95-004153 Department Of Business And Professional Regulation, Division Of Real Estate vs. Eugene A. Oathout And C I Associates, Inc. Status: Closed Recommended Order on Friday, March 29, 1996.

Summary: Error in real estate broker's escrow account not shown to be culpable negligence or breach of trust. Technical violation established.

STATE OF FLORIDA

DIVISION OF ADMINISTRATIVE HEARINGS

DEPARTMENT OF BUSINESS AND )

PROFESSIONAL REGULATION, )

DIVISION OF REAL ESTATE, )

)

Petitioner, )

)

vs. ) CASE NO. 95-4153

)

EUGENE A. OATHOUT AND )

C I ASSOCIATES, INC., )

)

Respondents. )

___________________________________)

RECOMMENDED ORDER

Pursuant to notice, the Division of Administrative Hearings, by its duly

designated Hearing Officer, Claude B. Arrington, held a formal hearing in the

above-styled case on December 12, 1995, in Vero Beach, Florida.

APPEARANCES

For Petitioner: Daniel Villazon, Esquire

Department of Business and

Professional Regulation

400 West Robinson Street

Post Office Box 1900

Orlando, Florida 32802

For Respondent: Michael O'Haire, Esquire

O'Haire, Quinn & Candler, Chartered

3111 Cardinal Drive

Vero Beach, Florida 32963

STATEMENT OF THE ISSUE

Whether the Respondents committed the offenses alleged in the

administrative complaint and the penalties, if any, that should be imposed.

PRELIMINARY STATEMENT

Eugene A. Oathout is a licensed real estate broker and C I Associates,

Inc., is the real estate company he owns and operates. Petitioner discovered a

discrepancy in an escrow account during a routine audit of the escrow accounts

maintained by the Respondents. Petitioner thereafter filed an administrative

complaint against the Respondents that alleged certain facts and, based on those

facts, alleged in Counts One and Two that the Respondents violated the

provisions of Section 475.25(1)(b), Florida Statutes, alleged in Counts Three

and Four that the Respondents violated the provisions of Section 475.25(1)(k),

Florida Statutes, and alleged in Counts Five and Six that the Respondents

violated the provisions of Rule 61J2-14.012(2) and (3), Florida Administrative

Code, thereby violating the provisions of Section 475.25(1)(e), Florida

Statutes. Respondents timely denied the material allegations of the

administrative complaint, the matter was referred to the Division of

Administrative Hearings, and this proceeding followed.

At the formal hearing, the Petitioner presented the testimony of Dawn

Luchik and presented four exhibits, each of which was admitted into evidence.

Ms. Luchik is an investigator employed by the Petitioner and performed the audit

that led to this proceeding. Eugene Oathout testified on his own behalf and

presented the additional testimony of Eric Price, an expert in the field of

computer programs and computer programming. Respondents presented three

exhibits, each of which was accepted into evidence.

No transcript of the proceedings has been filed. At the request of the

parties, the time for filing post-hearing submissions was set for more than ten

days following the conclusion of the formal hearing. Consequently, the parties

waived the requirement that a recommended order be rendered within thirty days

after the conclusion of the formal hearing. See, Rule 60Q-2.031, Florida

Administrative Code. Rulings on the parties' proposed findings of fact may be

found in the Appendix to this Recommended Order.

FINDINGS OF FACT

1. Petitioner is a state licensing and regulatory agency charged with the

responsibility and duty to prosecute administrative complaints against real

estate professionals pursuant to the laws of the State of Florida, in particular

Section 20.30 and Chapters 120, 455, and 475, Florida Statutes, and the rules

promulgated pursuant thereto.

2. Respondent, Eugene A. Oathout, is now and at all times pertinent to

this proceeding has been a duly licensed real estate broker in the State of

Florida. Mr. Oathout's license number is 0064983. The last license issued to

him was as a broker in care of C I Associates, Inc., trading as C I, 5075 N.

A1A, Post Office Box 3070, Vero Beach, Florida 32964-3070.

3. Respondent, C I Associates, Inc., trading as C I, is now and at all

times pertinent to this proceeding has been a duly licensed real estate broker

in the State of Florida. C I's license number is 0232366. The last license

issued to it was for the address 5075 N. A1A, Post Office Box 3070, Vero Beach,

Florida 32964-3070.

