ALJDEC decisions subject to certification as final

04F-BD021-BNK · State Banking Department · 2004-03-15

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

On October 22, 2003, a hearing was scheduled in this matter to determine if the Arizona State Banking Department (“Department”) properly issued a Cease and Desist Order against the Petitioner. Assistant Attorney General Craig Raby represented the Department. Attorney J. Michael Lowe appeared on behalf of the Petitioner. In lieu of a hearing[i], the parties: (1) submitted stipulated Findings of Facts and (2) stipulated to submitting legal memoranda on the issue before this tribunal. Based upon a review of the legal memoranda, the undersigned Administrative Law Judge makes the following Findings of Fact, Conclusions of Law and Recommended Order.

FINDINGS OF FACT[ii] Facts as to the “Meyer” Matter

1. On or about March 15, 2002, the owners of a property located at 3542 South Iowa Street, Chandler, Arizona 85248, Mr. And Mrs. Steven Meyer, sought refinancing of that particular property through Mortgage Mate d.b.a. Mortgage Capital, whose offices are located at 11150 West Olympic Boulevard, Suite 1160, Los Angeles, California 90064 (hereinafter referred to as “the Meyer transaction”).

2. On or about March 15, 2002, Mortgage Capital contacted Ms. Deanna Wayne of the Stewart Title of California, Inc. (hereinafter referred to as “STOCI”) office at 180 North Riverview Drive, Suite 100, Anaheim, California 92808, whereupon Ms. Wayne completed an “Open Order Sheet” which specified, among other things, that Mortgage Capital would be the lender and that the escrow would be handled by STOCI through its Escrow Officer, Lynette Sanchez.

3. On or about March 19, 2002, Ms. Wayne received an “Order Request” from Mortgage Capital requesting that STOCI handle the Escrow Account and the processing of the title and title insurance.

4. As was the custom and practice of STOCI, in order to most efficiently serve the needs of its customers, many of whom are large-volume mortgage companies, STOCI would then delegate to one of its affiliates, the processing of the title and title insurance in the financing or refinancing transaction.

5. On or about March 18, 2002, Ms. Wayne sent a facsimile communication to Ms. June Holland, Title Officer, at the Phoenix office of Stewart Title located at 244 W. Osborn Road, Phoenix, Arizona 85013 instructing that STOCI – Major Accounts Division which office is located at 180 N. Riverview Drive, Suite 100, Anaheim Hills, California 92808) was placing an order on behalf of Mortgage Capital for processing of the title and title insurance on the Meyer transaction.

6. On or about March 18, 2002, Ms. Lynette Sanchez, Escrow Officer with STOCI Orange Division – Escrow Services, located at 180 North Riverview Drive, Suite 100, Anaheim, California 92808 either prepared or had prepared, Loan Escrow Instructions for the Meyer transaction. Included in the Loan Escrow Instructions is a designation about how the title to the property at 3542 South Iowa Street in Chandler, Arizona was to read upon completion of the Meyer transaction. These Loan Escrow Instructions were signed by the Meyers on or about April 16, 2002.

7. On or about March 20, 2002, Ms. Nancy C. Ivery, Title Officer located at Title & Trust of Phoenix, Inc., 244 West Osborn Road, Phoenix, Arizona 85013 sent, on behalf of June Holland, another Title Officer at the same office, sent a fax to Ms. Wayne at the STOCI office on North Riverview Drive in Anaheim. Included in that multiple-page fax were documents relative to the title of the property at 3542 South Iowa Street in Chandler and the title insurance to be placed on the property.

8. Escrow documents relevant to the Meyer transaction were prepared by Lynette Sanchez of the STOCI office in Anaheim, California on or about April 9, 2002 and provided to the Meyers for their signature. The Meyers signed relevant escrow documents on or about April 16, 2002 in Arizona, before an Arizona Notary Public and the documents were provided by overnight delivery back to Ms. Sanchez.

