IN THE MATTER OF THE PROCEEDINGS BY THE COMMISSIONER OF BANKING AND INSURANCE, ETC. (NEW JERSEY DEPARTMENT OF BANKING AND INSURANCE) ( 2020 )

NOT FOR PUBLICATION WITHOUT THE
APPROVAL OF THE APPELLATE DIVISION
This opinion shall not "constitute precedent or be binding upon any court ." Although it is posted on the
internet, this opinion is binding only on the parties in the case and its use in other cases is limited. R. 1:36-3.
SUPERIOR COURT OF NEW JERSEY
APPELLATE DIVISION
DOCKET NO. A-0119-19T3
IN THE MATTER OF
PROCEEDINGS BY THE
COMMISSIONER OF
BANKING AND INSURANCE,
TO FINE, SUSPEND, AND/OR
REVOKE THE INSURANCE
PRODUCER LICENSE OF
HANY SHEHATA D/B/A
MHM INSURANCE AGENCY
REFERENCE NO. 9939802.
__________________________
Submitted November 9, 2020 – Decided December 21, 2020
Before Judges Hoffman and Suter.
On appeal from the New Jersey Department of Banking
and Insurance.
Miller, Meyerson & Corbo, attorneys for appellant
Hany Shehata (Gerald D. Miller and Nirmalan
Nagulendran, on the briefs).
Gurbir S. Grewal, Attorney General, attorney for
respondent Department of Banking and Insurance
(Melissa H. Raksa, Assistant Attorney General, of
counsel; Nicholas Kant, Deputy Attorney General, on
the brief).
PER CURIAM
Appellant Hany Shehata appeals the August 25, 2019 final order of the
Commissioner of the Department of Banking and Insurance (Commissioner) that
revoked his insurance producer license and imposed an aggregate civil penalty
of $25,000 plus costs. In his initial brief, appellant challenges — as excessive
— the amount of the civil penalties imposed by the Commissioner. In his reply
brief, appellant also challenges the revocation. We affirm the Commissioner's
final decision revoking appellant's insurance producer license. We vacate the
civil penalties and remand that issue to the Commissioner for further
proceedings consistent with this opinion. We do not retain jurisdiction.
I
In 2014, appellant was licensed as an insurance producer under the
Insurance Producer Act (the Act), N.J.S.A. 17:22A-26 to -48, and operated
under the trade name MHM Insurance Agency. L.C. 1 purchased a home
improvement insurance policy through appellant. The policy was issued by
Tapco Underwriters. Tapco cancelled the policy on March 15, 2014, refunding
$809.37 in premium to appellant for L.C. Appellant placed the premium in his
1
We use the abbreviation as it appeared in the final order.
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2
personal bank account, rather than in a trust account as required by N.J.A.C.
11:17C-2.3. He did not advise L.C. about the cancellation or the refund.
L.C. filed a complaint with the Department of Banking and Insurance
(DOBI) when L.C. became aware of the cancellation and refund. A DOBI
investigator contacted appellant on March 25, 2015, advised him about the
complaint and asked for an explanation. On April 5, 2015, appellant paid L.C.
$809, issuing this check from his personal bank account.
The DOBI issued administrative order to show cause E18-52 on May 25,
2018. In it, DOBI alleged appellant failed to advise L.C. about the cancellation
of the insurance policy (count one), N.J.S.A. 17:22A-40(a)(8); failed to refund
premium within five days (count two), N.J.S.A. 17:22A-40(a)(2), (4), (8) and
N.J.A.C. 11:17C-2.2; and failed to maintain a trust account (count three),
N.J.A.C. 11:17C-2.3. Appellant's attorney corresponded with DOBI's attorney
on February 21, 2019. In his letter, the attorney represented that appellant
"mistakenly deposited the client's check to his account. It was not until
receiving the March 25, 2015 letter from the investigator that he learned about
the mistaken deposit and within [ten] days of that date [appellant] issued the
refund check." Counsel exchanged further emails. The DOBI twice extended
A-0119-19T3
3
the deadline for appellant to file a response to the administrative order to show
cause and ask for a hearing, but appellant did not take any action.
The Commissioner issued a final order on August 25, 2019. The
Commissioner found that appellant was given notice of the charges and an
opportunity to contest them. He failed to respond to the charges which
constituted a waiver of his right to a hearing. Pursuant to N.J.A.C 11:17D-
2.1(b)(1), the Commissioner found the charges were admitted because of a lack
of response. The Commissioner ordered revocation of appellant's producer
license and imposed civil penalties as authorized by N.J.S.A. 17:22A-45(c).
These included $5000 for count one and $10,000 each for counts two and three.
The order also assessed $487.50 in costs for DOBI's investigation and
prosecution of the case as authorized by N.J.S.A. 17:22A-45(c) and N.J.A.C.
