1031, s 5, Stats.1970, ch. 1118, s 1.) In 1976 that fund was abolished and its assets transferred to a separate account in the Real Estate Fund for the purposes of real estate education, research and recovery. (s 10450.6.) These changes do not affect this proceeding, and we will use the word “Fund” to refer both to the preexisting fund and to the present separate account. The monies in the Fund are derived from license fees paid by real estate brokers and salespersons (ibid.), and a portion of its assets is allocated for recovery purposes pursuant to article 3 (s 10470 et seq.) of chapter 6, division 4 of the Business and Professions Code.

Article 3 was enacted in 1963 (Stats.1963, ch. 1426, s 3), for the purpose of satisfying certain uncollectible judgments against a real estate licensee. The type of judgment for which recovery against the Fund is permitted is a “final judgment . . . under grounds of fraud, misrepresentation, deceit, or conversion of trust funds arising directly out of any transaction when the judgment debtor was licensed and performed acts for which a license is required.” (s 10471.) Application for recovery is made to the court in which the judgment was entered (ibid.), and that court then conducts a hearing at which the judgment creditor must show, among other things, that “(h)e has obtained a judgment as set out in Section 10471,” and that he has exhausted other enforcement remedies. (s 10472, subds. (c)-(f).) If the court determines that the aggrieved party “has a valid cause of action within the purview of Section 10471 and has complied with the provisions of Section 10472” (s 10473), it enters an order directed to the real estate commissioner requiring payment from the Fund of whatever sums may be due, subject to certain limitations on the amount. (s 10474.)

A court order authorizing payment from the Fund carries with it consequences for the licensee as well. Section 10475 provides that upon the effective date of such an order, the license is “automatically suspended,” subject to reinstatement only upon full repayment to the Fund with interest. Prior to 1971 the statute made no provision for notice to or participation by the licensee; the only person entitled to defend the proceedings was the commissioner. In Slaughter v. Edwards (1970) 11 Cal.App.3d 285, 90 Cal.Rptr. 144, this court held that the lack of provision for notice to or participation by the licensee did not affect the validity of an order against the Fund and in favor of judgment creditors, but that it did render unconstitutional the provision in section 10475 for automatic license suspension. In reaching that conclusion the court took note of the fact that under section 10177.5 the commissioner may suspend or revoke the license of a real estate licensee where “a final judgment is obtained in a civil action against (him) upon grounds of fraud, misrepresentation, or deceit with reference to any transaction for which a license is required.” That statute, we said, did not provide for automatic suspension or revocation upon the rendering of a judgment against a licensee, but “obviously contemplates that before a license may be suspended or revoked it must be established at the hearing not only that such a judgment was obtained but also that it was based on (the specified grounds).” (11 Cal.App.3d at p. 294, 90 Cal.Rptr. at p. 151.) Since section 10471 used the same language in describing the nature of the judgment against the licensee, a similar finding must have been contemplated; but to make such a finding without notice to or participation by the licensee deprived him of due process of law.

In 1971 the Legislature, in apparent response to that decision, amended section 10473.1. Prior to the amendment, that section provided as follows: “The commissioner may defend any such action on behalf of the fund and shall have recourse to all appropriate means of defense and review, including examination of witnesses. Whenever an applicant's judgment is by default, stipulation, or consent, or whenever the action against the licensee was defended by a trustee in bankruptcy, the applicant shall have the burden of proving his cause of action for fraud, misrepresentation, deceit, or conversion of trust funds. Otherwise, the judgment shall be prima facie evidence, but not conclusive evidence, of the fraud, misrepresentation, deceit or conversion of trust funds.” (Stats.1969, ch. 729, s 3.) The 1971 amendment added the following sentence after the first sentence of the former section: “The judgment debtor may defend any such action on his own behalf and shall have recourse to all appropriate means of defense and review, including examination of witnesses.” In addition, the 1971 amendment substituted the following two sentences for the last sentence of the former section: “Otherwise, the judgment shall create a rebuttable presumption of the fraud, misrepresentation, deceit, or conversion of trust funds. This presumption is a presumption affecting the burden of producing evidence.” The change in language from “prima facie evidence” to “rebuttable presumption” represents no substantive change. (Evid.Code, s 602.) The question is what the judgment debtor (i. e., the licensee) may litigate in his defense. Knapp argues that the licensee is free to relitigate fully the factual questions underlying the prior determination of fraud, misrepresentation, deceit, or conversion, once he comes forward with evidence sufficient to challenge the presumption. Knapp did produce certain additional evidence in the second proceeding, in the form of records of loan transactions for all members of the class, and he argues that this was sufficient to dissipate the presumption and render the proceeding, in effect, a trial de novo. Plaintiffs, on the other hand, argue that there is no reason to believe that the Legislature intended to abandon traditional concepts of res judicata in enacting the 1971 amendments, and that to force applicants for recovery against the Fund to relitigate the issues already determined by the underlying judgment would defeat the purposes of the statute, which is remedial in nature and therefore subject to liberal construction in favor of claimants. (Nordahl v. Department of Real Estate (1975) 48 Cal.App.3d 657, 663, 121 Cal.Rptr. 794; Antonio v. Hempel (1977) 71 Cal.App.3d 128, 130, 139 Cal.Rptr. 309.) The only issue subject to litigation in the subsequent proceeding, plaintiffs argue, is whether the particular fraud was one “arising directly out of any transaction when the judgment debtor was licensed” and involved “acts for which a license is required.” (s 10471.) The commissioner, who asserts no position on the outcome of this issue in the case at hand, but who has responded at the court's invitation, agrees essentially with the plaintiffs.