9. On or about April 14, 2002, Ms. Sanchez, the Escrow Officer, processed an Amendment to the Escrow Instructions for the Meyer Transaction which document was signed some time thereafter by the Meyers, also in Arizona and provided back to Ms. Sanchez. Also prepared by or for Ms. Sanchez, on that date, was a document entitled “Borrower(s) Estimated Closing Statement”.

10. After preparing, obtaining signatures on and processing multiple documents for the Meyer transaction, Ms. Cristi Arnett, an Escrow Assistant in the STOCI office in Anaheim sent to Mortgage Capital, on or about April 18, 2002, the documents necessary to complete the Meyer refinancing transaction.

11. On or about April 18, 2002, a document entitled “Title Transmittal” was processed by or on behalf of Lynette Sanchez of the STOCI Anaheim office and provided to Ms. June Holland, the Title Officer at Stewart Title in Phoenix, Arizona by overnight UPS shipping.

12. On or about April 23, 2002, funds were wired from Bank One Chicago on behalf of Mortgage Capital to the Stewart Title of California – Orange County Division Escrow Trust Account at the City National Bank, City of Commerce Branch in Los Angeles in the amount of $170,657.05.

13. The Meyer transaction “closed” on or about April 25, 2002 and documents relevant to that closing originated from Ms. Sanchez, the Escrow Officer in the STOCI office located on North Riverview Drive in Anaheim, California.

Facts as to the Diamontopolous/Dres Matter

14. On or about December 21, 2001, the owners of a property located at 8877 W. Runion Drive, Peoria, Arizona 85382, Mr. John Diamantopoulis and Ms. Angie Dres, sought refinancing of that particular property through Mortgage Mate dba Mortgage Capital, whose offices are located at 11150 W. Olympic Boulevard, Suite 1160, Los Angeles, California 90064 (hereinafter referred to as the “Diamantopoulis/Dres Transaction”).

15. On or about December 21, 2001 Mortgage Capital contacted Ms. Deanna Wayne of the Stewart Title of California, Inc. (hereinafter referred to as “STOCI”) office at 180 North Riverview Drive, Suite 100, Anaheim, California 92808, where upon Ms. Wayne completed an “Open Order Sheet” which specified, among other things, that Mortgage Capital would be the lender and that the escrow would be handled by STOCI through its escrow officer, Lynette Sanchez.

16. On or about January 18, 2002, Mr. Diamantopoulis signed Initial information Disclosure Authorizations from Mortgage Capital authorizing the recipient to release to Mortgage Capital Association employment history, dates, title, income, banking and savings account information, mortgage loan rating information, payment amounts, loan balances, payment records, and any other information deemed necessary in connection with the consumer credit report for real estate transaction.

17. On or about January 25, 2002, Ms. Deanna Wayne received an “Order Request” from Mortgage Capital requesting that STOCI handle the escrow account and the processing of the title and title insurance.

18. As was the custom and practice of STOCI, in order to most efficiently serve the needs of its customers, many of whom are large-volume mortgage companies, STOCI would then allocate to one of its affiliates, the processing of the title and title insurance in the financing or refinancing transaction.

19. On or about January 28, 2002 Ms. Wayne sent a facsimile communication to the attention of the Order Desk/Title Only at the Phoenix office of Stewart Title located at 244 W. Osborn Road, Phoenix, Arizona 85013 instructing that STOCI-Major Accounts Division, which office is located at 180 North Riverview Drive, Suite 100, Anaheim Hills, California 92808 was placing an order on behalf of Mortgage Capital for processing of the title insurance on the Diamantopoulos/Dres transaction.

20. On or about January 28, 2002, Ms. Deanna Wayne prepared an “Open Order Sheet” indicating that STOCI of California had a request from Mortgage Capital to prepare escrow and title for the Diamantopoulis/Dres Transaction.

21. On January 29, 2002 Ms. Joan Nasser of the STOCI Orange Division- Escrow Services Office located at 180 North Riverview Drive, Suite 100, Anaheim, California 92808 prepared Loan Escrow Instructions. Attached to the Loan Escrow Instructions is a document labeled Exhibit 1 and titled General Provisions.

