The former president and designated broker of Realty Executives Inc., John E. Foltz, allegedly disparaged the company’s owners in an attempt to undermine their authority and wrest control of the company from them, according to a lawsuit accusing Foltz of fiduciary misconduct and breach of conduct.
Through his attorney, Foltz denied the allegations, maintaining that Realty Executives Inc., also commonly known as Realty Executives of Phoenix, is attempting to break the terms of an employment agreement that was not scheduled to expire until 2015.
Foltz, who has worked for Realty Executives Inc. since 1978, was named the president and designated broker of the company in 1989, holding that position for two decades before being replaced last fall.
In a May 24 complaint, franchisee Realty Executives Inc. and franchise company Realty Executives International Inc. claims Foltz or employees under his charge prepared false financial statements, failed to monitor and reduce expenses in the face of declining revenue, mismanaged cash and trust funds, and left the company’s general ledger "out of balance by more than $4 million for a period of several years."
As a result, shareholders’ equity in the company was reduced by nearly $4 million over a five-year period between 2004 and 2009, the lawsuit alleged. That, in turn, has "severely impacted the company’s balance sheet" and hampered the owners’ ability to operate the company because of their inability to obtain credit, the lawsuit said.
Realty Executives issued a statement characterizing the lawsuit as an "employment agreement dispute" that "by no means affects the company’s operations."
The suit seeks the recovery of salaries paid to Foltz, compensatory and punitive damages, and attorneys’ fees.
"This is a way to put pressure on John to resolve (an employment dispute), and it’s not going to work because these allegations have no merit," Foltz’s attorney, Lonnie Williams, said.
As for allegations that Foltz was attempting to "wrest control of the company" from the Rectors, "I don’t know how you get control of a private company from the sole shareholder(s)," Williams said. "It’s literally impossible — it’s not a public company."
According to figures compiled by Real Trends, the Realty Executives Inc. franchise was the nation’s 11th-largest real estate brokerage in 2009 in closed transaction sides, up from 14th in 2008.
Richard Rector and his wife, Robyn Lee Dependahl, are the company’s sole shareholders, and the majority shareholders of Realty Executives International Inc., the Phoenix-based franchisor founded by Rector’s father, Dale Rector, in 1965.
Realty Executives International claims nearly 11,000 sales associates and approximately 700 franchises in 24 countries around the globe. With 1,300 agents, the Realty Executives Inc. brokerage company was at one point the largest franchisee within the Realty Executives International franchise system, the lawsuit said.
Last year and this year, senior managers at Realty Executives International were asked to accept pay reductions "due to the company’s severe cash-flow difficulties," the lawsuit said. Officers of the franchisee were also asked to take pay cuts and all but Foltz agreed, the lawsuit said.
Foltz was then advised that "the company could no longer afford to pay him according to (the terms of his employment and independent contractor agreements) and directed him to accept a temporary reduction in pay along with the other officers and senior management personnel," the lawsuit said.
"Foltz has refused to follow this directive and has refused to accept any reduction in salary or benefits whatsoever," Realty Executives claims in the suit.
Dominic Scappaticci, formerly the CEO and designated broker for Russ Lyon Sotheby’s International Realty, was named president and designated broker of Realty Executives Inc. in October.
Foltz was still listed on the company website Tuesday as "president emeritus," participating in speaking engagements, coaching programs, and heading up projects "related to visioning and articulating the company’s value proposition of supporting entrepreneurialism in the real estate profession."
According to the complaint, Foltz has maintained that Realty Executives has no cause to terminate his employment agreement, and that the company is liable for the entire amount of compensation due to him through the end of 2015 under the agreement.
Foltz’s attorney, Williams, characterized the lawsuit as an attempt by Realty Executives to unilaterally withdraw from an employment contract that had five years remaining on it.
Since Realty Executives decided to remove Foltz from his longtime position last fall, Williams said, "all we have asked is for them to honor the contract."
Foltz never received any written directives concerning the allegations made in the complaint, Williams said, and was only notified Tuesday that he had been terminated — more than a week after the lawsuit was filed.
"I’ve never seen that, in 25 years (practicing law), where you file the lawsuit first, and fire the client" afterwards, Williams said.
Most of the allegations are dated, some going back to early 2000, Williams said. Foltz was not the company’s chief financial officer, he noted, and to his knowledge, the companies "haven’t sued anybody else. Why is this only coming to light when they tried to cut his salary by more than half?"
In a statement to Inman News, Realty Executives said that the Rectors and company officers "recognized a need for change in leadership" more than a year ago.
