STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF PROFESSIONAL )

REGULATION, DIVISION OF )

REAL ESTATE, )

)

Petitioner, )

)

vs. ) CASE NO. 92-1266

)

ARTHUR B. KARNS, and KARNS )

REAL ESTATE, INC., )

)

Respondents. )

)

RECOMMENDED ORDER

A hearing was held in this case in West Palm Beach, Florida on June 23, 1992 before Arnold H. Pollock, a Hearing Officer with the Division of Administrative Hearings.

APPEARANCES

For the Petitioner: James H. Gillis, Esquire

DPR, Division of Real Estate

400 W. Robinson Street

P.O. Box 1900 Orlando, FL 32801

For the Respondent: Arthur B. Karns, pro se

Karns Real Estate, Inc. 6346-63 West Lantana Rd. Lake Worth, FL 33463

STATEMENT OF THE ISSUES

The issue for consideration in this case is whether the Respondents' licenses as real estate broker and brokerage corporation, respectively, should be disciplined because of the matters set out in the Administrative Complaint filed herein.

PRELIMINARY MATTERS

By Administrative Complaint dated January 27, 1992, the Division of Real Estate, for the Florida Real Estate Commission, alleges in eight Counts that both Respondents violated various provisions of Section 425.25(1), Florida Statutes, and Rule 21V-14.012, F.A.C. by being guilty of misconduct or culpable negligence in a real estate transaction; by failing to properly maintain trust funds; by failing to keep and make available all required books and records of the brokerage; and by failing to prepare and sign required monthly escrow account reconciliations for the brokerage.

Respondent requested a formal hearing on the allegations and by letter dated February 21, 1992, the file was forwarded to the Division of Administrative Hearings for appointment of a Hearing Officer. On April 3, 1992, after the responses to the Initial Order entered herein, Hearing Officer William R. Dorsey, Jr. set the matter for hearing in West Palm Beach on June 23, 1992 at which time it was held as scheduled by the undersigned to whom the matter was transferred in the interim.

At the hearing, Petitioner presented the testimony of Sharon Thayer, an investigator with the Division of Real Estate; Charles S. Geil, formerly an investigator; and the Respondent, Arthur B. Karns. Petitioner also introduced Petitioner's Exhibits 2 - 9. Petitioner's Exhibit 1 was identified but withdrawn. Respondent Karns testified in his own behalf and also called Ms.

Thayer and Mr. Geil. He also introduced Respondent's Exhibits A through T. The undersigned officially recognized Rule 21V-14, F.A.C..

A transcript was provided and subsequent to the hearing both parties submitted Proposed Findings of Fact which have been ruled upon in the Appendix to this Recommended Order.

FINDINGS OF FACT

1. At all times pertinent to the issues herein, the Florida Real Estate Commission was the state agency responsible for the licensing and regulation of real estate salespersons, brokers, and brokerage operations in Florida. The Respondents, Arthur B. Karns and Karns Real Estate Inc., were a licensed real estate broker and brokerage corporation, respectively.

   
   

2. Sharon Thayer has been an investigator with the Florida Department of Professional Regulation's Division of Real Estate for over 3 1/2 years. As a part of her duties, she is required to conduct random, no-notice inspections of real estate brokerage offices in Florida. As a part of these inspections, she conducts audits of the broker's escrow account and over time has conducted approximately 1,000 audits. In her audits, she follows a standard audit procedure to reconcile the trust liability of the broker with the escrow account bank balance.

   
   

3. In early September, 1991, Ms. Thayer conducted an escrow audit and office inspection of the Respondent's company. During her initial visits, on September 3 and 5, 1991, she requested he furnish her with the office records pertinent to his trust escrow account. Respondent promptly provided most of the records excepting only the account reconciliation forms required by the Commission. When Respondent provided Ms. Thayer with the records, including what he felt were the reconciliations, she reviewed them and then discussed them with him, indicating wherein they were deficient and what, in addition, she would need.

   
   

4. In her initial report, completed on the conclusion of the initial visit, she indicated there was an overage of $3,452.75 in the Respondent's escrow account. This figure was in error. She also noted that Respondent was not accounting for his trust liability and indicated he had 5 days in which to take corrective action and provide documentation of the action taken.

   
   

5. When she returned for a follow-up visit on September 20, 1991, Ms. Thayer noted that the original note of overage had been in error and that the account now balanced. To achieve balance, however, she referred to the original

   $500.00 in seed money Respondent had used to open the escrow account. This

   covered errors in the account as of December, 1990 and service charges. Without this, she noted, the account would have been short by $446.45.

