ALJDEC

98A-H1967-REL · Department of Real Estate · 1998-11-16

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: September 29, 1998

APPEARANCES: Applicant Noel Allen appeared on his own behalf; Assistant Attorney General Moira McCarthy appeared on behalf of the State of Arizona, Department of Real Estate.

ADMINISTRATIVE LAW JUDGE: Eric A. Bryant _____________________________________________________________________

Applicant Noel S. Allen brings this appealable agency action protesting the Arizona Department of Real Estate’s denial of his application for a real estate salesperson’s license. The Department based the denial on its conclusion that Applicant had made false statements on his application and was not a person of honesty and good character. The parties presented evidence and testimony at the hearing. At the end of the hearing on September 29, 1998, the Assistant Attorney General submitted a Memorandum of Law (admitted into evidence post-hearing as Exhibit S) from a similar administrative action. The memorandum addresses the effect of judicial admissions. This tribunal gave Applicant until October 9, 1998, to respond to the memorandum. Applicant filed a response on October 9, 1998, and the record was closed. Based upon the entire record, the Administrative Law Judge makes the following Findings of Fact, Conclusions of Law, and Recommended Order. FINDINGS OF FACT 1. From 1992 to 1994, Applicant was an officer, director, and principal stockholder of American Pathfinders, Inc. (“API”). API was an agent of Sutter Insurance Company (“Sutter”), an insurer in the State of Arizona. API was authorized to solicit insurance contracts for Sutter and to collect premiums on behalf of Sutter. API was required to submit net premiums (amounts collected less applicable commissions) to Sutter. Applicant was licensed as an insurance agent by the Arizona Department of Insurance. (Exhibit L.) 2. In 1994, Sutter sued API and its officers as individuals in Maricopa County Superior Court, claiming breach of contract, breach of fiduciary duty, conversion, misappropriation of funds, and other claims (hereinafter “the 1994 lawsuit”). API and the individual defendants, including Applicant, counter-sued, claiming wrongful actions by Sutter. The parties to that litigation entered into a stipulated agreement to resolve the matter without further litigation. The parties stipulated to factual findings in favor of Sutter (hereinafter “the 1994 lawsuit stipulation”). These included a finding that the individual defendants, including Applicant, personally guaranteed the debts of API. The 1994 lawsuit stipulation findings also included a statement that API and the individual defendants misused net premiums. The parties agreed that API and the individual defendants, including Applicant, were liable to Sutter for an amount of damages specified in the agreement. (Exhibits E, F, G, and H.) 3. On October 5, 1994, Judge Cheryl Hendrix entered final judgment in favor of Sutter. Though the parties had submitted to her a form of judgment that included reference and reliance on the 1994 lawsuit stipulation, Judge Hendrix refused to incorporate it. Instead, she crossed- out reference to the stipulation and entered judgment against the individual defendants only on the grounds that the individuals had personally guaranteed the debts of API. (Exhibit I.) Thus, the final judgment is based on personal guarantees of the corporate debt, not fraud, misuse, or dishonesty. 4. In April 1996, the Arizona Department of Insurance (DOI) revoked Applicant’s insurance agent license. DOI found that Applicant failed to provide documentation of the 1994 lawsuit as part of his renewal application. Therefore, DOI concluded that Applicant made misrepresentations in attempting to retain his license. Furthermore, DOI relied on the 1994 lawsuit stipulation to conclude that Applicant had “a record of dishonesty in business or financial matters. . .,” that he had “a record of misappropriation, conversion, or irregular withholding by the applicant of monies belonging to . . . insurers . . .,” and that he had injured an insurer. (Exhibit L.) The DOI revocation became final without modification. 5. In October 1997, Applicant submitted an application for a real estate salesperson’s license. On that application, he answered every question, including the following: 2. Have you ever had any professional license or registration (including a real estate license) restricted, refused, denied, suspended or revoked, OR have you voluntarily surrendered any license during the course of an investigation or disciplinary proceeding, OR had an administrative order entered against you, OR any other disciplinary action taken against any license issued to you, whether reprimand, censure, fine or other penalty, by any state, federal or other regulatory agency?

ANSWER: YES

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5. Have you ever had any judgment or order entered against you by a court of competent jurisdiction in Arizona or any other state involving fraud, misrepresentation, dishonesty or moral turpitude, OR arising out of the conduct of any business in real estate, cemetery property, time-share intervals or membership campgrounds?

