August 17, 2009
IN THE MATTER OF PROCEEDINGS OF THE COMMISSIONER OF BANKING AND INSURANCE, STATE OF NEW JERSEY, TO FINE, SUSPEND, AND/OR REVOKE THE INSURANCE LICENSES OF HENRY J. KRAUZE (REFERENCE NO. 9474565-IP)
On appeal from the New Jersey Department of Banking and Insurance.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Argued January 27, 2009
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 Commissioner amended Krauze's obligation to pay restitution by linking that obligation with the federal litigation.
The Commissioner concluded that it "would be problematic if the District Court before which that case is now pending found that the amount owed to Prime was less than the $512,583.91 . . . or, alternatively, the parties settled the matter for a lesser amount." Accordingly, "[t]o avoid any conflict, the possible prejudicing of Krauze or the unjust enrichment [of] Prime," the Commissioner found "it appropriate to amend" the final order "to provide that Krauze is liable, jointly and severally, for payment of any amount that is determined to be owed by him to Prime by the U.S. District Court . . . or as may be agreed to in any settlement of that action . . . , but no more than $512,583.91."
As amended on October 18, 2006 (EO6-149), the Commissioner's order relevant to restitution by Krauze provides:
I further ORDER that Henry J. Krauze shall pay restitution to Prime Insurance Syndicate, Inc. in an amount and at a time as determined by the United States District Court, Docket No.: 03-CV-01050-KSH, if any, or an amount as determined by settlement between the parties in lieu of a determination in the case before the United States District Court, Docket No.: 03-CV-01050-KSH, up to $512,583.91.
I further ORDER that nothing contained herein shall be construed to limit the amount determined to be owed by Henry J. Krauze in restitution to Prime Insurance Syndicate, Inc. by any court or in settlement proceedings.
On January 5, 2007, Krauze moved for summary judgment in the federal suit. His motion was granted on April 3, 2007, and the case was dismissed on May 3, 2007.
Prime moved for reconsideration of the restitution order. Because the appeal was pending before this court, the Commissioner denied that motion on June 19, 2007 (EO7-48).
Later that month, this court granted the Commissioner's motion for a remand to permit reconsideration of the restitution order in light of the federal court's grant of summary judgment in favor of Krauze. On September 12, 2007, the Commissioner decided not to amend the order and gave reasons for that determination (EO7-71).
As I have stated previously, an enforcement proceeding between an administrative agency and a person subject to that agency's regulatory authority is generally not the appropriate forum in which to determine the amount of restitution owed to a party injured as a result of the regulatory violations of the respondent(s) in such matters, except where the amount owed is not contested; is confirmed by either stipulation or an admission in the evidentiary record; or is capable of being determined within the confines of the administrative proceeding on the alleged regulatory violations. . . .
Because the specific amount of restitution required of Krauze in Order E06-07 was not confirmed by either stipulation or admission and was contested, Order E06-149 modified the provision in Order 06-07 specifying that amount. Further, as the federal case is still pending against defendants URM and the Pohidas, and because pursuant to N.J.S.A. 17:22A-8 or N.J.S.A. 17:22A-40c and N.J.A.C. 11:17A-1.1(c), Krauze is jointly and severally liable for the actions of those defendants, the specific amount of restitution for which Krauze is liable, in the context of this case, has yet to be established.
I have not made and do not presume to make any judgments as to Krauze's liability under federal law. I have already ruled that Krauze is liable under New Jersey law for the restitution of unpaid premiums due and owing to Prime based on his status as an officer of URM, the holder of 5 percent of the shares of URM and as the designated individual insurance producer licensee responsible for the insurance related actions of URM, its licensed officers or partners and employees. I reiterate that Krauze is jointly and severally liable with URM and the Pohidas for the restitution of any premiums determined via adjudication or settlement in the United States District Court action to be due and owing to Prime by URM or the Pohidas. Order E06-149 did not provide otherwise. Rather, Order E06-149 merely changed the amount of Krauze's total restitution obligation from the amount certain specified in Order E06-07 to the amount, if any, that is determined to be payable to Prime in the matter still pending in the United States District Court because its proceedings are better structured to ensure an accurate determination of any such amount. Krauze remains liable for restitution to Prime, jointly and severally, for any amount of restitution determined to be owed Prime by himself, URM or the Pohidas, as an officer of URM, the holder of 5 percent of the shares of URM and as the designated individual insurance producer licensee responsible for URM.
