ALJDEC

00F-BD020-BNK · State Banking Department · 2000-09-08

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: August 31, 2000. Record closed on October 4, 2000, the deadline for submission of legal memoranda. APPEARANCES: Assistant Attorney General Viet Lee on behalf of the Arizona State Banking Department; Ivey Kushner, Esq. on behalf of Tambie Stevenson; Certified Collectors, Inc. did not appear at the hearing. ADMINISTRATIVE LAW JUDGE: Lewis D. Kowal _____________________________________________________________________ FINDINGS OF FACT At the commencement of the hearing, the parties voiced no objection in having the caption of this matter amended to reflect Tambie Stevenson as being a named respondent in this matter. At all times material to this matter, Certified Collectors, Inc. (“CCI”) was, and currently is, an Arizona corporation doing business as Commercial Recovery International. CCI was first issued a collection agency license by the Arizona Department of Banking (“Department”) in 1962. The license expired January 31, 2000, and was not renewed. The Department commenced this proceeding by issuing a Notice of Hearing and Complaint on March 29, 2000, after expiration of CCI’s collection agency license. The Department’s records that were presented to this tribunal revealed that at all times material to this matter, Tambie Stevenson (“Ms. Stevenson”) was, and currently is, the owner of CCI. In December 1998, Ms. Stevenson requested of and received approval from the Department for her to be appointed the active manager of CCI. On December 30, 1998, Ms. Stevenson submitted to the Department an application for renewal (“Application”) of CCI’s license. In the Application, Ms. Stevenson represented that she was the president and 100% owner of CCI. Since being approved as active manager of CCI and receiving renewal of CCI’s license in 1999, Ms. Stevenson has not made any further filings with the Department to indicate that CCI is not owned by her and/or that she is no longer the active manager of CCI. The instant proceeding is disciplinary in nature, wherein the Department alleges that CCI, through its owner and active manager, Ms. Stevenson, engaged in certain activities that are in violation of the State banking laws. Specifically, the Department alleges that CCI, through Ms. Stevenson, commingled trust funds, failed to remit collection of monies to clients, failed to remit monies to clients in a timely manner, and failed to comply with the Department’s request for production of documents. The Department further alleges that Ms. Stevenson has not been honest in her dealings with the Department and CCI’s clients. CCI did not appear at the hearing and offered no evidence to refute or rebut the evidence presented by the Department in support of the allegations contained in the Notice of Hearing and Complaint issued in this matter. Ms. Stevenson, through her counsel, stipulated as to certain trust shortages being owed by CCI to clients in the total amount of $45,104.76, and agreed to bear the responsibility for repayment of such shortages. In her closing argument, Ms. Stevenson requested that she be provided an opportunity to repay the shortage over a period of time. That request will be further addressed in the Recommended Order below. The evidence of record established that Ms. Stevenson previously worked for VeraCheck as an office manager and bookkeeper for 16 years. In that capacity, she dealt with the Department concerning examinations conducted regarding VeraCheck’s business records. In 1998, CCI employed Ms. Stevenson in the capacity of office manager. She was hired by Tom Paliganoff (“Mr. Paliganoff”), the owner of CCI at that time. In December, 1998, Ms. Stevenson entered into a contract for the purchase of CCI from Mr. Paliganoff for the sum of $200,000.00. Ms. Stevenson testified that prior to purchasing CCI, she did not review any financial records, bank statements, or tax returns of CCI. On December 14, 1999, Ms. Stevenson submitted to the Department an application (“TLC application”) for a collection agency license on behalf of TLC Enterprises, Inc. (“TLC”). The evidence of record established that, in conjunction with the submission of the TLC application, Ms. Stevenson submitted to the Department CCI’s collection agency license. The TLC application was approved, resulting in a collection agency license being issued to TLC on December 22, 1999. TLC was incorporated in September 1999 for the purpose of conducting a collection agency business. Ms. Stevenson was listed in the TLC application as being the president, sole director, and shareholder of TLC. Ms. Stevenson also represented in the TLC application that TLC would be operating under the trade name Commercial Recovery International, the same name under which CCI had been conducting a collection agency business. In January 2000, the Department received a copy of a letter the Arizona State Savings & Credit Union (the “Credit Union”) sent