OAH 16-1005-21207-2
STATE OF
OFFICE OF ADMINISTRATIVE HEARINGS
FOR THE DEPARTMENT OF COMMERCE
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In the Matter of Marlon Terrell Pratt |
ORDER DENYING CONTINUANCE AND GRANTING PARTIAL SUMMARY DISPOSITION
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This matter came before Administrative Law Judge Manuel J. Cervantes (ALJ) on the Motion of the Minnesota Department of Commerce (Department) for Summary Disposition. On July 15, 2010, Marlon Terrell Pratt (the Respondent), filed a response to the Department’s motion and also moved for a continuance regarding the motion. The Department filed a reply and supplemental affidavits on July 23, 2010. The motion record closed with the filing by the Department on July 23, 2010.
Christopher M. Kaisershot, Assistant Attorney General, appeared on behalf of the Department. Larry E. Reed, Esq., appeared on behalf Marlon Terrell Pratt (Respondent).
Based upon all of the files, records, and proceedings herein, and for
the reasons detailed in the Memorandum below,
IT IS HEREBY ORDERED THAT:
1.
The Respondent’s
Motion for a Continuance is DENIED.
2.
The
Department’s Motion for Summary Disposition is GRANTED to the extent that the
Respondent is collaterally estopped from contesting the factual basis for
imposing discipline arising out of his convictions for fraud and racketeering.
3.
The
Department’s Motion for Summary Disposition is GRANTED regarding the violations
of Minn. Stat. § 58.12 through the Respondent’s role in the identified mortgage
lending transactions (Ross and Smith transactions).
4.
The
parties will confer regarding scheduling a hearing in this matter on the
remaining issues as further discussed in the Memorandum below.
Dated: August 25, 2010
s/Manuel J. Cervantes
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MANUEL J. CERVANTES Administrative Law Judge |
MEMORANDUM
I. Background Summary and Jurisdiction
In 1998, the Legislature enacted the Minnesota
Residential Originator and Servicer Licensing Act (“the Act”), a measure that
regulates the practice of originating residential mortgages. Under the Act, residential mortgage originators
must either be directly licensed by the Department or covered by a specific
statutory exemption.[1]
Moreover, the Act imposes upon those who are directly
licensed and those who are otherwise exempt from licensure certain standards of
professional conduct, and these professional standards extend to matters that
relate directly to residential mortgage origination and other
non-mortgage-related volitional acts.[2]
On
September 8, 2008, the Respondent was charged with 17 counts of Felony Theft by
Swindle. Each count reflected a mortgage
lending transaction that the Respondent was involved in some capacity. The charges included the allegation that the
Respondent received a payment (described as a “kickback”) ranging from $13,000
to $100,000 as part of each transaction.
The charges were later supplemented with two counts of racketeering.[3] On July 8, 2009, the Respondent was convicted
of all seventeen felonies for theft by swindle and both racketeering felonies.[4] The Respondent was sentenced to 120 months in
prison and fined $500,000.[5] The Respondent is presently incarcerated as a
result of these convictions.
The
Respondent’s convictions arose from his activities as a mortgage originator,
more commonly known as a “mortgage broker,” working for Universal Mortgage,
Inc. (UMI). The Respondent was not
required to be licensed in that capacity because he was working under the
auspices of UMI’s mortgage originator licenses.[6] The criminal complaint identified the
Respondent as being the loan officer on 13 of the 17 transactions resulting in
felony convictions.[7]
The
Department seeks to impose administrative discipline on the Respondent for
violations of statute and rule “including debarment or the imposition of civil
penalties.”[8] On March 23, 2010, the Department filed a
Notice and Order for Prehearing Conference setting this matter on before the
ALJ.
On June
18, 2010, the Department moved for summary disposition. The Respondent filed a response to the motion
on July 15, 2010. The Department filed
its reply memorandum and supplemental affidavits on July 23, 2010.
The
Respondent contends that the Department lacks jurisdiction to proceed in this
matter because the Respondent is not licensed by the Department. Furthermore, “[d]ocuments submitted at the
time of trial clearly show that Mr. Pratt was not the signing loan officer in
the transactions that were involved in the case.”[9] The Respondent notes that his actions were as
“an individual purchaser or seller in several cases. Further, the jury found that there was no
monetary loss in any of the transactions.”[10]
The
Department responded that its jurisdiction over this type of proceeding, and
the Respondent in particular, is based in Ch. 58.[11] The Department characterized that authority
as follows:
The
Legislature vested the Department with broad authority to bar and impose civil
penalties against any “residential mortgage originator, servicer, applicant, or other person, an officer, director,
partner, employee, or agent or any person
occupying a similar status or performing similar functions, or a person in
control of the originator, servicer, applicant, or other person.” Regardless of
whether he acted as a facilitator, loan officer, or seller in any of the
various transactions at issue, Respondent is subject to the Department’s
jurisdiction since his misconduct -- adjudicated as racketeering -- violated
Minn. Stat. ch. 45 and 58.[12]
The
Respondent falls into the category of a person who performed the function of a mortgage
originator; in his role as a loan officer, Respondent assisted buyers of real
estate with their loan applications and found lenders for them. Any person performing that function, whether
a license holder or not, is subject to the jurisdiction of the Department. The Department has shown that it has jurisdiction
to proceed against the Respondent in light of his conduct.