4. At all times pertinent to this proceeding, Respondent Oathout was

licensed and operating as the qualifying broker and officer of Respondent C I.

5. On August 30, 1994, Dawn R. Luchik, an investigator employed by

Petitioner, paid an unannounced visit to Respondents' real estate brokerage

office for the purpose of performing a random audit of Respondents' escrow

accounts. Respondent Oathout was present at the Respondents' office on August

30, 1994, but because his secretary was not there, he had difficulty finding all

the files and records Ms. Luchik wanted to review.

6. At that time, Respondents maintained two escrow accounts, one for real

estate sales matters (the sales account) and one for rental and property

management matters (the management account).

7. After her review of the records on August 30, 1994, Ms. Luchik

tentatively concluded that there was no problem with the sales account but that

there existed a shortage in the management account of $4,111.00.

8. Ms. Luchik testified that Mr. Oathout appeared shocked at her tentative

finding as to the management account.

9. An appointment was scheduled for Ms. Luchik to return to complete her

audit on September 6, 1994. This second appointment was made so Respondent

Oathout could, with the assistance of his secretary, attempt to locate certain

files and determine how a deficiency in the escrow account occurred.

10. Rule 61J2-14.012(2), Florida Administrative Code, requires real estate

brokers to reconcile escrow accounts monthly. Respondent Oathout attempted to

reconcile this account by comparing the liabilities of the account with the

monthly bank balance that reflected the actual amount in the account at the end

of each month. At all times pertinent to this proceeding, Respondent Oathout

determined the liabilities of the account from computer generated data using a

computer data base contained in a commercial software computer program known as

"Ability". Respondents had purchased and installed this software program

between five and six years prior to the audit and used it until the audit.

11. This software program determined the liabilities against the

management escrow account by adding four columns of numbers. The program then

added together the sums of the four columns and the resulting number was

supposedly the total liabilities against the management escrow account.

12. In reviewing his records in an effort to determine the existence and

extent of any problem with the management account, Respondent Oathout determined

that this "Ability" computer program had regularly misadded two of the four

columns summaries that he prepared monthly.

13. The two columns erroneously totalled by the computer program were the

one for last month's rental deposits and the one for security deposits. No

pattern or reason for the miscalculations by the accounting program is apparent.

Unlike other recurring monthly income and expense items, disposition of these

payments occurred only on the termination of a tenancy. Consequently,

Respondent Oathout did not regularly review or reconcile the entries in these

columns.

14. Because the two incorrect columns consistently under-reported

Respondents' liability for last month's and security deposit payments,

Respondents' balances showed a lower escrow account liability than actually

existed.

15. In addition to managing rental properties for clients, Respondent

Oathout had his own rental properties.

16. Respondents maintained in the management account deposits made by

tenants of Respondent Oathout in addition to deposits made by their clients.

17. Each month, near month's end, Respondent Oathout would take a trial

balance of the management account. Based on the information contained in the

computer printout and after accounting for uncleared and outstanding checks and

unrecorded current deposits, he would determine whether there existed a surplus

in the management account. Because the calculation of liabilities was

consistently understated, his calculation of the surplus was consistently

overstated.

18. Respondent Oathout would thereafter assume that any surplus reflected

in the account belonged to him and he would withdraw the excess from the

account.

19. Respondents' reconciliation statements contained small discrepancies

that were inadequately explained and failed to provide the corrective action

that Respondents would take to resolve the discrepancies.

20. Because the computer software error had gone undetected for so long,

Respondents' accounting records had been overstated a total of $27,992.30 with a

corresponding shortage in the management bank account in the sum of $23,482.97.

21. When Ms. Luchik returned to Respondents's office on September 6, 1994,

Respondent Oathout told her that he calculated the shortage in the management

account as being $23,482.97 as opposed to $4,111.00, showed her his records, and

explained that he had detected an error in the computer program.

22. Ms. Luchik amended her final investigation report to reflect that the

amount of shortage in the management account was the amount calculated by

Respondent Oathout.

23. When the existence of a shortage was verified and the amount

confirmed, Respondent Oathout promptly corrected the shortages. On September 6,

9, and 12, 1994, he made deposits from his own funds into the management account

in the respective amounts of $12,000, $2,500, and $8,982.97.

