In Re Charles Armstrong, Debtor, Charles Armstrong, Helen Armstrong v. Department of Real Estate, State of California

I.

Defendant-Appellant Department of Real Estate, State of California (Department) appeals from the district court’s order granting plaintiff-appellee Charles Armstrong (Armstrong) $20,000 from California’s “Real Estate Recovery Fund” (the Fund). This is an adversarial proceeding in bankruptcy in which the substantive law of California applies. We reverse.

II.

Armstrong brought this action for fraud in the district court against Flynn Realty, Inc. (“Flynn”), a debtor in Chapter 11, and several individuals (some of whom were Flynn employees) contending they made misrepresentations which induced him into making an unprofitable investment in real estate. Soon thereafter, the parties reached settlement; Armstrong dismissed the action against the individual defendants in exchange for Flynn’s agreement to stipulate to a judgment for Armstrong with damages in the amount of $100,000.

Thereafter, Armstrong joined the Department in this matter as a defendant. He also requested that the district court order, pursuant to CaLBus. & Prof.Code § 10471 (West 1987), that the Department pay the damages resulting from Flynn’s conduct from the Fund. The Fund pro vides recovery of unpaid judgments…