ALJDEC

99A-254-INS · Department of Insurance · 2000-01-25

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: January 25, 2000 APPEARANCES: Petitioner Gerard Henry Lilley appeared on his own behalf. Assistant Attorney General Michael De La Cruz appeared on behalf of the Arizona Department of Insurance. ADMINISTRATIVE LAW JUDGE: Daniel G. Martin _____________________________________________________________________ The issue presented by this matter is the Arizona Department of Insurance’s decision to deny Gerard Henry Lilley’s application for an insurance license. Based on the entire record, the following Findings of Fact, Conclusions of Law and Recommended Order are made: FINDINGS OF FACT On October 6, 1999, Gerard Henry Lilley submitted an application to the Arizona Department of Insurance (the “Department”) for an individual insurance agent’s license (life and disability). By letter dated November 18, 1999, the Department notified Mr. Lilley that his application had been denied pursuant to A.R.S. § 20-290(B)(2) and (B)(6).[1] Mr. Lilley appealed the Department’s decision by letter dated November 23, 1999. On December 17, 1999, the Department issued a Notice of Hearing setting forth the factual and legal bases upon which it denied Mr. Lilley’s application. The Administrative Law Judge finds all of the facts alleged by the Department in the Notice of Hearing to be substantiated by the evidence presented at the hearing, and hereby incorporates those facts by reference herein. As to the legal bases upon which the Department relied, the Department’s Notice of Hearing departs from its November 18, 1999 denial letter in one material respect. The November 18 denial letter identifies A.R.S. § 20-290(B)(2) and (B)(6) as the statutory bases upon which the Department denied Mr. Lilley’s application, whereas the Notice of Hearing identifies A.R.S. § 20-290(B)(2) and (B)(5) (A.R.S. § 20-290(B)(5) allows the Director of the Department to deny an application if he finds a “record of suspension or revocation of an insurance license in any jurisdiction”). The Administrative Law Judge finds that the Notice of Hearing amended the Department’s November 18 denial letter, and that Mr. Lilley received adequate notice of the legal grounds upon which the Department relied to deny his application.[2] Mr. Lilley presented his case through his own testimony and through two exhibits. The Department presented its case through seven exhibits and through the cross-examination of Mr. Lilley. The following facts derive from the Department’s exhibits and were not contradicted at the hearing. g. On May 1, 1997, Mr. Lilley entered into a Consent Order with the Department (Hearing Exhibit 2) after the Department determined that Mr. Lilley, while a licensed Arizona insurance agent, had misappropriated and converted to his own use $4,700.00 which had been given to him by a customer for the purchase of a fixed annuity contract. h. At the time Mr. Lilley entered into the Consent Order, his agent license had expired. However, as part of the Consent Order Mr. Lilley agreed that the Department had jurisdiction over the matter. The Consent Order required Mr. Lilley to pay restitution in the amount of $5,031.35 (the $4,700.00 plus interest), and to pay the Department a civil penalty in the amount of $1,000.00. i. On May 15, 1997, Mr. Lilley applied to the Department to renew his previously expired agent license. Question D of the renewal application asks: “Have you had any judgment, order or other determination, including any criminal conviction issued or made against you in any criminal, civil, administrative or other judicial or quasi-judicial proceeding of any kind in any jurisdiction that has not previously been disclosed by you to this agency in a license application based on any of the following: 1. Misappropriation, conversion or the withholding of moneys; 2. Incompetence or a source of injury and/or loss to anyone; 3. Dishonesty in business or financial matters; . . . 5. Any cause arising out of an insurance transaction.” j. Despite having just entered into the Consent Order with the Department two weeks earlier, Mr. Lilley answered “No” to each of these questions. k. Question E of the renewal application asks: “Are any civil, administrative, other judicial or quasi-judicial proceedings of any kind . . . currently pending against you in any jurisdiction based on any of the following: 1. Misappropriation, conversion or the withholding of moneys; 2. Incompetence or a source of injury and/or loss to anyone; 3. Dishonesty in business or financial matters; . . . 5. Any cause arising out of an insurance transaction.” l. Mr. Lilley answered “No” to each of these questions. However, as the Department subsequently learned, on May 14, 1997 – the day immediately preceding his renewal application – Mr. Lilley had executed a “letter of acceptance, waiver and consent” with the National Association of Securities Dealers (NASD Regulation, Inc.) to resolve allegations which the NASD had brought against Mr. Lilley’s securities license arising out of the same conduct for which Mr. Lilley had entered into the Consent Order with the Department. m. The Department approved Mr. Lilley’s May 15, 1997 application and renewed his license. n. On June 15, 1998, Mr. Lilley entered into a second Consent Order with the Department (Hearing Exhibit 4) after the Department discovered the omissions on Mr. Lilley’s May 15, 1997 renewal application. As of this date, Mr. Lilley had not paid either the restitution or civil penalty which he had agreed to pay under the first Consent Order, nor had he made any effort to do so. The Department revoked Mr. Lilley’s license and again ordered him to pay the restitution and civil penalty called for by the first Consent Order. On June 16, 1998, the day after he entered into the second Consent Order, Mr. Lilley filed for Chapter 13 bankruptcy protection. Mr. Lilley still has not paid the restitution and civil penalty called for by the first Consent Order. At the hearing, Mr. Lilley asserted that his bankruptcy filing prevents him from making the restitution and civil penalty payments. Mr. Lilley testified that he understood the NASD letter of acceptance, waiver and consent to relieve him of any disclosure obligations. Yet, under paragraph 6 of that letter (Hearing Exhibit A, page 2), Mr. Lilley acknowledges “Having consented to the imposition of sanctions in this matter ‘without admitting or denying’ the allegations of violation, I may not deny, directly or indirectly, such allegations to the media or otherwise” (emphasis added). Pursuant to the terms of the first and second Consent Orders, Mr. Lilley has admitted violating the following statutes: A.R.S. § 20-291(G) (now (F)) (willful misrepresentation of any fact required to be disclosed in a license application), A.R.S. § 20-316(A)(2) (willful violation of, or willful noncompliance with, any provision of title 20 or any lawful rule or order of the Director of the Department); A.R.S. § 20-316(A)(3) (misrepresentation or fraud in obtaining or attempting to obtain any insurance license); A.R.S. § 20-316(A)(4) (misappropriation or conversion or illegal withholding of monies belonging to policyholders, insurers, beneficiaries or others and received in or during the conduct of business under an insurance license or through its use); A.R.S. § 20-316(A)(7) (conduct of affairs under the license showing the licensee to be incompetent or a source of injury and loss to, or repeated complaint by, the public or any insurer); and A.R.S. § 20-463(A)(4)(a) and (b) (diversion of monies of an insurer or other person in connection with the transaction of insurance or the conduct of business activities by any insurer, reinsurer or other entity licensed to transact insurance business in Arizona). Mr. Lilley apologized for his conduct, and claimed he never intended to harm anyone or to misappropriate funds. Mr. Lilley denied the Department’s allegations that he had conducted himself dishonestly. CONCLUSIONS OF LAW In this proceeding, Mr. Lilley bears the burden of proving, by a preponderance of the evidence, that the Department improperly denied his license application. A preponderance of the evidence is “such proof as convinces the trier of fact that the contention is more probably true than not.” Morris K. Udall, Arizona Law of Evidence ' 5 (1960). The Administrative Law Judge concludes, on the facts presented, that Mr. Lilley failed to sustain the required burden of proof. A.R.S. § 20-290(B) provides six (6) separate grounds upon which the Director of the Department of Insurance (the “Director”) may deny the issuance of an insurance agent’s license. The preponderance of the evidence was that Mr. Lilley has a record of dishonesty in business or financial matters by virtue of his misappropriation and conversion to his own use of $4,700.00 which had been given to him by a customer for the purchase of a fixed annuity contract, and that Mr. Lilley has a record of revocation of an insurance license. Thus, grounds existed for the Director to deny Mr. Lilley’s license application under A.R.S. § 20-290(B)(2) and (B)(5), and that denial was not unreasonable.[3] Mr. Lilley’s objections to the Department’s action are not well taken in view of the two Consent Orders into which Mr. Lilley entered, the second one of which revoked Mr. Lilley’s license. Further, Mr. Lilley’s claim that he was unable to pay the required restitution and civil penalty due to his bankruptcy filing flies in the face of the fact that Mr. Lilley had more than a year prior to his bankruptcy filing (i.e., the time between May 1, 1997, the date Mr. Lilley entered into the first Consent Order, and June 16, 1998, the date Mr. Lilley filed for bankruptcy protection) during which he made no efforts to make the required payments. RECOMMENDED ORDER In view of the foregoing, it is recommended that the Department’s decision to deny Gerard Henry Lilley’s application for an insurance agent’s license be affirmed.

