Opinion
C.A. Nos. 17075-NC, 17406-NC
Date Submitted: March 18, 2002
Date Decided: July 17, 2002
Watson M. Horner, Cundys Harbor, Maine, Appellant Pro Se.
Peter O. Jamison, III, Esquire, DEPUTY ATTORNEY GENERAL, DEPARTMENT OF JUSTICE, Wilmington, Delaware; Attorney for Appellee.
MEMORANDUM OPINION
Pending is an appeal from an Opinion and Order (the "Order"), issued on January 28, 1999 by an administrative hearing officer (the "Hearing Officer") in a matter before the Securities Commissioner of the State of Delaware (the "Commissioner"). The Hearing Officer found that Mr. Watson Horner ("Horner") and his corporation, XComp, Inc. ("XComp"), had issued to Mr. Robert Milligan ("Milligan") three promissory notes, secured by stock of XComp, in exchange for a loan. The Hearing Officer determined that Horner and XComp had violated various provisions of the Delaware Securities Act by misrepresenting to Milligan the precarious financial condition of XComp, which later defaulted on those notes.
For the reasons next discussed, the Order of January 28, 1999 will be affirmed.
I. FACTS
The Hearing Officer's factual findings are based upon the documentary exhibits and the testimony of five witnesses presented by the Division at the administrative hearing. Those witnesses were Milligan, Janet Sharpless (an agent of XComp's former landlord), Raymond Hazel (an XComp former officer), and Cecilia Gallagher and Gail Skeen (both Division investigators). Because I conclude that those findings are supported by material and substantial evidence, and because Horner submitted no contrary evidence, I accept the Hearing Officer's findings as established. See 6 Del. C. § 7324 (b) (providing that on an appeal from an order of the Commissioner, "[t]he findings of the Commissioner as to the facts, if supported by material and substantial evidence, are conclusive").
Horner founded XComp, a wholly owned Connecticut corporation in 1984. XComp was later reincorporated in Delaware. Beginning in 1991, XComp was financially insolvent, and by May 1991, XComp was unable to pay its rent. At that time, Carter Moore, Esquire, an attorney and an acquaintance of Horner, introduced Horner to Milligan, a retired businessman who lived in Orlando, Florida. Sometime thereafter, Horner and Milligan negotiated a $10,000 loan from Milligan to XComp, a loan that Horner (on behalf of XComp) promised to repay, together with $5,000 interest, within forty-five days. On October 3, 1991, Milligan mailed the loan proceeds (a certified check for $10,000) to Horner.
As consideration for the loan, Horner, on behalf of XComp, issued to Milligan a promissory note for $15,000, payable within forty-five days. The loan was collateralized by a stock certificate representing one share of stock in XComp. The stock certificate, which Moore held in escrow, indicated on its face that the value of the share was $15,000.
When the note fell due, Horner defaulted. With Milligan's consent, on November 18, 1991, Horner caused XComp to issue a second promissory note in the amount of $16,250, payable within fourteen days. Unable to pay the second promissory note, Horner issued to Milligan, on December 2, 1991, a third promissory note in the amount of $17,500, payable within twenty-nine days. Ultimately, XComp defaulted on that third promissory note as well.
XComp was insolvent at the time Horner negotiated the first promissory note with Milligan, yet Horner never disclosed to Milligan the risks involved in lending money to XComp, either while the notes were negotiated or during the period that the three promissory notes were outstanding. As the President and controlling shareholder of XComp, Horner was aware of the specifics of XComp's precarious financial condition, yet for two years after the third default, Horner repeatedly assured Milligan that XComp would soon be able to pay its debt.
In October 1994, after Horner had failed both to pay the promissory note and to redeem the stock certificate that secured the note, Milligan filed a complaint against Horner and XComp with the Division of Securities at the Delaware Department of Justice (the "Division"). In reliance on Horner's repeated assurances that Milligan would be paid, the Division deferred taking any formal action against Horner for a period of time. When it became clear that no payment would be forthcoming, on May 27, 1997, the Division filed with the Commissioner an administrative complaint against Horner, alleging several violations of the Delaware Securities Act. Horner was duly notified of that administrative complaint.
On July 9, 1998, the Hearing Officer notified the pates that a hearing would be held on August 25, 1998. On August 25 and 26, 1998, the hearing was held, at which Deputy Attorney General Peter O. Jamison III appeared as counsel for the Division. Horner did not appear, and except for a short telephonic statement made by Horner at the beginning of the hearing, neither respondent participated in the hearing. In his telephonic statement Horner advanced only procedural objections. Specifically, Horner claimed that (i) he was entitled to appointed counsel at the State's expense, (ii) he was being deprived of material discovery information and (iii) he had not received timely and sufficiently detailed information about the hearing. Those objections were overruled and the hearing went forward. Despite having been afforded an opportunity, Horner chose not to appear or to defend on the merits.