On September 19, 2007, the Commissioner issued a clarification (EO7-81), that in pertinent part provides:
I have already ruled that Krauze is liable under New Jersey law for the restitution of unpaid premiums due and owing to Prime based on his status as an officer of URM, the holder of 5 percent of the shares of URM and as the designated individual insurance producer licensee responsible for the insurance related actions of URM, its licensed officers or partners and employees. As a result, Krauze is jointly and severally liable with URM and the Pohidas for the restitution of any premiums determined via adjudication or settlement in the U.S.D.C. action to be due and owing to Prime by URM or the Pohidas.
In the federal action, the court entered a default judgment against URM and the Pohidas for $612,155.91 plus interest, as well as attorneys' fees and costs totaling $27,476.88. Thus, but for the restitution limitation imposed in Order E06-07, Krauze would be responsible, on a joint and several basis, for the entire amount of restitution awarded against URM and the Pohidas in the federal action. Because the amount of the default judgment entered in the U.S.D.C. against the Pohidas and URM was greater than the limitation imposed in Order E06-07, however, Krauze remains liable for restitution to Prime, jointly and severally with URM and the Pohidas, in the amount of $512,583.91 based upon his status as an officer of URM, the holder of 5 percent of the shares of URM and as the designated individual insurance producer licensee responsible for URM.
Krauze filed a second notice of appeal to challenge the portion of the foregoing order clarifying Krauze's "restitution obligation under a federal district court default judgment."
On these consolidated appeals, Krauze presents the following issues with respect to the aggregate administrative fine.
A. STANDARD OF APPELLATE REVIEW.
B. THIS COURT SHOULD REMAND THIS MATTER AND INSTRUCT THE DEPARTMENT TO APPLY THE KIMMELMAN FACTORS IN THE APPROPRIATE FASHION.
1. THE DEPARTMENT'S FINDINGS OF LAW WITH REGARD TO THE KIMMELMAN FACTORS ARE INCORRECT.
2. THE DEPARTMENT SHOULD HAVE APPLIED THE KIMMELMAN FACTORS PURSUANT TO THE PLAIN LANGUAGE OF THE NEW JERSEY SUPREME COURT.
3. IN LIGHT OF THE ABOVE FACTORS, THE FINES AND PENALTIES AGAINST KRAUZE ARE INAPPROPRIATELY HIGH.
C. THE COURT SHOULD ORDER THAT THE DEPARTMENT HOLD A HEARING TO DETERMINE THE FINES AND PENALTIES AGAINST KRAUZE.
The arguments presented in support of these issues lack sufficient merit to warrant discussion in a written opinion. R. 2:11-3(e)(1)(E). We affirm the Commissioner's order denying a hearing on the amount of the administrative fines substantially for the reasons stated in the Commissioner's written decision incorporated in order E06-149, which is dated October 18, 2006 and consistent with In re A-1 Jersey Moving & Storage, Inc., 309 N.J. Super. 33, 41 (App. Div. 1998).*fn4
With respect to the restitution award, Krauze raises these issues:
A. STANDARD OF APPELLATE REVIEW.
B. THE DEPARTMENT'S APPLICATION OF THE AMOUNT OF THE DEFAULT JUDGMENTS AGAINST URM AND THE POHIDAS TO KRAUZE VIOLATES DUE PROCESS RIGHTS OF KRAUZE.
C. THE DEPARTMENT'S APPLICATION OF DEFAULT JUDGMENTS AGAINST URM AND THE POHIDAS TO KRAUZE VIOLATES THE DOCTRINE OF RES JUDICATA.
D. THE DEPARTMENT'S APPLICATION OF DEFAULT JUDGMENTS AGAINST URM AND THE POHIDAS TO KRAUZE SHOULD BE REVERSED BECAUSE THE DEPARTMENT FOUND THAT PRIME WAS NOT ENTITLED TO RECONSIDERATION OF ORDER EO6-149.
In response to Krauze's arguments, the Commissioner contends that Krauze's waiver of an administrative hearing and the deemed admission that followed as a consequence of his failure to respond to the allegations in the Commissioner's order to show cause have the same import here as in the context of the administrative fines. But, the Commissioner's modification of the decretal portions of the order to restate Krauze's restitution obligation effectively eliminated the finality of the award of restitution entered following Krauze's default. In the second order the Commissioner directed: "Krauze shall pay restitution to Prime Insurance Syndicate, Inc. in an amount and at a time as determined by the [federal court], if any, or an amount as determined by settlement between the parties in lieu of a determination in the case before the [federal court], up to $512,583.91." The import is to fix the restitution award at $512,583.91 or any lower amount fixed by adjudication or settlement in the federal litigation. Given that significant modification, the Commissioner can no longer contend that the initial award retained the finality it had when entered upon Krauze's default in the administrative proceeding.
