STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

CONTINENTAL PACIFIC )

CORPORATION, )

)

Petitioner, )

)

vs. ) CASE NO. 95-6177

) COMMISSION ON MINORITY ) ECONOMIC AND BUSINESS )

DEVELOPMENT, )

)

Respondent. )

)

RECOMMENDED ORDER

Robert E. Meale, Hearing Officer of the Division of Administrative Hearings, conducted the final hearing by videoconference in Tallahassee, Florida, on February 19, 1996. Counsel for Respondent and its witness, Lloyd Ringgold, attended the hearing in Tallahassee. The court reporter, counsel for Petitioner, Petitioner's representative, Hui Schaefer, and Petitioner's witnesses, Ms. Schaefer and Leonard Le Rose, attended the hearing in Fort Myers.

APPEARANCES

For Petitioner: Kurt A. Streyffeler

Kurt A. Streyffeler, P.A.

3440 Marinatown Lane, Northwest, Suite 205 North Fort Myers, Florida 33903

For Respondent: Joseph L. Shields

Senior Attorney

Commission on Minority Economic and Business Development

107 West Gaines Street, Suite 201 Tallahassee, Florida 32399-2005

STATEMENT OF THE ISSUE

The issue is whether Petitioner is entitled to certification as a minority business enterprise.

PRELIMINARY STATEMENT

By letter dated December 4, 1995, Respondent advised Petitioner that its request for certification as a minority business enterprise was denied. The letter states in part:

The application, supporting documents and telephone interview establish that the minority ownership of Continental Pacific Corporation, Inc. is not real, substantial and continuing because the minority owners do. . . not share [profits] and risks commensurate with the percentage of her ownership.

The letter adds that the minority owner does not control the management and daily operations of the business and the overall corporate structure of the business, as set forth in the bylaws, does not give the minority owner the authority to control corporate affairs.

The letter states that Continental Pacific Corporation, Inc. fails to meet the following rules: 60A-2.001(7); 60A- 2.005(2)(b), and (2)(c); and 60A- 2.005(3)(a)-(d).

By letter dated December 7, 1995, Petitioner challenged the determination and demanded a formal hearing.

At the hearing, Petitioner called two witnesses and offered into evidence three exhibits. Respondent called one witness and offered into evidence 16 exhibits. All exhibits were admitted except Petitioner Exhibit No. 3.

Neither party ordered a transcript. Rulings on timely filed proposed findings of fact are in the appendix.

FINDINGS OF FACT

1. By undated application, Petitioner filed an Application for Minority Business Enterprise Certification. Stating that the applicant was established in November 1991, the application lists as the sole shareholders Hui Schaefer (a/k/a Gina Schaefer), who is a Korean-American minority, and her husband, Reid, who is a nonminority. The application was filed in July 1995.

   
   

2. The application states that Ms. Schaefer is an Asian female owning 81 percent of the shares. The application lists Ms. Schaefer as the chief executive officer, secretary, and treasurer, Mr. Schaefer as the president, and Gordon Holfelder as the vice-president. The application lists these three persons as directors, plus DuWayne Boudin and Lenny LaRose. Except for Ms. Schaefer, the directors are nonminorities.

   
   

3. Petitioner's bylaws provide for management of the business and property by a majority of the directors. The articles of incorporation provide similarly. Petitioner claimed at the final hearing that she had fired all of the directors except herself, but she produced no documentary proof of this action.

   
   

4. Mr. and Ms. Schaefer purchased all of the stock of Petitioner in 1991. At the time of purchase, Ms. Schaefer received 500 shares and Mr. Schaefer received 400 shares. The sole purpose of this allocation was to enable the corporation to qualify as a minority business enterprise.

   
   

5. The sole consideration for the shares was the forgiveness of about

   $6000 in debt. Mr. and Ms. Schaefer had lent this sum to Petitioner or its parent corporation, Unidyn Corp., so it could pay operating expenses, such as a telephone bill. Upon acquiring the shares, Mr. and Ms. Schaefer contributed capital to Petitioner in the form of furniture and equipment, which they value at $100,000.

6. The evidence does not indicate that Mr. or Ms. Schaefer possessed any disproportionate interest in the $6000 loan, equipment, or furniture. To the contrary, it appears that their interests were equal in the money and assets.

