STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

JOHN E. PHILLIPS, JR., )

)

Petitioner, )

)

vs. ) CASE NO. 94-6481F

) DEPARTMENT OF BANKING AND ) FINANCE, )

)

Respondent. )

)

FINAL ORDER

Pursuant to notice, the above matter was heard before the Division of Administrative Hearings by its assigned Hearing Officer, Donald R. Alexander, on February 17, 1995, in Pensacola, Florida.

APPEARANCES

For Petitioner: J. Lofton Westmoreland, Esquire

Post Office Box 1792 Pensacola, Florida 32598

For Respondent: Margaret S. Karniewicz, Esquire

Department of Banking and Finance The Capitol, Room 1302 Tallahassee, Florida 32399-0350

STATEMENT OF THE ISSUE

The issue is whether petitioner is entitled to an award of attorney's fees and costs under Section 57.111, Florida Statutes.

PRELIMINARY STATEMENT

This matter began on November 18, 1994, when petitioner, John E. Phillips, Jr., registered as an associated person with respondent, Department of Banking and Finance, filed a petition for attorney's fees and costs in the amount of

$13,990.33. The petition was filed under Section 57.111, Florida Statutes. As a ground, petitioner generally alleged that he was a prevailing small business party in Case No. 94-1266, a disciplinary proceeding brought against him by respondent, and that the proceeding was begun without substantial justification or special circumstances being present. On December 8, 1994, respondent filed its response to the petition generally denying the allegations.

By notice of hearing dated December 20, 1994, a final hearing was scheduled on February 17, 1995, in Pensacola, Florida. At final hearing, petitioner testified on his own behalf. He also filed, without objection, an amended affidavit increasing the amount of fees and costs being sought to $15,000.00.

Respondent presented the testimony of Robert R. Kynoch and Michael D. Blaker,

both agency employees. Also, it offered respondent's exhibits 1-4 and 6-9. All exhibits were received in evidence. Those exhibits constitute the record in Case No. 94-1266.

There is no transcript of hearing. Proposed findings of fact and conclusions of law were filed by petitioner and respondent on March 3 and 6, 1995, respectively. A ruling on each proposed finding has been made in the Appendix attached to this Final Order.

FINDINGS OF FACT

Based upon all of the evidence, the following findings of fact are determined:

1. Background

   
   

   1. This case involves a claim by petitioner, John E. Phillips, Jr., that he is entitled to an award of attorney's fees and costs because of an administrative action improvidently brought against him by respondent, Department of Banking and Finance (DBF). When the complaint was filed, Phillips was registered with DBF as an associated person with Aragon Financial Services, Inc. DBF contends the claim is without merit because Phillips is not a small business party within the meaning of the law, there is substantial justification to support the agency's decision to file a complaint, and special circumstances are present which would make an award of fees and costs unjust.

      
      

   2. The action which underlies this claim involved an administrative complaint filed against Phillips on February 4, 1994, charging him with violating various provisions within Chapter 517, Florida Statutes. That complaint was assigned Case No. 94-1266. The complaint also denied an application by Phillips to register as an associated person with a new firm. In addition, the complaint named Bruce M. Walker as a co-respondent, and as to that registrant, the complaint was assigned Case No. 94-1358. Both cases were consolidated for hearing and, after an evidentiary hearing was conducted on June 27, 1994, a Recommended Order was issued on September 13, 1994, recommending that all charges against Phillips be dismissed and that his application for registration be approved. The Recommended Order was adopted by DBF without change, and Phillips is accordingly deemed to be a prevailing party in that action.

      
      

   3. Phillips has requested fees and costs in the amount of $15,000.00, the maximum allowed by law. Respondent does not contest the reasonableness of that amount.

      
      

2. Prima Facie Requirements for an Award of Fees and Costs

   
   

   1. In order to show entitlement to an award of fees and costs, petitioner must demonstrate that he is a "prevailing small business party" within the meaning of the law. Since he has filed the petition on his own behalf, he must show he is a sole proprietor of an unincorporated business, including a professional practice, whose principal office is in this state, who is domiciled in this state, and whose business or professional practice has, at the time the action is initiated by the state agency, not more than 25 full-time employees or a net worth of not more than $2 million.

      
      

   2. At the time the administrative complaint was filed, Phillips was domiciled in Pensacola, Florida, and had a net worth of less than $2 million.

      According to an uncontroverted allegation in his petition, Phillips had no "employees relating to business that formed the basis for the Agency's charges." Petitioner was also a 50 percent shareholder in a subchapter S corporation known as Phillips, Walker & Associates, Inc. (PWA), a Pensacola firm engaged in the sale of insurance products. Although Phillips was registered with DBF as an associated person with Aragon Financial Services, Inc., that firm was not the subject of the complaint nor is it otherwise relevant to this dispute.