II. Summary Disposition Standard
Summary
disposition is the administrative equivalent of summary judgment. Summary disposition is appropriate where
there is no genuine issue as to any material fact and one party is entitled to
judgment as a matter of law.[13] The Office of Administrative Hearings has
generally followed the summary judgment standards developed by state and
federal courts when considering motions for summary disposition.[14] A genuine issue is one that is not sham or
frivolous. A material fact is a fact
whose resolution will affect the result or outcome of the case.[15]
The moving party has the initial burden of showing
the absence of a genuine issue concerning any material fact. To successfully resist a motion for summary
judgment, the non-moving party must show that there are specific facts in
dispute which have a bearing on the outcome of the case.[16] The nonmoving party must establish the
existence of a genuine issue of material fact by substantial evidence; general
averments are not enough to meet the nonmoving party’s burden under Minn. R.
Civ. P. 56.05.[17] The evidence presented to defeat a summary
judgment motion, however, need not be in a form that would be admissible at
trial.[18]
When considering a motion for summary judgment, the
Court must view the facts in the light most favorable to the non-moving party.[19] All doubts and factual inferences must be
resolved against the moving party.[20] If reasonable minds could differ as to the
import of the evidence, judgment as a matter of law should not be granted.[21]
III. Standards for Determination of Undisputed
Facts
The
factual background for this motion has been hotly contested by the
parties. The ALJ has carefully examined
the affidavits to assess what facts are not in dispute. In carrying out this assessment, the ALJ has
applied the foregoing summary disposition standards and relied upon those
precedents for guidance. Several issues
were raised regarding the determination of facts that must be addressed.
A. Hearsay
The
Respondent contends that Department investigators have no first-hand knowledge
of the underlying facts upon which this disciplinary action is based. The Respondent contends that:
Any
information submitted by [the investigator] would not be admissible in court
thus it cannot be used to support a summary judgment motion. It is fundamental that the evidence in support
of a summary judgment motion must be evidence that would be admissible in a
proceeding. The hearsay evidence of [the
investigator] and his opinions founded in the theories of the department are
not admissible evidence.[22]
The
Department responded that using investigators to collect and present their
findings is a practice that has been approved by the Minnesota Supreme
Court. These witnesses are competent, as
other “qualified” witnesses, to supply foundation for admission of business
records under Minn. R. Evid. 803(6).[23] The Department noted that the transactional
documents attached to the investigator’s affidavit were obtained directly from
the various lenders pursuant to administrative subpoenas or from other public
records.[24]
Admissible
evidence in administrative proceedings is that which “possesses probative
value, including hearsay, if it is the type of evidence on which reasonable,
prudent persons are accustomed to rely in the conduct of their serious
affairs.”[25] Records of regularly conducted business are
not excluded as hearsay.[26] In this instance, such records, properly
kept, are inherently reliable and should be considered.
B. Admissible Evidence
The Department
replied that the investigators are testifying as to matters within their own
knowledge based on subpoenaed documents obtained through their investigation
from various affected lenders and public documents. As noted above, the hearsay objection is not
a valid ground to preclude admission of the disputed records. The investigators have identified the sources
of the documents offered to demonstrate a prima
facie violation of the statutory standards governing mortgage lending. The documents identified are the sort of
evidence that persons are accustomed to relying upon in the conduct of their
serious affairs. Many of the offered
documents were prepared by or on behalf of the Respondent and were intended to
be relied upon by lending institutions in making mortgage loans. There is no evidence in the record to refute
this. The Respondent has not
demonstrated that these documents are in any way inadmissible in this
proceeding.[27]
C. Reliance on Affidavits
The
Respondent contends that the Department investigators’ affidavits do not meet
the standard for personal knowledge to establish the factual background to
support a grant of summary disposition.
The Department replied that its affidavits are providing information
developed through its investigation. The
Department noted that the Respondent’s affidavits are from Respondent’s counsel
and those affidavits do not reflect statements of fact relevant to this
proceeding. The Respondent described the
standard for reliance on affidavits as follows:
An affidavit
supporting a motion in opposition for summary judgment must ‘be made on
personal knowledge, shall set forth such facts as would be admissible in evidence,
and shall show affirmatively that the affiant is competent to testify to the
matters stated therein.’
The
Respondent has correctly stated the standard for reliance upon affidavits. Applying this standard to the Department’s
affidavits, the Department has relied upon investigators who have identified
specific information, obtained through their investigations. The investigators identified the sources of
their information and how it was obtained.
With very few exceptions, the investigators limited their statements to
factual matters. The inferences drawn by
the investigators will be discussed in the analysis of specific issues.
The
Respondent relied on two affidavits in opposing the Department’s summary
disposition motion and one affidavit in support of the Respondent’s continuance
motion. All of the affidavits are from
Respondent’s counsel only. The Department
maintained that the contents of the Respondent’s affidavits are not appropriate
to demonstrate that genuine issues of material fact exist for hearing in this
matter. Specifically, the Department described
as inadmissible the portions of those affidavits which contained the following:
• Presenting legal
theories on appeal as supposed facts for purposes of this proceeding. See,
e.g., Reed Aff. No. 1, ¶¶ 10-20.