to Ms. Stevenson’s attention demanding the return of all accounts it assigned to CCI and notifying CCI that the Credit Union had not received any funds from CCI for the months of October, November, and December 1999. The above-mentioned letter caused the Department to commence an investigation into the business affairs of CCI. In furtherance of the investigation, the Department arranged for a scheduled examination of CCI’s books and records on January 20, 2000 to be conducted by Department Senior Examiner James Watson (“Mr. Watson”). Prior to the above-mentioned examination being conducted, Mr. Watson called Ms. Stevenson to confirm the examination and to request certain records of CCI. At that time, Ms. Stevenson did not mention to Mr. Watson that the records he sought to review were not in her possession. Furthermore, Ms. Stevenson did not inform Mr. Watson as to any problems she was experiencing with respect to the business of CCI or of any transactional problems with Mr. Paliganoff concerning the purchase of CCI. Ms. Stevenson testified that because she had a prior working relationship with Mr. Watson, she wanted to explain the situation to him in person rather than attempt to explain it during a telephone conversation. The Administrative Law Judge does not find Ms. Stevenson’s testimony in this regard to be credible. Subsequent to her purchase of CCI, Ms. Stevenson learned that she had not been assigned the lease of the premises where CCI conducted its business at 411 North Central, Suite 540, Phoenix, Arizona (the “leased premises”). Consequently, Ms. Stevenson had to abandon the leased premises leaving the furniture, equipment, and most of the business records of CCI at that location. However, files of clients whose business was continued by Ms. Stevenson through TLC were taken by Ms. Stevenson. On the date of the above-mentioned examination, Ms. Stevenson informed Mr. Watson of the situation she perceived she was in with respect to the purchase of CCI. She told him that the business records he sought were at the leased premises, to which she did not have access. At that time, Ms. Stevenson did produce some business records of CCI to Mr. Watson, which he reviewed. Mr. Watson testified that those records were not the ones he had requested and sought to review. After the above-mentioned examination, Ms. Stevenson, through counsel, contacted the landlord of the leased premises (“landlord”) and requested access to the leased premises, which was denied. Due to Ms. Stevenson’s inability to gain access to the leased premises, the Department issued a subpoena duces tecum that was served upon the landlord to seek access to all books and records of CCI. On February 10, 2000, with the landlord’s permission, Mr. Watson and another examiner entered the leased premises and reviewed the books and records of CCI that were present. In particular, Mr. Watson had been seeking records pertaining to CCI’s bank records and trust accounts. Those records were not located at the leased premises. Subsequently, the Department issued a subpoena duces tecum that was served on Ms. Stevenson commanding her to produce certain records of CCI. After being served with the above-mentioned subpoena, Ms. Stevenson testified that she learned her accountant had in his possession the records sought by the Department. Ms. Stevenson had previously provided the accountant with CCI’s business records to review to provide her with an understanding as to the status of CCI’s financial affairs. Ms. Stevenson testified that prior to being served with the subpoena, she did not recall that certain business records of CCI had been provided to her accountant. Given the circumstances that Ms. Stevenson found herself in at that point in time, and that she suspected Mr. Paliganoff of having misappropriated certain trust funds, the Administrative Law Judge finds Ms. Stevenson’s testimony with respect to her knowledge as to the location of CCI’s business records to not be credible. Consequently, it is determined that Ms. Stevenson was not forthright in dealing with the Department concerning the location of the records sought by the Department prior to being served with the subpoena and not producing such records within three days of the Department’s production request. After Ms. Stevenson was served with the above-mentioned subpoena, her accountant contacted Mr. Watson and obtained an extension of time in which to comply with the production request. It is uncontroverted that the Department received the documents requested in the subpoena from Ms. Stevenson’s accountant. Therefore, it is determined that Ms. Stevenson complied with the above-mentioned subpoena. Mr. Watson testified that his examination of CCI’s records revealed that commencing in September 1999, it appeared there was a noticeable decrease in the amount of money being forwarded to clients from CCI’s trust account. He also testified that the documents showed trust funds in excess of the