After the conclusion of the hearing, and based on the evidence submitted by the Division, the Hearing Officer issued an Opinion and Order in which he found that: (i) at the times that the three promissory notes were issued to Milligan, XComp was financially insolvent; (ii) Horner knew of XComp's precarious financial situation and intentionally failed to disclose that fact; (iii) Horner intentionally failed to inform Milligan that his loan was an exceedingly risky and speculative investment; and (iv) Milligan relied upon those nondisclosures of material fact when he made his investment. The Commissioner also found that (v) Horner's representations that he intended to repay Milligan (made in both the promissory notes and in Horner's oral and written assurances) were knowingly false, and that (vi) Milligan relied upon those misrepresentations.
As a consequence, the Hearing Officer imposed sanctions against XComp and Horner. Specifically, XComp was ordered to: "(1) Within thirty (30) days of the date of this order, pay a fine to the State of Delaware in the amount of $15,000; (2) Jointly and severally with Mr. Horner, make full restitution to Mr. Milligan; and (3) Cease and desist from further violations of the Delaware Securities Act."
Horner has appealed to this Court from that Order. Horner claims that the Order must be overturned because: (i) he was denied due process of law; (ii) the Hearing Officer's findings of fact are not supported by material and substantial evidence; (iii) the Division had no subject matter jurisdiction; and (iv) the proceeding was time-barred.
On May 19, 2000, this Court issued a Memorandum Opinion denying the Commissioner's motion to dismiss the appeal for lack of subject matter jurisdiction, as well as Horner's motion to stay the Order pending the outcome of this appeal. XComp, Inc. v. Robb, 2000 WL 680362 (Del. Ch.).
II. THE ISSUES AND CONTENTIONS
Horner's first ground for appeal is that he was denied due process of law in that he was not afforded an opportunity to prepare his defense. Specifically, Horner claims that before the hearing he had requested certain procedural information and documents relating to the Division's investigation. He claims that those requests were largely ignored. Horner also contends that he did not receive timely notice of the hearing, and that the State "canceled" the testimony of Mr. Moore without providing any reason. Horner's second ground for appeal is that the findings on which the Order rests are not supported by material and substantial evidence. Horner's third ground is that the Hearing Officer erroneously determined that the loan transactions between Horner and Milligan involved a "security" covered by the Delaware Securities Act, because (Horner claims) as a matter of law no "security" was involved. Lastly, Horner urges that in any event the administrative prosecution was barred by the expiration of the five-year statute of limitations.The Commissioner's position is that the administrative proceedings were timely, fully respectful of Horner's due process rights, and that the Hearing Officer's decision is well supported by material and substantial evidence and is free from any errors of law.
* * *
It is well established that the reviewing court has the authority to determine questions of law de novo. As for issues of fact, under 6 Del. C. § 7324 (b) "the findings of the Commissioner . . ., if supported by material and substantial evidence, are conclusive."
Hubbard v. Hibbard Brown Co., 633 A.2d 345, 348 (Del. 1993) (citing Blinder, Robinson Co. v. Bruton, 552 A.2d 466, 470 (Del. 1989)).
I now turn to Horner's separate arguments on appeal, and conclude, for the reasons next discussed, that they are without merit and that the Order must be affirmed in all respects.
III. ANALYSIS
A. The Claimed Violations of Horner's Due Process Rights
Horner claims that his due process rights were violated in two respects. First, Horner contends that the "State . . . by not acknowledging requests for information, by not providing answers to questions relating the hearing procedures . . . [and] adequate written notice of the hearing, [and] by refusing to provide a witness list . . ., failed to recognize the Constitutional rights of the appellants to properly defend themselves." Second, Horner contends that Mr. Moore should have been — but was not — called as a witness, even though Moore was in a position to supply facts concerning the loan. Neither argument has merit.
Appellant's Op. Br. at 15.
In Kotler v. Board of Medical Practice, the Delaware Supreme Court articulated the standards to be applied in evaluating Horner's due process claims as follows:
In the case of Mathews v. Eldridge, 96 S.Ct. 893 (1976), the United States Supreme Court established a three-prong test to be used when determining what due process requires when physical liberty is not endangered. Three distinct factors must be considered: First, the private interest that will be affected by the official action; second, the risk of an erroneous deprivation of such interest through the procedures used, and the probable value, if any, of additional or substitute procedural safeguards; and finally, the Government's interest, including the function involved and the fiscal and administrative burdens that the additional or substitute procedural requirement would entail.