• Arguing failed
defenses from the underlying criminal matter, notwithstanding that they were
rejected by the jury and the court and that Respondent’s conviction precludes
him from relitigating those matters in this forum. Reed Aff. No. 1, ¶¶ 21-23,
84; Reed Aff. No. 2, ¶¶ 7-11; Reed Aff. No. 3, ¶¶ 5-16.
• Holding himself out as an apparent expert on
the mortgage industry. Reed Aff. No. 1, ¶¶ 24-33, 47-59, 77, 89-90.
• Summarizing supposed
findings and the testimony in the underlying criminal matter without providing
any corresponding exhibits or transcripts. Reed Aff. No. 1, ¶¶ 34-42; Reed Aff. No. 2, ¶¶
4-5.
• Offering general
assertions as supposed factual statements concerning the transactions involving
Mark Ross and Patricia Smith (and without establishing his competence to offer
such contentions). Reed Aff. No. 1, ¶¶
44-46, 83.
• Tendering personal
beliefs and legal opinions concerning Mr. Boyer’s affidavit, the Department’s
legal theories, and the pending administrative action. Reed Aff. No. 1, ¶¶ 60-69, 72-76, 78-81, 84,
86, 88, 91; Reed Aff. No. 3, ¶¶ 3-4.
• Commenting on the
types of documents that he has not seen during the course of representing
Respondent. Reed Aft No. 1, ¶¶ 70-71,
82, 87.
• Holding himself out
as a handwriting expert and opining that he does not recognize certain
signatures as those of Respondent. Reed Aff. No. 1, ¶ 92; Opp’n Mem., p. 16.
•
Promising to produce evidence at a later date. Reed Aff. No.3, ¶¶ 9, 11-15.[29]
Both
Respondent and the Department have cited the Minnesota Court of Appeals on this
issue, which stated:
The
only evidence presented to the court at the time of the hearing of the motion
for summary judgment was an affidavit by defendant's attorney, stating that on information and belief, plaintiff failed
to perform certain obligations under the lease guarantee agreement. Rule 56.05
requires such affidavits to be made on personal knowledge. Thus, defendant's
attorney's affidavit was not proper evidence, under Rule 56.05, to oppose summary
judgment.
The
evidence shows that long before the summary judgment motion was heard,
defendant knew who had personal knowledge of facts which might support triable
issues of fact, yet no effort was made to obtain their deposition testimony or
affidavits. Summary judgment was properly entered.[30]
The Respondent’s affidavits lack averments of actual
facts in dispute. In the main, the
averments to demonstrate that actual facts are in dispute must come either from
Respondent (rather than Respondent’s counsel) or other persons who have actual
knowledge or who were actually involved in the transactions that form the basis
of the Department’s action against the Respondent. The Respondent’s were not. The specific shortcomings of the Respondent’s
affidavits will be discussed regarding each issue asserted.
D. Foundation
The Respondent contends that Department investigators
cannot provide foundation for the documents offered in support of the summary
disposition motion. As discussed above,
the Department’s affidavits establish that the documents have been identified
as having been kept in the normal course of business. The investigators identified where the
documents were obtained. Nothing more is
required for laying foundation for the purpose of admitting the document into
the record. The Respondent has offered
no affidavit that sheds doubt on whether the records were so maintained. The persuasiveness or weight attributable to
any particular document rests with the development of the record through
witness testimony and support by the introduction of other documents.
IV. Determination of Undisputed Facts Regarding
Respondent’s Convictions
A.
Respondent’s
Criminal Convictions
The
Respondent was convicted on seventeen felony counts of fraud and two counts of racketeering
arising out of mortgage lending transactions.
There was no stay of execution entered on the convictions and the
Respondent is currently incarcerated.
The Respondent has appealed the convictions.
B.
Finality of
Convictions for Purposes of Estoppel
The Respondent contends that, since the convictions
are on appeal, they are not final judgments that can have collateral estoppel
effect. The Respondent has not cited any
case law in support of the contention that the judgments cannot be used for collateral
estoppel purposes.
The Department responded that the filing of an appeal
does not stay execution of the judgment or sentence, absent the grant of such a
stay by the district court judge or judge of the appellate court.[31] In addition, the Department cites a
significant number of cases holding that an appeal does not vacate or annul the
underlying judgment unless and until the judgment is reversed.[32] The Respondent has offered no legal support
to the contrary.
There is a judgment of conviction against the
Respondent and that judgment was not stayed pending appeal. The application of collateral estoppel is not
barred by Respondent’s appeal of the judgment of conviction.
C.
Assertion of
Double Jeopardy
The Respondent was fined $500,000 at his criminal
conviction sentencing. The Respondent
contended that no fine could be levied in this proceeding. It is barred by application of the
constitutional doctrine of double jeopardy.
On this issue, the Respondent argued:
Both the
See, Hudson v. United States, 522
The Double Jeopardy
Clauses of the United States Constitution and the Minnesota Constitution
protect a criminal defendant from three distinct abuses: a second prosecution for the same offense
after acquittal; a second prosecution for the same offense after conviction;
and multiple punishments for the same offense.
