Opinion
Index No. 100753/13 Motion Seq. No.001
01-31-2014
In the Matter of the Application of STEVEN M. KNOBEL and JEFFREY JACKSON, Petitioners, For a judgment under Article 78 of the Civil Practice Law and Rules, v. CESAR A. PERALES as SECRETARY OF THE STATE OF NEW YORK, Respondent.
SCHLESINGER, J.:
In this Article 78 proceeding, petitioners Steven M. Knobel and Jeffrey Jackson, Certified Real Estate Appraisers, are asking the Court to review and annul the Decision and Order of the Secretary of State dated May 10, 2013 (Petition, Exh A). This decision essentially adopted the December 27, 2012 Decision and Order of the Administrative Law Judge (Exh B), although broadened its rationale. In both decisions the penalty was the revocation of petitioners' licenses. Petitioners claim the decision was in violation of law, was arbitrary and capricious, and directed a penalty that was shocking in its harshness. Most significantly, they urge that the decision was lacking in due process and deprived them of the right to a fair hearing and prejudiced their ability to offer a meaningful defense. They base this assertion on the failure of respondent to give them proper notice of the charges against them.
The petitioners were directed to mail in their licenses on or before May 24, 2013. Their counsel then brought an Emergency Petition asking that this direction be stayed. On May 22, 2013, after hearing oral argument, I did grant a temporary stay of that direction. I then scheduled further argument for July 10, 2013, after reading the papers. At that time, I continued the stay. Finally, on October 11, 2013, a letter was sent to counsel from my Chambers, asking them to answer two questions relating to due process issues raised by petitioners and not really addressed by respondent.
Now, after reviewing those additional arguments and reading the cited cases, I am convinced that the temporary stays I had ordered were appropriate and I am relieved that the petitioners did not have to experience the loss of their licenses and possibly their livelihood as well. I say this because I find that the petitioners are right when they argue that they were denied due process for inadequate notice of the charges against them.
The substance of the allegations against Messrs. Knobel and Jackson and the corporation they ran, Mitchell, Maxwell & Jackson, Inc. ("MMJ") involved a former employee, Marianne Mueller. Ms. Mueller was with MMJ from 2003 to 2010. She clearly was good at her work, as shown by her advancement from Apprentice Appraiser to Appraiser and finally to Supervisory Appraiser. She served in this capacity with the title Executive Vice President of Legal Services and Private Claims.
Knobel is President of the corporation and Jackson is chairman.
Ms. Mueller, in this supervisory role, was to sign off on appraisals done by other MMJ employees. In 2009, Ms. Mueller said she discovered that her name and electronic signature had been placed without her knowledge and permission on appraisals that she had neither seen nor approved. She identified fourteen such documents. Subsequently, she brought a claim to this effect. Administrative Law Judge Roger Schneier presided at a hearing held on four non-consecutive days. The addresses of the properties involved in the appraisals were all located in New York City, except for one in Harrison, New York.
On the first day of the hearing, January 31, 2012, petitioners (respondents then) were represented by counsel, Eric S. Wei. However, after that day, they represented themselves. They are now, once again, represented by counsel.
In an extremely abbreviated decision, less than three pages, wherein the Findings of Fact take up about half of the three pages and are very general, the ALJ, in two paragraphs stated his findings. He found first that Ms. Mueller, the complainant, had the burden to prove her claim by substantial evidence, and second, that she had succeeded in doing that. She seems to have satisfied her burden solely on the strength of her testimony, which the ALJ found "convincing" and which the numerous witnesses and large number of documentary exhibits produced by respondents "did not refute". No details were given.
The final paragraph in the "Opinions and Conclusions of Law" section is one very long sentence, which states the following:
By participating in a scheme in which the electronic signature of an appraiser was affixed to appraisals to falsely indicate that she had reviewed those appraisals where without such a signature the appraisals would not have been accepted by their client and, therefore, MMJ obviously would not be paid, the respondents engaged in acts involving dishonesty and misrepresentation with the intent to substantially benefit themselves in violation of Executive Law §160-u[1][e].