   
   

7. Petitioner is in the computer software business. Specifically, at the time of the application, Petitioner was a value-added retailer of computer programs. Petitioner purchased software programs from developers, customized the programs for end users, and resold the program to the end user with a commitment to provide technical support and training.

   
   

8. Mr. Holfelder is a computer programmer. Mr. Schaefer is a sales representative. Ms. Schaefer is an office manager. At the time of the application, Petitioner employed nine fulltime permanent employees and earned over $800,000 in the fiscal year ending in 1993.

   
   

9. At all material times, the compensation of Mr. Schaefer or Mr. Holfelder at least doubled the compensation of Ms. Schaefer. For calendar year 1995, their salaries were set at $60,000, while Ms. Schaefer's was set at

   $30,000, which was the same paid to Mr. LaRose. The other director listed on the application, Mr. Boudin, was set to earn $48,000 for 1995.

   
   

10. The malleability of salaries in response to the requirements of government programs is reflected by Petitioner's explanation why Mr. Schaefer's salary is greater than Ms. Schaefer's salary. In a latter to Respondent dated August 30, 1995, Petitioner explained that the Schaefers were trying to refinance a home mortgage and "[s]everal of the mortgage companies suggested that it would be much easier to approve a VA mortgage if the husband and veteran, Reid Schaefer, had the highest salary."

    
    

11. Ms. Schaefer has little technical experience in software programming. She could provide some technical support to customers for programs with which she was familiar as an end user, but she generally was not involved with the technical end of Petitioner's business.

    
    

12. Ms. Schaefer's actual authority over corporation management was quite limited in practice. Hiring and firing authority is divided into departments with persons other than Ms. Schaefer responsible for such personnel decisions in the crucial areas of programming and marketing. Mr. Schaefer is responsible for purchasing. Even Ms. Schaefer's involvement in internal bookkeeping is subordinated to Mr. LaRose, who is Petitioner's in-house accountant. Mr. Boudin handles customer training and assists in sales. Ms. Schaefer signed most of the checks, but appeared to do so at the direction of others. She was not the sole person authorized to sign checks drawn on any of Petitioner's accounts, all of which authorized checks to be signed by a single authorized signer.

    
    

13. At the end of 1994, shares were redistributed, leaving Ms. Schaefer with 500 shares, Mr. Schaefer with 100 shares, and Mr. LaRose, Mr. Holfelder, and Mr. Boudin with five shares each. Later, Petitioner issues one share to Brian Risley, a systems installer. These transactions left Ms. Schaefer with 81 percent of the issued shares of Petitioner. Later transactions left her with an even greater percentage of the stock; Petitioner repurchased the shares owned by Mr. Schaefer and Mr. Holfelder, and Ms. Schaefer acquired an additional 89 shares.

14. Petitioner repurchased Mr. Holfelder's shares in connection with her termination in January 1996. By that time, Petitioner had transformed from a value-added retailer to custom applications, designing software programs from scratch.

    
    

15. Ms. Schaefer does not control Petitioner either in ownership or operation.

    
    

    CONCLUSIONS OF LAW

    
    

16. The Division of Administrative Hearings has jurisdiction over the subject matter. Section 120.57(1), Florida Statutes. (All references to Sections are to Florida Statutes. All references to Rules are to the Florida Administrative Code.)

    
    

17. Rule 60A-2.005(2) provides:

An applicant business must satisfy paragraphs (a), (b), (c), and (d) below in order to be considered 51 percent owned by minority persons. The ownership exercised by minority persons shall be real, substantial, and continuing,

and shall go beyond mere pro forma ownership of the firm as reflected in its ownership documents. In its analysis, the Office may also consider the transferral of ownership percentages with no exchange of capital at fair market value.

18. Rule 60A-2.005(2)(b) states:

The minority owners must demonstrate that they share income, earnings and any other benefits from the business concern which are accorded

to any other owner. The minority owners' share of income, earnings and benefits shall be commensurate with the percentage of their ownership in the business concern, including, but not limited to, salaries, draws, bonuses, commissions insurance coverage, proceeds from business investments and properties, profit- sharing and other benefits.

1. Ms. Schaefer does not share income or earnings commensurate with her claimed ownership interest in Petitioner. There is no evidence of any dividend income. Her only income is compensation, which is much less than 81 percent of the total compensation paid.