The company’s new leadership team has "been very well received and has positively impacted the operations, expenses and morale within the brokerage," while uncovering "past discrepancies that were not readily accessible or discernible under the prior leadership," according to the statement.
Alleged accounting deficiencies
According to court filings, Foltz’s 1997 employment agreement was amended in 2005 to extend Foltz’s term as designated broker from Dec. 31, 2010, through the end of 2015.
After Foltz’s employment agreement was amended, the lawsuit alleges that he "began exerting tighter control" over the operations of the Realty Executives Inc. franchisee, "undermining the Rectors and their authority in order to discredit them to the other employees of the company, as well as potential investors."
Foltz "began making numerous disparaging statements regarding Realty Executives’ owners … to Realty Executives’ employees, particularly management employees, as well as to Realty Executives licensees and vendors," the companies said in the complaint.
Foltz fostered an "anti-Rector" atmosphere "as part of a scheme to allow him to further his fraudulent and improper activities, to ultimately wrest control of the ownership of the company from them," the complaint said.
The complaint provides no further details on how Foltz intended to accomplish such a feat, but provides a long list of allegations about the accounting practices in place while he was company president and designated broker.
The lawsuit alleges a "consistent lack of controls and application of sound practices in accordance with Generally Accepted Accounting Principles (GAAP)," including balance sheet accounts with no reserves, accruals that went unrecorded, and a lack of reserve cash and other accounts to cover liabilities.
When the company was audited by the Arizona Department of Real Estate in 2005, regulators found 11 violations, the complaint alleges. Foltz and another executive withheld the existence of nine remote trust accounts that regulators did not discover during the audit, the lawsuit claims.
During the course of a follow-up audit in 2008, Realty Executives reported the existence of the nine remote trust accounts to the Arizona Department of Real Estate, and hired an independent accounting firm to audit each account. The audit revealed "serious internal control violations and regulatory compliance issues," the lawsuit said.
The lack of accounting controls over trust accounts enabled another employee to allegedly embezzle $579,000 over a seven-year period, the complaint said. When the alleged embezzlement was discovered, Foltz briefed the Realty Executives Inc.’s brokerage company’s board of directors on new internal controls that were to be put in place, though the policies were never put into place, according to the lawsuit.
Compensation issues
Realty Executives also claims to have uncovered "direct and circumstantial evidence" demonstrating "extensive fraudulent activity, improper and unauthorized payments to himself and misrepresentation to the owner of Realty Executives over a period of years."
Under his employment agreement, Foltz was compensated in several ways.
According to court documents, his monthly salary was determined by the number of licensed agents he oversaw. Foltz earned an "agent multiplier" that was set at $19.53 per licensed agent per month in 1998, and increased each year by 5 percent plus or minus any change in the consumer price index.
For the year ending July 31, 2010, the "agent multiplier" had increased to $48.53, the complaint said. With 1,300 licensed agents, that would equal a salary of about $63,000 per month.
Foltz also received an annual transaction bonus equal to 80 cents per transaction side, the complaint alleges. Although Realty Executives maintains that the transaction bonus included no provision for cost of living increases, the lawsuit accuses Foltz of raising the bonus over the years.
In a memo Foltz submitted in August, he put the bonus per transaction side at $1.16 — down from $1.18 the year before, due to a decrease in the consumer price index.
Foltz also worked as an independent contractor for Realty Executives International under a separate agreement, the lawsuit said.
According the Jan. 15, 1998, agreement, Foltz was to promote the benefits of membership in Realty Executives International to agents in Phoenix, "thereby allowing the franchise fees to be paid by the agents with the least possible resistance or rebellion."
In return, Foltz received a 20 percent cut of fees paid by Realty Executives Inc., a franchisee, to Realty Executives International, the franchisor.
Realty Executives said it also granted Foltz a 20 percent "phantom ownership" stake in the company, good for as long as he was actively employed by the company, allowing him a share of its profits. But the lawsuit claims Foltz billed the company additional fees for providing services that were part of his duties as president and designated broker, and which he was already receiving compensation for.
Foltz allegedly paid himself through a company, "True North Consulting," for services such as "public relations with other Realty Executives Franchises" — services he was already being compensated for under his independent contractor agreement, the lawsuit said.
The lawsuit also accuses Foltz of concealing excessive commissions he received from a real estate-owned (REO) properties division he created in or around 2008, and that Foltz negotiated real estate and equipment leases at "substantially higher rates than prevailing market rates," and retained a referral fee for a commercial insurance policy he obtained on behalf of the company without disclosing he had received it.
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