CONSOLIDATED MORTGAGE, INC. v. THE DEPARTMENT OF FINANCIAL INSTITUTIONS
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RENDERED:
December 10, 2004; 10:00 a.m.
NOT TO BE PUBLISHED
Commonwealth Of Kentucky
Court of Appeals
NO. 2003-CA-002122-MR
CONSOLIDATED MORTGAGE, INC.
v.
APPELLANT
APPEAL FROM FRANKLIN CIRCUIT COURT
HONORABLE ROGER L. CRITTENDEN, JUDGE
ACTION NO. 03-CI-00416
THE DEPARTMENT OF FINANCIAL INSTITUTIONS
APPELLEE
OPINION
AFFIRMING
** ** ** ** **
BEFORE:
BUCKINGHAM, DYCHE, AND SCHRODER, JUDGES.
SCHRODER, JUDGE:
In early 2003, the Commissioner for the
Department of Financial Institutions (“Department”) entered an
order of default against Consolidated Mortgage, Inc. (“CMI”)
revoking both of CMI’s broker’s licenses in the Department’s
administrative action designated 2003-AH-001.
motion to set aside the default order.
CMI filed a
The Deputy Commissioner,
to whom the case had been assigned, did modify the default order
but denied CMI’s motion to set aside the default order.
In
response, CMI filed a petition for review, pursuant to KRS
294.210 and KRS 13B.140, with the Franklin Circuit Court
challenging the denial.
summary judgment.
Shortly thereafter, it moved for
On September 10, 2003, the circuit court
entered an order in which it denied CMI’s motion; granted
summary judgment in the Department’s favor; and affirmed the
default order.
CMI appeals from the circuit court’s judgment.
On appeal, CMI argues that the default order was void
because the Department had filed a civil complaint against it
with the Franklin Circuit Court.
According to CMI, this granted
the circuit court exclusive jurisdiction to revoke its mortgage
broker’s licenses.
CMI also argues that the Deputy Commissioner
abused his discretion when he failed to set aside the default
order because CMI’s attorney was ill at the time the
administrative complaint in 2003-AH-001 was filed and because a
corporation is not responsible for crimes committed by employees
acting outside the scope of their employment.
Finding no abuse
of discretion, this Court affirms.
CMI was a mortgage loan broker company licensed by the
Department, which previously possessed two broker’s licenses.
Donald A. Clark (“Donald”), CMI’s president, owned fifty percent
of CMI.
His wife, Barber G. Clark (“Barber”), CMI’s vice-
president, owned the other fifty percent.
Brenda Gentry
(“Brenda”) worked as CMI’s secretary/treasurer.
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In 2002, the Department discovered that from February
2001 to March 2002, when CMI’s closing agent, James Clay
(“Clay”), would close a new residential mortgage loan, he would
turn the proceeds over to CMI instead of using them to pay off
the prior mortgage creditor.
CMI would then deposit the
proceeds into an escrow account that Barber and Brenda had
opened for CMI in 1993 at Central Bank in Lexington, Kentucky.
CMI would then pay off the prior creditor two to four weeks late
with funds from the escrow account.
Due to these activities,
the Department filed, pursuant to KRS 294.090, an administrative
action, designated as 2002-AH-017, against CMI and sought to
revoke both of CMI’s licenses.
In November of 2002, the
Department held an administrative hearing at which it introduced
an analysis of approximately seventy of CMI’s loans.
that CMI had paid numerous prior creditors late.
It found
Not only had
CMI paid the creditors late, but it had also altered over one
hundred checks to make it appear as if the prior creditors had
been paid simultaneously with the deposit of the new mortgage
loan proceeds.
CMI also altered numerous bank statements
apparently in an effort to hide its activities, and it failed to
disclose the existence of the escrow account to the Department.
While 2002-AH-017 was still pending, the Department
discovered that Barber and Brenda had opened another escrow
account for CMI at Bank One in Lexington.
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CMI also switched
closing agents from Clay to the law firm of Elam & Miller.
In
the closing months of 2002, Elam & Miller turned over to CMI the
loan proceeds from five different mortgage loans.
CMI deposited
these funds, totaling approximately $494,000.00, into its new
escrow account but never paid the prior creditors.
After the
Department learned of this, it filed, on January 10, 2003, a
civil complaint, pursuant to KRS 294.190(2)(b), with the
Franklin Circuit Court seeking injunctive relief against CMI and
against Donald, Barber, and Brenda, as individuals.