22. On February 5, 2002, Homeside Lending, Inc. generated a payoff statement for loan number 10423610 for the mortgagors John Diamantopoulis and Angie Dres on the property located at 8877 W. Runion Drive, Peoria, Arizona 85382. The payoff statement indicated that the total amount of the payoff was $173,649.49.

23. On February 5, 2002 Mr. Eddie Cheung of the Phoenix office of Stewart Title located at 244 W. Osborn, Phoenix, Arizona 85013 sent a 7-page fax to Ms. Joan Nasser of STOCI. The fax cover sheet indicates that the documents attached to the cover page are the documents pertaining to the commitment for title insurance – Order No. 02990125. On February 5, 2002 Stewart Title and Trust of Phoenix, Inc. located at 244 W. Osborn Road, Phoenix, Arizona 85013, sent to Ms. Joan Nasser of STOCI located at 2010 Main Street #250, Irvine, California 92614 an invoice which purports to reflect the fees for the title work done by Stewart Title and Trust of Phoenix, Inc.

24. On approximately February 26, 2002 Ms. Mary Ann Torres, Escrow Assistant, of STOCI, sent a fax to Garenty (sic) Bank to the attention of the payoff department asking for the payoff amount for the property located at 8877 W. Runion Drive, Peoria, Arizona 85382.

25. On March 27, 2002 the following documents were prepared for the signatures of John Diamantopoulis and Angie Dres: 1) Planned Unit Development Rider: 2) Fixed/Adjustable Rate Rider (one-year treasury index- rate caps): 3) Fixed/Adjustable Rate Note (One-year treasury index-rate caps): 4) Deed of Trust: and 5) General Closing Instructions. All of the foregoing documents were signed by Mr. Diamantopoulis and Ms. Dres on approximately April 3, 2002.

26. On April 1, 2002 HomeSide Lending, Inc. sent a payoff statement to STOCI indicating that the total payoff amount on that date was $174,041.51.

27. On or about April 1, 2002 the following documents were prepared by or on behalf of Joan Nasser of STOCI, 180 North Riverview Drive, Suite 100, Anaheim, California 92808: (1) Borrower’s Estimated Closing Statement: (2) Insurance Information Request to Allstate: and (3) Amendments to Escrow Instructions. Documents that necessitated signature by Mr. Diamantopoulis and Ms. Dres were appropriately signed on or about April 3, 2002.

28. On or about April 3, 2002 a payoff from the loan service center for GB Home Equity was sent to Ms. Joan Nasser at STOCI. The final payoff amount was $29,417.64 and it was requested that checks be made payable to GB Home Equity – Payoff Department.

29. On or about April 3, 2002 Mr. Diamantopoulis and Ms. Dres signed the following documents: (1) STOCI Statement of Information: (2) Stewart Title and Trust of Phoenix Inc. Affidavit as to Debts, Liens and Possessions: and (3) Uniform Residential Loan Application for Mortgage Capital Associates. All of the foregoing documents were signed on or about April 3, 2002 in Phoenix, Arizona.

30. On or about April 5, 2002 “Dianne” from STOCI, Orange Division – Escrow Services, 180 N. Riverview Drive, Suite 100, Anaheim, California 92808 sent to Mr. Stephen P. Borg of Allstate a request for evidence of insurance on the property located at 8877 W. Runion Drive, Peoria, Arizona 85382.

31. On April 5, 2002 Ms. Joan Nasser, Escrow Supervisor, Major Accounts, National Division of STOCI, Orange Division – Escrow Services, sent to Mortgage Capital at 11150 W. Olympic Boulevard #1160, Los Angeles, California 90064 a letter enclosing executed loan documents and requesting that the loan not be funded until further instructions from Ms. Nasser.

32. On or about April 9, 2002 the STOCI Irvine office received into escrow the amount of $2,118.73 from the Honeywell Aerospace Federal Credit Union earnest money to be applied to the Diamantopoulis/Dres transaction.

