On appeal from the New Jersey Department of Banking and Insurance.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Before Judges Skillman, Graves and Grall.
Henry J. Krauze appeals from final orders of the Commissioner of the Department of Banking and Insurance. The orders at issue impose an aggregate administrative fine in the amount of $736,150 and award Prime Insurance Syndicate, Inc., restitution in the amount of $512,583.91, for which Krauze is jointly and severally liable.*fn1
Krauze is a former officer and shareholder of United Risk Management (URM) and was the holder of a New Jersey insurance producer's license. Gary and David Pohida, with whom Krauze is jointly and severally liable on the restitution award, were also shareholders and officers of URM but not licensed producers.
Pursuant to an agreement with Prime, URM submitted applications for commercial automobile insurance coverage to Prime, which then provided the coverage, and URM was to remit the premiums. In 2003, Prime filed a complaint in the United States District Court for the District of New Jersey seeking to recover damages for breach of contract, fraud and conversion allegedly committed by URM, the Pohidas, Krauze and others. A default judgment in the amount of $612,155.91, plus interest, counsel fees and costs was entered against Krauze, the Pohidas and URM in December 2003, but Krauze obtained an order vacating the judgment against him in October 2004. That federal litigation is relevant here because, after awarding restitution in favor of Prime, the Commissioner issued an order tying Krauze's obligation to pay restitution to the outcome of the federal case. Accordingly, relevant developments in that litigation are noted here and elsewhere in this opinion.*fn2
The Commissioner commenced the administrative enforcement action at issue here by order to show cause issued on September 27, 2004 (EO4-112). It named Prime, Krauze, the Pohidas, URM and other New Jersey agencies and producers associated with Prime. The Commissioner alleged violations of various provisions of the Insurance Producer Licensing Act, N.J.S.A. 17:22A-1 to -25, the Insurance Producer Licensing Act of 2001, N.J.S.A. 17A:22-26 to -48,*fn3 the Surplus Lines Law, N.J.S.A. 17:22-6.40 to -6.69, and regulations promulgated by the Commissioner under the authority of those laws. As a licensed producer who held an interest of five percent or more in the URM, Krauze was responsible for the conduct of the insurance business activity of URM. N.J.S.A. 17:22A-8; N.J.S.A. 17:22A-40c, d; N.J.A.C. 11:17A-1.6(c). Pursuant to N.J.S.A. 17:22A-45c, the Commissioner is authorized to order a licensee to make "restitution of moneys owed . . . as appropriate." Cf. N.J.S.A. 17:22A-17b (authorizing restitution "in appropriate circumstances").
The following specific allegations made by the Commissioner and relevant to the issues raised on this appeal are as follows. The Commissioner alleged, among other things, that between 2000 and April 15, 2001, Prime had "issued 209 policies of insurance for lines of coverage in New Jersey for which it did not have the requisite authority." (Count One). The Commissioner further charged that although Prime advised the Commissioner that it would not write new coverage after April 15, 2001, subsequent to that date Prime had written new coverage for over 100 vehicles. (Count Two). According to the Commissioner's allegation, URM, Krauze and the Pohidas placed 152 commercial automobile coverages with Prime between 2000 and April 15, 2001, and after that date added "100 new and unrelated vehicles to existing Prime Policies." (Counts Three and Four). The Commissioner's order to show cause included similar allegations apparently involving different coverages issued by Prime and arranged by other New Jersey producers and agents. (Counts Five and Six). In Count 23, the Commissioner charged that URM, the Pohidas and Krauze "failed to remit approximately $512,583.91 in premium funds to Prime" for the coverage Prime wrote.
Although there is no dispute that the Commissioner's order to show cause was properly served upon and received by Krauze, he did not respond within the twenty-day period following service. There is no question that the order to show cause provides notice of the charges and the significant administrative fines and restitution obligation at issue, and the order to show cause includes a clear warning that upon failure to respond or request a hearing within twenty days of service, the allegations would be "deemed . . . admitted," the right to be heard deemed waived and the proposed sanctions imposed.
Krauze acknowledged service on October 1, 2004, but the Commissioner did not issue a final order based on Krauze's deemed admission until January 6, 2006 (EO6-07). Krauze had taken no action to defend against the allegations in the interim. The Commissioner assessed an administrative fine in the aggregate amount of $736,150 against Krauze. Approximately seventy-seven percent of the fine, $570,000, was for "failure to turn over premium[s to Prime] in the transactions involving 57 insurance policies." In addition, the Commissioner ordered Krauze to pay restitution to Prime in the amount of $512,583.91.
Six months later, on June 8, 2006, Krauze moved to vacate the order the Commissioner entered following Krauze's default. In the alternative, he sought a hearing to dispute the amount of the restitution award and challenge the reasonableness of the administrative fines under the criteria identified in Kimmelman v. Henkels & McCoy, Inc., 108 N.J. 123, 133 (1987).
In support of his motion to vacate, Krauze asserted that he "believed . . . that [his] counsel would take whatever steps were necessary to respond to the Order to Show Cause [and] was not aware that [his] counsel did not provide any written response." He also claimed that he did not understand that he was a party to the order and that in 2005 he was suffering from a serious infection. In the alternative, Krauze contended that regardless of his failure to respond, he was entitled to a hearing on the reasonableness of the penalty and the amount of restitution.
On October 18, 2006, the Commissioner denied Krauze's request to vacate the order and his request for a second opportunity to reduce the amount of the penalty (EO6-149). Although the Commissioner assumed that reconsideration would be appropriate if Krauze established that his failure to respond was excusable and that he had a meritorious defense, the Commissioner concluded that Krauze had not made either showing. The Commissioner further determined that because Krauze had waived the right to a hearing on liability he had also waived the right to a hearing on the amount of any administrative fine.
With respect to restitution, the Commissioner concluded that the time for challenging the amount of restitution "had come and gone" and that the Department "tend[ed] to believe" the amount of the award appropriate because it was based upon information obtained by the Department "through its investigation of the case as a whole" and not, as Krauze alleged, solely on information provided by Prime. Nonetheless, the ...