STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

JOHNSTON LITHOGRAPH & ENGRAVING, ) INCORPORATED, )

)

Petitioner, )

)

vs. ) CASE NO. 94-2653

) COMMISSION ON MINORITY ECONOMIC ) AND BUSINESS DEVELOPMENT, )

)

Respondent. )

)

RECOMMENDED ORDER

A hearing was held in this case in Tampa, Florida on August 2, 1994, before Arnold H. Pollock, a Hearing Officer with the Division of Administrative Hearings.

APPEARANCES

For Petitioner: Frederick T. Reeves, Esquire

Langford, Hill, Trybus and Whalen, P.A. Post Office Box 3277

Tampa, Florida 33601-3277

For Respondent: Wayne H. Mitchell, Esquire

Commission on Minority Economic and Business Development

Suite 201, Knight Building 2737 Centerview Drive

Tallahassee, Florida 32399-0950 STATEMENT OF THE ISSUES

The issue for consideration in this case is whether Petitioner, Johnston Lithograph & Engraving, Inc., (Johnston), should be granted minority business enterprise certification by the State of Florida.

PRELIMINARY MATTERS

By letter dated April 6, 1994, to Brenda Cloversettle, president of Johnston, the Department of Management Services, (Department) advised Petitioner that its request for certification as a Minority Business Enterprise, (MBE), had been denied because, the Department had found, Johnston did not meet the specifications of Section 288.703(2), Florida Statutes, which required, in part, that an MBE must be at least 51 percent owned by minority persons and its management and daily operations must be controlled by such persons.

By Petition filed on April 29, 1994, Petitioner challenged this determination and requested formal hearing and this hearing ensued. At the

hearing, Petitioner presented the testimony of Brenda Cloversettle, its president, and introduced Petitioner's Exhibits 1 through 15. Respondent presented the testimony of Lloyd Ringgold, a certification officer, and introduced Respondent's Exhibits A and B, and D and E. Respondent's Exhibit C was offered but withdrawn before ruling. Each party requested the Hearing Officer officially recognize certain matters. Petitioner sought recognition of pertinent rules of the Commission, found in Chapter 60A, F.A.C., and pertinent portions of Section 90.202, Florida Statutes. Respondent sought recognition of several DOAH Recommended Orders and a decision of the United States Supreme Court relevant to this proceeding. Official recognition of the requested matters is granted.

A transcript was provided. Subsequent to the hearing, both counsel submitted Proposed Findings of Fact which have been ruled upon in the Appendix to this Recommended Order, and counsel for Petitioner submitted a memorandum of law relative to Respondent's Exhibit B, which memorandum has also been carefully considered in the evaluation of the evidence and the preparation of this Order.

FINDINGS OF FACT

1. At all times pertinent to the matters concerned herein, either the Department of Management Services, or its successor, the Commission of Minority Economic and Business Development, was the state agency in Florida responsible for certification of Minority Business Enterprises in this state.

   
   

2. Johnston was started by Mrs. Cloversettle's grandfather and operated by him and his three sons, including Conrad Johnston, Mrs. Cloversettle's father, for many years. As a child and young woman, Mrs. Cloversettle worked at the place of business in differing capacities and learned something of the business operation. At some point in time, she married Mr. Cloversettle who was and has been an employee of the firm, and over the years, he operated much of the equipment used in the business.

   
   

3. Mrs. Cloversettle is also a licensed cosmetologist, and owns and operates a beauty salon through a corporation she owns with her husband. He does much of the handyman work at that shop and she works, part time, as a cosmetologist. Most of her time, however, is occupied with the affairs of Johnston.

   
   

4. There are currently 60 shares of common stock issued in Johnston Lithograph & Engraving, Inc.. Seven and three quarters shares are owned by Mr. and Mrs. Cloversettle. Three and three-quarters shares came from her father, and she acquired four additional shares at the time she bought the business. Three and three quarters shares are owned by Mrs. Cloversettle's aunt, Ms. Sims, who lives in North Carolina; fifteen shares are held in the name of her father, Conrad Johnston; and eighteen and three-quarters shares each are held by his two brothers, Bert and Don. Ms. Sims takes no income from Johnston, does not participate in the management of the company, and plays no role in it other than as share owner.