33. On or about April 9, 2002 Mr. Stephen Borg of Allstate faxed to Ms. Joan Nasser, Escrow Supervisor, evidence of insurance on the property located at 8877 W. Runion Drive, Peoria Arizona. On or about April 10, 2002 a document entitled Title Transmittal was generated by or on behalf of Ms. Joan Nasser, Escrow Supervisor, STOCI, Orange Division – Escrow Services. This document was transmitted to Stewart Title Company at 244 W. Osborn, Phoenix, Arizona 85013 to the attention of the recording desk and indicated that upon recording the Stewart Title Company should issue the ALTA Lender’s Policy in the amount of $204,000 with a premium of $541 and endorsements numbers to the policy of 100, 116, 115.2, 100.13, 104.1 on the property described as 8877 W. Runion Drive, Peoria, Arizona 85382. The title transmittal indicated that the Seller/Borrowers were John Diamantopoulis and Angie Dres, Husband and wife, as joint tenants with rights of survivorship. The title transmittal indicated that the title would be vested in John Deamantopoulis nad Angie Dres, Husband and wife, as joint tenants with rights of survivorship. The additional instructions from Ms. Nasser were that someone would call to confirm the projected recording date.

34. On February 5, 2002 an invoice was sent from Stewart Title and Trust of Phoenix, Inc. at 244 W. Osborn Road, Phoenix, Arizona 85013 to Mortgage Capital in the care of STOCI, Joan Nasser, at 2010 Main Street #250, Irvine, California 92614 an invoice in the amount of $606. The fees set forth on the February 5, 2002 invoice purport to be charges for preparing the title and title insurance in the Stewart Title and Trust of Phoenix, Inc. office located at 244 W. Osborn Road.

35. On April 15, 2002 the Borrower’s Final Closing Statement was prepared by STOCI, 180 N. Riverview Drive, Suite 100, Anaheim, California 92808 by or on behalf of Joan Nasser for the Diamantopoulis/Dres Transaction with Mortgage Capital as the lender on the property located at 8877 W. Runion Drive, Peoria, Arizona 85382 with a closing date of April 15, 2002 and a pro ration date of April 15, 2002. The total amount financed was $202,456.26.

36. The Diamantopoulis/Dres Transaction was completed on approximately April 16th when all checks had been prepared and disbursements transmitted to appropriate entities involved in the transaction.

General Facts Stipulated to by the Parties

37. Stewart Title of California, Inc. (“STOCI”) has handled the closing of

approximately 50 escrow transactions for properties located in Arizona from

January 1, 2003 to October 21, 2003.

38. STOCI handles approximately 116,000 escrow closings per year.

39. STOCI neither advertises nor solicits business in Arizona. STOCI does not solicit the business of Arizona lenders, mortgage brokers or realtors. STOCI does not solicit Arizona buyers or sellers of real estate. All escrow transactions involving Arizona real estate emanate from lenders requesting STOCI to handle the escrow transaction.

40. All escrow transactions involving Arizona real estate have emanated from lenders outside Arizona requesting that STOCI handle the escrow transaction.

41. All title insurance issued on Arizona real estate is issued through an Arizona licensed title insurer or title insurance agency.

APPLICABLE OR RELEVANT LAW

1. A.R.S. § 6-812. Foreign corporations.

No foreign corporation without a valid grant of authority to do business under title 10, chapter 15, article 1 shall transact any escrow business in this state.

See, A.R.S. § 6-812.

2. A.R.S. § 6-813. License of agent; nontransferable; posting.

A. A person, except those exempt under section 6-811, shall not engage in or carry on, or hold himself out as engaging in or carrying on, the escrow business or act in the capacity of an escrow agent in this state without first obtaining a license.

See, A.R.S. § 6-813(A).

