JOSEPH CAIRONE INC v. STATE REAL ESTATE COMMISSION REAL ESTATE RECOVERY FUND (1997)

The Commonwealth of Pennsylvania's Bureau of Professional and Occupational Affairs, Real Estate Commission (Commission) appeals from an order of the Court of Common Pleas of Philadelphia County (common pleas court) directing the Commission to pay to Joseph A. Cairone, Inc. (Cairone) the sum of $125,000 from the Real Estate Recovery Fund (Fund).   We affirm in part, and reverse in part.

On September 14, 1987, Cairone instituted a civil action against Edward M. Frey, Inc. (Frey Realty), Edward M. Frey (Frey), John R. Whitham (Whitham) and Brighton Corporation (collectively, the Agents) alleging fraud, misrepresentation and breach of contract while acting as real estate agents pursuant to the Real Estate Licensing and Registration Act (Act).¹  Cairone seeks recovery pursuant to Section 803 of the Act, 63 P.S. § 455.803.

The Agents were licensed real estate brokers and held a non-exclusive listing agreement with the owner of certain parcels of land in Philadelphia.   The Agents contacted Cairone and expressed their intentions to buy and develop the parcels.   The Agents, on behalf of the owner, prepared a sales agreement with Cairone as the buyer-developer.   The Agents were to receive additional commissions for each home developed and sold by Cairone.   Subsequent to the agreement but before Cairone developed the land, the Agents sold the parcels to another party and received greater fees than they would have under the agreement with Cairone.

After a trial by jury, the jury found that a partnership existed between Cairone and Frey Realty and that Frey Realty breached its fiduciary duty as partner.   The jury returned a verdict in favor of Cairone in the amount of $198,000 for lost profits.   The jury found against Frey Realty, Frey and Whitham, on the fraud count, in the amount of $100,000, and $20,000 for negligent misrepresentation.   The jury also awarded punitive damages in the amount of $12,500, each against Frey Realty and Frey, and $30,000 against Whitham.

Cairone asserted he exhausted all reasonable efforts to collect on the judgment and requested relief from the Fund. Common pleas court approved the civil action under the Act and directed the Fund to pay $20,000 for each of the four claims against the Agents and $45,000 as a result of the punitive damages awarded by the jury.   Order of the Court of Common Pleas, September 10, 1996 (Order);  Reproduced Record (R.R.) at 520a.   The Commission appealed to this Court.²

The issues before this Court are whether the business arrangement between Cairone and the Agents was a “transaction” within the meaning of the Act, whether common pleas court erred in determining that Cairone exhausted all reasonable means to collect from the Agents and whether public policy prohibits recovery of punitive damages from the Fund, a state agency.³

When a person obtains a final judgment against a person licensed under the Act upon grounds of fraud, misrepresentation or deceit, the aggrieved person may upon termination of all proceedings, including reviews and appeals, file an application in the court in which the judgment was entered for an order directing payment of unpaid portions of the judgment.   Section 803 of the Act, 63 P.S. § 455.803.

The common pleas court determined the Agents were licensed real estate brokers and the proposal was submitted to Cairone by the Agents, acting as real estate brokers.   Opinion at 4;  R.R. at 537a.   Our Pennsylvania Superior Court, in ruling on the validity of the jury awards, determined that “the purchase agreement, dated January 10, 1985, was prepared by Whitham and executed by Frey, for [Frey] Realty, and Joseph Cairone, Sr., for [Cairone] as buyers.   After some adjustments by the seller, the agreement was signed settlement was scheduled for April 30, 1985”.  Joseph A. Cairone, Inc. v. Edward M. Frey Realty, Inc., et al, No.1981 Philadelphia 1993, filed March 8, 1994, Slip Opinion at 13, 435 Pa.Super. 618, 644 A.2d 802;  R.R. at 93a.   We agree that the business arrangement was a transaction under the Act.

Next, for a transaction to come under the guidance of Section 803 of the Act, 63 P.S. § 455.803, the aggrieved party must establish the following requirements:

1. he is not a spouse or representative of a spouse of the debtor;

2. he has obtained a final judgment;

3. all reasonable personal acts, rights of discovery and other such remedies at law and equity as exist have been exhausted in collection thereof;

4. the application must be within one year of the termination of all proceedings.

