The real estate recovery fund is known as funds used for the reimbursement of aggrieved persons who suffer monetary damages due to acts committed by licensed real estate brokers or salesmen. As long as such act was performed by a broker or salesman.
It was founded by the legislature to make available funds to victims of fraud, misrepresentation and deceit committed by real estate licensees, where the victims are more or less unable to recover on a court judgment.
Note that various jurisdictions have established statutory real estate recovery funds to protect the public by covering certain types of judgments against licensed real estate brokers, their agents, and salespersons in cases where the aggrieved party would otherwise go unpaid.
In the United States, only a buyer who has been awarded a judgment in a court of competent jurisdiction against a licensed real estate salesperson, broker, or firm (“licensee”) may be eligible to file a claim.
Have it in mind that the court judgment is expected to be obtained against an individual or entity licensed by the state’s Real Estate Board and is expected to be based upon the improper or dishonest conduct of the licensee.
Also, any language in the judgment supporting the conclusion that the court found the conduct of the licensee involved improper or dishonest, may be used by the Board to determine eligibility for recovery from the Fund.
“Improper or dishonest conduct” tends to include only the wrongful and fraudulent taking or conversion of money, property, or other things of value or material misrepresentation or deceit. Also note that any disciplinary action taken against a licensee by the Real Estate Board does not, by itself, satisfy any statutory requirements to support a Recovery Fund claim.
In a scenario where the real estate licensee has filed bankruptcy, the aggrieved buyer or claimant is expected to first file a claim with the proper bankruptcy court. If no distribution is made, or if the distribution fails to satisfy the claim, the consumer may then file a Recovery Fund claim with the Board.
In the United States, once the court order is silent on the matter of the licensee’s conduct, the Board is then tasked with determining whether the conduct was improper and dishonest and what amount, if any; such claimant is entitled to recover from the Fund.
Also note that the real estate salesperson, broker, or firm is expected to have been licensed during the period in which the improper or dishonest conduct occurred. The conduct is also expected to have occurred in connection with a transaction involving the sale, lease, or management of real property by the licensee acting in the capacity of a real estate broker or real estate salesperson, and not in the capacity of a principal.
People Prohibited From Filling a Recovery Fund Claim
Although regulations tend to differ by state, most state laws prohibit the following from filing a Recovery Fund claim:
- A real estate licensee;
- The personal representative of a real estate licensee;
- The spouse or child of the licensee who is the subject of the claim (the licensee against whom the judgment was awarded), nor the personal representative of such spouse or child; or
- Any lending or financial institution, nor anyone whose business involves the construction or development of real property.
Requirements needed to be met to have a Valid Claim against the Recovery Account
When an aggrieved buyer takes any legal action against a real estate licensee, the Clerk of Court is expected to notify the State board charged with administering Real Estate Recovery Fund. The board in the state is expected to receive a copy of the notice served on the licensee. An affidavit stating the acts of improper or dishonest conduct of the licensee must be included with the notice given to the Board.
Once the aggrieved buyer obtains a judgment from a court, the buyer is first expected to attempt to collect from the licensee by conducting debtor interrogatories. This legal action determines whether the licensee has any assets which can be sold or applied to satisfy the court judgment. If any assets are revealed by the interrogatories, the consumer must provide evidence that all legally available actions have been taken to sell the assets, and disclose amounts realized from such actions.
However, aside the fact that a buyer is expected to exhaust all other methods of recovery, such as recovery under title or errors and omissions (E&O) insurance, a variety of requirements must be met in order to have a valid claim against the Recovery Account. These requirements, which may also vary across board, may include;
- A final judgment is expected to have been obtained already, either in court or through an approved arbitration procedure. This simply means that no one is required to go to the account to start arguing the merits of the case itself.
- The claimant is also expected to have pursued collection efforts against the judgment debtor already and, in situations where it is appropriate, against “all other persons liable to the claimant in the transaction that is the basis for the underlying judgment. ”Note that one does not obtain the judgment and then proceed directly to the Recovery Account.
- The judgment debtor is expected to have been a real estate licensee at the time the underlying transaction occurred. Even though this requirement seems simple enough, it has sometimes been an occasion for dismay. For instance, imagine the judgment debtor’s license had been expired at the time of the transaction, or that the person never had a license in the first place – that he was an imposter – the Recovery Fund could not pay on the claim.
- The judgment debtor is expected to have been performing acts for which a real estate license was required. The judgment is also expected to have been based on a real estate transaction. You couldn’t go to the Recovery Fund because a real estate licensee had stolen your car.
- In addition, not only is the acts expected to have been related to a real estate transaction, but also they must have involved fraud, misrepresentation, deceit, or a conversion of trust funds. This is a very specific requirement, and was confirmed in an appellate court decision (Yergan v. Department of Real Estate, California Second District Court of Appeal, and January 25, 2000). Note that in that case, the judgment was based on negligence and breach of duty. The court upheld the DRE’s refusal to pay a Recovery Account claim, because the judgment was not based on fraud.
Aggrieved buyers should always note that obtaining assistance from the Recovery Fund is not a swift process, and occurs only after all other civil legal remedies are exhausted. The recovery fund only offers relief to eligible consumers who have incurred losses through the improper or dishonest conduct of a licensed real estate salesperson, broker, or firm. The Recovery Fund is supported entirely by assessments paid by licensees, not by any tax revenues.
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