3. A.R.S. § 6-811. Exemptions.

A. The provisions of this chapter do not apply to and the term "escrow agent" does not include: 1. Any person who is licensed to practice law in this state and who is not actively engaged in conducting an escrow business. 2. Any person doing any of the acts specified in section 6-801, paragraph 4 pursuant to the order of a court. 3. Trustees of deeds of trust to the extent the activities are performed as a trustee under a deed of trust. 4. Any person doing any of the acts specified in section 6-801, paragraph 4 in a fiduciary capacity for any person, trust or estate pursuant to the order of a court. 5. Licensed real estate brokers who render certain services by collecting rents for others, as to such rents, and who within a reasonable time account for such rents to the person or persons properly entitled to such accounting. 6. Licensed real estate brokers who in the regular course of their business accept earnest money for the purpose of effecting the sale or transfer of property, as to such earnest money, and who within a reasonable time account for such earnest money to the prospective buyer or seller or to a licensed escrow agent. 7. Persons licensed pursuant to title 32, chapter 9, but only to the extent that these activities are regulated by title 32, chapter 9.

8. Any person who is licensed pursuant to chapter 9, article 2 of this title and who is approved to service loans for either:

(a) The federal national mortgage association.

(b) The federal home loan mortgage corporation.

9. Any person licensed pursuant to chapter 14, article 1 of this title. 10. Any person who is licensed pursuant to chapter 9, article 3 of this title.

See, A.R.S. § 6-811(A).

4. “Escrow” means: any transaction in which any escrow property is delivered with or without transfer of legal or equitable title, or both, and irrespective of whether a debtor-creditor relationship is created, to a person not otherwise having any right, title or interest therein in connection with the sale, transfer, encumbrance or lease of real or personal property, to be delivered or redelivered by that person upon the contingent happening or nonhappening of a specified event or performance or nonperformance of a prescribed act, when it is then to be delivered by such person to a grantee, grantor, promisee, promisor, obligee, obligor, bailee or bailor, or any designated agent or employee of any of them. Escrow includes subdivision trusts and account servicing.

See, A.R.S. § 6-801(4).

5. "Escrow business" means a commercial activity characterized by the regular and continuous carrying on of escrow transactions. See, A.R.S. § 6- 801(6).

6. A.R.S. § 10-1501. Authority to transact business required.

A. A foreign corporation shall not transact business in this state until it is granted authority to transact business in this state as provided in this chapter from the commission.

B. The following activities, among others, do not constitute transacting business within the meaning of subsection A:

1. Maintaining, defending or settling any proceeding.

2. Holding meetings of the board of directors or shareholders or carrying on other activities concerning internal corporate affairs.

3. Maintaining bank accounts.

4. Maintaining offices or agencies for the transfer, exchange and registration of the corporation's own securities or maintaining trustees or depositaries with respect to those securities.

5. Selling through independent contractors.

6. Soliciting or obtaining orders, whether by mail or through employees or agents or otherwise, if the orders require acceptance outside this state before they become contracts.

7. Creating or acquiring indebtedness, mortgages and other security interests in real or personal property.

8. Securing or collecting debts or enforcing mortgages and security interests in property securing the same.

9. Owning, without more, real or personal property.

10. Conducting an isolated transaction that is completed within thirty days and that is not one in the course of repeated transactions of a like nature.

11. Transacting business in interstate commerce.

12. Being a limited partner of a limited partnership or a member of a limited liability company.

C. The list of activities in subsection B is not exhaustive.

D. This section does not apply to insurance corporations or any corporation transacting in this state only the business of lending monies to religious, social or benevolent associations. See, A.R.S. § 10-1501.

CONCLUSIONS OF LAW 1. STOCI, a foreign corporation, cannot transact any escrow business in the state of Arizona without a valid grant of authority to do business under A.R.S. § 10-1501[iii] et seq. A.R.S. § 6-812; A.R.S. § 10-1501.

2. STOCI (i.e., its escrow agent) cannot engage in or carry on, or hold itself out as engaging in or carrying on, the escrow business or act in the capacity of an escrow agent in the State of Arizona without first obtaining a license. A.R.S. § 6-813(A). STOCI, an escrow company, does not fall within the exemptions set forth in A.R.S. § 6-811. See, A.R.S. § 6-811(A) & (B).