The parties agree that requirements one, two, and four of the Act were satisfied.   The common pleas court determined that requirement three was satisfied, based on testimony from Cairone, the discovery in aid of execution, and the affidavits by the Agents as to their assets.   Opinion at 3;  R.R. at 536a.⁴

The test of reasonableness is aptly stated in Murphy v. Today's Properties Ltd., 673 A.2d 6 (Pa.Cmwlth.1996) and is on all fours with this case.   In Murphy, this Court held that the test for determining reasonableness in the quest for discovery does not require exhaustive acts.   Id. at 11.   The Record indicates that Cairone engaged in extensive discovery in an attempt to uncover any available assets of the Agents.⁵  All assets discovered were either encumbered, exempt from execution or of nominal value.   The Commission failed to establish the existence of any assets that Cairone could access.   Opinion at 3;  R.R. at 536a.

Section 803(d) of the Act, 63 P.S. § 455.803(d), provides that recovery under the Fund shall not exceed $20,000 for any claim, nor $100,000 against any one licensee.   The common pleas court made separate awards for three claims of fraud and a claim for negligent misrepresentation for a total of $80,000.⁶  The common pleas court was within its discretion in fixing liability for the four tort claims against each of the Agents at $20,000 maximum for each claim.

We do not agree with the common pleas court in its determination that punitive damages are recoverable under the Fund. The purpose of punitive damages is to punish the wrongdoer for his outrageous conduct and deter him and others from engaging in similar conduct in the future.  Feld v. Merriam, 314 Pa.Super. 414, 461 A.2d 225 (1983).   To surcharge the Fund for punitive damages punishes the taxpayer who took no part in the commission of the tort.  Feingold v. Southeastern Pennsylvania Transportation Authority, 512 Pa. 567, 517 A.2d 1270 (1986).

The Fund is financed by every person who obtains a real estate license.   Section 802 of the Act, 63 P.S. § 455.802, states that payment of punitive damages, fees, interest and costs is not authorized under the Act. In the absence of legislative authority, punitive damages are not recoverable against a state agency.   Accordingly, we affirm the determination of the common pleas court that granted Cairone's application for payment of $80,000 from the Fund as a result of the claims for fraud and misrepresentation.   We reverse the determination permitting recovery for punitive damages.

ORDER

AND NOW, this 5th day of December, 1997, the order of the Court of Common Pleas of Philadelphia County at Number 7567, March Term, 1987, dated September 10, 1996, is affirmed as to the determination that the amount of $80,000 is recoverable by Cairone, Inc. pursuant to the Real Estate Recovery Fund.

We reverse the determination by the Court of Common Pleas permitting any recovery for punitive damages.

FOOTNOTES

1.   Act of February 19, 1980, P.L. 15, No. 9, as amended, 63 P.S. §§ 455.101-455.901.

2.   Pa. R.A.P. No.1925, provides that upon receipt of a notice of appeal the judge who entered the order “shall forthwith file of record a brief statement in the form of an opinion”.   On December 3, 1996, common pleas court issued an opinion.   Opinion of the Court of Common Pleas, December 3, 1996 (Opinion) at 1-6.

3.   Our review is limited to determining whether the trial court abused its discretion, committed an error of law, or made findings of fact not based on substantial evidence.  Jones v. Whiting, 152 Pa.Cmwlth. 297, 618 A.2d 1213 (1992).

4.   Property searches were run with respect to all Agents.   The searches determined that any asset was either jointly held and exempt from execution, or contained insufficient equity to justify incurring the costs and expenses of prosecuting collection efforts.   Discovery indicated that a majority of the assets of the individual Agents were either jointly held with their spouses, exempt by law from execution, or encumbered to the point of nominal value.   As to the Frey Realty, the largest assets were held in escrow for third parties pursuant to agreements of sale and not available for execution.   Items of personalty were determined to be of nominal value.   Certification to Common Pleas Court, May 21, 1996;  R.R. at 277a-461a.

5.   Information on Whitham included copies of tax returns, a summary of bank accounts and corporations owned, copies of deeds and listings of business contracts.   Information on Frey included property owned, and bank account information.   A search of the assets of Frey Realty revealed no assets.

6.   The $80,000 award represented $60,000 for the fraud claims and $20,000 for the misrepresentation claim.

McGINLEY, Judge.

SMITH, J., dissents. LEADBETTER, J., did not participate in the decision in this case.