Considerable light is cast upon the issue so framed by judicial interpretation of section 10177.5. In Richards v. Gordon (1967) 254 Cal.App.2d 735, 62 Cal.Rptr. 466, the commissioner filed an accusation against a licensee on the basis of a final judgment against him in a civil action ordering rescission of a contract for the exchange of real properties by reason of the licensee's fraud and misrepresentation. Upon the hearing, evidence was excluded which assertedly would have impeached the prior finding of fraud and misrepresentation, and the licensee was limited to a showing of rehabilitation or mitigation. The court held that the evidence was properly excluded under the doctrine of res judicata, since the issues decided in the underlying proceeding were identical with those sought to be litigated. (Id., at p. 739, 62 Cal.Rptr. 466.) Invoking the principle that “any construction of a statute leading to absurd consequences is to be avoided,” the court stated, “such would be the result if a de novo hearing were compelled with the accompanying necessity of attendance by all witnesses to a prior superior court proceeding which had determined all the material facts in controversy.” (Id., at p. 741, 62 Cal.Rptr. at p. 470.) Except for inquiry limited to the mitigating circumstances, if any, involved in the transaction, the court concluded, “any offer of proof in impeachment of the prior judgment should be rejected.” (Id., at p. 742, 62 Cal.Rptr. at p. 471.)

Procedure under section 10177.5 is relevant not only by analogy, but also because our opinion in Slaughter v. Edwards, supra, 11 Cal.App.3d 285, 90 Cal.Rptr. 144, relied upon the opportunity for hearing under that section in support of its conclusion that the revocation of a broker's license under section 10475 without opportunity for hearing was unconstitutional. The 1971 amendment to section 10473.1 constituted an attempt by the Legislature to cure that constitutional defect. Whether it succeeded is open to question, but that is a question which in this proceeding is premature. This case involves only the right of plaintiffs to recover against the Fund. They are innocent citizens who, according to the judgment in the prior proceeding, have been wronged by the acts of a state licensee; and the Legislature created the Fund in order to protect them against loss. It seems extremely unlikely that the Legislature intended to place obstacles in their path by providing the licensee in an article 3 proceeding with greater opportunity to relitigate issues already determined by a judgment against him than the licensee would have in a proceeding brought against him by the commissioner under section 10177.5. Indeed, the policy reasons for invoking the principles of res judicata are much greater in the article 3 context. We conclude, therefore, that in an article 3 proceeding the licensee is precluded from relitigating issues previously determined against him by the underlying judgment.² Here, Knapp's appeal rests upon his dual contentions that the underlying judgment was erroneous and that on the basis of additional evidence introduced in the article 3 proceeding he should not be found guilty of fraud. Both contentions involve a collateral attack on the underlying judgment which, as we have explained, is not permissible. In some cases, such as those where the underlying trial is by a jury which renders a general verdict, it may be unclear whether the judgment was based on the grounds specified in section 10471, and in such cases evidence may be relevant to bridge the gap. There is no question but that the underlying judgment was premised at least on misrepresentation, and that the misrepresentation arose directly out of transactions when Knapp was licensed and for which a license was required. The requirements of section 10471 are therefore satisfied, and Knapp's appeal is without merit.³

2. Plaintiffs' Cross-appeal.

Plaintiffs appeal from the judgment insofar as it limits their recovery to $20,000. The limitation is based on section 10474, subdivision (a), which provides that liability of the Fund shall not exceed that amount “for any one licensee for which the cause of action occurred on or after July 1, 1964, and prior to January 1, 1975.” Plaintiffs contend that they are entitled to greater judgment because (1) at the time of the transactions involved in the underlying suit, Knapp had three real estate licenses in effect; and (2) section 10474, subdivision (b) provides for a $40,000 limitation where the “cause of action occurred on or after January 1, 1975,” and their application for recovery from the Fund was not filed until July 1975.

We find both contentions to be without merit. It is true that Knapp had three licenses, the first issued to him in 1949, when he was doing business as Investors Exchange; the second in 1967 under the name Mission Mortgage and Loan; and the third in 1969, as Mutual Mortgage and Loan. Plaintiffs' judgment, however, was solely against Knapp individually, based upon allegations in their complaint that he was doing business with them as Investors Exchange. The fact that Knapp had other licenses is fortuitous, and in no way affected the plaintiffs. This aspect of the case is governed by Fox v. Prime Ventures, Ltd. (1978) 86 Cal.App.3d 333, 334-337, 150 Cal.Rptr. 202, holding that where the transaction giving rise to the judgment arose out of acts for which only one license was required, recovery is limited by the amount stipulated in the statute “for any one licensee.”