The Supreme Court thus
held that under the Double Jeopardy Clause a defendant who already has been
punished in a criminal prosecution may not be subjected to an additional civil
sanction to the extent that the second sanction may not fairly be characterized
as remedial, but only as a deterrent or retribution. 490
The Department responded that neither the ALJ nor the
Commissioner have the authority to address constitutional issues, as a matter
of law.[33]
In the context of a contested case proceeding,
neither an ALJ nor an agency head can declare a statute or rule
unconstitutional on its face, since that power is vested in the judicial branch
of government.[34] Alms are obligated to apply laws, rules, and
ordinances in a constitutional manner, but questions as to the constitutional
validity of the laws, rules, and ordinances are outside the jurisdiction of an
ALJ or agency official.[35] It is permissible, however, for an agency or
ALJ to determine a constitutional question in the interpretation or application
of a statute or rule to particular facts taking into account relevant judicial
decisions.[36]
In addressing the constitutional issue of double
jeopardy as applied to the facts of this matter, the ALJ follows the direction
of the Minnesota Court of Appeals which held:
The United States Supreme Court has recently returned to its earlier view that the Double Jeopardy Clause of the Fifth Amendment applies only to criminal punishment, not to civil sanctions that could be described as punishment or that serve some of the same purposes as criminal punishment.[37]
The
D.
Estoppel Effect
The Department has proceeded against the Respondent
under Minn. Stat. § 58.12, which states in pertinent part:
Subdivision 1. Powers of commissioner. (a) The commissioner may by order take any or
all of the following actions:
(1)
bar a person from engaging in residential mortgage origination or servicing;
(2)
deny, suspend, or revoke a residential mortgage originator or a servicer
license;
(3)
censure a licensee;
(4)
impose a civil penalty as provided for in section 45.027, subdivision 6; or
(5)
revoke an exemption or certificate of exemption.
(b) In order to take
the action in paragraph (a), the commissioner must find:
(1) that the order is
in the public interest; and
(2) that the
residential mortgage originator, servicer, applicant, or other person, an
officer, director, partner, employee, or agent or any person occupying a
similar status or performing similar functions, or a person in control of the
originator, servicer, applicant, or other person has:
(I)
violated any provision of this chapter or rule or order under this chapter;
* * *
(iv)
violated a standard of conduct or engaged in a fraudulent, coercive, deceptive,
or dishonest act or practice, whether or not the act or practice involves the
residential mortgage lending business;
(v)
engaged in an act or practice, whether or not the act or practice involves the
business of making a residential mortgage loan, that demonstrates
untrustworthiness, financial irresponsibility, or incompetence;
(vi)
pled guilty, with or without explicitly admitting guilt, pled novo contender,
or been convicted of a felony, gross misdemeanor, or a misdemeanor involving
moral turpitude; ….
To apply collateral estoppel, the current issue must
be identical to one in a prior adjudication, where there is a final judgment on
the merits. The estopped party must have
been a party or in privities with a party to the prior adjudication. The estopped party must have been given a
full and fair opportunity to be heard on the adjudicated issue.[39]
The issue on which estoppel is to be applied must have been necessary and
essential to the prior adjudication.[40]
The Respondent was a party in his criminal trial and
he was afforded the full opportunity to present his case in that
proceeding. The criminal complaint states,
[t]he
instant complaint concerns Defendant’s [Respondent’s] role in the purchase of
[real] properties, some of which were sold to straw buyers in 2006. The property purchases outlined in this
complaint were all financed by fraudulently obtained loans and all resulted in
a ‘kickback’ to Defendant [Respondent] from the loan proceeds.[41]
The
complaint goes on to enumerate the 17 counts of theft by swindle and a
racketeering count.[42]
The State prevailed on all counts under the higher
standard of proof; beyond a reasonable doubt.
As discussed above, the judgment of conviction is final for purposes of
collateral estoppel.
Count I, in the Department’s Notice and Order for
Prehearing Conference, states that the Respondent was convicted of 19 felonies
involving moral turpitude – 17 counts of Felony Theft by Swindle and two counts
of Felony Racketeering – in conjunction with 17 transactions involving the
mortgage lending business, each of which constitutes a separate violation of
law. Respondent violated a standard of
conduct, engaged in a fraudulent, coercive, deceptive, or dishonest act, and
otherwise engaged in an act that demonstrates untrustworthiness, financial
irresponsibility, or incompetence.[43]
The facts underlying the Respondent’s convictions for
fraud and racketeering constitute grounds to impose discipline under Minn.
Stat. § 58.12, sub. 1(b)(2)(I) (violation of any provision of this chapter),
(iv) (engaged in a fraudulent, coercive, deceptive, or dishonest act or
practice, whether or not the act or practice involves the residential mortgage
lending business), (v) (engaged in an act or practice, whether or not the act
or practice involves the business of making a residential mortgage loan, that
demonstrates untrustworthiness, financial irresponsibility, or incompetence),
and (vi) ([has] been convicted of a felony, gross misdemeanor, or a misdemeanor
involving moral turpitude).[44] The factual background of the convictions
falls squarely within the Act, and the criminal conduct of the Respondent would
not have been possible, absent his actions as a mortgage originator.[45]
Under this analysis, the Respondent is estopped from
disputing the fact of his convictions for fraud and racketeering. The Department need not prove any additional
facts, except for the criminal convictions, in order to impose administrative
discipline. But there is a limit to the
extent that estoppel on this issue addresses all the issues in this
proceeding. The Respondent was convicted
of violations of the criminal code, not the statutory obligations of mortgage originators. Where there is a difference between the
underlying conduct that formed the basis for a conviction and the obligations
governing mortgage originators under Minn. Stat. § 58.12, a Respondent would
then be entitled to assert any defense relating to that difference for which he
can adduce evidence.[46]
E.
