ALJDEC decisions subject to certification as final

08F-BD018-BNK · Arizona Department of Financial Institutions · 2007-12-24

STATE OF ARIZONA OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: December 3, 2007 (record held open until December 12, 2007)

APPEARANCES: John Janocsko, President, appeared on behalf of Licensee; the State of Arizona, Department of Financial Institutions (ADFI), was represented by Assistant Attorney General Erin O. Gallagher, accompanied by Assistant Superintendent Robert D. Charlton.

WITNESSES: Jack Watson, Senior Examiner, ADFI; Mike Fowler, Manager of Administration Division, Chief Financial Officer, ADFI; and John Janocsko. Court Reporter Nicola Bauman-Delgado recorded the proceedings.

ADMINISTRATIVE LAW JUDGE: Eric A. Bryant _____________________________________________________________________

This disciplinary action brought by the Arizona Department of Financial Institutions (“Department”) alleges that collection agency Niagara Credit Solutions, Inc. (“Licensee”) has violated its statutory obligations by being insolvent. The Department seeks revocation of the license and a civil penalty. Licensee disputes the violation and, in the alternative, requests lesser sanctions. The parties presented evidence and testimony at the hearing, including the case file and Exhibits marked Department’s Exhibits 1, 2, and 3, and Petitioners’ Exhibits A, B, C, D, E, F, and G. Based upon the entire record, the Administrative Law Judge makes the following Findings of Fact, Conclusions of Law, and Decision finding a violation of statute and recommending suspension of Petitioners’ license and a $5,000.00 civil penalty. FINDINGS OF FACT Stipulated Facts At the start of the hearing, the parties stipulated to the following five factual findings, taken from the Notice of Hearing: 1. Petitioner Niagara Credit Solutions, Inc. (hereinafter “Niagara”) is a New York corporation authorization to transact business in Arizona as a collection agent, license number CA 0907499, within the meaning of A.R.S. §§ 32-1001, et seq. The nature of Niagara’s business is that of a collection agency within the meaning of A.R.S. § 32-1001(2). 2. Petitioner John Janocsko (“Mr. Janocsko”) is the President of Niagara. 3. On March 15, 2007, the Department conducted an examination of Niagara’s business affairs. Based upon that examination, a report was prepared (“Report of Examination”) which revealed that Niagara and Mr. Janocsko have: a. Failed to maintain a positive net worth, pursuant to A.R.S. § 47-1201(23), specifically: i. Niagara’s net worth was a negative <$334,260.00> as of October 31, 2006; ii. Niagara’s net worth was a negative <$415,712.00> as of December 31, 2006; iii. The most recent balance sheet for the quarter-ending [sic] March 31, 2007 reflects a negative net worth of <$334,664.00>. 4. Based upon the above findings, the Department issued and served upon Niagara and Mr. Janocsko an Order to Cease and Desist; Notice of Opportunity For Hearing; Consent to Entry of Order (“Cease and Desist Order”) on September 5, 2007. The Cease and Desist Order also included the imposition of a five thousand dollar ($5,000.00) civil money penalty. 5. On October 2, 2007, Petitioners filed a Request for Hearing. Further Factual Findings Based on the testimony and documentation presented at the hearing, the tribunal makes the following factual findings: 6. The March 2007 examination, which found negative net worth, found that Licensee was in compliance with all other statutory duties, including the operation of its trust fund.[1] 7. Since that time, Licensee’s negative net worth has remained, although it has recently decreased to <150,723.00> as of August 31, 2007.[2] Petitioners’ evidence shows that Licensee has recently been profitable and is reducing its debt.[3] 8. Since receiving the Cease and Desist Order, Licensee has suspended all activity in Arizona.[4] 9. No evidence was presented to show the value of any intangible assets that Licensee may have, including goodwill. 10. Licensee has a surety bond in the amount of $10,000.00.[5] Licensee also has professional liability insurance in the amount of $2,000,000.00.[6] CONCLUSIONS OF LAW 1. The Department bears the burden of showing, by a preponderance of the evidence, that Licensee has violated the statutes cited in the Notice of Hearing.[7] The Department has met its burden. Violation 2. A corporation licensed as a collection agent by the Department must meet the financial responsibility requirements imposed by the statutes on collection agencies.[8] One of those requirements is that a licensee not become insolvent.[9] Insolvency is defined, in part, as “being insolvent within the meaning of federal bankruptcy law,”[10] which states that insolvency means, in pertinent part, a “financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation. . . .”[11] This is a straightforward requirement for collection agencies to have a positive net worth. 3. The evidence is clear that Licensee does not presently have a positive net worth, and has not had one for at least more than one year’s time, since October 2006. Petitioners’ attempt to argue that intangible assets should be taken into account is not persuasive because it was not supported by either evidence or legal authority. 4. Because of Licensee’s negative net worth, this tribunal finds Licensee in violation of A.R.S. §§ 32-1051(1) and -1053(A)((1). Sanction 5. The Superintendant has discretion to suspend or revoke a license found in violation of the statutes governing licensure.[12] Revocation is the ultimate sanction, and should be used only when the public cannot be protected with any other sanction. Here, the public can be protected by suspension of the license. Licensee has manifested an intent to comply with Arizona laws; it has just been sluggish about it. Licensee has presented mitigating evidence in the form of its otherwise good examination results, its voluntary cessation of activity in Arizona,[13] its continuing progress to obtain positive net worth, and its other liability protections. This shows a Licensee who is willing to conform to the law. Suspension of its license will allow Licensee to achieve compliance and then conduct business in Arizona, while at the same time protecting the public.[14] Civil Penalty 6. In order to assess a civil penalty, the Department must prove that Licensee committed a “knowing violation” of an order issued by the Superintendent.[15] This does not mean that the violation has to be intentional. The term “knowingly” is statutorily defined as meaning knowledge of facts showing an act or omission within the statute, not knowledge of the unlawfulness of the act or omission.[16] In other words, to impose a civil penalty the evidence must show that the violator knew of the facts that constitute the violation. The evidence shows that the violation found above is a “knowing” violation. Therefore, a civil penalty of up to $5,000.00 for each violation may be imposed. 7. Here, the Department has not articulated a basis for the maximum amount of civil penalty that it is seeking. Thus, this tribunal is left to its own judgment. While there is mitigating evidence, as stated above, the length of time that the violation has been ongoing warrants a hefty penalty, even to the maximum. Therefore, this tribunal finds the maximum civil penalty to be justified in this case. DECISION IT IS RECOMMENDED that the Superintendent find Licensee Niagara Credit Solutions, Inc. in violation of A.R.S. §§ 32-1051(1) and -1053(A)((1). IT IS FURTHER RECOMMENDED that the Superintendent suspend collection agent license CA 0907499, held by Licensee Niagara Credit Solutions, Inc., until such time as Licensee has shown to the Superintendent’s satisfaction that it has a positive net worth and is otherwise in compliance with the requirements applicable to Arizona-licensed collection agents.