3. Thus, the issue becomes: Do STOCI’s commercial activities constitute “escrow business” within the meaning of A.R.S. § 6-813(A) and A.R.S. § 6- 801(6). "Escrow business" means a commercial activity characterized by the regular and continuous carrying on of escrow transactions. A.R.S. § 6- 801(6). It is undisputed that STOCI handles approximately five escrow transactions per month involving Arizona real estate. However, multiple transactions alone are not dispositive that STOCI’s commercial activities are “characterized by the regular and continuous carrying on of escrow transactions.” Cf, Rochester Capital Leasing Corp. v. Sprague, 474 P.2d 201 (App. 1970) (over twenty transactions over a five year period).

4. The undersigned Administrative Law Judge concludes that simply counting the number of STOCI’s escrow transactions is probably not the most prudent approach for determining whether STOCI’s escrow transactions (involving Arizona real estate) constitute “escrow business” within the meaning of A.R.S. § 6-813(A) and A.R.S. § 6-801(6). Rather, the undersigned Administrative Law Judge concludes that a more prudent approach is to consider the facts and circumstances[iv] surrounding the escrow transactions. Having considered these facts and circumstances, the undersigned Administrative Law Judge concludes that STOCI’s escrow transactions (involving Arizona real estate) do not constitute “escrow business” within the meaning of A.R.S. § 6-813(A) and A.R.S. § 6-801(6). The undersigned Administrative Law Judge makes this conclusion based on the following: a. STOCI handles approximately 116,000 escrow closings per year (or 9,666 per month). Thus, STOCI’s escrow transactions (involving Arizona real estate) comprise about .04% of its escrow transactions. b. STOCI neither advertises nor solicits business in Arizona. c. STOCI does not solicit the business of Arizona lenders, mortgage brokers or realtors. d. STOCI does not solicit Arizona buyers or sellers of real estate. e. All of STOCI’s escrow transactions involving Arizona real estate have emanated from lenders outside of Arizona that have requested that STOCI handle the escrow transactions. f. All title insurance issued on the Arizona real estate was issued through an Arizona licensed title insurer or title insurance agency. g. STOCI has no employees in the Stewart Title of Phoenix office.

5. Based on the foregoing, the undersigned Administrative Law Judge concludes that STOCI’s escrow transactions (involving Arizona real estate) do not constitute “escrow business” or “the regular and continuous carrying on of escrow transactions” in the State of Arizona, within the meaning of A.R.S. § 6-813(A) and A.R.S. § 6-801(6). Accordingly, the Arizona State Banking Department does not have the authority to issue a cease and desist order (and civil penalty) against STOCI. RECOMMENDED ORDER Based on the foregoing, the undersigned Administrative Law Judge recommends that the Arizona State Banking Department quash its July 22, 2003 Order to Cease and Desist and the accompanying civil penalty. Done this day, January 2, 2004.

______________________________________ Casey J. Newcomb Administrative Law Judge

Original transmitted by mail this ____ day of January, 2004, to:

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

By ___________________________

----------------------- [i] The record in this matter was held open until December 12, 2003, to allow for the submission of legal memoranda and to allow sufficient time for the undersigned Administrative Law Judge to review the legal memoranda and write this recommended decision. [ii] The parties prepared and stipulated to the Findings of Facts. [iii] It is unclear from the record if the Petitioner has obtained (or is required to obtain) the proper authority from the Arizona Corporation Commission to transact business in the State of Arizona. A.R.S. § 10- 1501(A). This issue is not before this tribunal. Likewise, it is not before this tribunal whether STOCI’s activities fall within the exemptions set forth in A.R.S. § 10-1501(B). The only issue before this tribunal is if the Arizona State Banking Department has the authority to issue a cease and desist order (and civil penalty) against the Petitioner for engaging in escrow business without a valid escrow agent’s license. [iv] In its legal memorandum, the Petitioner cited several cases where courts looked beyond the mere number of transactions to determine if a corporation was “transacting business” in the State of Arizona. These cases referred to the current A.R.S. § 10-1501. However, by analogy, they are applicable to determining whether a corporation’s commercial activity is “characterized by the regular and continuous carrying on of escrow transactions.” A.R.S. § 6-801(6).

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