The Commissioner further contends that the award "must be presumed correct" and is "reasonable." But the Commissioner's explanation for linking the award to the outcome of the federal litigation precludes reliance on principles of deference due the head of an administrative agency. See Mayflower Sec. Co., v. Bureau of Sec., 64 N.J. 85, 93 (1973); In re Assignment of Exposures to Aetna Cas. and Sur. Co., 248 N.J. Super. 367, 376 (App. Div.), certif. denied, 126 N.J. 385 (1991), cert. denied sub nom., Allstate Ins. Co. v. Fortunato, 502 U.S. 1121, 112 S.Ct. 1244, 117 L.Ed. 2d 476 (1992). We refer to the Commissioner's order of September 12, 2007 (EO7-71) (quoted above), in which the Commissioner reasoned that the agency "is generally not the appropriate forum in which to determine the amount of restitution owed to a party injured as a result of the regulatory violations . . . except where the amount owed[:] is not contested; is confirmed by either stipulation or an admission in the evidentiary record; or is capable of being determined within the confines of the administrative proceeding on the alleged regulatory violations."
The Commissioner has discretionary authority to "order restitution of moneys owed . . . as appropriate." N.J.S.A. 17:22A-45c. But in this case, the Commissioner's ambivalence about the propriety of the amount of this restitution is apparent in his several statements of reasons. His most definitive statement about the amount of restitution is found in E06-149: "the Department relied upon the information it obtained through its investigation of the case as a whole, and thus, tends to believe that the dollar amount included in EO4-112 is appropriate." Moreover, after that weak endorsement the Commissioner concluded that determination of the amount should await the outcome of the federal litigation in which Krauze was participating. The Commissioner's doubts about the amount were not reasonably resolved by simply relying on the default judgment entered by the federal court. Further inquiry was required.
We do not question Krauze's responsibility under the insurance law as a licensed producer and holder of an interest in URM in excess of five percent. Nor do we do suggest that the Commissioner cannot rely on a default judgment in any circumstance. The circumstances of this case, however, are quite complicated. First, the Commissioner presumably was aware of the default judgment entered against URM and the Pohidas when the Commissioner determined to await the outcome of Prime's litigation against Krauze. Second, there is evidence in the record that raises a significant factual issue about the date upon which Krauze transferred his interest in URM and responsibility for the conduct of its business; it appears that these affiliations with URM are the only basis for charging Krauze with responsibility for amounts owed to Prime. Thus, it was incumbent upon the Commissioner, who cast doubt on the propriety of the amount of the award stated in EO6-07, to conduct further inquiry and proceedings necessary to satisfy himself that the award is "appropriate." In this context, reliance upon the default judgment is an arbitrary exercise of the Commissioner's discretion to award "appropriate" restitution.
We reject Krauze's claim that the Commissioner was bound to dismiss the order of restitution in its entirety and without further inquiry following the federal court's grant of summary judgment in his favor. As the Commissioner noted, Krauze's responsibility under the insurance laws of this State was not at issue in that proceeding.
While the Commissioner could not rely on the default judgment to resolve his question about the amount of restitution, the Commissioner had an option other than to vacate the entire restitution award as to Krauze. Krauze's favorable result in the federal litigation is a new development that would warrant exercise of the Commissioner's inherent power to reopen and rehear the question of restitution owed by Krauze. See In re Parole Application of Trantino, 89 N.J. 347, 364 (1982) (discussing that authority); Trap Rock Indus., Inc. v. Sagner, 133 N.J. Super. 99, 109-10 (App. Div. 1975) (same), aff'd, 69 N.J. 599 (1976); see generally E. H. Schopler, Annotation, Power of Administrative Agency to Reopen and Reconsider Final Decision as Affected by Lack of Specific Statutory Authority, 73 A.L.R. 2d 939, 946-48 (1960) (discussing cases so holding). Accordingly, we vacate the order of restitution and remand to allow the Commissioner to decide whether to exercise that inherent power.
We find insufficient merit in Krauze's remaining arguments to warrant any further discussion in a written opinion. R. 2:11-3(e)(1)(E).
The order imposing the administrative fine is affirmed; the order of restitution is vacated; and the matter is remanded to permit the Commissioner to determine whether to conduct further proceedings necessary to fix an "appropriate" restitution award.