   
   

6. Ms. Thayer determined that the Respondent had opened his escrow account with $500.00 of his own funds as seed money. She contend this was improper as the Department allows only $200.00 of seed money which is to be reported each month on the account reconciliation. The $200.00 "limit" is relatively recent. At the time in issue, she claims, the "limit" was set, by unwritten, unpublished Department policy, at $100.00. The only evidence of the existence of such a policy is an article in the Fall, 1991 FREC newsletter, written by Howard M. Gunter, Jr., then Chairman, which notes:

   
   

   There is an unwritten rule that currently allows a broker to keep a minimum amount in his escrow account to cover bank charges,

   ....

   
   

7. The April, 1992 edition of the Central Palm Beach County Association of Realtors' Realtor Review advises of new FREC rules, one of which allows a broker to maintain up to $200.00 of his own or the company's funds in the escrow account to keep it open or to pay for bank monthly service charges.

   
   

8. Ms. Thayer's investigation also appeared to indicate that in January, 1991, Respondent disbursed an $850.00 security deposit to lessors of a rented unit when the actual deposit collected was only $500.00. This was also determined to be in error. The evidence demonstrates that on January 3, 1991, Respondent drew check number 1040 on his escrow account to open an escrow account for the Alexandre to Livingston rental. The deposit of $1,700.00 in that case included an $850.00 security deposit. This money was not disbursed to the client, however, as it was placed in an escrow account for that lease. In any case, the security deposit should have been only $500.00 as that was all that had been collected by the prior agent and transferred to the Respondent. When the deposit was made here, Respondent, whose practice was to collect the first and last month rent in advance, along with a security deposit of one month rent, mistakenly assumed the prior agent had done the same. When he learned of his mistake, by letter dated September 13, 1991, he notified the Alexandre's of the mistake and noted the excess $350.00 would be paid back to Karns Real Estate, Inc. Therefore, the extra $350.00 in the trust account had been placed there by Respondent from his own funds, not from any client funds and was due back. Since the $96.45 in bank charges were also accounted for previously and deducted, there was in actuality no shortage.

   
   

9. Ms. Thayer also discovered that with regard to two contracts for the sale of real property, both dated in early May, 1991, between E. Buwalda as seller and Ronald Cecere as buyer on one, and Cecelia Barraclough as seller and Jeanne Cecere as buyer on the other, $100.00 in cash was accepted as a partial down payment on each, with each contract calling for an additional deposit of

   $2,900.00. A special clause in each contract provided:

   
   

   The purchaser will post a Certificate(s) of Deposit with a face amount of at least

   $3,000.00 with Karns Real Estate, Inc. to be held in escrow as and for the $2,900.00 additional deposit. The Certificate(s) of Deposit can be returned to the Purchaser if and when the Purchaser posts $2,900.00 in cleared funds to cover the additional deposit.

10. In fulfillment of that clause requirement, the Ceceres deposited with the Respondent CD Numbers 020002358756 and 020002359408, from Nova Savings Bank, each in the amount of $2,000.00, the former dated October 24, 1990 and the latter dated December 3, 1990, both showing Jeanne A. Cecere as trustee for Patrick J. and Ronald P. Cecere. The certificates also reflected they were "Not Transferable except on the books of Nova Savings Bank." By his own admission, at no time did Respondent notify either of the sellers that the certificates he held on their behalf as additional deposit were not transferable outside the Nova Savings Bank.

    
    

11. At the same time he received the certificates as deposit on the Barraclough property, Respondent also received an additional $1,000.00 in cash to constitute the balance of the $3,000.00 deposit called for in the contract. Aside from a letter from the Ceceres' chastising the Department for its action against Respondent and expressing outrage that the agency should have a negative opinion as to the propriety and legality of the Respondent's activities, there is no independent evidence of any additional deposit placed with regard to the Buwalda contract. In any event, when the matter was noted by Ms. Thayer, the Ceceres, by checks dated September 5, 1991 in the amounts of $1,900.00 each, made payable to Karns Realty, Inc., replaced the two certificates.

    
    

12. When Ms. Thayer discussed this matter with Mr. Karns, he seemed surprised at her concern. He indicated he felt accepting the certificates was the same as taking jewelry as security. However, he promised to get replacement security and, as was seen, did so immediately.