Remaining Issues
Surrounding Convictions
Where there are differences between the underlying
conduct to a conviction and the standards governing mortgage originators, a
person subject to discipline must be afforded the opportunity to address any
such differences in a contested case hearing.
In this matter, there are no such differences relating to the conduct
for which sanctions are being sought, since the fraudulent conduct that formed
the basis of the Respondent’s convictions occurred in the context of his
conduct as a loan officer originating mortgage loans. However, there is a clear difference in
penalties between the criminal conviction and this proceeding. The Respondent is entitled to make a record
and introduce arguments regarding any proposed sanctions, including the amount
of any civil penalty ultimately imposed, since none of those issues are
collaterally estopped by the Respondent’s conviction.
V. Determination of Undisputed Facts
Regarding Respondent’s Other Transactions
A.
Respondent’s
Transactions
Apart
from the evidence regarding Respondent’s convictions, the Department introduced
evidence regarding transactions entered into between the Respondent and two
other persons (the Ross and Smith transactions).
The
Department established that the Respondent was involved in five real estate
closings between March 28, 2006 and August 28, 2006 involving Mark Ross. Consistent with schemes involving occupancy
fraud, a different lender was used for each transaction. As the loans closed, Respondent neglected to
notify the lenders on the pending loans that Ross had incurred significant
liabilities and monthly payment requirements, distorting the debt-to-income
ratio. This ratio is a key underwriting
criterion in determining most mortgage loans and the omission of liabilities
artificially lowered Ross’ debt ratio.
These undisclosed liabilities also significantly affected Ross’ ability
to repay each loan and increased the risk of default.[47]
Except for the first Ross purchase of an
Respondent similarly provided false information on
the 1003 by failing to include liabilities associated with the Oliver and
Approximately five months after Ross’ purchase of the
Respondent also provided false information on the
1003s by failing to disclose that Ross was purchasing more than one property as
his “primary residence.” This is
significant because lenders generally charge a higher interest rate to
investors compared to an individual who personally occupies the residence
because the risk of loss is generally higher with an investor.[52] Respondent also overstated Ross’ $3,607
monthly income by $1,393 to $3,286 on the various 1003s.[53]
Ross
eventually defaulted on all four properties resulting in substantial losses to
the lenders involved.[54]
Like
the Ross fraudulent property transactions described above, Respondent, as the
loan officer, made similar false representations to lenders in three property purchase
transactions involving Smith.[55]
The Department alleged that the undisputed evidence
regarding these transactions constituted violations of Minn. Stat. §§ 45.027,
58.12, and 58.13.[56]
B.
Respondent’s
Claim of Estoppel
In relation to the Ross and Smith transactions, the
Respondent contends that:
Also,
the department is asking that this court declare violations based upon
collateral estoppel on matters that have not yet been litigated. In particular,
the Commerce Department makes reference to “straw buyer” transactions. Those
matters are the subject of a trial in Hennepin County District Court which is
not yet commenced. Thus, they cannot serve as the basis for a claim of
collateral estoppel.[57]
The Department has cited the Ross and Smith transactions
as factual demonstrations of violations by the Respondent of his statutory obligations
as a person engaging in mortgage origination.
These allegations stand on their own factual underpinnings. The Department has not claimed that there is
any final court judgment, civil or criminal, arising out of those transactions. There is no estoppel analysis of the Ross and
Smith transactions to be performed.[58]
C.
Evidence on the
Smith and Ross Transactions
Count II, in the Department’s Notice and Order for
Prehearing Conference, states the Respondent participated in, directed, or
authorized false, deceptive, or misleading statements and representations
concerning the borrower’s intended residence, income, assets, and/or
liabilities in connection with 7 other residential loan transactions, each of
which constitutes a separate violation of law.
Respondent violated a standard of conduct, engaged in a fraudulent,
coercive, deceptive, or dishonest act, and otherwise engaged in an act that
demonstrates untrustworthiness, financial irresponsibility, or incompetence.[59]
Under
a “straw borrower” mortgage fraud scheme, an investor is persuaded to purchase
multiple residences with promises of high return on investment. The mortgage originator plays a key role in
the scheme by securing loans from different lenders while misrepresenting the
purchaser’s status as an occupant (as compared to an investor), inflating the
purchaser’s income, and underestimating the purchaser’s liabilities. The benefits to the mortgage originator are
the fees and commissions paid at the closings.
