SC Administrative Law Court Decisions

This matter is before the Administrative Law Judge Division on the petition by James MacDonald for an injunction or, in the alternative, to quash a subpoena duces tecum issued to NationsBank for certain bank records. A temporary restraining order was issued on July 10, 1997 enjoining NationsBank from releasing the records until further order of this tribunal. A hearing was conducted on July 18, 1997 on the petition. Based upon the information provided at the hearing, the Petitioner's request is GRANTED. Any issues raised in the proceeding or hearing of this matter not specifically addressed in this Order are deemed denied. ALJD Rule 29.

Based upon the evidence presented, I make the following findings of fact, taking into consideration the burden on the parties to establish their respective cases by a preponderance of the evidence and taking into account the credibility of the witnesses:

1. On February 10, 1997, the Real Estate Commission issued an Order based upon certain stipulations and agreements between the Commission and James MacDonald arising out of conduct occurring in 1995 and 1996.

2. The primary conduct addressed in the Commission's Order concerned the deposit of escrow funds in non-escrow accounts and checks issued by MacDonald or his company (Realty Associates) not being honored because of insufficient funds in the bank account.

3. Based upon the Commission's findings and conclusions, it revoked MacDonald's real estate license and fined him $5000.00. Both of these sanctions were stayed for a probationary period of 36 months, contingent upon his compliance with the certain terms. These terms were to make restitution to two individuals before July 15, 1997 and that escrow funds are to be handled by an independent escrow agent approved by the Commission during the probationary period. In addition, MacDonald was ordered not to violate any of the provisions of the real estate licensing provisions or their regulations.

4. Failure to comply with any of the terms of probation or any subsequent violation proven after an opportunity for a hearing would result in the lifting of the stay and therefore the revocation of the license and the imposition of the $5000.00 fine.

5. MacDonald was never informed orally or in writing that the Commission would seek copies of bank statements or records to determine compliance with the terms of probation.

6. On June 26, 1997, the Real Estate Commission issued a Subpoena Duces Tecum to NationsBank requesting documents and information pertaining to an account in the name of Realty Associates, MacDonald's business. The deadline for the bank to return the information was July 8, 1997.

7. The subpoena requested monthly statements from February 1, 1997 to June 30, 1997 as well as all deposit slips, deposited checks, and checks drawn on the account for the same period.

8. MacDonald was never served a copy of the subpoena or notified by the Commission of its intent to issue a subpoena for the information.

9. On July 5, 1997, MacDonald received a letter from the bank (dated July 1, 1997) informing him of the subpoena and informing him of the bank's policy regarding release of the documents.

10. On the same day, MacDonald issued a reply to the bank indicating that there was no pending investigation by the Real Estate Commission, that the account for which information was sought was not a trust account, and that he had never been requested to provide the information or notified of any charges against him.

11. Copies of these documents were filed with the Division with a letter seeking an injunction or stay until the matter was resolved.

12. On Friday, July 19, 1997, at the hearing before the Division, the Commission served MacDonald with a Complaint and Notice of Hearing scheduling a hearing for August 20, 1997 on the issues raised in the Complaint.

13. The Complaint alleges that MacDonald failed to comply with the provisions of the Commission's Order and the terms of his probation by failing to make restitution, failing to deposit escrow funds in an escrow account, and not maintaining sufficient funds in his business accounts for checks written on the account.

14. At the hearing, the focus of the Department centered on a check written on Realty Associates; account on May 19, 1996 (sic) payable to Coldwell Banker in the amount of $500.00 which the Commission states was not honored by NationsBank because there were insufficient funds.

15. MacDonald testified that when the check was presented, the bearer sought to obtain a cashier's check using those funds. MacDonald had given instructions to the bank not to issue any cashier's checks without his authorization. When contacted by the bank, he authorized the transaction. The check bears notations indicating it was negotiated on May 22, 1997.

Based upon the findings of fact, I conclude, as a matter of law, the following:

1. The Administrative Law Judge Division has jurisdiction pursuant to S.C. Code Ann. §§ 1-23-320 and 1-23-630 (Supp. 1996) and § 40-57-170 (B)(4) (Supp. 1996).

2. Injunctive relief is a drastic remedy and should be cautiously applied only when legal rights are unlawfully invaded or legal duties are willfully or wantonly neglected. LeFurgy v. Long Cove Club Owners Assoc., Inc., 313 S.C. 555, 443 S.E.2d 577 (Ct. App. 1994).