earned commissions were being removed from CCI’s trust account and deposited into CCI’s operating account. As a result of the examination, Mr. Watson ascertained that from January 1999 through December 1999, CCI’s trust account had shortages totaling $45,104.76. The examination also revealed that beginning in September 1999, through December 1999, CCI paid clients monies that had been collected on their behalf more than thirty days from the last day of the month in which the monies were collected. Shortly after purchasing CCI, Ms. Stevenson began receiving communication from clients that monies had not been paid. At the time when Ms. Stevenson purchased CCI, there was no money in the operating or trust account. Ms. Stevenson testified that as CCI began collecting money, she would use some of the money collected from CCI’s trust account to operate CCI. Ms. Stevenson also testified that she infused her own money into CCl to provide payments to clients for monies owed by CCI for work performed prior to her purchase of CCI. 38. When Ms. Stevenson began receiving demands for payment for work previously accomplished prior to the purchase of CCI and found “credit memos” in clients’ files, she began to perceive there was a problem with the way CCI had previously conducted its collection agency business under the control of Mr. Paliganoff. 39. As a result of the situation she found herself in concerning CCI’s business affairs, Ms. Stevenson hired the above-mentioned accountant to review the records of CCI and she also hired an attorney. 40. In December 1998, Ms. Stevenson notified Mr. Paliganoff that she was rescinding the CCI purchase agreement and stopped making payments on the promissory note she had executed in conjunction with the purchase of CCI. 41. During the hearing, Ms. Stevenson contended that she was a victim in the transaction involving the purchase of CCI and accused Mr. Paliganoff of conducting activities that caused the trust shortages identified by Mr. Watson. However, Ms. Stevenson failed to produce either to the Department prior to the instant hearing or to this tribunal any documentary or credible evidence to support the contention. 42. While the Administrative Law Judge believes there is a legal entanglement with respect to Ms. Stevenson’s purchase of CCI, the evidentiary record is devoid of any credible evidence showing that the trust shortages at issue were the result of Mr. Paliganoff’s actions. In fact, the record establishes that as of 1997, when an examination was conducted by Mr. Watson during the period of time when CCI was owned and operated by Mr. Paliganoff, CCI did not have any trust shortages. 43. Ms. Stevenson appears to be involved in a legal quagmire with respect to her purchase of CCI and the current ownership of CCI. Ms. Stevenson may believe she rescinded the transaction involving the purchase of CCI and that CCI’s stock was not transferred to her. However, the belief or existence of those facts does not alter the fact that Ms. Stevenson represented to the Department that she was the active manager, owner and president of CCI from January 1999 through December 1999. It is also undisputed that Ms. Stevenson did not formally notify the Department of anything to the contrary with respect to her association with CCI other than what was previously presented to the Department in the above-mentioned renewal application of CCI. 44. In mitigation, Ms. Stevenson asserts that she notified the Department that she was no longer associated with CCI by her submission of the TLC application and surrendering the CCI license. Further, Ms. Stevenson noted that those actions were performed prior to the Department’s investigation of CCI. 45. Ms. Stevenson’s counsel requested that the Administrative Law Judge infer from the fact that Ms. Stevenson has stopped making payments to Mr. Paliganoff on the promissory note, that she has notified Mr. Paliganoff of her rescission of the purchase contract, and that Mr. Paliganoff has not taken any action against her, that the allegations she made during the hearing with respect to misappropriation of trust funds by Mr. Paliganoff and shortages of trust funds be found to be true. The Administrative Law Judge draws no such inference but merely views the current situation as establishing that, at this point in time, Mr. Paliganoff has not taken any legal action against Ms. Stevenson concerning the purchase of CCI. 46. The evidence of record established that Ms. Stevenson, an individual who has worked in the collection industry for over 16 years, utilized CCI’s trust funds inappropriately by commingling them with CCI’s operating account funds, and using them for CCI’s operating expenses, thereby causing delay in payments to clients and further causing trust shortages, that resulted in other clients not receiving funds to which they were entitled. 