   
   

   20. Rule 60A-2.005(2)(c) states:

   
   

   The minority owners must demonstrate that they share in all the risks assumed by the business firm. Such sharing of business risks shall be demonstrated through the minority owners' primary role in decision- making, and negotiation and execution of related transaction documents either as individuals or as officers of the business.

   The minority owners' sharing in business risks shall be commensurate with their percentage of ownership, including but not limited to, start- up costs and contributions, acquisition of additional ownership interest, third-party agreements, bonding applications, and other liabilities. Start-up contributions may be space, cash, equipment, real estate, inventory or services estimated at fair market value.

   All contributions of capital by the minority owners must be real and substantial. The following are presumed not to be real and substantial capital contributions:

   1. promises to contribute capital,

   2. notes payable to the applicant business,

   3. notes payable to the non-minority owners or to the non-minority family members of any owner, and

   4. past services rendered by the minority person as an employee, rather than as a decision maker . . ..

1. Ms. Schaefer did not contribute 81 percent of the start-up costs of Petitioner. She did not even contribute money and capital in proportion to her original claimed ownership interest of 55 percent. Nor does she have decisionmaking authority in proportion to her claimed ownership interest.

   
   

2. Rule 60A-2.005(3) provides:

   
   

   An applicant must establish that the minority owners possess the authority to control and exercise dominant control over the management and daily operations of the business.

   1. The discretion of the minority owners shall not be subject to any formal or informal restrictions (including, but not limited to,

      by-law provisions, purchase agreements, employment agreements, partnership agreements, trust agree- ments or voting rights, whether cumulative or otherwise) which would vary or usurp managerial discretion customary in the industry.

   2. If the applicant business is a corporation and the business and affairs of the corporation are managed under the direction of a board of directors as provided by the articles of incor- poration or bylaws of the corporation of Section 607.0824, Florida Statutes, a majority of the directors must be minority owners, notwithstanding whether the directors are required to be elected by a majority vote of the outstanding shares of the corporation.

   3. The minority owners must exercise sufficient management and technical responsibilities and capabilities to maintain control of the business. If the owners of the business who are not minority persons are disproportionately responsible for the operations of the business, then the business is

      not controlled by minority owners.

   4. The control exercised by the minority owners shall be real, substantial and continuing, and shall go beyond mere pro forma control. In instances where the applicant business is found to be a family- operated business, with duties, responsibilities and decision-making occurring either jointly and mutually among owners and principals, or severally along managerial and operational lines between minority owners and

      non-minority owners or principals, the minority owners shall not be considered as controlling the business. Where the minority owners substantiate that the assumption of duties is not based on their lack of knowledge or capability to independently make decisions regarding the business' management and day-to-day operations, the minority owners' control may not be affected. The minority owners shall establish that they have dominant responsi- bility for the management and daily operations of the business as follows:

      1. The minority owners shall control the purchase of goods, equipment, business inventory and services needed in the day-to- day operation of the business. The minority owners' control of purchasing shall be evidence of their knowledge of products, brands, manufacturers, types of equipment and products and their uses, etc. rather than merely reflective of the minority owners' ministerial execution of the ordering/acquisition of goods.

      2. The minority owners shall control the hiring, firing and supervision of all employees, and the setting of employment policies, wages, benefits

         and other employment conditions. In instances where minority owners have delegated the hiring and firing of employees, the minority owners shall demonstrate that their knowledge and capability is [sic] to evaluate the employees' performance in the given industry.

      3. The minority owners shall have knowledge and control of all financial affairs of the business.

         The ability of any non-minority owner or employee

         to sign checks and enter into financial transactions on behalf of the business shall be considered in determining financial control. The minority owners shall expressly control the investments, loans to/ from stockholders, bonding, payment of general business loans, payroll and establishment of lines of credit.

      4. The minority owners shall have managerial and technical capability, knowledge, training,

         education and experience required to make decisions regarding that particular type of work. In determining the applicant business' eligibility, the Office will review the prior employment and educational backgrounds of the minority owners,

         the professional skills, training and/or licenses

         required for the given industry, the previous and existing managerial relationship between and among all owners, especially those who are familially related, and the timing and purpose of management changes. If the minority owners have delegated management and technical responsibility to others, the minority owners must substantiate that they have caused the direction of the management of

         the business and each phase of the technical operations of the business through their demon- strable knowledge of and capability in the delegated areas.