1993 WL 307621, at *2 (Del.Supr.).
Applying those standards to the facts at bar, I find that the first prong of the Mathews test is satisfied. Because the Commissioner has the power to impose a fine and restitution, Horner had a protected property interest in the administrative proceeding.
As for the second Mathews prong, there has been no showing that the administrative procedure followed here (specifically, the absence of pre-hearing discovery) improperly deprived Horner of that property interest. Nor has Horner shown that the manner in which the proceeding was conducted unfairly prejudiced his right to a fair trial. In administrative proceedings, "rudimentary requirements of fair play satisfy the due process requirements. . . . [A]n individual's due process rights are not violated, and will not affect the validity of an administrative determination, unless actual prejudice is shown." The uncontroverted record establishes that Horner received timely notice of the date of the hearing and also of the charges brought against him. Moreover, there is no evidence that the Division's failure to provide Horner with specific documents hindered his ability to mount a defense.
Sandefur v. Unemployment Ins. Appeals Bd., 1993 WL 389217, at *5 (Del.Super.) (internal quotations and citations omitted).
Appendix to Appellee's Ans. Br. at B-42, B-43, B-49.
Again, Horner chose not to participate in the hearing or to mount a defense. By refusing to appear at the hearing and defend himself, Horner waived his right to a hearing on the facts at issue in this litigation. See Hayes v. Cape Henlopen School Dist., 341 F. Supp. 823, 834 (D. Del. 1972) (holding that "[it] is axiomatic that an individual who voluntarily refuses to participate in a hearing offered by an administrative board waives his procedural due process rights to a hearing and is precluded from subsequently challenging the Board for failing to provide him with a hearing").
As for the third Mathews prong, the State has demonstrated a substantial interest. Establishing a due process right to discovery in an administrative proceeding would create a significant fiscal and administrative burden for the State. Accordingly, the Delaware Supreme Court has previously rejected the contention that "the Board['s] failure to provide [the litigant] with pre-hearing discovery [in an administrative proceeding] violated [the litigant's] right to due process." Moreover, and in any event, in compliance with the Rules and Regulations issued pursuant to the Delaware Securities Act, the Division furnished Horner a copy of each document that it intended to present into evidence at the hearing.
Kotler, 1993 WL 307621 at *2; see also In re Gresick, 1988 WL 116411, at *6 (Del.Super.) (stating that "formal discovery is not necessary for due process to be satisfied in an administrative proceeding" and that "[d]ue process requires that the notice inform the party of the time, place, and date of the hearing and the subject matter of the proceedings").
Section 228(a)(2) of the Rules and Regulations issued pursuant to the Delaware Securities Act.
In these circumstances, Horner has failed to establish a violation of his constitutional due process rights. Indeed, the procedures employed at the hearing exceeded the minimum standard for a fair administrative proceeding. Specifically, Horner (i) received adequate notice of the charges against him, (ii) had the opportunity to be heard at a meaningful time and in a meaningful manner, (iii) had the opportunity to present witnesses on his behalf, and (iv) was afforded the opportunity to cross-examine the witnesses called by the Commissioner. That is all the process that was "due."
See Mathews v. Eldridge, 424 U.S. 319, 333 (1976) (quoting Armstrong v. Manzo, 380 U.S. 545, 552 (1965) ("[T]he fundamental requirement of due process is the opportunity to be heard `at a meaningful time and in a meaningful manner.'"); Mullane v. Central Hanover Bank Trust Co., 339 U.S. 306, 313 (1950) ("An elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections."); see also authorities cited at note 9, supra.
Lastly, Horner contends that his due process rights were violated because the Commissioner failed to call Mr. Moore (the attorney who introduced Horner to Milligan) as a witness. That argument fails for two reasons. First, Horner himself could have called Mr. Moore as a witness, but instead Horner chose not to participate in the hearing. Horner can hardly fault the Commissioner for failing to do that which Horner himself, who had the burden of presenting his defense, could have done. Second, and in any event, the "exclusion of relevant, material, and competent evidence . . . is grounds for reversal, [only] if that refusal is prejudicial." Horner has failed to show how (if at all) the failure to obtain Moore's testimony prejudiced his case.
San Del Packing Co. v. Garrison, 761 A.2d 11, 14 (Del. 2000).