11:1-32.4(b)(20). The order required payment in ten days.
Appellant appeals the final order arguing the fines and penalties imposed
against appellant are excessive and contending the Commissioner failed to
assess the factors set forth in Kimmelman v. Henkels & McCoy, Inc., 108
N.J.123 (1987). He argues the civil penalties imposed violate the Excessive
Fines Clause of the United States Constitution's Eighth Amendment.
A-0119-19T3
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II
Our review of an administrative agency's final decision is limited.
Kadonsky v. Lee, 452 N.J. Super. 198, 201-02 (App. Div. 2017). "We will not
reverse an agency's judgment unless we find the decision to be 'arbitrary,
capricious, or unreasonable, or [ ] not supported by substantial credible evidence
in the record as a whole.'" Id. at 202 (alteration in original) (quoting In re
Stallworth, 208 N.J. 182, 194 (2011)). We "'defer to the specialized or technical
expertise of the agency charged with administration of a regulatory system.'"
K.K. v. Div. of Med. Assistance & Health Servs., 453 N.J. Super. 157, 160 (App.
Div. 2018) (quoting In re Virtua-West Jersey Hosp., 194 N.J. 413, 422 (2008)).
The business of insurance is "properly subject to comprehensive
regulation in protecting the public welfare" because it is affected with a strong
public interest. Sheeran v. Nationwide Mut. Ins. Co., 80 N.J. 548, 559 (1979).
The insurance producers conducting this business are fiduciaries who are held
to a high standard. In re Comm'r of Banking & Ins. v. Parkwood Co., 98 N.J.
Super. 263, 268 (App. Div. 1967). "Premiums collected by the agent become a
trust fund to be held and disbursed by the agent in a fiduciary capacity." Dep't
of Ins. v. Universal Brokerage Corp., 303 N.J. Super. 405, 409 (App. Div. 1997)
(citing Bohlinger v. Ward & Co., 34 N.J. Super. 583, 588 (App. Div. 1955)
A-0119-19T3
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(providing an agent is a fiduciary regarding the collection and refund of
premiums)). "Close and continuous scrutiny of the licensee's exercise of his
license and the establishment of standards and guidelines are necessary to
maintain [a] high standard of conduct and . . . fidelity . . . ." Parkwood, 98 N.J.
Super. at 268. The legislature has conferred this authority on the Commissioner.
The Act authorizes the Commissioner to "place on probation, suspend,
revoke or refuse to issue or renew an insurance producer's license. . . for any
one or more" of nineteen enumerated "causes." N.J.S.A. 17:22A-40(a)(1) to
(19). The Commissioner also can impose civil penalties consistent with the Act
under N.J.S.A. 17:22A-45(c). Causes for action include:
(2) Violating any insurance laws, or violating any
regulation, subpoena or order of the commissioner or of
another state's insurance regulator;
....
(4) Improperly withholding, misappropriating or
converting any monies or properties received in the
course of doing insurance business;
....
(8) Using fraudulent, coercive or dishonest practices, or
demonstrating incompetence, untrustworthiness or
financial irresponsibility in the conduct of insurance
business in this State or elsewhere. . . .
[N.J.S.A. 17:22A-40(a)(2), (4), (8).]
A-0119-19T3
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The Commissioner is authorized to promulgate regulations to "effectuate
the purposes of [the] [A]ct." N.J.S.A. 17:22A-48. Under applicable regulations,
an insurance producer is required to return refunded premiums within five
business days. N.J.A.C. 11:17C-2.2(b). As a fiduciary, a producer is required
to maintain a trust account. N.J.A.C. 11:17C-2.3. An insurance producer is not
to misappropriate funds or convert funds to his own use. N.J.A.C. 11:17C -
2.1(a).
A producer subject to suspension or revocation receives written notice of
the reasons and may request an administrative hearing within twenty days from
service. N.J.A.C. 11:17D-2.1(d)(1). If the producer does not respond within
the time allotted, the failure "shall be deemed to be an admission to all of the
allegations, charges and conclusions contained in the notice, and no further
proceeding shall be required prior to the execution of a final order . . . ."
N.J.A.C. 11:17D-2.1(b)(1).
In this case, the Commissioner found appellant was served with the
administrative order to show cause that set forth three separate violations of the
Act or its regulations. Appellant did not respond to the charges or request a
hearing. His attorney submitted a short letter to the DOBI explaining that
appellant mistakenly deposited the return premium in his own account and
A-0119-19T3
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refunded it a year later when the issue was called to his attention by DOBI.
However, the attorney's letter is not evidence and there remains no certification
from appellant responding to the underlying charges. See Pressler & Verniero,
Current N.J. Court Rules, cmt. on R. 1:6–6 (2020) ("Affidavits by attorneys of
facts not based on their personal knowledge but related to them by and within
the primary knowledge of their clients constitute objectionable hearsay."