As regards plaintiffs' second contention, the phrase “cause of action” in section 10474, subdivisions (a) and (b) quite clearly refers to the underlying suit, not to the application for recovery from the Fund. This is made clear by the language of section 10471, which uses the term “cause of action” in a distinct manner from the filing of a “verified application . . . for an order directing payment out of the . . . Fund.” Plaintiffs' underlying suit was filed in 1971, and their claim does not qualify for the increased limitation.

3. Commissioner's Appeal.

The trial court awarded plaintiffs costs in the amount of $226.17 against the Fund in addition to the $20,000. These costs were incurred in connection with the plaintiffs' attempts to satisfy their judgment against Knapp as a precondition to application for recovery from the Fund. The commissioner does not contest the propriety of including such costs in an order for recovery against the Fund. (See Nordahl v. Department of Real Estate, supra, 48 Cal.App.3d 657, 121 Cal.Rptr. 794), but insists that section 10474 precludes an order requiring any amount to be paid in excess of the applicable statutory limitation. We agree. Code of Civil Procedure section 1032, subdivision (a), which provides generally for costs to a plaintiff upon judgment in his favor, is subject to the limitation “except as otherwise expressly provided,” and section 10474 constitutes such an express limitation. While the amount of costs involved in this case is small, the amount in some cases could be quite substantial; and to render the Fund liable for unpredictable amounts in excess of the statutory limitations would defeat one of the legislative objectives.

The judgment is modified by deleting the provision for payment of $226.17 costs, and as so modified the judgment is affirmed. Each party is to bear its own costs on appeal.

FOOTNOTES

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

2.  It is unnecessary for present purposes to decide, and we refrain from deciding, whether the scope of issues litigable by the commissioner is any different.

3.  We granted Knapp's petition for rehearing in this matter in order to assure full consideration of the parties' views bearing upon the court's analysis of the issues presented by Knapp's appeal. Having done so, we adhere to our original opinion but take this opportunity to amplify our analysis in response to the additional arguments that have been raised.In 1968 section 10471 was amended to require a “final judgment . . . under grounds of fraud, misrepresentation, (or) deceit” (Stats.1968, ch. 330, s 1), rather than the previous “upon grounds” etc. (Stats.1963, ch. 1426, s 3). In the same year, the second paragraph of section 10473 was changed from “The judgment . . . shall be considered the only prima facie evidence and the findings of fact therein shall not be conclusive for the purposes of this article” (Stats.1963, ch. 1426, s 3) to “The judgment shall be only prima facie evidence of such cause of action and for the purposes of this article shall not be conclusive . . .” (Stats.1968, ch. 330, s 4). Knapp finds in both changes a reflection of legislative intent to restrict recovery against the Fund and (as regards the change in s 10473) to require that the judgment be one which “on its face” falls within the designated classes of fraud, etc. We find no such implication. The change from “upon” to “under” in section 10471 seems inconsequential in this context, and the change in section 10473 is equally compatible with the assumption that the Legislature intended the findings of fact in the underlying action to be binding. The 1975 amendment to section 10471, providing for determination in the case of small claims court judgments that the judgment “was based on facts constituting grounds for recovery,” is likewise compatible with our analysis. Finally, we have considered and rejected Knapp's argument that section 10473.1 deals solely with the merits of the underlying action.Nor are we persuaded by Knapp's policy argument that the underlying judgment should not be given res judicata effect because the recovery statute allows applicants a “special benefit” not accorded other judgment creditors. Rather, the fact that the Legislature has seen fit to provide special assistance to persons defrauded by state licensed brokers points markedly in the direction of an interpretation that would avoid the necessity of relitigation. Code of Civil Procedure section 1908 provides unequivocally that a “judgment . . . in respect to the matter directly adjudged” is “conclusive between the parties” and nothing in section 10473.1 calls for application of a different rule.Knapp's major arguments have to do with the effect of a judgment in the recovery action upon the broker's license. He contends, in his petition for rehearing, that section 10473.1, as construed by the court, denies him due process of law and equal protection of the laws as guaranteed by article I, section 7(a) of the California Constitution and of the Fourteenth Amendment of the United States Constitution by denying him a hearing on the merits of the underlying action. The Commissioner, on the other hand, advises the court that before a license is suspended a hearing is conducted at which the defendant has the right to defend and present evidence, including any mitigating evidence he may consider necessary or advisable. Whether such a hearing is sufficient to satisfy constitutional requirements is not an issue that can properly be decided on this appeal.

GRODIN, Associate Justice.

RACANELLI, P. J., and NEWSOM, J., concur.