   
   

5. At one point, Mr. Cloversettle owned a one-half interest in the four shares his wife got at the time of purchase, but she considered herself the owner in that they were titled jointly only "for simplicity", just as the house and their bank accounts are also owned jointly. On April 26, 1994, after the initial denial of Petitioner's application for MBE certification, the joint ownership was terminated and the shares registered in Ms. Cloversettle's name only without any exchange of consideration therefor. Much the same pertains to

   the company bank accounts. Before the denial, both George and Brenda Cloversettle could sign company checks. Since then, however, George Cloversettle has been removed as an authorized signatory on company accounts.

   
   

6. The shares owned by Ms. Cloversettle's father and his brothers, Donald, Bertram, are presently held as "security" for the payment of the purchase of Johnston by Mrs. Cloversettle. The shares are not voted and are held in escrow under an escrow agreement. A stock pledge agreement, dated February 7, 1986, to which the Cloversettles were not parties, produced after the hearing, pertains only to the corporation and Conrad and Margaret Johnston. Its terms, somewhat confusing, can best be interpreted as providing that upon default in payment, the stock held in escrow would revert to the original holder as titled on the face of the certificate or, at the option of the original owner, be sold.

   
   

7. At the time of denial, the shares owned by Donald and Bertram had not been properly endorsed into the escrow but this was done prior to formal hearing when, by affidavit dated August 1, 1994, the escrow agent indicated both Donald's and Bertram's shares were subject to the 1986 escrow agreement. The 1986 agreement prohibits the issuance of any new or additional shares of stock until the purchase obligation is paid off. This provision may have been violated when the four additional shares were issued to the Cloversettles in 1990.

   
   

8. The shares owned by both Bertram and Donald were the subject of a stock sale agreement for $93,000.00 for each block of eighteen and three-quarters shares. Both the date of the agreement and the signatures of the parties are not evidenced on the documents, however, but it appears Bertram deposited fifteen of his shares with the Tampa 1st National Bank in 1975, some fifteen years prior to the Cloversettle's 1990 purchase of the company. Conrad Johnston entered into a purchase agreement in 1985 with the original owners which did not include the Cloversettles. His fifteen shares were signed into escrow on February 6, 1986. These discrepancies in capital ownership were not clarified at hearing.

   
   

9. Mr. and Mrs. Cloversettle entered into the agreement to buy the company from the Johnstons in 1990 for a purchase price of $300,000. Though in an earlier deposition, Mrs. Cloversettle indicated only about $3,000 of the purchase price had been paid, which money allegedly came from the proceeds of an insurance policy loan and a mortgage on their home, at hearing, she testified

   $30,000 had been paid, all of which came from the mortgage on their home. No payments on the obligation are currently being made by the Cloversettles because each of the original owners executed an agreement deferring payment until the company is financially able to make regular payments.

   
   

10. The minutes of a special shareholder's meeting held on July 8, 1994, reflect the above-noted Johnston brothers' certificates were surrendered for cancellation in July, 1990. However, the minutes also note that the sale and redemption of the certificates was subject to an escrow pursuant to the February, 1986 escrow agreement which, in November, 1993, was affixed to an amended agreement naming Edward Hill as Escrow Agent, which referred to the Johnston brothers not as stockholders but as secured creditors.

    
    

11. Because of the complex manipulation of the shares and their status, it is impossible to determine the relative ownership of the parties. Petitioner has not established with any degree of clarity that Brenda Cloversettle, though a minority owner, has actual and real ownership of at least 51 percent of the company equity free of any residuary or reversionary interest which could

    divest her of her 51 percent ownership. The shares covered by the escrow agreement, while classified by Petitioners as treasury stock, cannot legitimately be so considered since it is still in the name of the original owners and does not become property of the company until the obligation incurred for its purchase is satisfied.

    
    

12. While, as noted previously, no additional payments have been made on the purchase price, the company maintains a life insurance policy on each Johnston which Ms. Cloversettle indicates is to be used to pay off the outstanding debt upon their respective deaths. She admits however, there is no document requiring the insurance proceeds to be used that way, and no independent evidence of the policies' existence was forthcoming.

    
    

13. The primary business of Johnston is commercial printing/graphics. Ms. Cloversettle is the sole director of the corporation whose bylaws, as of July 8, 1994, require all directors to be minority persons. She has asserted, and it was not disproved by evidence to the contrary, that she has the primary role in decision-making concerning the company's business transactions and she is the sole person required to execute any transaction related documents. She has final authority as to all corporate decisions and is not required to consult with anyone else when corporate decisions are being made, though she may do so.