    
    

13. Ms. Thayer was also concerned about the Respondent's apparent inability to properly reconcile his escrow account with the related bank balance. Her audit revealed he was using a lengthy, self-developed form to balance the checking account statement but this is not enough. There is no requirement that any particular form be used, but the Commission had developed a sample form which contains all the information required in a proper reconciliation and Department rules set out those requirements.

    
    

14. On May 13, 1991, the Department of Professional Regulation, in a letter to all real estate brokers, indicated the concern of the Commission that brokers be aware of and comply with their responsibilities regarding monthly escrow account reconciliation. The letter cited the provisions of Commission Rule 21V-14.012 which, while noting there is no official form to be used, reminds brokers the reconciliation must contain certain required information. The sample form, referenced above, requires a bank reconciliation and, in addition, a trust liability reconciliation. Ms. Thayer concluded Respondent had, indeed, completed a full bank reconciliation, but had not completed the additionally required trust liability reconciliation and merged the two. Notwithstanding Respondent's continuing protestations that he had done a complete reconciliation, the evidence indicates rather that he has not. As Respondent's own exhibit, an extract from the 1991 Gaines & Coleman continuing education book points out at paragraph 23 on page 7, the provisions of the rule on escrow reconciliation "is much more than a mere balancing of checkbook accounts." The evidence demonstrates Respondent did no more than that and his reconciliations were not adequate.

    
    

15. Mr. Geil, who assisted Ms. Thayer in the audit, has reviewed between

    100 and 150 offices in addition to Respondent's office. Of all of these, he would rate Respondent among the 5 or 6 brokers who did the most detailed

    reconciliations, but he cannot say, from what he saw of Respondent's records, whether Respondent was making a bona fide effort to do an accurate reconciliation.

    
    

16. It is clear, however, that, as Respondent repeatedly asserted at hearing, everyone makes mistakes, and Respondent's delicts, established by the evidence, do not show any fraudulent or criminal intent. As Ms. Thayer noted, she found no evidence of fraud, theft or an abuse of trust money for Respondent's own purposes, and the Commission has received no complaints about him from any of his clients.

    
    

    CONCLUSIONS OF LAW

    
    

17. The Division of Administrative Hearings has jurisdiction over the parties and the subject matter in this case. Section 120.57(1), Florida Statutes.

    
    

18. In its eight Count Administrative Complaint, Petitioner seeks to discipline Respondents' licenses as a real estate broker and brokerage corporation respectively for various alleged acts of misconduct, all of which, if proven constitute violations of Section 475.25(1), Florida Statutes. To successfully do so, however, Petitioner must establish the Respondents' guilt of each incident of alleged misconduct by clear and convincing evidence. Ferris v. Turlington, 510 So.2d 292 (Fla. 1987).

    
    

19. Section 475.25 (1), Florida Statutes, in pertinent part, authorizes the Florida Real Estate Commission to discipline a licensee's license if it can show the licensee:

    
    

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

    
    

    * * *

    
    

    (e) Has violated any of the provisions of [Chapter 475] or any lawful order or rule made or issued under ... Chapter 455.

    
    

    * * *

    
    

    (k) Has failed, if a broker, to immediately place upon receipt, any money, fund, deposit, check, or draft entrusted to him by any person dealing with him as a broker in

    escrow ... until disbursement thereof is properly authorized.

    
    

20. Rule 21V - 14.012(1), (2), and (3), Florida Administrative Code provides:

    
    

    1. A broker who receives a deposit ... shall preserve and make available to the

       Department, or its authorized representative, all deposit slips and statements of account ...,

       together with all agreements between the parties ... and shall keep an accurate account in his books of all [transactions]

       .... All such books and accounts shall be subject to inspection by the Department or its authorized representatives at all reasonable times during regular business hours.

       
       

    2. A broker shall cause to be made at least monthly a written statement comparing the broker's total liability with the reconciled bank balance(s) of all trust accounts. The broker's trust liability is hereby defined as the sum total of all deposits received, pending and being held by the broker at any point in time. The minimum information to be included in the monthly statement- reconciliation shall be the date the reconciliation was undertaken, the date used to reconcile the balances, the name of the bank(s), the names of the account(s), the account number(s), the account balance(s)

       and date(s), deposits in transit, outstanding checks identified by date and check number, and any other items necessary to reconcile the bank account balance(s) with the balance per the broker's checkbook(s) and other

       trust account books and records disclosing the date of receipt and the source of the funds. The broker shall review, sign and date the monthly statement-reconciliation.