Inevitably, the investor cannot make the multiple mortgage payments and
defaults on the loans. The consequences
on the local community are serious, resulting in foreclosed residences and
decreasing property values. Lenders also
take substantial losses on the defaulted mortgage loans. Ultimately, the community suffers significant
financial distress as a result of this type of mortgage fraud.[60]
The Department offered evidence of a number of real
estate transactions with two persons for which the Respondent was not criminally
charged. Between March 28, 2006, and
August 28, 2006, five real estate closings occurred involving mortgages
originated through UMI for Mark Ross.
The Respondent was the loan officer on all but one of these
transactions. A different lender was utilized
for each transaction. The Respondent did
not notify the lenders on pending loans that Ross had incurred significant
liabilities through closing on the preceding real estate purchases and that
Ross was now obligated for monthly payments on those mortgages. Specifically, the Department alleges that the 1003
for at least four of the purchases failed to identify the loans incurred for
prior purchases, even when the properties were identified as assets owned by
Ross. Some of the 1003s prepared for Ross
overstated his income from about 40 to 90%.[61] In the normal practice of mortgage
origination, the 1003 is prepared by the loan officer, which for these
transactions was the Respondent.[62]
The Department also notes that a statement was
prepared for Ross to sign which stated, “I, Mark Ross, have several inquiries
on my credit report due to applying for a home loan. I gave several lenders permission to pull my
credit, trying to find the best lender to meet my needs of having the lowest
interest rate and affordable payment.”[63]
Four of the Ross-purchased properties were foreclosed
upon, all within one year of the purchase date.
These foreclosures resulted in substantial financial losses to the
lenders in the Ross transactions.[64]
Between December 5, 2005 and January 27, 2006, three
real estate closings on behalf of Patricia Smith occurred involving mortgages
originated through UMI and involving the Respondent. Smith also purchased a residence on December
5, 2005, through another loan officer at UMI.
All of the real estate transactions were identified as Smith’s primary
residence. The 1003s for Smith were
prepared in similar fashion to those for Ross, omitting the additional
liabilities of the purchased residences and omitting the ongoing monthly
payments for the mortgages on those properties. [65]
Two of the Smith-purchased properties were foreclosed
upon, within 17 months of the purchase date. On May 14, 2007, a financial institution
involved in one Smith transaction complained to the Department regarding the conduct
of the Respondent in misrepresenting the 1003 information. The complaint noted that the Respondent was
the loan officer on another mortgage loan that bore very similar
characteristics to the Smith loan. The
complaint noted that the similarities suggested that the Respondent’s conduct
was a pattern or practice, not an isolated incident.[66]
From the information provided by the lenders to the
Ross and Smith transactions, the Department estimated that the foreclosures in
those transactions resulted in losses to the lenders of more than $650,000.[67]
The Department contends that the Ross and Smith transactions
are consistent with a pattern of financial transactions used in occupancy
fraud. The Department noted that the manner
in which the loan originator conducted the multiple purchases misstated both borrowers’
debt-to-income ratios. Since the
debt-to-income ratio is important to determine eligibility for most mortgage
loans, failing to inform a lender of added liabilities had the result of artificially
lowering the debt ratio of the borrower. The Department argues that these undisclosed
liabilities significantly affected both Ross’ and Smith’s ability to repay each
loan and increased the risk of default. The Department also maintained that the rapid
succession of closings (three weeks for Ross, eight for Smith) ensured that the
new mortgages would not appear on the borrowers’ credit reports when the lender
checked on each borrower’s credit-worthiness.[68] These assertions are reasonable inferences
from the undisputed facts in this proceeding.
There are no reasonable inferences that can be taken from the undisputed
facts to conclude that the Respondent did not have a plan to mislead
mortgage lenders to their detriment and for his own enrichment through fees and
commissions.
D.
Respondent’s
Assertions of Fact Issues.
The Respondent maintains that summary disposition is
inappropriate because genuine issues of material fact remain for hearing. The Respondent cites the possibility that he
was not the signatory on the 1003s as an example of such a fact issue. But the Respondent has not filed an affidavit
that affirmatively states the he did not sign the 1003s that bear his signature. Raising a speculation about the quality of
the evidence offered by the moving party does not meet the standard for the
nonmoving party. Posing a “metaphysical
doubt” regarding a factual issue does not establish a genuine issue of material
fact.[69]
For the Respondent to raise a genuine issue of fact,
a competent affidavit must contain information to show that there are issues
remaining. An affidavit from the
Respondent (not Respondent’s counsel) asserting that the Respondent was not the
loan officer on the Smith and Ross transactions, that the Respondent did not
sign the 1003s, and that the Respondent had no culpable role in those
transactions would be sufficient to carry the nonmoving party’s burden (since
all inferences are taken in favor of the nonmoving party). There is no such affidavit in the record of
this motion.
The Respondent contends that there is no proof that
any lender relied on the information in the 1003s. The only support for this contention is a
description of the various types of loan instruments from the Respondent’s
counsel.[70] There is no affidavit or sworn deposition
testimony from an affected lender that the information was not relied upon. There is evidence in the record that a
statement from Ross was prepared to explain the unusual credit report activity
coinciding with Ross purchasing multiple residences over a very short period of
time.[71] This statement suggests that lenders were
relying on information regarding Ross in assessing credit-worthiness. The only competent evidence in the record on
this motion supports the conclusion that the Respondent acted as the loan
officer in the Smith and Ross transactions and that he was knowledgeable about
the nature of those transactions.