      5. The minority owners shall display independence and initiative in seeking and negotiating contracts, accepting and rejecting bids and in conducting all major aspects of the business in regard to any and all bidding and contracting. In instances where

         the minority owners do not directly seek or nego- tiate contracts, prepare estimates, or coordinate with contracting officials, but claim to approve or reject bids and contractual arrangements, the minority owners shall demonstrate that they have the knowledge and expertise to independently make contractual decisions.

      6. The minority owners shall substantiate personal direction and actual involvement with all major aspects of the applicant business.

      The major aspects shall be defined as those tasks essential to accomplish all objectives and oper- ations related to those services or commodities for which the applicant business requests certification.

      
      

3. Ms. Schaefer does not control Petitioner. She failed to establish that she was the sole director. Even if she had, she lacks the technical and business background to control the business of Petitioner.

RECOMMENDATION

It is

RECOMMENDED that the Commission on Minority Economic and Business Development enter a final order denying Petitioner's application for certification.

DONE and ENTERED on April 29, 1996, in Tallahassee, Florida.

ROBERT E. MEALE

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 on April 29, 1996.

APPENDIX

Rulings on Petitioner's Proposed Findings

1: rejected as unsupported by the appropriate weight of the evidence. 2-3 and 6: rejected as legal argument.

4: rejected as unsupported by the appropriate weight of the evidence and subordinate.

5: adopted or adopted in substance except as to implication that Ms.

Schaefer controls the business.

7: rejected as not finding of fact.

8-9: rejected as recitation of evidence.

10 (first sentence): rejected as unsupported by the appropriate weight of the evidence.

10 (remainder): rejected as recitation of evidence and unsupported by the appropriate weight of the evidence.

11: rejected as speculative and unsupported by the appropriate weight of the evidence.

12: rejected as speculative. 13: rejected as subordinate.

14 (first sentence): adopted or adopted in substance.

14 (remainder): rejected as irrelevant. 15: rejected as subordinate.

16: rejected as unsupported by the appropriate weight of the evidence, recitation of evidence, and subordinate.

17: rejected as unsupported by the appropriate weight of the evidence and recitation of evidence.

18-19: rejected as unsupported by the appropriate weight of the evidence. 20: rejected as unsupported by the appropriate weight of the evidence.

21 (first sentence): adopted or adopted in substance.

21 (remainder): rejected as unsupported by the appropriate weight of the evidence.

22: rejected as unsupported by the appropriate weight of the evidence and subordinate.

23: rejected as legal argument.

24: rejected as unsupported by the appropriate weight of the evidence, subordinate, and legal argument.

25-26: rejected as unsupported by the appropriate weight of the evidence.

Rulings on Respondent's Proposed Findings

1: adopted or adopted in substance except for subsequent transaction, which does not alter findings.

2: adopted or adopted in substance.

3: adopted or adopted in substance except for presence of additional nonminorities.

4-8: adopted or adopted in substance.

9-10: rejected as subordinate and recitation of evidence. 11-14: adopted or adopted in substance.

15: adopted or adopted in substance except that such personnel decisions are divided into three areas with different persons in charge of each area.

16-17: adopted or adopted in substance except that the illustrations are rejected as subordinate and recitation of evidence.

COPIES FURNISHED:

Veronica Anderson, Executive Administrator Commission on Minority Economic

and Business Development Collins Building, Suite 201

107 West Gaines Street Tallahassee, Florida 32399-2000

Joseph Shields, General Counsel Commission on Minority Economic

and Business Development Collins Building, Suite 201

107 West Gaines Street Tallahassee, Florida 32399-2000

Kurt A. Streyffeler

Kurt A. Streyffeler, P.A.

3440 Marinatown Lane, Northwest Suite 205

North Fort Myers, Florida 33903

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 longer period within which to submit written exceptions. You should contact the agency that will issue the final order in this case concerning agency rules on the deadline for filing exceptions to this Recommended Order. Any exceptions to this Recommended Order should be filed with the agency that will issue the final order in this case.

Docket for Case No: 95-006177

Orders for Case No: 95-006177