       
       

    3. Whenever the trust liability and the bank balances do not agree, the reconciliation shall contain a description or explanation for the difference(s) and any corrective action taken reference shortages or overages of funds in the account(s). Whenever a trust bank account record reflects a service charge or fee for a non- sufficient account check being returned or whenever an account has a negative balance, the reconciliation shall disclose the cause(s) of the returned check or negative balance and the corrective action taken.

       
       

21. The Administrative Complaint here alleges misconduct on the part of Respondents Karns and Karns Real Estate, Inc. independent of each other. Counts I, III, V and VII allege misconduct on the part of Respondent Karns. Counts II, IV, VI and VIII allege the same misconduct by Karns Realty, Inc. The Conclusions of Law and recommended action herein as to either Respondent shall be construed as relating to both as to the related Count.

    
    

22. In Counts I and II, Respondents are alleged to be guilty of misrepresentation, concealment, dishonest dealing by trick, scheme, or device, culpable negligence or breach of trust in a business transaction. Petitioner's

    counsel, in his Proposed Recommended Orde, equates cuklpable negligence with ordinary negligence and outlines the elements of proof required to establish culpable negligence as duty, breach, and forseeability. The distinction between the two is, however, profound. Culpable negligence requires a showing of

    
    

    that entire want of care which would raise the presumption of a conscious indifferencew to consequences, ... or that reckless indifference to the rights of others which is equivalent to an intentional violation

    of them.

    
    

    Cannon v. State, 107 So. 360, 363 (Fla. 1926). See also, Carraway v. Revell, 116

    So.2d 15 (Fla. 1959). and 38 Fla.Jur.2d, Negligence, Section 3.

    
    

23. Taken together, the evidence fails to show where any client of the Respondents suffered any loss as a results of either Respondent's actions. Ms. Thayer's testimony indicates no evidence of fraud, theft, or an abuse of trust funds. Consequently, while Respondent might not have kept the records required in the exact form deemed appropriate by the Department, the evidence falls far short of showing culpable negligence.

    
    

24. By the same token, Respondent made no misstatements of fact, nor did he falsify any documents. The evidence of record shows at best that Respondent accepted nontransferable certificates of deposit as a down payment on a sale without notifying the seller of that fact and he failed to do the proper reconciliations of his trust accounts as required, though his efforts to comply were obvious. Respondent clearly failed to understand, both during the time in issue and at the hearing, what constituted a proper reconciliation of his trust account and an education effort at this juncture would be futile. It is sufficient to note that Respondent's reconciliations fell short of the requirements of the Commission but this defect does not constitute misrepresentation or concealment. In addition, Respondent's explanation of the alleged shortage/overage in his escrow account is sufficient to establish a proper basis for the figures as stated.

    
    

25. More troubling and less clear is the Respondent's acceptance of nontransferable certificates of deposit as a portion of the down payment on two sales transactions. Respondent either could not or would not see, at hearing or before, the impropriety of accepting such items as a down payment or security therefor since to do so created no security interest in the property for the seller. Again, it would be futile to attempt, here, to convince the Respondent of his mistake, but equally, again, it is clear from the evidence and the fact that when it was brought to his attention, Respondent immediately contacted the buyers and had them substitute appropriate collateral for the other, that his actions did not constitute either concealment, misrepresentation, or dishonest dealing or a breach of trust.

    
    

26. Petitioner claims that the overpayment of $350.00 to the Alexandres from a Barnett bank account was a breach of Respondent's trust responsibility in that the account from which the payment was made was not an appropriate trust account.

    
    

27. Respondent's explanation of that transaction was both plausible and convincing. It would appear that this property account was taken over from another broker who did things somewhat differently than did Respondent. It was

    in the transfer that the overpayment was made by Respondent who mistakenly attributed to the former broker the same practices with regard to security deposits he followed. Taken in its most implicating light, however, the evidence does not come close to clearly and convincingly showing misconduct on the part of the Respondent as was alleged in Counts III and IV.

    
    

28. As to Counts V and VI, alleging Respondents' failure to turn over all books, records, and supporting documents to Ms. Thayer during the audit, again, the evidence of Respondent's failure to comply is neither clear nor convincing. Albeit his records may have been inadequate on the first two visits by the investigators, it is clear that by the final visit he had produced all that was required and available.