3. In the present case, the Commission sought financial records of Petitioner's business through the use of a subpoena without notice to Petitioner. He was never served a copy of the subpoena, never informed orally of the issuance of the subpoena, and never told that the Commission would subpoena documents to determine his compliance with the terms of probation. MacDonald received notice of the subpoena from NationsBank three days before the deadline for the bank to release the documents.

4. The Commission argues that it has authority to subpoena documents pursuant to S.C. Code Ann. § 40-57-170(B)(3) (Supp. 1996). This section authorizes the Commission to issue subpoenas in connection with any public or private investigation which it considers necessary to determine whether a person is violating the provisions of law relating to real estate brokers in order to obtain material evidence.

5. The Commission also argues that under Regulation 105-21, the books and records of real estate brokers relating to escrow or trust accounts and monies received pursuant to a real estate transaction are open to inspection by the Commission upon request. This regulation provides that the Commission may inspect the books and records of the real estate broker upon request. It does not give the Commission authority to seek records from the bank relating to these transactions. If the real estate broker fails or refuses to allow the Commission to inspect the books then appropriate action can be taken.

6. The Commission certainly was entitled to obtain the information it sought; however, it did not follow appropriate procedures in seeking the information. The Commission's first step should have been to require MacDonald to produce the information it sought. Even if the Commission sought to investigate MacDonald's conduct and issue a subpoena under its authority in S.C. Code Ann. § 40-57-170, it violated MacDonald's due process rights by not informing him and not providing notice of its action.

7. Due process encompasses "[a]ll rights which are of such fundamental importance as to require compliance with due process standards of fairness and justice" and includes "[p]rocedural ... rights of citizens against government actions that threaten the denial of life, liberty, or property." BLACK'S LAW DICTIONARY 501 (6th ed. 1990); Anonymous (M-156-90) v. State Bd. Of Medical Examiners, ___ S.C. ___, 473 S.E.2d 870 (Ct. App. 1996).

8. "Due process is flexible and calls for such procedural protections as the particular situation demands." Morrisey v. Brewer, 408 U.S. 471, 481, 92 S.Ct. 2593, 2600, 33 L.Ed.2d 484 (1972); Stono River Environmental Protection Ass'n v. South Carolina Dept. Of Health and Environmental Control, 305 S.C. 90, 406 S.E.2d 340 (1991); Anonymous (M-156-90) v. State Bd. Of Medical Examiners, supra.

9. Following the due process analysis in Anonymous, it is clear that MacDonald's property and private interests would be gravely affected by the action of the Commission in seeking to obtain the bank records. Second, the risk of erroneous deprivation of his interest through the procedures used by the Commission without any additional or substitute procedural safeguards was high. The Commission's failure to notify MacDonald of the subpoena gave him no opportunity to employ any methods of assuring that release of the documents was not an unwarranted intrusion into the business records. Had the Bank not notified MacDonald, there would have been no opportunity to utilize the procedural safeguards afforded through injunctive relief. And finally, the government's interest in obtaining the records to prevent harm to the public may be great but the burden that additional or substitute procedural requirements would entail is minimal.

10. The Commission certainly has the right to seek the information and the bank records to determine whether MacDonald was appropriately handling funds. MacDonald's records would not reveal whether any checks were returned for insufficient funds and therefore, the Commission would have to seek the information from the bank. However, in seeking the information, the Commission had a duty to inform MacDonald that it would be reviewing the records, seeking information about financial transactions to determine compliance with the terms of his probation.

11. By failing to provide notice to MacDonald, the Commission violated his due process rights and the injunctive relief sought by MacDonald should be granted. The Commission may subpoena the documents from NationsBank but only after affording MacDonald due process by notifying him of the information it is seeking.

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

ORDERED, that NationsBank is permanently enjoined from complying with the Subpoena Duces Tecum issued by the Real Estate Commission on June 26, 1997 relating to documents and records of Realty Associates. The Subpoena Duces Tecum is QUASHED.

IT IS FURTHER ORDERED, that nothing in this Order prevents the Real Estate Commission from issuing a Subpoena Duces Tecum to NationsBank for documents or records regarding Realty Associates after providing notice to James E. MacDonald, as broker in charge.

AND IT IS SO ORDERED.

ALISON RENEE LEE

Administrative Law Judge

July 23, 1997

Columbia, South Carolina