As many practitioners know, the California BRE requires that brokers retain client files for no less than three (3) years (Business and Professions Code Section 10148(a)), but that regulation should not be viewed as a license to shred on every three (3) year anniversary (especially for transactions subject to dispute, or involving the broker as a party).
FACTS
Broker ("B") engages in a number of transactions representing Principal ("P") in the purchase of small commercial buildings. P also engages in a number of hard money loans to 3rd parties, with B preparing the loan agreements and notarizing those agreements. Toward the end of these transactions B loans P some money (in cash) during a heavy tax year, which is documented with a "note" signed by P. Later the same year P repays B with a check, but does not designate on the check or the note that the check was intended as a repayment of the note. B did not retain banking records reflecting the original cash loan, or record on the check or note that the check was a repayment of the note. At roughly the same time, one of the loans made by P to a 3rd party goes bad. P and B stop talking to one another as a result of the bad financial outcome for P.
Almost six (6) years later, P appears at B's office demanding that B repay the bad debt of the 3rd party borrower, and B refuses. P thereafter files a lawsuit, with a forged "note," claiming that the check was actually money deposited in "trust" for another real estate transaction that B had allegedly converted for himself. Unfortunately, B was forced to defend the matter through trial. (For the attorney's reading this, the statute of limitations was wrongfully determined to have been tolled until the date of the first demand for return of the alleged trust deposit.)
HOW COULD THIS BE AVOIDED IN THE FUTURE
While you can't do anything to prevent people from committing perjury or filing forged documents with the Court, you can hold onto the documents that reflect the inconsistency of the other party's story. The only real defense to a perjurer is to document your transactions thoroughly in the same way every time, and hold onto those documents until you are certain that the claim is dead. (Hint: When you know someone is angry with you and may be looking for a way to sue, the claim is never truly dead.)
Documenting the transaction means having some document that identifies what your agreement is. If you undertake the representation of a buyer, using a buyer-broker agreement that identifies what you are going to do and for how long.
Documenting the transaction means, when you accept a trust deposit for a particular task, you issue a receipt that identifies what the deposit is for, and you note the deposit and reconcile the trust account regularly.
Documenting the transaction means, when you have a conversation where someone makes an unreasonable demand on you, or misrepresents facts as part of a demand, you or your attorney should document that exchange, and consider legal action to resolve the dispute.
Finally, documenting the transaction means, when two documents are related (e.g. note and payment on the note) there should be some indication on one or both of the documents that reflects their relationship. It doesnt take much to fill in the "memo" portion of a check, and that little memo can make all the difference in the world!