The evidence in the record shows that the Ross and Smith
transactions were part of a fraudulent, deceptive, or dishonest practice
involving the residential mortgage lending business; in violation of Minn.
Stat. § 58.12, sub. 1(b). The Respondent
had the opportunity to submit admissible evidence to rebut or contradict the
Department’s evidence but did not. The
Respondent has not shown that any genuine issues of material fact remain for
hearing concerning the alleged violation of those standards.
E.
Remaining Issues
Surrounding the Ross and Smith Transactions
As with the estoppel applied to the Respondent’s
criminal conviction, the grant of summary disposition for the Ross and Smith transactions
does not resolve all the issues in this proceeding. The Respondent is entitled to make a record
and introduce arguments regarding any proposed sanctions, including the amount
of any civil penalty ultimately imposed, since none of those issues are addressed
by the Department’s request for summary disposition.
VI. Summary
The
Respondent is subject to administrative discipline from the Department of
Commerce because his conduct, both criminal and the Ross and Smith
transactions, violated the Act while he worked as a mortgage originator.
The Department has shown that the Respondent’s
convictions support the imposition of discipline under Minn. Stat. §
58.12. The Respondent has not demonstrated
that any genuine issue of material fact exists to dispute that discipline is
appropriate.
While the Respondent moved for a continuance to
conduct additional discovery, the only matter identified as needing discovery
was the trial transcript in the Respondent’s criminal proceeding. As discussed above, there are no aspects of
the criminal trial that are at issue in this proceeding. The only information needed to demonstrate whether
genuine issues of material fact exist for hearing can be obtained from the
Respondent himself. Therefore, the
Respondent’s motion for a continuance is denied.
The Department has made a prima facie showing that the Respondent engaged in additional real
estate transactions that were not the subject of his criminal convictions. The Department has made a prima facie showing that the Respondent
engaged in fraudulent conduct through these transactions that violate Minn.
Stat. § 58.12. The Respondent has
failed to introduce any evidence showing that any genuine issue of material
fact remains for hearing on these transactions.
The lack of material issues of fact relates only to
the issues regarding the alleged violations.
The Respondent will have the opportunity to present evidence regarding
the propriety of the sanctions to be imposed for the violations.
M. J. C.
[1] See,
[2] See,
[3] Eider
Affidavit, at 1-2, Ex. 1.
[4] Eidem
Aff., at 2, Ex. 2; Boyer Aff., Ex. 1.
[5] The Department’s Notice and Order of Prehearing Conference, at 3
(filed March 23, 2010).
[6] Boyer
Aff., at 1
[7] Eidem
Aff., Ex. 1.
[8]
Notice and Order for Prehearing Conference, at 1 (filed March 23, 2010).
[9]
Respondent Brief, at 7.
[10]
[11] Minn. Stat. § 58.04, subd.
2(b)(2) exempts Respondent from having a license as an employee of a licensed
mortgage originator. Minn. Stat. §
58.05, subd. 1, subjects Respondent to all other applicable provisions of Minn.
Ch. 58. See also, Pomrenke v. Commissioner of Commerce, 677 N.W.2d 85,
90-91 (Minn. Ct. Appls. 2994) (acts committed by a mortgage originator who is
exempt from licensure requirement provide the commissioner with jurisdiction to
impose civil penalties and bar that individual from the field.
[12]
Department Reply, at 5 (citing Minn. Stat. § 58.12, subd. 1(a)(2) (emphasis
added).
[13] Sauter v. Sauter, 70 N.W.2d 351, 353 (
[14]
See
[15] Illinois Farmers Insurance Co. v. Tapemark
Co., 273 N.W.2d 630, 634 (
[16] Thiele v. Stich, 425 N.W.2d 580, 583 (
[17]
[18]
Carlisle, 437 N.W.2d at 715 (citing Celotex Corp. v. Catrett, 477
[19] Ostendorf v. Kenyon,
347 N.W.2d 834 (
[20] See, e.g., Celotex, 477
[21] Anderson v. Liberty Lobby, Inc., 477
[22]
Respondent Brief, at 11.
[23]
Department Reply, at 5 (citing Byers v.
Commissioner of Revenue, 741 N.W.2d 101, 106-07 (
[24]
Department Reply, at 5-6. See also, 1st
Amended Criminal Complaint, where Investigator Eidem states that “Property
purchase records seized from Universal, from Defendant’s [Respondent’s]
residence, and provided by closing agents for the loans contain the … details
of property purchases orchestrated by Defendant resulting in kickbacks from
loan proceeds to Defendant.”
[25]
Minn. R. 1400.7300, subp. 1.
[26]
[27]
The Department offered a recording of a telephone conversation with one of the
purchasers in the transactions cited below.
The ALJ has not relied upon any part of that evidence as it is unsworn
(by the purchaser) and not the sort of information that is sufficiently
reliable to be accepted in this proceeding.
[28]
Respondent’s Memo, at 11, footnote 6.
[29] Department
Reply, at 7.
[30] Boulevard Del, Inc. v. Stillman,
343 N.W.2d 50, 52-53 (Minn. Ct. App. 1984) (emphasis in original).
[31] Department
Reply, at 4, citing Minn. R. Crim. P. 28.02, subd. 6 (2010).
