STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF PROFESSIONAL ) REGULATION, DIVISION OF REAL ) ESTATE, )

)

Petitioner, )

)

vs. ) CASE NO. 86-2911

)

DAN LEE ISSACS and KEY ) REALTY MANAGEMENT, INC., )

)

Respondents. )

)

RECOMMENDED ORDER

Pursuant to notice, this cause came on for administrative hearing before P. Michael Ruff, duly designated Hearing Officer, on November 14, 1986, in Tallahassee, Florida. The appearances were as follows:

APPEARANCES

For Petitioner: James H. Gillis, Esquire

Division of Real Estate

400 West Robinson Street Post Office Box 1900 Orlando, Florida 32802

For Respondent: Elwin R. Thrasher, Jr., Esquire

Post Office Box 4351 Tallahassee, Florida 32315

Pursuant to Administrative Complaint, the Petitioner has alleged in pertinent part that the Respondents are guilty of having failed to maintain trust funds in a real estate brokerage trust account or some other depository until disbursement thereof was properly authorized and had thus violated Subsection 475.25(1)(k) , Florida Statutes, as to Counts III, IV and VII. It is further alleged, in Count V, that the Respondents used trust funds in the approximate amount of $32,334.16 for their own use and benefit or for some other use and benefit not intended by and without the prior knowledge and consent of the landlords and tenants who were entitled to those funds and that based upon this conduct, the Respondent, Dan Issacs, is guilty of fraud, misrepresentation, concealment, false promises and the other indicia of actionable misconduct enumerated in Subsection 475.25(1)(b) , Florida Statutes. Count VI realleges Count V as to the other Respondent, Key Realty Management, Inc. Count VIII contains the allegation that the Respondent, Key Realty Management, Inc., is guilty of having failed to place and maintain trust funds in a real estate brokerage trust account or some other proper depository maintained by Respondents until disbursement was properly authorized, in alleged violation of Subsection 475.25(1)(k), Florida Statutes.

At the final hearing, the Petitioner offered five exhibits, which were admitted into evidence and presented one witness. Respondent Dan Lee Issacs presented the testimony of one witness as well as his own testimony and offered two exhibits, which were admitted into evidence. At the conclusion of the proceeding, the parties requested a transcript of the proceedings and requested an extended briefing schedule. Petitioner's Proposed Findings of Fact and Conclusions of Law in the form of a Proposed Recommended Order was thus timely filed. The provisions of Rule 28-5.402, Florida Administrative Code, were waived. Each of the proposed findings submitted have been treated in this Recommended Order and are considered as well in the Appendix attached hereto and incorporated by reference herein.

The issue to be resolved in this proceeding concerns whether the Respondents are guilty of the misconduct alleged in the Administrative Complaint, whether the statutory authority pled in the Administrative Complaint was violated and what, if any, penalty is warranted.

FINDINGS OF FACT

1. The Petitioner is a State government agency charged with licensing and regulating the practice of real estate sales and brokerage in the State of Florida. Its authority under Chapter 475, Florida Statutes, includes the duty to prosecute Administrative Complaints against licensees who have allegedly violated the various provisions of Chapter 475 enumerated above.

   
   

2. The Respondent, Key Realty Management, Inc., is and was at all times material hereto a corporation licensed as a real estate broker in the State of Florida, having been issued License Number 0222667 in accordance with Chapter 475, Florida Statutes.

   
   

3. Respondent Dan Lee Issacs is an officer of and qualifying broker for the Respondent, Key Realty Management, Inc., and holds License Number 0203152. On or about September 26, 1985, Richard A. Cook, an investigator employed by the Petitioner, conducted a routine audit of the Respondents' real property rental management trust account numbered 1201145156 maintained at Barnett Bank at 315 South Calhoun Street, Tallahassee, Florida. The audit consumed about one and one-half days. The audit revealed that as of September 26, 1985, the Respondents had received in trust from their tenants, in their capacity as real estate brokers, damage and security deposits in the amount of approximately

   $76,566.46. The balance of record in that account at the time of the audit was only $44,232.30. Approximately $32,334.16 were thus unaccounted for.

   
   

4. The Petitioner's investigator, Mr. Cook, admitted in his testimony that there was no basis for him to believe that the subject funds unaccounted for had been diverted to the Respondents' own use, embezzled or otherwise improperly employed. He also acknowledged that there was no evidence of intentional misconduct in these particulars. Mr. Cook further conceded in his testimony that this prosecution stems from an increased emphasis by his agency on enforcing the requirements, concerning accounting for escrow monies, expressed in the statutory provisions pled in the Administrative Complaint in the last two years. His testimony reveals that the motivation for this prosecution, at least in part, results from that policy change. No other witness was presented by the Petitioner.