24. There was no evidence that Respondent Oathout knew of this computer

problem or that he was aware that a shortage existed before Ms. Luchik's audit.

The software problem was a glitch that was not caused by Respondents or

manipulated by them.

CONCLUSIONS OF LAW

25. The Division of Administrative Hearings has jurisdiction of the

parties to and the subject matter of this proceeding. Section 120.57(1),

Florida Statutes.

26. Petitioner has the burden of proving by clear and convincing evidence

the allegations against Respondents. See Ferris v. Turlington, 510 So. 2d 292

(Fla. 1987); Evans Packing Co. v. Department of Agriculture and Consumer

Services, 550 So.2d 112 (Fla. 1st DCA 1989).

27. Section 475.25, Florida Statutes, provides, in pertinent part, as

follows:

(1) The commission may deny an application

for licensure, registration, or permit, or

renewal thereof; may place a licensee,

registrant, or permittee on probation; may

suspend a license, registration, or permit for

a period not exceeding 10 years; may revoke a

license, registration, or permit; may impose

an administrative fine not to exceed $1,000

for each count or separate offense; and may

issue a reprimand, and any or all of the fore-

going, if it finds that the licensee,

registrant, permittee, or applicant:

* * *

(b) Has been guilty of . . . culpable

negligence, or breach of trust in any business

transaction in this state . . .

* * *

(e) Has violated any of the provisions of

this chapter or any lawful order or rule made

or issued under the provisions of this chapter

or 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 . . .

wherein the funds shall be kept until disburse-

ment thereof is properly authorized . . .

28. Rule 61J2-14.012(2) and (3), Florida Administrative Code, provides, in

pertinent part, as follows:

(2) At least monthly, a broker shall cause

to be made 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 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 name(s) 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 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 in reference to shortages or overages of

funds in the account(s). . . .

29. Counts One and Two of the Administrative Complaint allege that the

Respondents violated the provisions of Section 475.25(1)(b), Florida Statutes.

Petitioner alleges that Respondents's escrow shortage proves that Respondents

are guilty of "culpable negligence" and "breach of trust." Petitioner argues,

in part, that Respondents would have discovered this shortage had they properly

reconciled the escrow account referred to as the management account. While this

may be true, this fact was not established by clear and convincing evidence. In

this proceeding, there was no evidence that the Respondents knew of the escrow

account shortage prior to the audit and there was insufficient evidence to

establish that they should have known of the shortage.

30. The appellant in Munch v. Department of Professional Regulation,

Division of Real Estate, 592 So.2d 1136 (Fla. 1st DCA 1992) was a real estate

salesman who had been charged in Count I of an administrative complaint with

"fraud, misrepresentation, concealment, false promises, false pretenses,

dishonest dealing by trick, scheme or device, culpable negligence or breach of

trust in a business transaction" in violation of Section 475.25(1)(b), Florida

Statutes. The following observations made in that opinion are pertinent to this

proceeding:

It is clear that Section 475.25(1)(b) is penal

in nature. As such, it must be construed

strictly, in favor of the one against whom the

penalty would be imposed. . . . Reading the

first clause of Section 475.25(1)(b) (the

portion of the statute which appellant was

charged with having violated in Count I of the

complaint), and applying to the words used

their usual and natural meaning, it is apparent

that it is contemplated that an [intentional]

act be proved before a violation may be found.

(592 So. 2d 1136, at 1143-1144. Citations

omitted. [Emphasis in the original.]

31. Based on the foregoing, it is concluded that Petitioner failed to

establish by clear and convincing evidence that Respondents violated the

provisions of Section 475.25(1)(b), Florida Statutes, as alleged in Counts One

and Two of the Administrative Complaint.

32. Counts Three and Four of the Administrative Complaint allege that the

Respondents violated the provisions of Section 475.25(1)(k), Florida Statutes.

Petitioner proved by clear and convincing evidence that Respondents placed funds

in the escrow account and that a total of $23,482.97 was withdrawn from this

escrow account without proper authorization, thereby establishing the violations

alleged in Counts Three and Four. Respondents correctly assert that this should

be considered a technical violation that does not merit suspension or revocation

of licensure since there was no showing of dishonest or unscrupulous conduct.