(citations omitted)). Thus, there was no evidence before the Commissioner that
appellant had a defense to the charges or that his conduct demonstrated
mitigating circumstances.
There was no dispute that L.C.'s policy was cancelled in 2014, that
premiums were refunded to appellant and that appellant did not return the
amount of the refunded premium until a year later. The refund was made from
his personal account, not a trust account. Appellant did not advise L.C. that the
policy was cancelled, or the premium refunded. This conduct violated the
regulations. The Commissioner found the charges were admitted.
On this record, the Commissioner's order revoking appellant's producer
license was not arbitrary, capricious or unreasonable. The appropriate test for
reversal of a license revocation is "whether such punishment is so
disproportionate to the offense, in light of all the circumstances, as to be
A-0119-19T3
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shocking to one's sense of fairness." In re License Issued to Zahl, 186 N.J. 341,
354 (2006) (quoting In re Polk, 90 N.J. 550, 578 (1982)). The Act and
regulations permit license revocation for "violating any insurance laws . . . or
regulation[s]," "[i]mproperly withholding, misappropriating or converting any
monies," "[u]sing fraudulent, coercive or dishonest practices, or demonstrating
incompetence, untrustworthiness or financial irresponsibility" in the course of
the producer's business. N.J.S.A. 17:22A-40(a)(2), (4), (8). There was
unrebutted evidence to support the charges that appellant violated the
regulations, withheld funds improperly and was irresponsible in the conduct of
his business. L.C. was unknowingly uninsured for a year. This conduct could
have posed substantial risk to the insured. We cannot say that the sanction of
revocation was an abuse of the Commissioner's discretion.
Appellant contends the Commissioner's imposition of civil penalties was
excessive and in violation of the law because the Commissioner did not consider
the factors under Kimmelman. 108 N.J. at 123. He contends that the penalties
violated the Excessive Fines Clause of the U.S. Constitution's Eighth
Amendment. Neither argument was addressed to the Commissioner because
appellant never responded to the charges.
A-0119-19T3
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The Commissioner is authorized to assess civil penalties for violation of
the Act or regulations.
Any person violating any provision of this act shall be
liable to a penalty not exceeding $5000 for the first
offense and not exceeding $10,000 for each subsequent
offense to be recovered in a summary proceeding . . . .
In addition, the commissioner or the court, as the case
may be, may order restitution of moneys owed any
person and reimbursement of the costs of investigation
and prosecution, as appropriate.
[N.J.S.A. 17:22A-45(c).]
Administrative penalties "must be tested for reasonableness as applied to
the specific facts involved." In re Garay, 89 N.J. 104, 115 (1982). To determine
reasonableness, courts assess "whether [the] punishment is so disproportionate
to the offense, in light of all the circumstances, as to be shocking to one's sense
of fairness." Zahl, 186 N.J. at 354 (quotation omitted). Our Supreme Court has
outlined seven factors for consideration when imposing civil penalties: (1) the
good or bad faith of a defendant; (2) a defendant's ability to pay; (3) amount of
profits obtained from the illegal activity; (4) injury to the public; (5) duration of
the conspiracy; (6) existence of criminal or treble damages actions; and, (7) past
violations. Kimmelman, 108 N.J. at 137-39.
The Commissioner imposed the maximum civil penalty here, assessing
$5000 for count one and $10,000 for each of the remaining two counts for a total
A-0119-19T3
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of $25,000. The Commissioner also assessed $487.50 for investigation costs.
The assessment of costs is not challenged.
The Commissioner acknowledges she did not analyze the Kimmelman
factors because the administrative action was a final order following appellant's
default. However, there is nothing in the Act that would support the imposition
of the maximum civil penalty just because there has been a default. The law has
long supported the notion that the assessment of civil penalties should not be
calculated simply based on the maximum allowable. See Garay, 89 N.J. at 115(providing that where the maximum civil penalty was imposed, the director did
not exercise discretion and the Court "remand[ed] to him to decide upon a
reasonable sum."). By not analyzing the factors under Kimmelman or any other
information, we conclude the Commissioner has not appropriately exercised
discretion. Therefore, we vacate the civil penalties and remand that issue to the
Commissioner for further consideration and analysis. The Commissioner should
permit appellant and the DOBI the opportunity to submit argument on this issue.
Appellant also contends the civil penalty raises issues of a constitutional
dimension. That issue is moot in light of our opinion. It also was never raised
to the Commissioner. We are not required to decide issues that were not raised.
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See State v. Galicia, 210 N.J. 364, 382 (2012) (stating that "[g]enerally, an
appellate court will not consider issues . . . which were not raised below").
Affirmed in part; the civil penalties are vacated and that issue is remanded
to the Commissioner for further proceedings consistent with this opinion. We
do not retain jurisdiction.
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