. . .

IT IS FURTHER RECOMMENDED that the Superintendent find that Licensee knowingly violated A.R.S. § 32-1053(A)(1). IT IS FURTHER RECOMMENDED that the Superintendent impose on Licensee a civil penalty of $5,000.00, to be paid in full within 30 days of the effective date of the final order in this matter.

Done this 24th day of December 2007.

Office of Administrative Hearings

______________________________ Eric A. Bryant Administrative Law Judge

Original mailed this ___ day of December 2007, to:

Felecia Rotellini, Superintendent Arizona Department of Financial Institutions ATTN: Susan L. Ross 2910 North 44th Street, Suite 310 Phoenix, AZ 85018

By ___________________________ ----------------------- [1] Exhibit 1. [2] Exhibit 2. [3] Id. [4] Id.; testimony of John Janocsko. [5] Exhibit 2. [6] Id. [7] Culpepper v. State, 187 Ariz. 431, 437, 930 P.2d 508, 514 (Ct. App. 1996). [8] A.R.S. § 32-1051(1). [9] A.R.S. § 32-1053(A)(1). [10] A.R.S. § 47-1201(23). [11] 11 U.S.C. § 101(32). [12] A.R.S. § 32-1053(A). [13] The Cease and Desist Order did not require Licensee to cease business, but that it correct the negative net worth situation. [14] It is also important to note that no actual harm was shown by the Department. Although actual harm is not a necessary element for showing a violation (nor should it be, for the protection of the public), when determining an appropriate sanction a licensee who has not caused actual harm should not be equated with one who has caused actual harm. In other words, the lack of a showing of actual harm is a mitigating factor. [15] A.R.S. § 6-132. [16] A.R.S. § 1-215(15).

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