See, Rivard v. McCoy, 212 So.2d 672 (Fla. 1st DCA 1968). The conclusion that

suspension or revocation is inappropriate does not compel the conclusion that no

penalty is appropriate. Respondents violated the provisions of Section

475.25(1)(k), Florida Statutes, and an appropriate penalty should be imposed.

33. Counts Five and Six of the Administrative Complaint allege that the

Respondents violated the provisions of Rule 61J2-14.012(2) and (3), Florida

Administrative Code, thereby violating the provisions of Section 475.25(1)(e),

Florida Statutes. These violations were established by clear and convincing

evidence. Respondents failed to properly address discrepancies that appeared on

the reconciliation statements that were prepared and failed to address measures

to correct those discrepancies.

34. In considering the recommended penalties that follow, the undersigned

has considered the fact that the violations in Counts Three and Four are

technical as opposed to intentional, that Respondent Oathout has been a real

estate professional approximately 24 years without prior incident, that

Respondent Oathout cooperated fully with Petitioner's investigator, that

Respondent promptly corrected the shortage in the escrow account, and that no

harm has come to any member of the public as a result of this error. The

undersigned has also considered the disciplinary guidelines found at Rule 61J2-

24.001(1)(f) and (l), Florida Administrative Code, and the discretion to deviate

from those guidelines in the event of mitigating factors, as authorized by Rule

61J2-24.001(4)(a), Florida Administrative Code. While the penalty guideline for

a violation of Section 475.25(1)(k), Florida Statutes, includes a suspension of

licensure for a minimum of 90 days, it is appropriate to deviate from that

minimum suspension since the violation has been found to be a technical one.

RECOMMENDATION

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

RECOMMENDED that Petitioner enter a final order that adopts the findings of

fact and conclusions of law contained herein, dismisses the charges alleged in

Counts One and Two, finds Respondents guilty of the charges alleged in Counts

Three, Four, Five, and Six. It is recommended that Respondent Oathout be placed

on probation for a period of one year for these violations. 1/ Administrative

fines in the total amount of $500.00 should be imposed against the Respondents

for the violations of Counts Three and Four. Administrative fines in the total

amount of $2,000.00 should be imposed against the Respondents for the violations

of Counts Five and Six.

DONE AND ENTERED this 29th day of March, 1996, in Tallahassee, Leon

County, Florida.

____________________________________

CLAUDE B. ARRINGTON, Hearing Officer

Division of Administrative Hearings

The DeSoto Building

1230 Apalachee Parkway

Tallahassee, Florida 32399-1550

[phone]

Filed with the Clerk of the

Division of Administrative Hearings

this 29th day of March 1996.

ENDNOTE

1/ In its proposed order, Petitioner proposes that the penalty imposed on

Respondent Oathout include the imposition of an administrative fine, six month

suspension of licensure, and following the suspension the imposition of a term

of probation for a period of one year. Petitioner also recommends that the term

of probation include a requirement that Respondent Oathout complete a 7 hour

real estate brokerage escrow management course in addition to any other

education required of him to remain current and active as a real estate broker

in the State of Florida. For the reasons discussed, the suspension of licensure

is not recommended in this proceeding. The recommended term of probation is

reasonable under the circumstances of this case.

APPENDIX TO RECOMMENDED ORDER, CASE NO. 95-4153

The proposed findings of fact submitted by Petitioner are adopted in

material part by the Recommended Order.

The following rulings are made as to the proposed findings of fact submitted by

the Respondent.

1. The proposed findings of fact in paragraphs 1 - 14 are adopted in

material part by the Recommended Order.

2. The proposed findings of fact in paragraphs 15 and 16 are subordinate

to the findings made.

3. The proposed findings of fact in paragraph 17 and 18 are treated as

preliminary matters, but are unnecessary as findings of fact.

COPIES FURNISHED:

Daniel Villazon, Esquire

Department of Business and

Professional Regulation

Division of Real Estate

Post Office Box 1900

Orlando, Florida 32802-1900

Michael O'Haire, Esquire

O'Haire, Quinn & Candler, Chartered

3111 Cardinal Drive

Vero Beach, Florida 32963

Henry M. Solares, Director

Division of Real Estate

Post Office Box 1900

Orlando, Florida 32802-1900

Lynda L. Goodgame, General Counsel

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 to this recommended

order. All agencies allow each party at least ten days in which to submit

written exceptions. Some agencies allow a larger 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.