Judge Schneier then determined in the final paragraph of his decision that all three respondents, Knobel, Jackson and MMJ, had violated Executive Law §160-u(1)(e) and "accordingly, pursuant to Executive Law §160-u[1]," Knobel & Jackson's licenses as Certified Residential Real Estate Appraisers were revoked. They were then directed to surrender their license certificates and pocket cards.
Rather than doing that, petitioners, on January 22, 2013, appealed the decision to the Secretary of State. That appeal was heard by First Deputy Secretary of State, Daniel E. Shapiro. Appellants sought a de novo review of the ALJ's decision, claiming the decision had multiple "errors of law and fact". They also asked for a stay of the penalty, which the Appellee, the Division of Licensing Services, opposed. Despite this opposition, a stay was granted pending a final determination on appeal.
Deputy Secretary Shapiro reached his decision on May 10, 2013. Even though it was considerably longer than the one preceding it (it was thirteen plus pages), the Findings of Fact were announced in one sentence; that is, "Upon review of the full record on appeal, the Findings of Fact, as stated in the ALJ's decision ... are hereby adopted and incorporated by reference." Later on in the decision, the Deputy Secretary stated that the ALJ as the trier of fact had determined the credibility of each witness and by having "personally observed the testimony of the witnesses, the ALJ is in the best position to judge a witness' veracity and credibility...", (p. 5, citations omitted).
What Deputy Secretary Shapiro did next is interesting and certainly raised a question in my mind as to its propriety. I asked counsel to discuss this issue after reviewing their submissions and hearing oral argument. What he did was reference a number of the appraisal reports and point out that they contained "peculiarities in the Supervisory Appraiser's signature block of the reports' certifications" (p. 6). He then specifically noted certain e-mail addresses "that appear to be unconnected to Ms. Mueller" (p. 6). Several pages later, he made a connection between these peculiar addresses and the "Personal Liability of Appellants Knobel and Jackson" (p. 9).
He began this discussion with the conclusory statement that "Evidence in the record strongly suggests that Appellants Knobel and Jackson either directed the affixing of Ms. Mueller's electronic signature to the subject appraisal reports without her authorization, or knew that it was done"(p. 9). He elaborated no further on what this evidence is. He then pointed to two e-mail addresses that appear in the area of the Supervisory Appraiser's signatures, "SKNOBEL@MMJA.COM" and "SK@MMJA.COM". along with State Certification numbers that match Knobel's. Finally, he noted that the one report appraised by Appellant Jackson contained the e-mail address "mmfieff@aol.com". He then made the finding, one never reached or even considered before, relevant to these items on page 10 that:
the presence of Appellants' e-mail addresses or state certification number beneath Ms. Mueller's signature constitutes substantial evidence that they personally knew of or authorized the affixing of Ms. Mueller's electronic signature without her permission, at least in connection with five of the summary appraisal reports offered by Appellee at the hearing. Accordingly, the ALJ's conclusion that Appellants Knobel and Jackson violated Executive Law §160-u(1)(e) will not be disturbed.
Finally, Deputy Secretary Shapiro found the penalty appropriate because "as discussed above [appellants] committed multiple fraudulent acts intended to benefit themselves that also constituted separate violations of USPAP" (p. 12).
Before this Court begins its discussion as to whether the determination here "was made in violation of lawful procedure, was affected by an error of law or was arbitrary and capricious or an abuse of discretion, including abuse of discretion as to the measure or mode of penalty or discipline imposed" in accordance with §7803(3) of the CPLR, it is important to review the complaint that initiated the inquiry and contains the actual charges. I say this because the petitioners urge that lawful procedures were in fact not followed and that their rights to due process of law were violated.
Specifically, counsel argues that the complaint was materially defective because it never informed petitioners that they were charged with having engaged in acts of dishonesty or misrepresentation with an intent to substantially benefit themselves. Such a charge forms the substance of Executive Law 160-u(1)(e), which they were found guilty of by both the ALJ and the reviewing Deputy Secretary, but petitioners argue that it was something they were never charged with. And it is clear they were not. Petitioners also claim that the above failure was a clear violation of State Administrative Procedure Act (SAPA) §301(2)(c), which requires the Notice of Violation to include "a reference to the particular sections of the statutes and rules involved, where possible".
