06-004483 Department Of Business And Professional Regulation, Division Of Florida Land Sales, Condominiums, And Mobile Homes vs. Eden Isles Condominium Association, Inc. Status: Closed Recommended Order on Friday, May 11, 2007.

Summary: Respondent did not have (and was not required to have) a statutory reserve account because, for each annual budget at issue, a majority of the unit owners had voted to waive the funding of reserves. Respondent did not improperly misuse "reserve funds."

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF BUSINESS AND )

PROFESSIONAL REGULATION, )

DIVISION OF FLORIDA LAND SALES, )

CONDOMINIUMS, AND MOBILE HOMES, )

)

Petitioner, ) Case No. 06 - 448 3

)

vs. )

)

EDEN ISLES CONDOMINIUM )

ASSOCIATION, INC., )

)

Respondent. )

)

RECOMMENDED ORDER

This case came before Administrative Law Judge John G.

Van Laningham for final hearing by video teleconference on

February 1 and 2, 2007, at sites in Tallahassee and Lauderdale

Lakes, Florida.

APPEARANCES

For Petitioner: David J. Tarbert, Esquire

Department of Business and

Professional Regulation

1940 North Monroe Street, Suite 42

Tallahassee, Florida 32399 - 2202

For Responden t: Leonardo G. Renaud, Esquire

Leonardo G. Renaud, P.A.

8105 Northwest 155 Street

Miami Lakes, Florida 33016

STATEMENT OF THE ISSUE

The issue in this case is whether Respondent condominium

association misused "reserve funds."

PRELIMINARY STATEMEN T

On August 21 , 200 6 , Petitioner Department of Business and

Professional Regulation, Division of Florida Land Sales,

Condominiums, and Mobile Homes, entered a Notice to Show Cause

directing Respondent Eden Isles Condominium Association, Inc. ,

to rebut the charge that it had failed to obtain the approval of

a majority of the unit owners prior to using statutory reserve

funds for purposes other than capital expenditures, in violation

of Section 718.11 2 ( 2 ) (f)3. , Florida Statutes . Respondent

disputed the alleg ations and timely requested a formal hearing.

On November 6, 2006, t he case was referred to the Division

of Ad ministrative Hearings ("DOAH"), where it was docketed as

Case No. 06 - 448 3 and assigned to an administrative law judge

("ALJ"). The ALJ soon conso lidated this case with DOAH Case

Nos. 06 - 448 1 and 06 - 448 2 , finding that the parties and counsel

were the same in all three cases, which also presented similar

issues.

The final hearing respecting the consolidated cases took

place on February 1 and 2 , 2007, as scheduled, with all parties

present. Petitioner called two witnesses, its employees Patrick

Flynn and Boyd McAdams, and introduced three composite exhibits,

which were received in evidence. Respondent presented three

witnesses: Louis Claps, a certif ied public accountant; Suzanna

Rockwell, an employee of Respondent; and Jonathon Marks, the

president of Respondent's Board of Directors. In addition,

Respondent's Exhibits 1 through 7 were admitted .

The two - volume final hearing transcript was filed on

Fe bruary 28 , 2007, making the Proposed Recommended Orders due on

March 30 , 2007, pursuant to the schedule established at the

conclusion of the final hearing. At the parties' joint request,

this deadline was later enlarged, to April 20, 2007.

Thereafter, e a ch party timely filed a Proposed Recommended

Order , and these were carefully considered during the

preparation of this Recommended Order.

Although the consolidated cases share a common evidentiary

record, the undersigned has elected to issue a separate

R ecommended O rder for each one .

Unless otherwise indicated, citations to the Florida

Statutes refer to the 2006 Florida Statutes.

FINDINGS OF FACT

1. Respondent Eden Isles Condominium Association, Inc.

("Association") is the entity responsible for operati ng the

common elements of the Eden Isles Condominium ("Condominium").

As such, the Association is subject to the regulatory

jurisdiction of Petitioner Division of Florida Land Sales,

Condominiums, and Mobile Homes ("Division").

2 . The Association retai ned Seth M. Lipson ("Lipson"), a

certified public accountant, to audit the Association's books

and prepare financial statement s respecting the year s e nding

December 31, 200 2, and December 31, 2003.