Done this day, January 31, 2000.

______________________________________ Daniel G. Martin Administrative Law Judge

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

Department of Insurance Charles R. Cohen ATTN: Curvey Burton 2910 North 44th St., Suite 210 Phoenix, AZ 85018

By ___________________________ ----------------------- [1] These provisions are as follows:

20-290. Licensing of agent or broker. * * * * * B. The director may refuse to accept any application or issue any license under this article if the director finds one or more of the following: * * * * *

2. A record of dishonesty on the part of the applicant in business or financial matters. * * * * * 6. A record of conviction by final judgment of a felony involving moral turpitude.

[2] The November 18 denial letter specifically states that the statutory provisions cited in the letter are “not intended as an exhaustive listing of the grounds to deny your application.” [3] Although not specifically alleged by the Department, and not relied upon by the Administrative Law Judge here, the preponderance of the evidence would also support the conclusion that Mr. Lilley made a material misrepresentation in his May 15, 1997 renewal application by failing to disclose his admissions under the first Consent Order and by failing to disclose his submission to the NASD letter of acceptance, waiver and consent, and that Mr. Lilley has a record of misappropriation and conversion. Thus, grounds existed for the Director to deny Mr. Lilley’s license application not only under A.R.S. § 20-290(B)(2) and (B)(5), but also under (B)(1) and (B)(3).

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