ANSWER: NO

(Exhibit A.) As part of his answer to question 2, Applicant disclosed the DOI license revocation and the 1994 court judgment. (Exhibit B.) 6. The Arizona Department of Real Estate (“the Department”) denied the application “based on [the] revocation of [Applicant’s] Arizona insurance license and [the] underlying circumstances which led to the revocation.” (Exhibit C.) Applicant appealed. (Exhibit D.) 7. The Department issued a Notice of Hearing Upon Denial of License that referred not only to Applicant’s prior insurance license revocation and the 1994 lawsuit, but also alleged that Applicant had deceitfully attempted to obtain a real estate license. At the hearing, the State urged this tribunal to conclude that Applicant misrepresented himself to the Department by answering “No” to question 5 on the application. 8. Applicant testified at the hearing that he answered every question honestly and that he disclosed everything to the Department. He argued that Judge Hendrix had refused to incorporate the 1994 lawsuit stipulation into the 1994 court judgment and that, therefore, the judgment did not involve fraud or dishonesty. He also presented a character witness. 9. Rob McCabe credibly testified at the hearing as a character witness for Applicant. Mr. McCabe has a real estate license and is a mortgage broker (inactive), as well as a licensed general contractor. He has known Applicant for 25 years and has high regard for Applicant’s honesty and business reputation. He is a personal friend of Applicant and has offered him a job if Applicant gets his license. CONCLUSIONS OF LAW 1. Applicant must show that he meets the qualifications for licensure. A.R.S. § 32-2125.01. The Commissioner has discretion to deny a license application for any of the reasons listed in A.R.S. § 32-2153(A) and (B). The Department has alleged that grounds for denial of Applicant’s application exist under that statute per subsections (B)(1)--attempting to obtain a license by false, misleading, or deceitful means, (B)(3)--making a substantial misrepresentation to the Department, (B)(5)--committing “dishonest dealings,” and (B)(7)--not being a person of honesty, truthfulness, and good character. 2. As noted above, the Department argues that Applicant falsely answered question 5 on the application. That question, in its entirety, asks: “Have you ever had any judgment or order entered against you by a court of competent jurisdiction in Arizona or any other state involving fraud, misrepresentation, dishonesty or moral turpitude, OR arising out of the conduct of any business in real estate, cemetery property, time-share intervals or membership campgrounds?” (Emphasis added.) The question clearly asks only about judgments or orders, not claims and allegations. The State admits that the 1994 court judgment did not include the 1994 lawsuit stipulation that referred to misuse of funds. (Exhibit S at p.3.) Furthermore, the judgment that Applicant was personally liable for the corporate debt does not by necessity involve fraud, dishonesty, or misrepresentation. Thus, the only reasonable conclusion is that the 1994 court judgment did not involve dishonesty or fraud. Applicant answered question 5 correctly and honestly. 3. Moreover, the record is clear that Applicant disclosed all the information about his insurance license revocation and the 1994 lawsuit and judgment. There is no indication whatsoever that Applicant has tried to hide anything from the Department. 4. Therefore, the evidence does not support a conclusion that Applicant has attempted to obtain a license through misrepresentation or deceit or has made a substantial misrepresentation, pursuant to A.R.S. § 32- 2153(B)(1) and (3). 5. What remains, then, is the 1994 lawsuit stipulation (Exhibit G) and the DOI order of revocation (Exhibit L). The DOI order is based mainly on the fact that Applicant did not disclose the 1994 lawsuit and court judgment with his insurance renewal application. It is also based on DOI’s interpretation of the 1994 lawsuit stipulation, but that department’s interpretation is not binding on this tribunal or the Commissioner.( 6. A close look at the 1994 lawsuit stipulation shows it to be a contractual dispute. Of the 2 ½ million dollars in net premiums collected by API, Sutter was suing for about one-half million dollars that it claimed it was owed. In the 1994 lawsuit stipulation, Applicant admits that the money was owed and that the money was “improperly utilized.” However, there is no finding that the money was to have been set aside in a trust account, or that the money was misused by Applicant in some risky venture. And, the parties to the 1994 lawsuit stipulation ask for judgment based only on the personal guarantees of API’s individual guarantors. Boiled down and looked at closely, the stipulation shows a resolution to a breach of contract claim. It does not present evidence that Applicant lied to Sutter or committed fraud. It shows merely that Applicant was involved in a contract dispute and agreed that he was liable for a specified amount of corporate debt. Thus, even if used against Applicant, the 1994 lawsuit stipulation is not evidence of fraud or dishonesty and is weak evidence for lack of good character. 7. This tribunal gives great weight to Applicant’s character witness, Rob McCabe. Not only is Mr. McCabe well acquainted with Applicant, he is willing to hire Applicant and work with him. This shows personal confidence in Applicant’s character. 8. The evidence is insufficient to support a conclusion that Applicant engaged in fraud or dishonest dealings, or that he is not a person of honesty, truthfulness, and good character, pursuant to A.R.S. § 32-2153(B)(5) and (7). Therefore, this Administrative Law Judge recommends that Applicant’s application be approved. However, if the Commissioner disagrees, this Administrative Law Judge would recommend, based on the strong character evidence, that the Commissioner consider giving applicant a probationary license for one or two years, with terms designed to protect against whatever fears the Commissioner may have. Because the Commissioner has the discretion to deny a license completely, he also has the discretion to grant a license with conditions if the circumstances warrant it.

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RECOMMENDED ORDER Based on the factual findings and conclusions above, IT IS RECOMMENDED that the Arizona Department of Real Estate approve the application of Noel S. Allen for a real estate salesperson's license. If the Commissioner concludes that there are grounds to refuse a license, then it is recommended that a probationary license be issued instead.

Done this 17th day of November 1998.

OFFICE OF ADMINISTRATIVE HEARINGS

_________________________________ Eric A. Bryant Administrative Law Judge

Original mailed this ___ day of November 1998, to:

Mr. Jerry Holt, Commissioner Arizona Department of Real Estate 2910 North 44th Street, Suite 100 Phoenix, AZ 85018 ATTN: Bonnie Hollon

By _______________________________

( The State does not argue that the DOI Order has an estoppel effect on this tribunal or the Commissioner, nor could it argue such a position. The Commissioner can and should exercise his discretion independently of other governmental entities.

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Office of Administrative Hearings 1700 West Washington, Suite 602 Phoenix, Arizona 85007 (602) 542-9826