3. Lipson delivered to the Board a financial report for

each of these years. The respective balance sheets in each

report made reference to a "replacement fund," which (as the

notes to the financial statements reveal ) Lipson believed

constituted the statutory "reserve account" that Florida law

requires be incl uded in a condominium's annual budget unless, by

a majority vote, the unit owners elect not to maintain such

reserves for capital expenditures.

4. In fact, the Condominium's unit owners, by majority

vote, had always waived the funding of reserves. The a ccount

that Lipson characterized as a "replacement fund" consisted not

of statutory "reserve funds," but rather of funds that the

Association had received over the years, through regular

assessments for " common expenses, " in excess of amounts needed

to pay " common expenses. " These excess "common expenses"

assessments had been placed in certificates of deposit and,

evidently, were available for such uses as the Board might

determine , from time to time, were necessary and appropriate.

5. According to the f inancial reports that Lipson

prepared, some of the excess funds had been use d for purposes

other than capital expenditures. Each balance sheet shows an

amount "due" to the "replacement fund" from the account for

operating expenses.

CONCLUSIONS OF LAW

6 . DOAH has personal and subject matter jurisdiction in

this proceeding pursuant to Sections 120.569 and 120.57(1),

Florida Statutes.

7 . Upon finding reasonable cause to believe that a

violation of the Condominium Act or any rule promulgated

thereunder has occurred, the Division is authorized to institute

an administrative enforcement proceeding through which various

coercive means of securing compliance may be imposed , including

" a civil penalty [of up to $5,000] against a developer or

association, or its a ssignee or agent . . . ."

§ 718.501(1)(d)4., Fla. Stat. The Division may also

issue an order requiring the developer,

association, officer, or member of the board

of administration, or its assignees or

agents, to cease and desist from the

unlawful pract ice and take such affirmative

action as in the judgment of the division

will carry out the purposes of this chapter.

§ 718.501(1)(d)2., Fla. Stat.

8 . Because the imposition of a fine is (obviously)

punitive in nature and implicates significant prope rty rights,

the D ivision has the burden, in an enforcement proceeding

brought for that purpose , of proving the alleged violation by

clear and convincing evidence. Department of Banking and

Finance, Div. of Securities and Investor Protection v. Osborne

Ste rn & Co. , 670 So. 2d 932, 935 (Fla. 1996).

9 . Regarding the standard of proof, in Slomowitz v.

Walker , 429 So. 2d 797, 800 (Fla. 4th DCA 1983), the Court of

Appeal, Fourth District, canvassed the cases to develop a

"workable definition of clear and convin cing evidence" and found

that of necessity such a definition would need to contain "both

qualitative and quantitative standards." The court held that:

clear and convincing evidence requires that

the evidence must be found to be credible;

the facts to whic h the witnesses testify

must be distinctly remembered; the testimony

must be precise and explicit and the

witnesses must be lacking in confusion as to

the facts in issue. The evidence must be of

such weight that it produces in the mind of

the trier of fac t a firm belief or

conviction, without hesitancy, as to the

truth of the allegations sought to be

established.

Id. The Florida Supreme Court later adopted the F ourth

D istrict's description of the clear and convincing evidence

standard of proof. Inquiry Concerning a Judge No. 93 - 62 , 645

So. 2d 398, 404 (Fla. 1994). The First District Court of Appeal

also has followed the Slomowitz test, adding the interpretive

comment that "[a]lthough this standard of proof may be met where

the evidence is in conflict, . . . it seems to preclude evidence

that is ambiguous." Westinghouse Elec. Corp., Inc. v. Shuler

Bros., Inc. , 590 So. 2d 986, 988 (Fla. 1st DCA 1991), rev .

denied , 599 So. 2d 1279 (Fla. 1992)(citation omitted).