    
    

14. Johnston does not keep inventory on hand but purchases supplies necessary on a job driven basis. According to Ms. Cloversettle, she controls the purchase of inventory and determines the need and appropriateness of equipment rentals or purchases. She seems to be familiar with and to understand the use of the products utilized by the company in its daily operations. She has a fundamental knowledge of the equipment used in the company's operation and, though she may not be fully qualified to operate every piece, can operate some of it. Though she periodically consults with her husband regarding business operations, she is not required to do so and has the responsibility for the hiring and management of employees. She alleges she sets employment policies, wages, benefits, and employments conditions at the company without the need to coordinate her actions with anyone. However, in a phone interview with the Department's representative, in February, 1994, Ms. Cloversettle had difficulty correctly answering many of the technical questions she was asked at hearing.

    
    

15. Mr. Cloversettle, who has worked with the firm for approximately twenty years, is its key employee in computer graphics and serves as production manager and vice-president. Without doubt, along with Mr. Ezell, the firm's printer, he is primarily responsible for the daily plant operations, supervising the other employees, planning daily work flow, and insuring the vendors who supply the needed raw materials do so in a timely fashion. Ms. Cloversettle is college trained and, as noted previously, a licensed cosmetologist. She has done bookkeeping for the firm and acted as office manager, but has no formal training in printing, or graphics, other than years of observation as she grew up with the operation when it was operated by her father. Her primary hands-on experience is in book bindery and shop cleaning but she can run some of the smaller, less exotic equipment. She is not familiar with all the terms and duties involved in the operation of this business and could not accomplish them all. She acknowledges she spends most of her time in the office.

    
    

16. She claims to be solely responsible for the financial affairs of the company and is the only one currently authorized to sign company checks. This situation, as has been noted, is of but recent origin, however. Nonetheless, Mr. Cloversettle continues to remain subject to equal debt responsibility with

    Ms. Cloversettle because of his prior co-signing of risk documents relative to loans taken by the company prior to the application, denial and hearing.

    
    

17. Ms. Cloversettle's testimony regarding her method of evaluating the company's ability to perform potential jobs creates the impression that she is aware of the company's limitations and its abilities. She does not run the cameras or the presses and she need not do so. She does not solicit business but she hires a salesperson to do so and has the authority and capability to evaluate and accept or reject the work brought in.

    
    

18. In the last two quarters of 1993, according to company payroll records, Mr. Cloversettle was paid approximately $6,426.00 while Ms. Cloversettle was paid only $2,650.00. However, after the application was denied, the ratio was changed dramatically to where she now earns $180.00 per week, and he, only $52.95.

    
    

    CONCLUSIONS OF LAW

    
    

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

    
    

20. Petitioner has claimed status as a minority business enterprise as defined in Section 288.703, Florida Statutes. A minority business enterprise is defined by the statute as:

    
    

    ... any small business concern as defined in subsection (1) which is organized to engage in commercial transactions, which is domiciled in Florida, and which is at least fifty-one percent owned by minority persons and whose management

    and daily operations are controlled by such persons.

    
    

21. The Bureau of Minority Business Enterprise Assistance is required, by statute, to insure that the preferences for minority business firms obtained by the certification process are awarded only to those firms for which the benefit is intended. Petitioner, as applicant for minority business enterprise status, has the burden of proving its entitlement to certification. Florida Department of Transportation vs. J.W.C. Company, Inc., 39 So.2d 778 (Fla. 1st DCA 1981).

    
    

22. The Department of Management Services has promulgated rules to be followed in determining the certification of eligibility of applicants for MBE status, which rules have been transferred to the Commission on Minority Economic and Business Development. Rule 60A-2.005, F.A.C. is the rule defining the eligibility requirements for MBE certification. In substance, to be considered

    51 percent minority owned, and thereby eligible for MBE certification, the applicant must establish real, substantial, continuing and more than mere pro forma ownership of the firm by (a), owning 51 percent of the issued stock of the company; (b), receiving income commensurate with the percentage of her ownership from any means; (c), demonstrating she shares in all the business and financial risks through her role in decision-making, negotiation and execution of documents as either an individual or officer of the firm, and (d), not being subject to rights of others which would dilute the minority's ownership below 51 percent.