Petitioners also claim that the decisions here were arbitrary and capricious and not supported by substantial evidence. Respondents dispute this claim and essentially argue two things; one, that the decision by the Secretary of State was supported by substantial evidence, and two, since the Petition raises that issue, the controversy must be transferred to the Appellate Division pursuant to §7803(4) and §7804(g) of the CPLR.
The Notice of Hearing, which contained the complaint, is dated December 21, 2011 (Exh J). It was signed by ALJ Roger Schneier. In the complaint's Preliminary Statement, which gives the basis for the enforcement proceeding, the following is stated as Respondent's alleged actions:
By directly or indirectly, negligently and/or fraudulently, preparing and communicating one or more real estate appraisal reports which contained errors and omissions, and evidenced violations of the Uniform Standards of Professional Appraisal Practice (USPAP) and/or NYS Executive Law Article 6-E and 19 NYCRR, Parts 1101 and 1106, et. seq., thereby violating provisions of all of the foregoing, and violatingParenthetically, counsel points out here that Executive Law 160-u(1) contains 12 subsections, all affording different grounds for the discipline of appraisers.
the standards for the development or communication of real estate appraisals provided in Article 6-E of the Executive Law in violation of Executive Law §160-u.
The statement then sets out five specific categories of failures, presumably in an effort to elaborate on the charges. But vis-a-vis any statutes or rules that were violated, only Executive Law §160-u is referenced.
The General Allegations proceed to discuss how Marianne Mueller submitted a written complaint which alleged that MMJ, her former employer, had "improperly affixed her electronic signature on appraisal reports, without her approval" (¶5 under this heading). These allegations contain 20 paragraphs which discuss "errors and misstatements" and state that the "Department's investigation confirmed that there was a failure by the Respondents to implement satisfactory security measures ..." to make sure the appraisals were "properly prepared and reviewed" (¶18-19).
The complaint concludes that "By Reason of the Foregoing, the Respondents are charged with engaging in the following acts of professional misconduct." What follows is a restatement of the earlier allegations with no further specification. Significantly, there are, at most, two assertions of dishonesty or fraud which appear in the first sentence of the first charge and the fourth charge. The first reads as follows: "By directly or indirectly, negligently and/or fraudulently, preparing and communicating one or more real estate appraisal reports which contained errors and omissions ...," respondents violated various provisions of law. As stated earlier, the statutory references regarding the charged misconduct are to USPAP and Article 6-E of the Executive Law, Section 160-u.
The fourth paragraph alleges the failure to implement satisfactory security measures. By this failure "Respondents demonstrated negligence, untrustworthiness and/or incompetency."
Contrary to the position urged by counsel for respondent here, I do not agree that this controversy exclusively involves a question of substantial evidence. That is why I am not transferring it to the Appellate Division. Rather, as suggested by the above, I find that the matter can and should be resolved pursuant to CPLR §7803(3) because I find that there was a failure to give proper notice of the charges and that such a failure compromised the entire process and clearly prejudiced the petitioner's right to prepare and prove a defense to Executive Law §160-u(1)(e), the section they were found guilty of violating but never charged with. I also find that the Deputy Secretary's use and analysis of evidence never before dealt with by the ALJ exacerbated the lack of proper notice and the prejudice that resulted. Under circumstances such as these, where issues exist that could terminate the proceeding, transfer to the Appellate Division on substantial evidence grounds is premature. See, e.g., Nabors v Town of Somers, 54 AD3d 833 (2nd Dep't 2008).
Here it should be noted that while Ms. Mueller testified that the electronic signatures were not placed by her, nor did she review the fourteen appraisals, there was no testimony identifying the person or persons who did place her signature. Nor was there any testimony that petitioners Knobel and Jackson had specific knowledge of this act. Rather, the defense testimony from all six of the appraisers who had prepared the 14 reports in the first instance was that, in fact, the reports were shown to Ms. Mueller and signed by her. But the ALJ made no mention of these witnesses in his one sentence finding.
I raise the above evidence not to counter my earlier finding that this case is not so much a substantial evidence one as a due process error of law one. Rather, I raise it because there was a complete paucity of proof here that Knobel and Jackson individually or jointly were behind this so-called nefarious scheme and/or that they reaped large benefits from it. They were never informed that such a possibility was being considered by the ALJ hearing the evidence. Further, there was no way they could have reasonably predicted it because again they were never given notice that such were the allegations that could lead to such a finding against them.