   
   

5. The Respondent presented the testimony of Gary Erdman, an accountant and computer consultant. The witness was in charge of the Respondents' accounting, records keeping and management and computer programming. He

   designed their computer system, which kept up with their rental property management records, receipts and disbursements. During November 1984 to January 1985, the Respondents' business was in the process of converting to a new computer management, data storage and processing system. They were a very busy firm, with a large number of clients and properties which they managed. They thus ran out of space on their old computer system. Mr. Erdman was unable to transfer all the old data and program of the firm to the new system and had to re-program the new system. Some information was lost and never was entered in the new system. Additionally, on July 16, 1985, a problem of an accidental nature, possibly due to lightning, damaged the hard computer data storage disk of the firm and some data, which contained the record of receipts and disbursements regarding the missing $32,334.16, was lost. There was no soft disk or other backup system for this data, so it was irretrievably lost. Mr.

   Erdman had to start trying to reconstruct the lost data at the same time he was having to keep up, on a day-to-day basis, with his records keeping and accounting responsibilities. The reconstruction process, therefore, took a substantial period of time.

   
   

6. Through this witness, the Respondents introduced their Exhibit 1, which was the claim or notice of loss to their insurance carrier as probative of and corroborative of Mr. Erdman's testimony regarding the July 16, 1985 accidental data loss. From that point it took two months after July 16, 1985, to learn from the manufacturer of the hard disk how much of the data had been lost. The Respondents had sent the hard disk to that manufacturer for repair and damage assessment. July and August of every year is the busiest time in the Respondents' rental management business. Possibly because of this they were unaware of the accounting problem regarding the $32,334.16 until it was discovered by Mr. Cook.

   
   

7. The Respondents were very cooperative with Mr. Cook and apparently were unaware of the problem until he discovered it. They immediately transferred funds to cover the deficit in the subject escrow account so that no client or entity entitled to the funds therein suffered any loss. No misrepresentation was made to any client, person or entity entitled to any funds in their escrow account concerning the use, location, depository or entitlement to any escrow funds.

   
   

8. The Respondents have now corrected the problem with their computer system and have also voluntarily changed their accounting procedures and deposit procedures so that not only loss and damage security deposits, but also rental income itself goes directly to their trust account first, before any disbursement to the landlords entitled to net rentals above the Respondents' fees and costs. Formerly, everything was deposited initially in the Respondents' operating account and then withdrawn and deposited in the escrow account, as to the security and loss and damage deposit receipts. Under the new system, however, they are able to more readily track every monetary receipt and more readily and properly account for it. This change was voluntarily made only a week or two after Mr. Cook's first visit wherein he alerted them to the problem.

   
   

9. Additionally, Respondents' Exhibit 2 reflects that apparently there was an excess of $50,000 in the subject bank account as evidenced by a bank reconciliation record contained in that exhibit, which Mr. Cook had not seen at the time of his investigation and prior to the hearing. Thus, the subject

   $32,334.16 may be somewhat overstated. Further, it was established with this exhibit that, as of October 23, 1985, one month after Mr. Cook's inspection, the subject trust account had a balance of $73,973.56. It was shown by the

   Respondent that at the time of Mr. Cook's inspection the office staff was overloaded and that transfers to the trust account were running behind schedule. Some of the deficit was merely due to non-timely deposits to the trust account, rather than funds being mistakenly placed in a different account or used for other purposes by mistake, it not having been established that any intentional wrong-doing occurred concerning the trust account and escrow account violations charged.

   
   

10. In any event, it has been established that the Respondents' new computer system of accounting and record management has alleviated the problem discovered by Mr. Cook. The Respondents have never encountered such a problem with their deposits either before or after this instance as of the time of hearing. It was established by the Respondent, Dan Issacs, who testified, that neither he nor his firm was co-mingling rental income with funds required to be retained in their trust account but rather were simply unaware of the apparent requirement that rental receipts must first be deposited in the trust account. In any event, it was established conclusively that no funds were diverted for the Respondents' own use or benefit and that all monies are now properly on deposit and are otherwise accounted for and were within a matter of several weeks after the audit and inspection. Additionally, all computer-retained records are now subjected to back-up record keeping at the present time.