47. The evidence of record established that Ms. Stevenson was not forthright to the Department concerning the situation she found herself in with respect to the purchase of CCI and Mr. Paliganoff, that she did not provide documents to the Department in a timely manner, as requested, and only did so upon being served with a subpoena duces tecum. 48. The Department presented evidence concerning certain disclosures made by Ms. Stevenson in the TLC application and contended that non- disclosure of the problems she had with CCI or Mr. Paliganoff in the TLC application shows that Ms. Stevenson was not forthright in her dealings with the Department. The Administrative Law Judge allowed such evidence into the record on a limited basis. It is determined that such evidence is not probative of the issues raised in the Notice of Hearing and Complaint with respect to CCI or Ms. Stevenson in her capacity as the active manager, owner, and president of CCI. However, nothing herein is intended to preclude the Department from raising that issue in the future against TLC or Ms. Stevenson. 49. Although Ms. Stevenson contends that she is a victim and being held accountable to the Department for the wrongdoing of Mr. Paliganoff, she failed to present credible evidence establishing that fact and failed to refute or rebut the credible evidence presented by the Department showing that the trust shortages occurred while she owned and operated CCI, that she commingled trust funds with operating account funds, that trust funds were used to pay CCI’s operating expenses, that CCI clients were not paid timely, that some of CCI’s clients were not paid at all due to trust fund shortages, and that she was not forthright in her dealings with the Department. 50. Robert Charlton (“Mr. Charlton”), the Manager of the Department’s Financial Services Division, testified he is Mr. Watson’s supervisor, that he recommended that this matter proceed to hearing, and that Ms. Stevenson be personally assessed a $10,000.00 civil penalty. 51. Mr. Charlton testified that the basis for the Department requesting a civil penalty in the amount of $10,000.00 was that the Department had assessed similar penalties in approximately 6 cases over the past five years involving collection agencies that had problems in their administration of trust funds and who failed to supply requested documents to the Department. According to Mr. Charlton, the Department is interested in continuity and uniform treatment among licensees with respect to the imposition of civil penalties. 52. While the concerns of the Department are considered by the Adminstrative Law Judge, it is noted that the Department did not produce credible evidence to convince the Administrative Law Judge that the prior 6 cases referred to by Mr. Charlton involved factual circumstances comparable to those presented at the instant proceeding. 53. During the hearing, the Department decided not to proceed with a Cease and Desist Order against Respondents because CCI was no longer operating under its collection agency license. CONCLUSIONS OF LAW At the request of the Administrative Law Judge, the parties briefed two issues: a) What authority, if any, has been delegated to the Arizona State Department of Banking to take disciplinary action against a licensee whose license has expired?; and b) Does the Arizona State Banking Department have jurisdiction to proceed against the active manager, president and owner of a collection agency after the agency’s license has expired?[1] While the Department presented a policy argument as to why it should have the authority to revoke a collection agency’s license that has expired, it fails to cite any statutory authority that expressly provides it with such jurisdiction. When a collection agency license issued by the Department expires, it ceases to exist. It is determined that absent the existence of express statutory authority delegating jurisdiction to the Superintendent of the Department to proceed against an expired license, the Department does not have jurisdiction to revoke a license that has expired. This is in contrast to other agencies such as the Arizona Department of Real Estate and the Registrar of Contractors that have been specifically delegated by statute with the authority to take disciplinary action against an expired license. See A.R.S. §32-2153(D) and 32-1154(C). 5. Thus, it is determined that the Superintendent of the Department does not have jurisdiction to revoke a collection agency license that has expired prior to the issuance of a Notice of Hearing and Complaint initiating the disciplinary action to be taken against the expired license. 6. A.R.S. §6-132 provides the Superintendent of the Department with the authority to: …assess a civil penalty in an amount of not more than five thousand dollars against a person, including any officer, director, employee, agent, or other person who participates in the conduct of the affairs of the person, for any knowing violation of any provision of … [T]itle [6] or of any rule or order adopted or issued pursuant to … [T]itle [6].