The
Department sought to enjoin the respondents from engaging in the
mortgage loan broker business.
The circuit court issued the
injunction that same day.
Later, on January 20, 2003, the Department filed
administrative complaint, 2003-AH-001, against the respondents.
Pursuant to KRS 294.090, the Department sought to revoke both of
CMI’s broker’s licenses.
On January 22, 2003, the Department
successfully served the complaint on CMI by serving Donald,
CMI’s process agent.
On the same day, the Department also
successfully served the complaint on both Barber and Donald, as
individuals.
Finally, on February 3rd, the Department served the
complaint on Brenda.
In the complaint, the Department alleged that CMI had
committed at least five counts of theft by failure to make
required disposition of property, KRS 514.070, because it failed
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to pay off five residential mortgage loans.
Pursuant to 808 KAR
12:030, the respondents had twenty days to file an answer and to
request a hearing.
Despite the fact the complaint clearly
stated this, the respondents failed to file an answer or to
request a hearing.
On February 28, 2003, the Commissioner
entered an order of default against CMI and against Donald,
Barber, and Brenda, as individuals.
The Commissioner revoked
both of CMI’s licenses and prohibited Donald, Barber, and Brenda
from engaging in the mortgage loan broker business.
On March 10, 2003, the respondents filed a motion to
set aside the default order; to consolidate 2003-AH-001 with
2002-AH-017; to dismiss Donald and Barber as individuals, and to
strike all allegations against them.
To support this motion,
CMI’s attorney, Robert Ristaneo, argued that he had been
hospitalized from January 5th to January 13th and under medical
supervision from January 14th to February 25th.
unable to engage in the practice of law.
Thus, he was
Not only did Ristaneo
argue his illness prevented the respondents from answering the
complaint, but Ristaneo also argued that the Department’s
attorney failed to serve the complaint on him as required by the
“Canons of Ethics.”
The Deputy Commissioner, who considered the
motion, modified the default order by dismissing the complaint
against Donald, Barber, and Brenda, as individuals, and by
striking the portion that prohibited them from engaging in the
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mortgage loan broker business.
But the Deputy Commissioner
declined to set aside the default order, and he affirmed the
revocation of CMI’s licenses.
Not satisfied with the Deputy Commissioner’s ruling,
CMI filed a petition for review with the Franklin Circuit Court.
In its petition, CMI argued once again that Ristaneo’s illness
prevented it from answering the administrative complaint.
CMI
also argued again that the Department’s attorney violated the
“Canons of Ethics” by failing to serve the complaint on
Ristaneo.
Finally, CMI argued that it was not responsible for
Barber’s and Brenda’s criminal conduct since they had acted
outside the scope of their employment.
judgment.
CMI moved for summary
The Franklin Circuit Court found that the Department
had complied with KRS 13B.050, the statute regarding procedures
for administrative hearings, and had properly served the
complaint on CMI.
The circuit court noted that CMI had failed
to respond to the complaint and failed to request a hearing.
The circuit court also noted that KRS 13B.050 only required
service of process on the parties named in the complaint.
Unconvinced by CMI’s arguments, the circuit court denied its
motion and granted summary judgment in the Department’s favor.
On appeal, CMI argues that when the Department filed
for injunctive relief with the Franklin Circuit Court, this
civil action invested the circuit court with exclusive
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jurisdiction to revoke CMI’s licenses.
CMI insists that the
Department lacked jurisdiction to maintain the administrative
action, 2003-AH-001, against it.
default order against it was void.
Thus, CMI concludes that the
To support its argument, CMI
cites Smothers v. Lewis, Ky., 672 S.W.2d 62 (1984), and Revenue
Cabinet v. Cherry, Ky., 803 S.W.2d 570 (1990).
However, CMI
fails to explain how these cases support its argument.
Contrary to CMI’s argument, the General Assembly, in
KRS 294.090, granted the Commissioner of the Department of
Financial Institutions exclusive authority to revoke mortgage
loan broker’s licenses.
Not only did the General Assembly grant
the Commissioner this power but, in KRS 294.190(2)(b), it also
granted the Commissioner the authority to seek injunctive relief
from Franklin Circuit Court.
CMI cites neither case law nor
statute that would prohibit the Department from seeking to
administratively revoke a broker’s license while simultaneously
seeking to enjoin that same broker from violating the provisions
of KRS Chapter 294.
Furthermore, neither of the cases cited by CMI
supports its argument that the circuit court had exclusive
jurisdiction to revoke its broker’s licenses.