      Petitioner's principal source of income was through the sale of insurance products sold through PWA although he occasionally sold a few securities during that same period of time.

      
      

   3. The administrative complaint was not filed against PWA, which held no licenses from the state, but rather was filed against the registration of Phillips as an individual. Although he was an officer, employee and shareholder of PWA, Phillips was not a sole proprietor of an unincorporated business, including a professional practice. Therefore, he does not qualify as a small business party.

      
      

3. Was There Substantial Justification?

   
   

   1. The consumer complaint which eventually led to the filing of the charges in Case No. 94-1266 was made by Jane Hubbard, a Gulf Breeze realtor who had loaned a substantial amount of money ($50,000.00) to PWA in May 1988 and was never repaid. The loan was secured by a promissory note personally signed by Phillips and Walker, as the owners of the corporation.

      
      

   2. After PWA ceased doing business in May 1990, and both Phillips and Walker had filed for bankruptcy, Hubbard, or her attorney, contacted DBF in an effort to seek DBF's aid in collecting her money from Phillips and Walker. Since petitioner was registered with DBF as an associated person, and thus was subject to DBF's regulatory jurisdiction, Hubbard apparently assumed that

      Phillips may have violated the law in some respect, and the agency might be able to assist her in recovering all or a part of her money. A similar complaint filed with the Department of Insurance was not pursued by that agency.

      
      

   3. Hubbard's complaint was eventually referred to a DBF financial examiner, Robert R. Kynoch, who, among other things, interviewed Phillips, Walker, Hubbard, and three other persons who had made loans to Walker (but not Phillips). Although Kynoch did not place the persons interviewed under oath during the investigative stage, there was no requirement that he do so.

      
      

   4. Based on a representation by Hubbard that Phillips and Walker had failed to disclose to her all relevant information regarding PWA's financial status at the time the loan was made, Kynoch concluded that a reasonable basis existed to bring charges against the two if the loan was actually an investment, and thus subject to DBF's jurisdiction under Chapter 517, Florida Statutes. Accordingly, Kynoch prepared a written investigative report, received in evidence as respondent's exhibit 3, which recommended that the report "be further reviewed for appropriate disposition."

      
      

   5. The report was first reviewed by Michael D. Blaker, a DBF area financial manager, who approved the recommendation and forwarded it to his supervisor, Richard White. It was then reviewed and approved by a bureau chief, William Reilly, and finally by the division director, Don Saxon. After Saxon signed off on the report, it was sent to the general counsel's office for a legal determination as to whether the loan was an investment. Margaret S.

      Karniewicz, an assistant general counsel, concluded that it was, and recommended the issuance of an administrative complaint.

      
      

   6. After an evidentiary hearing was conducted, a determination was made that the loan constituted an investment. This determination in the Recommended and Final Orders was not contested by any party, including Phillips. There was, however, insufficient evidence to establish that misrepresentations were made by Phillips during the sale of the investment. For this reason, the charges against Phillips were dismissed and his application for registration with a new firm was approved.

      
      

   7. Because DBF had statements, which it assessed to be credible, from a complaining witness (Hubbard) that misrepresentations or material omissions were made by Phillips and Walker during the transaction, and DBF properly construed the transaction as an investment, it had a reasonable basis in fact and law to file the complaint. Since there was no showing that the agency's credibility assessment was unreasonable, DBF was substantially justified in bringing the charges in Case No. 94-1266.

      
      

4. Special Circumstances

1. There was no evidence presented by respondent to show that special circumstances exist that would make an award of attorney's fees and costs unjust.

   
   

   CONCLUSIONS OF LAW

   
   

2. The Division of Administrative Hearings has jurisdiction of the subject matter and the parties hereto pursuant to Sections 57.111 and 120.57(1), Florida Statutes.

16 Under well-established principles of law, petitioner bears the burden of showing that it is a prevailing small business party within the meaning of the law, and that the requested fees and costs, which cannot exceed $15,000.00, are reasonable and necessary. Once this burden is met, respondent must then demonstrate that it was "substantially justified" in initiating the proceeding. Dept. of Professional Regulation v. Toledo Realty, Inc., 549 So.2d 715, 717 (Fla. 1st DCA 1989). In other words, DBF must show that it had a reasonable basis in law or fact to justify its decision to file an administrative complaint. To do this, DBF must show that it "conducted a reasonable investigation" prior to filing the complaint. Ann & Jan Retirement Villa, Inc.

v. Department of Health and Rehabilitative Services, 580 So.2d 278, 280 (Fla. 4th DCA 1991).

