Thursday, November 30, 2017

reasonable consumers expect real estate agents to be licensed, but remedies are still limited by the 1A

People ex rel. Flippo v. Silva, 2017 WL 5712601, No. H041209 (Cal. Ct. App. Nov. 28, 2017)

Susana Silva operated Estates on the Bay, which advertised itself as a professional real estate company, while her real estate broker’s license was revoked. Defendants’ activities included grossly overstating a borrower’s income on mortgage loan applications.  After a bench trial, the court found violations of the FAL and UCL and awarded civil penalties, restitution, and injunctive relief. The court of appeals upheld the liability finding but remanded on the remedies.

Defendants argued that Estates on the Bay’s website wouldn’t confuse reasonable consumers into thinking Silva had a valid real estate license, as she was required to do in order out to carry out real estate brokerage or selling.  The website had a page entitled “My Resume,” and the top of the webpage stated, “Estates on the Bay - A Professional Real Estate Company.” The body included: “Our experience in the Real Estate industry will provide you the knowledge and expertise that you need throughout the entire buying or selling process. As you choose one of our real estate agents, and/or loan agents our job to you is to price your home effectively from day one ….”  Defendants argued that there was no reference to Silva, and that even if “the use of the first-person-plural to refer to a corporation and its agents is somehow flawed, it is at most the mildest of innocuous puffery posing none of the risks the [false advertising law] protects against.”

Likely deception is generally a question of fact.  The court of appeals found that the website wasn’t too vague to be actionable: “a reasonable consumer would expect that a corporate entity holding itself out as a professional real estate company and offering real estate services requiring a license would in fact have the necessary license(s) to carry out those services, and specifically that all its agents/employees who were carrying out those services would be licensed to the extent necessary to lawfully conduct those services.”  Given the trial court’s findings that Silva violated the licensing law, and that Estates on the Bay permitted this, substantial evidence supported the liability finding.

As for the UCL, the violation was in connection two mortgage loans that they brokered for one borrower, Rosa, by deliberately and knowingly overstating Rosa’s income on mortgage loan applications to induce the lenders to fund the loans. These overstatements unjustly enriched defendants at Rosa’s expense, and that the practices were “a repeat by Silva of the very conduct which led the [Department of Real Estate] to revoke her license.” However, the court apparently imposed a separate penalty for every day the sales were pending, for a total of $21,500.  The UCL allows the People to ask for “a civil penalty not to exceed two thousand five hundred dollars ($2,500) for each violation.” “In assessing the amount of the civil penalty, the court shall consider any one or more of the relevant circumstances presented by any of the parties to the case, including, but not limited to, the following: the nature and seriousness of the misconduct, the number of violations, the persistence of the misconduct, the length of time over which the misconduct occurred, the willfulness of the defendant’s misconduct, and the defendant’s assets, liabilities, and net worth.”

What a “violation” is must be determined case by case, and can be calculated per victim or per act. The amount is reviewed for abuse of discretion.  The court assumed that it would have been proper for the court to determine that there were two violations based on income misrepresentations in loan applications that induced the funding of two loans, or that there were three violations based on three victims (Rosa and the two lenders), or that there were four violations based on income misrepresentations affecting Rosa and a lender as to each of the two properties.  However, the evidence didn’t support the conclusion that false income representations were made to one or more victims on a daily basis for 86 days. Thus, the court remanded for recalculation.

An order of restitution to Rosa was affirmed, in the amount of $29,575, based on the commissions defendants received for brokering the loans and for a “yield spread premium” they received for getting her to take a higher interest rate than her credit entitled her to. Though defendants argued that she got what she paid for—refinancing—the court accepted the argument that the loans were only issued because of the misrepresentations.  However, Rosa was not entitled to recovery of a prepayment penalty in connection with paying off the existing mortgage that she refinanced through defendants.  The UCL allows recovery of restitution, not compensatory damages, and the prepayment penalty went to the bank, not to the defendants.  However, the court pointed out that this could potentially be considered in setting the amount of the civil penalty.

In terms of injunctive relief, the court of appeals affirmed the imposition of recordkeeping requirements on defendants.  The court also ordered “Silva and [her codefendant and sister] Gobert shall not jointly engage in the sale (this specifically includes acting as real estate agents or brokers) or financing (specifically including, but not limited to, originating, negotiating or soliciting loans) of real estate.” Defendants argued that this interfered with their constitutional rights to engage in lawful work and their constitutional rights to association as sisters.  But they didn’t have a constitutional or statutory right to work with each other in real estate. They could individually work in real estate, if they complied with the rest of the injunction, and they could associate with each other; along with the ability to modify the injunction over time, that was enough.  Defendants’ argument that they’d already dissolved the business didn’t matter, given their past behavior of violating the law after Silva’s license revocation (of which Gobert knew).  Even assuming that the injunction burdened the constitutional right of association, it was no more than necessary to serve the compelling interest in protecting the public.

Defendants also challenged two aspects of the injunction as unconstitutional prior restraints: (1) a requirement that they use their best efforts to remove any reference to Silva’s broker’s license from all media, including electronic media and social or business websites, such as LinkedIn, Facebook and Google and (2) a requirement that they submit any real estate-related advertising to the Monterey County District Attorney’s Office at least 15 days in advance of publication.  “[A]n injunctive order prohibiting the repetition of expression that ha[s] been judicially determined to be unlawful [does] not constitute a prohibited prior restraint of speech,” but such an order must be in the narrowest terms that will accomplish a permissible goal.  Under this standard, the ban on any advertising about real estate services, property management, or real estate financing without first obtaining written consent from the district attorney or a court order was too broad: the injunction required preapproval of (1) advertising that could be unrelated to activities requiring a real estate license, and (2) advertising that didn’t contain any reference, express or implied, to Silva’s licensing status. The court of appeals remanded for tailoring more closely to the unlawful conduct in this case. Likewise, requiring the removal of any reference to Silva’s broker’s license from all media also was broader than necessary. “For example, to the extent the reference to her license includes the start and end dates of her licensure, the representation might not be false or misleading depending on the context.” 

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