ALJDEC

98A-H1967-REL-rhg · Department of Real Estate · 1999-04-15

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

REHEARING: April 6, 1999

APPEARANCES: 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 _____________________________________________________________________

The original hearing in this matter took place on September 29, 1998. This tribunal issued a Recommended Order concluding that there were no grounds to refuse licensure. The Commissioner accepted the Recommended Order and granted licensure. The Attorney General moved for rehearing or reconsideration. The Commissioner amended his Final Order and granted partial reconsideration. The Commissioner ordered reconsideration of only the allegations regarding A.R.S. § 32-2153(B)(5) and (7), as they relate to the 1994 lawsuit stipulation authorized by Applicant and as they relate to the Arizona Department of Insurance’s 1996 denial of Applicant’s insurance license renewal. The Commissioner also ordered that an administrative law judge other than the undersigned conduct the reconsideration. That part of the order was treated as a request for change of administrative law judge and denied by order of the Director of the Office of Administrative Hearings. The rehearing was held by the undersigned as noted above. The parties argued their respective positions and Applicant testified further in his behalf. Based upon the entire record, including the original record and the rehearing record, this Administrative Law Judge makes the following Findings of Fact, Conclusions of Law, and Recommended Order. Findings of Fact 1-9 from the original Recommended Order (adopted by the Commissioner’s Final Order) are incorporated herein and restated below. Finding of Fact 10 is added based on additional evidence at the rehearing. Conclusions of Law 1-5 from the original Recommended Order are incorporated and restated below, including the Commissioner’s correction of the footnote. Conclusions of Law 6-14 set forth the reconsideration ordered by the Commissioner. 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. 10. At the rehearing, Applicant credibly testified further on his behalf. He stated that Sutter has been fully paid and no more money is owing. (Exhibit R.) He testified that he understood the 1994 lawsuit stipulation to mean that he was admitting liability for the debt based on breach of contract, but not that he committed any illegal or dishonest acts. He continued to characterize the events at issue in the 1994 lawsuit as a failed business venture and not some fraudulent scheme. 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 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.[1] 6. The State’s continued urging that the 1994 lawsuit stipulation be viewed as admission of fraud, dishonesty, or conversion is not persuasive. Not only was the 1994 lawsuit stipulation not used as a basis for the court’s judgment, but the parties to the stipulation did not characterize the events as fraud or dishonesty. The conclusions proposed in the 1994 lawsuit stipulation called API’s actions “wrongful” and a “breach” of the agreement. The wrongful conduct described by the parties is clearly contractual in nature, not tortious. Thus, this Administrative Law Judge continues to view the 1994 lawsuit as a contractual dispute that does not show dishonesty. The State has simply not made that case before this tribunal. 7. In any event, the Director of the Arizona Department of Insurance denied license renewal because he found that Applicant was dishonest. That Order (Exhibit L) must be considered as a record of dishonesty, and it is that point that the undersigned ALJ overlooked in the original recommendation. For that reason, it is unquestionable that Applicant has a record of dishonesty as proscribed in A.R.S. § 32-2153(B)(5). 8. Whether Applicant lacks good character as stated in A.R.S. § 32- 2153(B)(7) is not as clear. On the one hand, it is important to note that Applicant has not engaged in any criminal conduct, or even been accused of criminal or tortious conduct. On the other hand, he has had his insurance license “revoked.”[2] And in so doing, the Insurance Director found dishonesty. This obviously goes to Applicant’s character. 9. But, Applicant has also presented credible evidence of good character. This tribunal gives great weight to Applicant’s character witness, Rob McCabe, who testified that he trusts Applicant. Not only is Mr. McCabe well acquainted with Applicant, he is willing to hire Applicant to work under his broker’s license. This shows personal confidence in Applicant’s character. 10. The evidence regarding Applicant’s character is a close call, but falls short of showing a lack of good character. Although Applicant was dishonest when renewing his insurance license, and although he was found liable for failing to fully remit net premiums to Sutter, Applicant has taken steps to re-establish trustworthiness. He has satisfied the lawsuit debt. He fully disclosed the DOI action and the 1994 lawsuit to the Real Estate Department. And he has garnered trust from Mr. McCabe. For these reasons, the allegation of lack of good character fails. 11. The only ground for denial of licensure that the evidence supports is that Applicant has a record of dishonesty stemming from the DOI action. The statute provides that the Commissioner may refuse licensure based on that ground. The legislature has given the Commissioner discretion in this area, leaving it to a judgment of each case’s facts. For Applicant, eve though there is a ground for denial, there are reasons, discussed in Conclusion of Law 10, that he should not be precluded from licensure. Applicant should be granted a probationary license. 12. Probationary licenses upon initial application are not expressly provided for in the statutes governing the Arizona Department of Real Estate. However, it is settled law that administrative agencies have both express and implied powers and that not all standards accompanying a grant of powers need be set forth in express terms. Neal v. City of Kingman, 167 Ariz. 574, 579, 810 P.2d 572 (App. 1990), vacated in part on other grounds, 169 Ariz. 133, 817 P.2d 937 (1991) (affirming the appellate court’s implied- powers ruling); Cracchiolo v. State, 146 Ariz. 452, 457, 706 P.2d 1219 (App. 1985). For example, in Janusz v. Ariz. Dep’t of Economic Security, ADES erroneously paid Janusz unemployment benefits. 157 Ariz. 504, 759 P.2d 650 (App. 1988). Janusz requested a waiver of repayment under a statutory grant of authority giving ADES power to waive repayments in certain circumstances. Because ADES found that Janusz could not repay immediately, but would likely be able to repay in the future, DES “deferred” payment to a future date. The court found that, even though the statute did not expressly mention deferment as an option, deferment was implicitly authorized under the statutory grant of authority to waive repayments in full. 157 Ariz. at 507. 13. Using that reasoning, the Commissioner has authority to grant initial probationary licenses in appropriate circumstances, such as Applicant’s. Because the Commissioner may either completely grant or completely deny licensure, implicitly the Commissioner may take an action that is “in between” those two options. Like the governmental action in the Janusz case, there is implied authority for it. 14. The appropriate action is to grant Applicant a probationary license for two years. The terms of probation should be that Applicant obey all statutes and rules, comply with all Department directives, and only work under Mr. McCabe‘s designated broker's license. These provisions address any lingering concerns for public welfare.

. . .

. . . RECOMMENDED ORDER Considering the factual findings and conclusions above, IT IS RECOMMENDED that the Arizona Department of Real Estate grant Noel Allen a probationary license for two years, as long as he meets the other criteria for licensure. The terms of probation should be that he obey all statutes, rules, and Department directives, and that he only work under the supervision of Rob McCabe as his designated broker; he may not work under any other broker during the probationary period.

Done this 16th day of April 1999.

OFFICE OF ADMINISTRATIVE HEARINGS

______________________________________ Eric A. Bryant Administrative Law Judge

Original mailed this ___ day of April 1999, to:

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

By ___________________________

----------------------- [1] In Arizona, a party subject to the traditional rules of collateral estoppel is precluded from re-litigating the issue with another party as long as there was a full and fair opportunity to litigate the issue in the first action. Wetzel v. Arizona State Real Estate Dep’t, 151 Ariz. 330, 333, 727 P.2d 825, 828 (App. 1986). In this case, estoppel could have properly been applied but was not raised by the State. [2] Denial of renewal is virtually the same as revocation.

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