1. It is first necessary to determine whether Phillips is a small business party within the meaning of Subsection 57.111(3)(d)1., Florida Statutes. As is relevant here, that statute defines a small business party as a "sole proprietor of an unincorporated business, including a professional practice." Citing the Ann & Jan Retirement Villa case, supra, Phillips argues that by inserting the language "including a professional practice" in the statute, the legislature "clearly intended to make section 57.111 available to all professional practices below the specified size, regardless of organizational form, and to include such businesses when engaged in the practice of a profession." He goes on to contend that because the charges were not filed against him in his capacity as a guarantor on the loan but rather were because he was a "control person" in PWA, he and PWA are essentially one and the same.

2. The case of Florida Real Estate Commission v. Shealy, 19 F. L. W. 1149 (Fla. 1st DCA 1994), is found to be dispositive as to this issue. In that proceeding, Shealy had been denied a real estate license which he intended to use in a corporation owned by he and his wife. After eventually prevailing in an administrative action, Shealy sought to recover the fees and costs expended in obtaining his license. In denying his request, the court held as follows:

   
   

   Section 57.111 authorizes an attorney's fee for a qualifying small business party,

   which must be a corporation, a partnership, or a sole proprietor of an unincorporated business. . . . This does not encompass individual employees. (citations omitted) Although the appellee and the corporation were found to be "one and the same entity" based on the appellee's control of the business, the statute does not permit such disregard of the corporate form. (Emphasis added)

   
   

   Id. at 1149.

   
   

   Here, as in Shealy, Phillips claims to be "one and same entity" based on his 50 percent control of PWA. But since PWA was not a party to the disciplinary proceeding, "the statute does not permit such disregard of the corporate form," and he cannot qualify as a small business party. This is true even though the charges filed against him were in his capacity as a "control person" with the corporation and not as an employee of that firm. Moreover, the Ann & Jan Retirement Villa case is inapplicable since in that case the corporation, and not an individual, was awarded fees and costs. Accordingly, the petition must be denied.

   
   

3. Even if petitioner had demonstrated that he was a small business party, the agency has still shown that it was substantially justified in filing an administrative complaint. This is because the agency's determination to prosecute turned on a credibility assessment of a complaining witness, Jane Hubbard, and where the decision to prosecute turns on a credibility assessment, a reasonable basis in fact and law exists to initiate an action. Gentele v. Department of Professional Regulation, 513 So.2d 672, 673 (Fla. 1st DCA 1987).

   
   

4. Because petitioner has failed to demonstrate that he is a small business party, and there was substantial justification for the agency to initiate Case No. 94-1266, the petition for attorney's fees and costs must be denied.

Based on the foregoing findings of fact and conclusions of law, it is ORDERED that the petition for attorney's fees and costs be denied.

DONE AND ORDERED this 13th day of March, 1995, in Tallahassee, Florida.

DONALD R. ALEXANDER

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 13th day of March, 1995.

29. Rejected as being irrelevant. 30-32. Rejected as being unnecessary.

33. Rejected as being irrelevant. See finding 13.

Respondent:

1. Partially accepted in finding of fact 1.

2. Partially accepted in finding of fact 5.

3. Partially accepted in finding of fact 6.

4. Partially accepted in findings of fact 8 and 9.

5. Partially accepted in finding of fact 7.

6. Partially accepted in finding of fact 10.

7. Rejected as being unnecessary.

8. Partially accepted in finding of fact 7. 9-11. Rejected as being unnecessary.

12-13. Partially accepted in finding of fact 8.

14. Partially accepted in finding of fact 11.

Note - Where a proposed finding has been partially accepted, the undersigned has rejected the remainder as being unnecessary, subordinate, irrelevant, contrary to the more persuasive evidence, or a conclusion of law.

COPIES FURNISHED:

J. Lofton Westmoreland, Esquire Post Office Box 1792

Pensacola, Florida 32598

Margaret S. Karniewicz, Esquire Department of Banking and Finance The Capitol, Room 1302 Tallahassee, Florida 32399-0350

Harry L. Hooper, III, Esquire General Counsel

Department of Banking and Finance The Capitol, Room 1302 Tallahassee, FL 32399-0350

NOTICE OF RIGHT TO JUDICIAL REVIEW

A party who is adversely affected by this Final Order is entitled to judicial review pursuant to Section 120.68, Florida Statutes. Review proceedings are governed by the Florida Rules of Appellate procedure. Such proceedings are commenced by filing one copy of a notice of appeal with the agency clerk of the Division of Administrative Hearings and a second copy, accompanied by filing fees prescribed by law, with the District Court of Appeal, First District, or with the district court of appeal in the appellate district where the party resides. The notice of appeal must be filed within 30 days of rendition of the order to be reviewed.

Docket for Case No: 94-006481F

Orders for Case No: 94-006481F