In respondent's Supplemental Memorandum of Law requested by this Court, counsel points to an exchange that occurred on the first day of the hearing between attorney Wei, who for that one day represented Knobel and Jackson, and Mr. Kenny, counsel for the complainant. Wei wanted to have Counts 2,3 and 4 dismissed because he said "if I understand Mr. Kenny correctly, he is saying they [Knobel and Jackson] committed blatant fraud". The Counts he wanted dismissed concerned negligence and failure to implement proper security measures. But Kenny backed away from this suggestion, saying: "I don't think I ever said 'blatant fraud'. We will be presenting evidence that hopefully shows she did not give her consent to have her signature placed on the appraisals. It is up to the court to decide the facts and circumstances of the evidence as to whether these violations exist, like in any other case."
However, as counsel for petitioners argued in their Reply here, the State when given an opportunity to acknowledge that fraud was what they did intend to prove, did not take it. Rather, all counsel for the complainant said was that the evidence would show Ms. Mueller had not given her consent and the court could take it from there. At the very least, this exchange shows confusion as to the true gravamen of the offense charged.
Individuals facing charges, such as these turned out to be, should not have any confusion as to what the State is attempting to prove. They are entitled to know with precision that they could be found guilty of intentionally committing a fraud, a fraud in which they intended to substantially benefit. That charge was never communicated. And, as evident by the above exchange, nor was it even suggested.
The cases cited by moving counsel amply illustrate why this decision must be annulled. In an early Court of Appeals decision, Matter of Murray v Murphy, 24 NY2d 150 (1969), two police detectives were dismissed by the Police Commissioner of the City of New York because he found that they had acted with a corrupt motive in effectuating a coercive settlement between individuals under investigation. His findings were at sharp variance with the trial commissioner's findings; he had recommended a far lesser penalty. The court said that the question to be resolved was whether petitioners had received a fair hearing in light of their argument that they had been found guilty of a specification never charged (p155). Further, the court said that it appeared that the attorney representing the petitioners at the hearing had made clear his belief that corruption was not being charged. No one, including the trial judge, had disabused him of that notion.
In beginning the discussion that followed, the court stated: "The first fundamental of due process is notice of the charges made. This principle equally applies to an administrative proceeding for even in that forum no person may lose substantial rights because of wrongdoing shown by the evidence, but not charged." 24 NY2d at 157. The court even went so far as to say that: "Where we are involved with such a fundamental constitutional right as the right to be put on notice of the charges made, prejudice will be presumed ...." (Id., citations omitted).
However, here the petitioners do succeed in showing that while prejudice might be presumed, in actuality, they were prejudiced. There was prejudice in how they approached the hearing and prepared their defense. Examples of this are given. First, counsel states that petitioners would have presented evidence that they lacked knowledge of the use of Mueller's unauthorized signature. Then, they would have submitted evidence of their good character. They also would have submitted evidence that they neither intended to benefit from the unauthorized signature, nor did they in actuality benefit, certainly not in a substantial way. This is a factor that must be proved pursuant to Executive Law §160-u(1)(e). Finally, Knobel would have testified that the e-mail addresses found so significant by Deputy Secretary Shapiro were not in fact his.
In a more recent Court of Appeals decision Block v Ambach, 73 NY2d 323 (1989), the court in considering the issue of what satisfies the notice requirement of due process, found that in light of all the other solid evidence in the case, the absence of the specific dates of misconduct, which were not alleged there, was not fatal.
Two proceedings were involved in Block, both concerning doctors and charges of misconduct involving sexual activity with their patients. Both doctors were found guilty and had their licenses revoked. But both argued that the failure to specify specific dates of the misconduct violated their due process rights. These claims were rejected. The court distinguished between the specificity required for a hearing pursuant to the State Administrative Procedure Act and one required under the Criminal Procedure Law. The latter, involving a loss of freedom, naturally requires much more specification. Here, the court found that petitioners had received reasonable notice of the charges, which enabled them to prepare and present adequate defenses.