    
    

    CONCLUSIONS OF LAW

    
    

11. The Division of Administrative Hearings has juris- diction of the subject matter of and the parties to this proceeding. Section 120.57(1), Florida Statutes.

    
    

12. Section 475.25(1), Florida Statutes, provides that the Commission may suspend a license for a period not to exceed ten years, may revoke it or may impose an administrative fine not to exceed $1,000 for each count or separate offense, or may issue a reprimand or any and all of the foregoing if it finds that a licensee:

    
    

    (b) has been guilty of fraud, misrepre- sentation, concealment, false pretenses, dishonest dealing by trick, scheme or device, culpable negligence or breach of trust in any business transaction, ...

    (k) has been guilty of having failed to place and maintain trust funds in his real

    estate brokerage trust account or some other proper depository maintained by him until disbursement thereof is properly authorized, ...

    
    

13. The burden of proof herein is on the Petitioner. Balino vs. U.S. Department of Health and Rehabilitative Services, 348 So.2d 349 (Fla. 1st DCA 1977). Revocation of license proceedings are penal in nature. State ex. rel. Vining vs. Florida Real Estate Commission, 281 So.2d 487 (Fla. 1973). The burden of proof required of Petitioner has not been met. See Santowski vs. Kramer, 102 So.2d (1333 at 1396)(1981); Addington vs. Texas, 441 U.S. 424, 99 S.Ct. 1808; School Board of Escambia County vs. James Martin, Case No. 86-1189 (Recommended Order entered 11/25/86)

    
    

14. The offense under Subsection (b) quoted above involves fraud, misrepresentation, concealment, dishonesty, false pretenses and the like, all of

    which species of misconduct involve the element of scienter or intent. Shelton vs. Florida Real Estate Commission, 120 So.2d 191 (2nd DCA 1960). It is obvious from the Petitioner's witness' own testimony as well as the evidence adduced by the Respondent that no intentional wrong- doing or misrepresentation or other offense enumerated under Subsection (b) quoted above, has been established to have occurred. It likewise has not been established that the Respondents were guilty of having failed to place and maintain trust funds in the proper account or "other proper depository." It rather has been demonstrated that the records of the accounting of those funds were deficient or non-existent for a relatively short period of time, but that that problem was alleviated.

    
    

15. Be that as it may, the lack of records or the inappropriate condition of the records of trust fund or other depository account receipts and deposits is not an element of the charges in the Administrative Complaint. It has not been proven that the Respondents failed to deposit funds in and maintain trust funds in the proper accounts or depository. The proof merely shows that through inadvertence, neglect or accident the record of the deposits and disbursement of some of the trust funds was not maintained. In any event, none of the funds were shown to have been subjected to the personal benefit or use of the Respondents. Accordingly, it must be concluded that the charges in the Administrative Complaint have not been established and that the Complaint should be dismissed in its entirety.

RECOMMENDATION

Having considered the foregoing Findings of Fact, Conclusions of Law, the evidence of record, and the candor and demeanor of the witnesses, it is, therefore

RECOMMENDED that the Administrative Complaint filed against Dan Lee Issacs and Key Realty Management, Inc. be dismissed in its entirety.

DONE and ENTERED this 13th day of May, 1987, in Tallahassee, Florida.

P. MICHAEL RUFF Hearing Officer

Division of Administrative Hearings The Oakland Building

2009 Apalachee Parkway

Tallahassee, Florida 32399

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 13th day of May, 1987.

APPENDIX TO RECOMMENDED ORDER, CASE NO. 86-2911

Petitioner's Proposed Findings of Fact:

1. Accepted.

2. Rejected as irrelevant. 3-5. Accepted.

1. Accepted, except as to specific amounts which are found in the Recommended Order.

2. Accepted, but not dispositive.

3. Rejected as not in accordance with the greater weight of the evidence.

4. Accepted.

COPIES FURNISHED:

James H. Gillis, Esquire Division of Real Estate

400 West Robinson Street Post Office Box 1900 Orlando, Florida 32802

Elwin R. Thrasher, Jr., Esquire Post Office Box 4351 Tallahassee, Florida 32315

Van Poole, Secretary Department of Professional Regulation

130 North Monroe Street Tallahassee, Florida 32399-0750

Joseph A. Sole, Esquire General Counsel

Department of Professional Regulation

130 North Monroe Street Tallahassee, Florida 32399-0750

Harold Huff, Executive Director Division of Real Estate

400 West Robinson Street Post Office Box 1900 Orlando, Florida 32802

Docket for Case No: 86-002911

Orders for Case No: 86-002911