    
    

23. In addition, as paraphrased here, the rule requires the minority owners to exercise unfettered discretion in the control over the management and

    daily operation of the business; constitute a majority of the board of directors, if the entity is a corporation; exercise sufficient management and technical responsibilities to maintain control of the business; and, if a family business, control the purchase of goods, equipment, and services needed, the hiring and firing of personnel and the setting of all employment policies. The minority owner must demonstrate knowledge and control of the financial affairs of the business, and have managerial and technical capability, knowledge and training, and display independence and initiative in seeking and negotiating contracts and in conducting all operations of the business. Further, the minority owner shall exercise substantive personal direction and actual involvement with all major aspects of the business - those tasks essential to accomplish all business objectives and operations.

    
    

24. In the instant case, Respondent admits Brenda Cloversettle is a minority person as defined in the statute, and that she owns seven and three- quarters shares of the company in issue. It does not admit, however, that she holds real ownership of the firm by at least a 51 percent margin, or that she possesses the knowledge, experience and functional roles within the organization to control the management and daily operations of the firm.

    
    

25. The inability to track the actual status of the stock held within the escrow agreement and to make a definitive determination that such stock could not reasonably be expected to, in the future, dilute the applicant's more than

    51 percent ownership of the business, makes it impossible to conclude her ultimate ownership would constitute more than 51 percent of the corporate stock.

    
    

26. Ms. Cloversettle may not possess exquisite and detailed knowledge of all facets of the operation, nor may she have the dexterity or skill to perform every job. Such capabilities are not required, however. As the chief executive, she must have enough technical and managerial ability to run the company, and it would appear she meets these basic requirements. Vector Intra- National Inc. vs. State of Florida, Department of Management Services, DOAH Case # 93-4001, Order dated January 18, 1994. However, the evidence is also clear that Mr. Cloversettle formerly shared the decision making responsibilities, formerly earned from the company more than twice that which the minority owner did, (though it is questionable whether the post-denial change in operation was real or sham), continues to assume financial risk as cosignatory on the company's working debt, and still is primarily responsible, along with Mr. Ezell, for the actual technical printing/production. See Aletha Dunn t/a Thumbprint Copy & Printing Center vs. State of Florida, Department of General Services, DOAH Case # 88-5533, Order dated May 12, 1989. It also appears that much of Ms. Cloversettle's currently expressed knowledge of business and technical operations is of recent acquisition. Taken together, it is not clear that she has demonstrated her ability to exercise a dominant role in both management as well as the daily operations of the business.

    
    

27. Taken together, the evidence presented by Petitioner does not satisfy its burden of proof.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of Law, it is, therefore:

RECOMMENDED that a Final Order be entered denying Johnston Lithograph & Engraving, Inc.'s request for certification as a minority business enterprise.

RECOMMENDED this 15th day of September, 1994, 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 15th day of September, 1994.

APPENDIX TO RECOMMENDED ORDER

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. & 2. Accepted and incorporated herein.

3. Accepted as to the shares of Ms. Cloversettle and Ms. Sims. However, this does not indicate acceptance of the proposition that there are no other shareholders, or that the transfer of shares from Mr. Cloversettle to his wife was bona fide.

FOR THE RESPONDENT:

1. First four sentences accepted and incorporated herein. Balance accepted as a comment on the evidence.

2. Accepted.

3. Not a proper Finding of Fact but more a comment on the state of the evidence.

4. Accepted.

5. Accepted but more as a comment on the state of the evidence.

6. - 12. Accepted and incorporated more briefly herein.

   1. More a comment on the evidence and a Conclusion of Law than a Finding of Fact.

   2. Accepted and incorporated herein.

   3. First two sentences accepted and incorporated herein. Balance more a comment on the meaning and effect of the basic fact.

   4. & 17. Accepted and incorporated herein.

      1. First three sentences accepted and incorporated herein. Balance comment on the evidence.

      2. - 22. Accepted and incorporated herein.

23. & 25. This is a restatement of testimony by both sides.

26. & 27. Accepted and incorporated herein.

COPIES FURNISHED:

Frederick T. Reeves, Esquire Langford, Hill,

Trybus & Whalen, P.A. Post Office Box 3277 Tampa, Florida 33601-3277

Wayne H. Mitchell, Esquire Commission on Minority Economic

and Business Development Knight Building, Suite 201 2737 Centerview Drive

Tallahassee, Florida 32399-0950

John Thomas

Interim Executive Director Commission on Minority Economic

and Business Development Knight Building

2737 Centerview Drive

Tallahassee, Florida 32399-0950

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: 94-002653

Orders for Case No: 94-002653