    
    

29. The final Counts, VII and VIII, relate to Respondents' alleged failure to prepare and sign the required written monthly reconciliations. To be sure, Respondent did methodical and detailed reconciliations of his bank statements, but these reconciliations were far less than the required reconciliations of his total trust liability with the balances in his escrow accounts. Respondent obstinately refused, both before and during the hearing, to accept that there was any way, other than his way, to do an appropriate reconciliation. Certainly there was no prescribed format for the required reconciliation as Respondent asserts. However, the rule and the literature available then and now clearly indicate the subjects which must be addressed in an appropriate conforming reconciliation and Respondent's product simply does not meet those requirements. His reconciliations are not the "required" reconciliations called for and as Petitioner's counsel indicated in his submittal, Respondent's position, both as to the reconciliation and to the aforementioned deposits of nontransferable certificates leaves little room for learning the correct methods of satisfying the requirements of the Commission.

    
    

30. Having concluded that Respondents are guilty of at least one violation, that of failing to complete the required reconciliations, the question remains as to the appropriate action to be taken. Rule 21V-24(2) & (3), F.A.C.., provides disciplinary guidelines to be considered is assessing an appropriate penalty when misconduct has been shown. The rule provides, for a violation of Section 475.25(1), for up to 8 years suspension or revocation of the license, and an administrative fine of $1,000.00.

    
    

31. As has been previously noted, there was no showing of fraud or misrepresentation, dishonesty or a breach of trust, and the investigators saw no evidence of an abuse of trust money or criminal intent. Mr. Geil, in fact, estimated that Respondent's reconciliations were among the 5 or 6 most detailed of all the 100 to 500 brokers whose offices he has audited.

    
    

32. Nonetheless, Respondent has committed some offense which has the potential for financial loss to future clients if not corrected. Most important, Respondent has demonstrated not only a lack of knowledge of some requirements imposed by the Commission on the maintenance of escrow accounts and their reconciliations but also an almost stubborn resistance to accept what the Commission, with the clear authority to do so, has delineated as its standards. It is clear that Respondent must be willing to learn what is required and to comply with those requirements of the potential for future problems is great.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of Law, it is: RECOMMENDED that a Final Order be entered in this case by the Florida Real

Estate Commission dismissing Counts I through VI of the Administrative Complaint, but placing the licenses of Respondents, Arthur B. Karns and Karns Real Estate, Inc. on probation for a period of one year under such terms and conditions, specifically including post licensure education, as the Commission may require, and imposing a reprimand on the Respondent, Arthur B. Karns.

RECOMMENDED this 21 day of August, 1992, in Tallahassee, Florida.

ARNOLD H. POLLOCK, Hearing Officer Division of Administrative Hearings The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

(904) 488-9675

Filed with the Clerk of the Division of Administrative Hearings this 23 day of August, 1992.

APPENDIX TO RECOMMENDED ORDER IN CASE NO. 92-1266

The following constitutes my specific rulings pursuant to Section 120.59(2), Florida Statutes, on all of the Proposed Findings of Fact submitted by the parties to this case.

FOR THE PETITIONER:

1. - 4. Accepted and incorporated herein.

   1. Accepted and incorporated herein.

   2. Accepted and incorporated herein.

   3. Accepted and incorporated except for the word shortage which should be prefaced by the work "apparent."

   4. Accepted and incorporated herein.

   5. Accepted and incorporated herein.

   6. Accepted and incorporated herein.

   7. First three sentences accepted. Balance is a comment on the evidence.

FOR THE RESPONDENT:

1. & 2. Accepted and incorporated herein.

   1. Accepted and incorporated herein.

   2. Accepted and resolved in favor of Respondent.

   3. Accepted and resolved in favor of Respondent. 6A -C. Accepted and discussed within the body of the

Order.

6D. Not a Finding of Fact but a discussion of the evidence.

6E & F. Not relevant.

7A - C. Not a Finding of fact but a statement of evidence presented.

COPIES FURNISHED:

James H. Gillis, Esquire

DPR - Division of Real Estate Hurston Building, N-308

400 West Robinson Street Orlando, Florida 32801-1772

Arthur B. Karns,. pro se Karns Real Estate, Inc. 6346-63 West Lantana Road Lake Worth, Florida 3343

Jack McRay General Counsel

Department of Professional Regulation

1940 North Monroe Street Tallahassee, Florida 32399-0792

Darlene F. Keller Division Director Division of Real Estate

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

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS: All parties have the right to submit written exceptions to this Recommended Order. All agencies allow each party at least 10 days in which to submit written exceptions. Some agencies allow a larger period within which to submit written exceptions. You should consult with the agency which will issue the Final Order in this case concerning its rules on the deadline for filing exceptions to this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency which will issue the Final Order in this case.

Docket for Case No: 92-001266

Orders for Case No: 92-001266