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Commissioner of Indiana Department of Insurance v. Schumaker

Court of Appeals of Indiana

December 31, 2018

The Commissioner of the Indiana Department of Insurance, Appellant,
v.
Jeffrey A. Schumaker, Appellee.

          Appeal from the Marion Superior Court The Honorable Patrick J. Dietrick, Judge Trial Court Cause No. 49D12-1703-MI-11747

          ATTORNEYS FOR APPELLANT Curtis T. Hill, Jr. Attorney General of Indiana Frances Barrow Deputy Attorney General Indianapolis, Indiana

          ATTORNEY FOR APPELLEE Arend J. Abel Cohen & Malad, LLP Indianapolis, Indiana

          Brown, Judge.

         [¶1] The Commissioner (the "Commissioner") for the Indiana Department of Insurance (the "Department") appeals the trial court's order vacating its decision to not renew Jeffrey A. Schumaker's insurance producer license. We affirm.

         Facts and Procedural History

         [¶2] Schumaker has held an insurance producer license since 1990 and concentrates his business in life, health, disability, and Medicare supplement insurance. He also held a license with the Financial Industry Regulatory Authority ("FINRA") permitting him to sell securities. In 2011, Mr. Schumaker experienced financial difficulties[1] and took $8, 300 from his homeowners association, for which he volunteered as the treasurer. In March 2014, Schumaker repaid the money he had taken from the homeowners association along with two years of dues he owed and one year of future dues. He disclosed his actions to the homeowners association and resigned as treasurer, and the association elected not to pursue charges. Schumaker reported his actions to his broker-dealer, the broker-dealer in turn communicated with FINRA, and Schumaker elected not to challenge the suspension issued by FINRA. Schumaker believed FINRA communicated with the Commissioner, and when completing his license renewal application, he disclosed his FINRA bar.[2]

         [¶3] On August 12, 2016, the Commissioner issued an Administrative Order Notice of Nonrenewal of License which stated the enforcement division of the Department received untimely notification of Schumaker's securities license suspension and permanent bar, stated Schumaker had disclosed that he misappropriated funds for personal use as treasurer of his homeowners association, cited Ind. Code § 27-1-15.6-17(a)[3] and Ind. Code § 27-1-15.6-12(b)(8), [4] and stated that Schumaker's producer license would not be renewed. At Schumaker's request, a hearing was scheduled before an administrative law judge (the "ALJ").

         [¶4] On September 14, 2016, the ALJ held a hearing. In November 2016, the ALJ issued Findings of Fact, Conclusions of Law and Order. The ALJ found, "[i]n response to Question 2, of his application for renewal to [the Department] Schumaker made a full and complete disclosure of the FINRA bar and the circumstances leading thereto."[5] Appellant's Appendix Volume II at 35. The ALJ found that no evidence was presented that Schumaker has ever committed any conduct that is fraudulent, coercive, dishonest, incompetent, untrustworthy, or financially irresponsible in the conduct of his insurance business or any other business venture. The ALJ also found "the evidence in this case demonstrates that Schumaker took $8300 from the homeowners' association bank account with the intent to repay it" and "[w]hile dishonest, all evidence presented at the hearing was that this was a singular issue, out of character for Schumaker, and not part of a pattern of deceit or a series of 'practices' in either his personal or professional life." Id. at 37. The ALJ recommended that the order of nonrenewal be reversed on the conditions that Schumaker's license be granted on a two-year probationary basis and that he pay a civil penalty of $1, 000.

         [¶5] On February 20, 2017, the Commissioner issued Findings of Fact, Conclusions of Law, and Final Order. The Commissioner stated that the Department filed an objection to the ALJ's recommended order and challenged, in relevant part, the ALJ's conclusions relating to Ind. Code § 27-1-15.6-12(b)(8). The Commissioner found that Schumaker violated subsections (1) and (8) of Ind. Code § 27-1-15.6-12(b) and ordered that his insurance producer license not be renewed.

         [¶6] On March 22, 2017, Schumaker filed a petition for judicial review with the trial court. The parties submitted briefs[6] and on February 1, 2018, the court held argument. On March 19, 2018, it issued its Findings of Fact, [7] Conclusions of Law and Order which vacated the Commissioner's February 20, 2017 order and provided:

         Findings of Fact

1. Mr. Schumaker concentrates his business in life and health insurance, disability and Medicare supplement insurance. Ex. 5. In his insurance business, Mr. Schumaker does not handle any cash for insureds. Tr. 35. Instead, the insured pays all premiums directly to the insurance company. Id. The only funds Mr. Schumaker deals with are his own commission checks from which he pays his salary and his office expenses. Id.
2. At the time of the administrative hearing, Mr. Schumaker had held a license from the Department for 26 years and was serving about 300 customers. Ex. 5. He has never [had] a complaint relating to [the] manner in which he conducted his business. Id.
3. Mr. Schumaker also served as treasurer of his homeowners' association, an unpaid, volunteer position that was neither elected nor appointed. Mr. Schumaker held the position because the association needed volunteers for various positions due to its small size. Tr. 24-25.
4. In 2011, Mr. Schumaker experienced significant personal issues. At a school sporting event on a rainy evening, two young girls ran out in front of his car and, because one stopped and the other ran, Mr. Schumaker could not avoid hitting one of them and injuring her. Tr. l6. The accident exacted a heavy emotional toll on Mr. Schumaker and his family. Tr. l6, Tr. 55. It also had a big impact on his business. Tr. 16. In addition to the emotional turmoil the event caused, Mr. Schumaker incurred expenses because he was sued over the accident. Id; Ex. 5.
5. Mr. Schumaker was expecting a substantial commission check and wrote an equally substantial check to pay a medical bill. Tr. l7. When the commission check did not arrive, Mr. Schumaker took $8300 in homeowner's association funds for his own use, without authorization. Tr. 41. He always intended to pay the money back, and no one with the homeowners' association discovered his actions. TR. 17; Ex. 5.
6. In 2014, the homeowners' association had bills coming due and needed funds. Tr. 18. Mr. Schumaker returned the funds he had taken, depositing $9000, which included the $8300 and his own dues. Tr. 19-20. He disclosed to the association what he had done and how he had corrected it. Tr. 22. He also resigned as treasurer. Id.
7. After hearing Mr. Schumaker's disclosures, the other members of the homeowners' association deliberated. Id. Tom Mack, a neighbor who was present when Mr. Schumaker told the homeowners what he had done, noted that Mr. Schumaker was very remorseful. Ex. 2. Mr. Mack and the other home owners concluded Mr. Schumaker made a bad decision, but that because he informed them, repaid the funds, and was being investigated at work, they would not pursue charges. Tr. 22; Ex. 2. According to Mr. Mack "Jeff is a very reliable, honest and kind person that had made a bad choice." Ex. 2. Mr. Schumaker's wife testified how out of character the actions were for her husband, describing them as "an aberration." Tr. 56.
8. One association member was a former registered representative (a person who buys or sells securities for a registered broker-dealer) and said Mr. Schumaker should report the incident to his broker-dealer, so he did. Tr. 24-25. The broker-dealer reported the incident to the Financial Industry Regulatory Authority, also known as FINRA, a private self-regulatory entity in the securities business. Tr. 25.
9. FINRA began an investigation, which its attorneys pursued aggressively. Tr. 27. Mr. Schumaker learned that even if [he] avoided being barred from association with FINRA, the process would be expensive. Id. He heard from one individual who spent approximately $100, 000.00 in attorneys' fees, costs, and fines. Id. Accordingly, Mr. Schumaker did not contest or otherwise participate in the investigation. Ex. 5. Under FINRA' rules, non-participation leads to a bar against further association with FINRA. Id. FINRA's attorneys and his own counsel assured him he could continue in his insurance business, he just could no longer sell securities. Tr. 27-28.
10. After Mr. Schumaker could no longer serve his broker/dealer clients, another registered representative, William Novack began serving them. Tr. 50. Novack testified Mr. Schumaker's clients "spoke very highly of him." Id. Novack further testified to his own assessment that Mr. Schumaker "did quite well" and "did a very nice job in putting things together for his clients." Id. Novack also testified Mr. Schumaker's clients could be negatively affected if Mr. Schumaker could not assist them with their insurance needs. Id. at 51.
11. Mr. Schumaker did not know he was supposed to disclose the FINRA bar to the Department until he was in the process of renewing his producer's license. Tr. 31. Question 2 of the application asked "Have you been named or involved as a party in an administrative proceeding, including a FINRA sanction or arbitration proceeding regarding any professional or occupational license or registration, which has not been previously reported to this insurance department?" Filing No. 10 (ALJ's Order) p. 2, ¶ 3. Mr. Schumaker disclosed the FINRA bar and the circumstances leading to it. Ex. l.
12. On August 12, 2016, the Department notified Mr. Schumaker his license would not be renewed in an "Administrative Order - Notice of Nonrenewal of License." Record Doc. 16. The reasons given for the non-renewal were that Mr. Schumaker failed to report the FINRA suspension within 30 days of its final disposition and that he allegedly used "fraudulent, coercive, or dishonest practices, or demonstrate[d] incompetence, untrustworthiness, or financial irresponsibility in the conduct of business in Indiana or elsewhere," which Ind. Code § 27-1-15.6-12(b)(8) lists as a basis for discipline. Id.
13. Mr. Schumaker timely sought administrative review.
14. Mr. Schumaker acknowledged his personal use of association funds was wrong, but stated the events were caused by extreme circumstances not likely to recur and had no relationship to his blemish-free, 26-year record in providing services under his Indiana insurance producer's license. He denied the conduct amounted to "fraudulent, coercive, or dishonest practices, or demonstrate[d] incompetence, untrustworthiness, or financial irresponsibility in the conduct of business in Indiana or elsewhere" within the meaning of Ind. Code § 27-1-15.6-12(b)(8).
15. Mr. Schumaker further argued it was arbitrary and capricious to refuse to renew his insurance producer's [license] based on the belated disclosure of the FINRA action.
16. Mr. Schumaker's Indiana producer's license expired on June 30, 2016, while his application was pending. Record Doc. l6 (Administrative Order - Notice of Nonrenewal) ¶ 2.
17. The Honorable Reuben B. Hill, Administrative Law Judge, held an evidentiary hearing. Mr. Schumaker presented his own testimony, his wife's, and that of the homeowner and registered representative described above. He also presented evidence of his most recent Field Office Review Worksheet and a post-audit letter stating, "Congratulations! I would like to commend you on how well you have been managing the affairs of your branch office. I am pleased to inform you that there were no material exceptions found during the audit of your branch office. This is a great accomplishment and a direct reflection of your commitment to excellence." Ex. 3. Mr. Schumaker also testified he has made changes to his business to avoid the extreme financial pressures that led to his actions. Tr. 36-37.
18. Mr. Schumaker is the sole financial supporter for his family, which includes his wife, two sons in college, his mother-in-law who lives with him, and a young family member placed in their home by family services. Tr. l l-12; Tr. 53. Losing his producer income would be devastating to the family, Ex. 5; And, at age 53 with 26 years in the insurance industry, ...

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