7. A.R.S. §6-137 A) states: If it appears to the superintendent that any person has engaged, is engaging or is about to engage in any act, practice or transaction which constitutes a violation of … [T]itle [6] or any rule or order of the superintendent or a violation of any federal insurance regulation as determined by the appropriate federal regulatory authority in writing, the superintendent may issue an order directing the person and directors, officers, employees and agents of the person to cease and desist from engaging in the act, practice or transaction and to take appropriate affirmative action, within a reasonable period of time as prescribed by the superintendent, to correct the conditions resulting form the act, practice or transaction.

8. A.A.C. R20-4-102.18 defines the term “person “as “a natural person or any legal or commercial entity including a corporation, business trust, estate, trust, partnership, limited partnership, joint venture, association, limited liability company, limited liability partnership or limited liability limited partnership.” 9. It is therefore determined that regardless of a person’s licensure status with the Department, the Superintendent of the Department has jurisdiction over a person who violates Title 6, A.R.S., pursuant to A.R.S. §§6-132 and 6-137, and may issue a Cease and Desist Order and assess civil penalties against such a person. 10. The evidence of record established that CCI failed to maintain all records or complete duplicates of records as required by law and failed to have such records available to the Department upon demand for examination within three working days, in violation of A.A.C. R20-4-1504(C). 11. The evidence of record established that CCI failed to maintain records such as trust general ledgers, reconciliation reports of trust accounts, books, records and files of each client for at least six years following their creation, in violation of A.A.C. R20-4-1504(D). 12. The evidence of record established that CCI failed to keep and maintain books, records and files in such condition that a spot check by the Department could be readily and easily made, in violation of A.A.C. R20- 4-1504(A)(6). 13. The evidence of record established that CCI failed to render an account of, and pay to, certain clients, for whom collections were made, monies collected less commissions or collection charges agreed to by CCI and the clients, within thirty days from the last day of the month in which the monies were collected, in violation of A.R.S. §32-1055(D)(1). 14. The evidence of record established that CCI commingled client funds held for the benefit of clients with monies in which CCI, or any of its officers, directors managers or employees have an interest other than that provided for in the client contracts, in violation of A.A.C. R20-4- 1505(C). 15. The evidence of record established that CCI and Ms. Stevenson failed to deal openly, fairly, and honestly in conducting a collection agency business, in violation of A.R.S. §32-1051(4). 16. The conduct of CCI and Ms. Stevenson, as set forth above in the Findings of Fact, constitutes grounds for the imposition of civil monetary penalties against CCI and against Ms. Stevenson personally, pursuant to A.R.S. §6-132. RECOMMENDED ORDER It is recommended that within 45 days of the effective date of the Order entered in this matter, CCI and Ms. Stevenson are to each pay a civil monetary penalty in the amount of $5,000.00 to the Department, and that, within four months of the effective date of the Order entered in this matter, CCI and Ms. Stevenson are each responsible to make restitution payments totaling $45,104.76, for the trust shortages that the Department determined to have occurred between January 1999 and December 1999. Done this day, October 18, 2000.

______________________________________ Lewis D. Kowal Administrative Law Judge

Original transmitted by mail this ____ day of ____________, 2000, to:

Arizona State Banking Department Richard C. Houseworth 2910 North 44th Street, Suite 310 Phoenix, AZ 85018

ATTN: June Beckwith

By ___________________________ ----------------------- [1] It is the duty of a tribunal to initially determine whether there is jurisdiction. See State v. Phelps, 67 Ariz. 215, 193 P.2d 921 (1948).

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Office of Administrative Hearings 1400 West Washington, Suite 101 Phoenix, Arizona 85007 (602) 542-9826