But in two recent Appellate Division, First Department, cases, closer to the circumstances here, the court found otherwise. In Mayo v Personnel Review Bd. of Health & Hosps. Corp., 65 AD3d 470 (2009), the court held that petitioner's due process rights had been violated because the termination of Mayo's employment had been based on uncharged misconduct. He had been charged with initiating an assault with one of his subordinates, but he was found guilty of failing to report the incident, an offense he was never charged with.
The court there citing to Murray (supra) stated that the "Petitioner and his attorney were entitled to assume that the hearing would be limited to the charges as made. By switching the basis of the charges after the hearing ..., the PRB violated petitioner's right to be treated with elemental fairness ..." 65 AD 3d at 473.
In Wolfe v Kelly, 79 AD3d 406 (2010), a police officer with consistently positive evaluations was accused of having stopped unidentified individuals in unspecified locations and confiscating narcotics and money. These events had allegedly occurred six to eight years earlier and at four times on unspecified dates in a two-year period. Wolfe asserted that he had been denied due process of law because of this lack of specificity, which prevented him from preparing any type of defense other than a general denial. The court agreed.
Respondent cites to cases, all of which are easily distinguishable from the circumstances here. In Matter of Mangini v Christopher, 290 AD2d 740 (3rd Dep't 2002), petitioners were denied assistance from the County's Department of Social Services after a fair hearing. They claimed that the notice to them was defective as not clearly informing them of the basis for the denial. But the court found this claim unavailing and pointed out that the notice did adequately detail the reasons for the proposed termination. Further, the petitioners had failed to demonstrate any prejudice as a result of any inadequacies in the notice.
A case much closer to this one as regards the facts and the ultimate conclusion is Whitehead-Nolan, Inc., et al., v Shaffer, as Secretary of State, 183 AD2d 610 (1st Dep't 1992). This case involved real estate brokers whose licenses had been revoked pursuant to a finding of incompetency. This determination was annulled by the court. Because of financial difficulties, petitioners had been in the habit of writing or post-dating checks without sufficient funds. But a settlement had been reached wherein they promised not to issue post-dated checks. However, after the settlement, petitioner's counsel, who had complained about not being paid, was given a post-dated check that was dishonored. Charges were then brought by the State for violating the terms of the settlement.
After a hearing, the judge found petitioners guilty and revoked their licenses based on improper checks given to Stolz, a former employee of petitioner and to other employees as well. But the problem was that the notice to petitioners before the hearing only referenced the one post-dated check given to the lawyer. This was not part of the evidence at the hearing.
The court said that notice was inadequate as the checks to employees including Stolz had never been mentioned prior to the hearing. The court found also that petitioners had no way of knowing in advance that the Hearing Judge might predicate his determination on the Stolz checks and therefore had no reason to object to this testimony. The court said in conclusion (at 612) that: "In fact, prejudice was created by the mere fact that if petitioners had known that the Stolz checks would be so crucial to the Administrative Judge's decision, they might have approached the hearing differently."
A similar comment can and should be made here. As pointed out earlier, if petitioners had been informed of the actual section they were accused of violating, Executive Law §160-u(1 )(e), or if it had been made clear that they were being charged with intentional acts sounding in fraud, their defense could have and would have been very different. Therefore, even though courts do find that prejudice may be presumed in administrative proceedings where inadequate notice has been provided, here petitioners succeed in showing that they did suffer prejudice both real and substantial.
In conclusion, I am annulling the determination of Deputy Secretary Shapiro in all respects. This decision relied on the ALJ's findings, which of course are also annulled. Before individuals can be deprived of their professional licenses, they must first be told what they are claimed to have done and further how that activity specifically violated some rule or statute. It is clear to me that that was not done here. No specific statute was alleged to have been violated and, as important, no assertions were ever communicated to them making it clear that they were facing claims of intentional fraudulent conduct.
Accordingly, it is hereby
ADJUDGED that this Article 78 petition is granted and the May 10, 2013 determination revoking petitioners' licenses is annulled based on inadequate notice of the predicate charges. However, this dismissal is without prejudice to any further action the respondent may have the right to take.
__________
ALICE SCHLESINGER
J.S.C.