[32]
Department Reply, at 4, citing Wilcox
Trust, Inc. v. Rosenberger, 169 Minn. 39, 43, 209 N.W. 308, 310 (1926); State ex rel. Spratt v. Spratt, 150
Minn. 5, 7, 184 N.W. 31, 32 (1921); Am.
Druggists Ins. v. Thompson Lumber Co., 349 N.W.2d 569, 572 (Minn. Ct. App.
1984); see also Rauchuy v. Anchor Bank, 2009 WL 3426939, **5.6 (Minn. Ct. App.
2010), rev. dismissed (Minn. 2010) (holding that after reversal a criminal
conviction is no longer effective for collateral estoppel purposes in a civil
matter).
[33] Department
Reply, at 8-9 (citing Neeland v.
[34] Neeland v.
[35] Neeland v.
[36] Pettersen v. Commissioner of Employment
Services, 306
[37] Johnson v. 1996 GMC Sierra, 606 N.W.2d
455, 458 (Minn. App. 2000), review denied (
[38]
The Respondent asserted that the Department’s action in bringing this
enforcement proceeding was so obviously a violation of the double jeopardy
doctrine that attorney’s fees should be awarded to Respondent. As discussed above, the double jeopardy
doctrine does not preclude this proceeding.
Further, an award of attorney’s fees in this type of proceeding is
governed by the Minnesota Equal Access to Justice Act (Minn. Stat. § 15.471 to
15.474). Such awards are available only
to litigants who prevail on the merits and demonstrate that the State’s
position is not substantially justified, and are not available to
individuals.
[39] Ill. Farmers Ins. Co. v. Reed, 662
N.W.2d 529, 531 (
[40] Hauser v. Mealey, 263 N.W.2d 803, 808 (
[41] 1st Amended Criminal
Complaint, at 2 (attached to the Department’s Notice and Order for a Prehearing
Conference).
[42]
[43] Minn. Stat. §§ 45.027, subd. 7(a)(4), 58.12, subd. 1(b)(2)(iv), (v),
and (vi), 58.13, subd. 1(19).
[44] Moral turpitude is not defined in the
statute, but Black’s Law Dictionary, pp. 1008-09 (6th ed. 1990) (citations
omitted), defines it as follows: The act of baseness, vileness, or depravity in
private and social duties which man owes his fellow man, or to society in general,
contrary to accepted and customary rule of right and duty between man and
man. Act or behavior that gravely
violates moral sentiment or accepted moral standards of community and is a
morally culpable quality held to be present in some criminal offenses as
distinguished from others.
[45]
The Respondent raised a number of issues concerning the conduct of the criminal
trial and the nature of the evidence presented there. None of these issues has any bearing on the
Respondent’s conviction for criminal behavior engaged in while conducting
mortgage origination activities. None of
the Respondent’s issues are relevant
issues of material fact for which a hearing need be held.
[46] ITMO the Disciplinary Hearing Relating to
Michael Alan Kveene, License No. 10639, OAH Docket No. 12-2402-10724-2 (ALJ
Order Granting Partial Summary Disposition issued November 1, 1996) (relying on
ITMO the Matter of the Teaching License
of Falgren, 545 N.W.2d 901, 905-06 (Minn. 1996)).
[47] Boyer Aff., at 3.
[48]
[49]
[50]
[51]
[52]
[53]
[54]
[55]
[56] Department Brief, at 10.
[57]
Respondent Brief, at 2.
[58] Respondent
asserted that there was a trial scheduled regarding those transactions that had
not yet occurred. Where properly
pleaded, a stay of administrative proceedings can be had to allow a court
proceeding to go forward, consistent with the principles of judicial
economy. See Bill Johnson's Restaurants, Inc. v. NLRB, 103
[59] Minn. Stat. §§ 45.027, subd.
7(a)(4), 58.12, subd. 1(b)(2)(iv), (v), and (vi), 58.13, subd. 1(19).
[60] Notice and Order for
Prehearing Conference, at 3-4.
[61] Boyer
Aff., ¶ 22; and Exs. 2, 5, 9, 11, 14.
[62] Boyer Aff. ¶ 9. The ALJ notes that a subsequent financial
institution’s complaints regarding false information in the relevant 1003 named
the Respondent for his role in its preparation.
Supp. Boyer Aff., Exs. B and C.
[63] Boyer Aff. ¶ 23 and Ex. 18.
[64] Boyer Aff.
[65] Boyer Aff., at 7-9.
[66] Supp.
Boyer Aff., Ex. C.
[67] Department
Brief, at 10; Boyer Aff.
[68] Department
Brief, at 4; Boyer Aff., ¶ 8.
[69] DLH, Inc. v. Russ,
566 N.W.2d 60, 71 (
[70] Respondent
Brief, at 15-16; Reed Aff. No. 1, ¶¶ 24-33.
[71] While
the Department received a complaint from a financial institution, the
complainant was not the initial mortgage lender. Supp. Boyer Aff., Ex. C. Similarly, a purchasing institution
complained to the initial lender that circumstances constituting a default,
including Ross not residing in property that was used for rental property, had
occurred. Boyer Aff., Ex. 8.