In Revenue
Cabinet v. Cherry, Ky., 803 S.W.2d 570 (1990), the Supreme Court
held that KRS 131.130 did not grant the Revenue Cabinet the
authority to issue administrative subpoenas in order to obtain a
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taxpayer’s records.
In Smothers v. Lewis, Ky., 672 S.W.2d 62
(1984), the Supreme Court held that the General Assembly could
not restrict a court’s inherent power to issue injunctions.
CMI also argues that the Department abused its
discretion by not setting aside the default order.
According to
CMI, the Deputy Commissioner abused his discretion because he
failed to take into consideration the fact that Ristaneo had
been ill.
Also, the Deputy Commissioner abused his discretion
because he failed to recognize that CMI was not responsible for
Barber’s and Brenda’s criminal conduct since they were acting
outside the scope of their employment.
To support this
argument, CMI cites Caretenders, Inc. v. Commonwealth, Ky., 821
S.W.2d 83 (1991).
In Lexington-Fayette Urban County Human Rights
Commission v. Wal-Mart Stores, Inc., Ky. App., 111 S.W.3d 886
(2003), the Lexington-Fayette Urban County Human Rights
Commission entered a default judgment against Wal-Mart and
denied Wal-Mart’s subsequent motion to set aside the default
judgment.
Id. at 889.
Wal-Mart filed a petition for the
Fayette Circuit Court to review the Commission’s denial.
Fayette Circuit Court reversed the Commission.
Id.
The
On appeal,
this Court pointed out that when reviewing an agency’s decision,
the ultimate concern is whether the agency acted arbitrarily.
This Court stated that the Commission’s denial of Wal-Mart’s
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motion to set aside the default judgment was entitled to the
same deference from a reviewing court as this Court must give to
a trial court when reviewing one of its discretionary rulings.
Id. at 890.
In Green Seed Company, Inc. v. Harrison Tobacco
Storage Warehouse, Inc., Ky. App., 663 S.W.2d 755, 757 (1984),
this Court noted that trial courts have wide discretion in
deciding whether or not to set aside a default order but a trial
court will not set aside a default order unless the movant has
shown both good cause and a meritorious defense.
The record shows that the Department properly and
successfully served process on CMI.
Yet, despite being properly
served and being aware of the complaint, CMI chose to ignore it.
Once the default order had been entered against it, CMI argued
that it could not answer the complaint because its attorney,
Ristaneo, was ill.
But CMI never explains to this Court, nor
did it explain to the Deputy Commissioner or the circuit court,
why or how Ristaneo’s illness prevented it from responding.
Therefore, the Deputy Commissioner did not abuse his discretion
when he concluded CMI failed to show good cause.
Not only did CMI fail to show good cause but it also
failed to show it had a meritorious defense.
KRS 502.050, the
statute regarding corporate liability, states in pertinent part:
(1) A corporation is guilty of an offense
when:
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. . . .
(b)The conduct constituting the offense is
engaged in, authorized, commanded or
wantonly tolerated by the board of directors
or by a high managerial agent acting within
the scope of his employment in behalf of the
corporation; or
. . . .
(2) As used in this section:
. . . .
(b)"High managerial agent" means an officer
of a corporation or any other agent of a
corporation who has duties of such
responsibility that his conduct reasonably
may be assumed to represent the policy of
the corporation.
The Department revoked both of CMI’s licenses because Barber and
Brenda had opened the escrow account; had deposited loan
proceeds in it; and subsequently failed to pay those proceeds to
the prior creditors.
Since Brenda was CMI’s treasurer, she
obviously acted within the scope of her employment when she
engaged in these activities.
Barber was a fifty-percent owner
of CMI and its vice-president, which made her an officer of the
corporation.
As one of CMI’s officers, Barber not only
authorized the illicit activities but she also actively
participated in them.
Pursuant to KRS 502.050, Barber’s and
Brenda’s actions were sufficient to impute liability to CMI.
Given the facts, CMI’s argument that it was not responsible for
Barber’s and Brenda’s criminal conduct is simply without merit.
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Since CMI failed to show either good cause or a
meritorious defense, the Deputy Commissioner did not abuse his
discretion.
Therefore, this Court affirms the Franklin Circuit
Court’s order.
ALL CONCUR.
BRIEF FOR APPELLANT:
BRIEF FOR APPELLEE:
Robert F. Ristaneo
Lexington, Kentucky
Aubrey R. Mooney
Office of Financial
Institutions
Frankfort, Kentucky
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