10 . In this case, the Division has alleged that the

Association failed to obtain the approval of the Condominium's

unit owners before using reserve funds for purposes other than

capital expenditures, in violation of Section 718.11 2 ( 2 ) (f) ,

Florida Statutes , which provides in pertinent part as follow s :

REQUIRED PROVISIONS. -- The bylaws shall

provide for the following and, if they do

not do so, shall be deemed to include the

following:

* * *

(f) Annual budget. —

* * *

2. In addition to annual operating

expenses, the budget shall incl ude reserve

accounts for capital expenditures and

deferred maintenance. These accounts shall

include, but are not limited to, roof

replacement, building painting, and pavement

resurfacing, regardless of the amount of

deferred maintenance expense or replac ement

cost, and for any other item for which the

deferred maintenance expense or replacement

cost exceeds $10,000. The amount to be

reserved shall be computed by means of a

formula which is based upon estimated

remaining useful life and estimated

replacem ent cost or deferred maintenance

expense of each reserve item. The

association may adjust replacement reserve

assessments annually to take into account

any changes in estimates or extension of the

useful life of a reserve item caused by

deferred maintenan ce. This subsection does

not apply to an adopted budget in which the

members of an association have determined,

by a majority vote at a duly called meeting

of the association, to provide no reserves

or less reserves than required by this

subsection. . . . .

3. Reserve funds and any interest accruing

thereon shall remain in the reserve account

or accounts, and shall be used only for

authorized reserve expenditures unless their

use for other purposes is approved in

advance by a majority vote at a duly cal led

meeting of the association. . . . .

(Emphasis added.)

11. According to t he Division , the f act that the

Condominium's unit owners voted each year to waive the

requirements relating to statutory reserves is irrelevant ,

because once the accountant c haracterized the excess "common

expenses" assessments as a "replacement fund," a reserve account

subject to Section 718.112(2)(f), Florida Statutes, was created.

The Division's position simply cannot be squared, however, with

the plain language of the sta tute, which unambiguously provides

that subsection (f) does not apply to a budget when , as here, a

majority of the unit owners votes not to establish statutory

reserves.

12. The Division's position is not only clearly contrary

to the statute, but also, if accepted, would permit one person

(the accountant) —— who need not even hold a voting interest in

the condominium —— to retroactively overturn the will of the unit

owners with regard to statutory reserves. The legislature

cannot possibly have intended to a llow such an anomalous result.

13. Based on the evidence in the record, which establishes

convincingly that, in connection with each relevant budget , the

Condominium's unit owners waived the funding of reserves, it is

concluded that the so - called "replac ement fund" was not a

"reserve account" subject to Section 718.112(2)(f), Florida

Statutes , because the statutory provisions regarding reserves do

not apply when waived, as here . i Accordingly, the Association

did not improperly use statutory reserves, as charged.

RECOMMENDATION

Based on the foregoing Findings of Fact and Conclusions of

Law, it is RECOMMENDED that the Division enter a final order

rescinding the Notice to Show Cause and exonerating the

Association of the charge of using statutory reserve fun ds for

purposes other than capital expenditures without first obtaining

the unit owners' approval .

D ONE AND ENTERED this 1 1 th day of May, 2007, in

Tallahassee, Le on County, Florida.

S

___________________________________

JOHN G. VAN LANINGHAM

Administ rative Law Judge

Division of Administrative Hearings

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399 - 3060

(850) 488 - 9675 SUNCOM 278 - 9675

Fax Filing (850) 921 - 6847

www.doah.state.fl.us

Filed with the Clerk of the

Division of Administrative Hearings

this 1 1 th day of May, 2007.

ENDNOTE

i / The proper designation for the funds in question would have

been "common surplus," which term is defined in § 718.103(10),

Fla. Stat., as follows:

"Common surplus" means the amount of all

receipts or revenues, including assessments,

rents, or profits, collected by a

condominium association which exceeds common

expenses.

COPIES FURNISHED :

David J. Tarbert, Esquire

Department of Business and

Professional Regulation

1940 North Monroe Street, Suite 42

Tallahassee, Florida 32399 - 2202

Ned Luczynski, Gen eral Co unsel

Department of Business and

Professional Regulation

1940 North Monroe Street

Tallahassee, Florida 32399 - 2202

Leonardo G. Renaud, Esquire

Leonardo G. Renaud, P.A.

8105 Northwest 155 Street

Miami Lakes, Florida 33016

Michael Cochran, Division Director

Department of Business and

Professional Regulation

1940 North Monroe Street

Tallahassee, Florida 32399 - 0792

NOTICE OF RIGHT TO SUBMIT EXCEPTIONS

All parties have the right to submit written exceptions within

15 day s from the date of this Recommended Order. Any exceptions

to this Recommended Order should be filed with the agency that

will issue the Final Order in this case.