B. The Adequacy Of The Evidence Supporting The Conclusions of Facts And Law
Horner next contends that the Hearing Officer's findings and conclusions must be overturned because they are not supported by material and substantial evidence. That argument is also groundless. "[S]ubstantial evidence is more than a scintilla and less than a preponderance. Stated another way, it is such relevant evidence as a reasonable mind might accept as adequate to support a conclusion." With respect to testimonial evidence, "it is not the Court's province to reevaluate evidence presented to the Board and make its own decisions as to the credibility of the witnesses, the weight of their testimony, or the reasonable inferences that may be drawn therefrom."
Quaker Hill Place v. State Human Relations Comm'n, 498 A.2d 175, 178-79 (Del.Super. 1985) (internal citations omitted).
Carousel Studio v. Unemployment Ins. Appeal Board, 1990 WL 91108, at *4 (Del.Super.) (citing Coleman v. Dep't of Labor, 288 A.2d 285 (Del.Super. 1972)).
Applying those standards, I conclude that the overwhelming preponderance of evidence supports the Hearing Officer's factual findings in this case. Horner has provided only bald assertions that the Hearing Officer should have evaluated the testimony in a manner more favorable to Horner, without making any effort to show why. The record establishes that all sixteen of the Hearing Officer's findings of fact (twelve of which are based on Milligan's uncontroverted testimony) are supported by material and substantial evidence.
Thus, the Hearing Officer's conclusion that Horner violated Section 7303(2) of the Delaware Securities Act is supported by material and substantial evidence. As the Delaware Supreme Court has stated:
[I]n order to establish a violation of section 7303 (2), it must be demonstrated that the defendant (1) made a misstatement or omission (2) of material fact (3) with scienter (4) in connection with a purchase or sale of a security (5) upon which the plaintiff (or another person if the action is brought by the Delaware Division) relied and (6) that reliance proximately caused the plaintiff's (or other person's) injury.
Hubbard v. Hibbard Brown Co, 633 A.2d 345, 349 (Del. 1993) (citing In re Phillips Petroleum Sec. Litig., 881 F.2d 1236, 1244 (3d Cir. 1989).
The Hearing Officer made proper findings that satisfy each of those requirements.
C. The Statute of Limitations Defense
Horner next contends that the Division's proceedings were time-barred because the five-year period of limitations had expired. That argument has no merit either. Horner waived his statute of limitations defense, because he never raised it during the administrative proceeding. Indeed, it was the Hearing Officer who raised the limitations issue sua sponte in a letter sent on September 2, 1988, wherein he invited the parties to submit a memoranda of law on that question.
Cannelongo v. Fid. Am. Small Bus. Inv. Co., 540 A.2d 435, 440 (Del. 1980); Ferralloy Indus. v. Wilson, 1998 WL 442937, at *3 (Del.Super.).
Appendix to Appellee's Ans. Br. at B-119.5.
Moreover, and in any event, the Hearing Officer properly found that the fraudulent concealment doctrine operated to toll the statute of limitations. The complaint was filed in May 1997. The Hearing Officer found that Horner's fraudulent concealment continued until at least August 14, 1995, when Horner sent letters to the securities investigator and to Milligan misrepresenting that he was recapitalizing Xcomp and would be able to make the payment within sixty days. No payment was ever made, however, and the representation was found to be intentionally false.
Bradley v. Maryland Cas. Co., 563 F. Supp. 602, 606 (D. Del. 1983); Kahn v. Seaboard Corp., 625 A.2d 269, 274-76 (Del.Ch. 1993).
D. The Jurisdictional Argument
Finally, Horner argues that the transactions between Horner and Milligan were not subject to or covered by the Delaware Securities Act, and that the Hearing Officer erred in concluding otherwise, because "the loan was not a security transaction." On this issue, the Hearing Officer found that:
Appellant's Op. Br. at 2.
In Reeves v. Ernst Young, 494 U.S. 56, 65 (1990), the U.S. Supreme Court held that a promissory note is presumed to be a security. Section 6 Del. C. § 7302(a)(13) of Title 6, Del. C. defines the term `security' to include `any note.' Accordingly, I hold that the promissory notes at issue here were securities.
In Rubin v. United States, 449 U.S. 424, 431 (1981), the US. Supreme Court held that the pledging of stock as collateral for a loan constitutes the offer and sale of a security for the purpose of the anti-fraud provisions of the federal Securities Act of 1933. Accordingly, I hold that Mr. Horner's pledging of XComp stock as collateral for the loan from Mr. Milligan constitutes the offer and sale of a security for the purposes of 6 Del. C. § 7303.
The case law establishes that the pledge of XComp stock as security for the Milligan loans brought the transactions within the coverage of the Act. Because Horner has made no reasoned, legally supported argument to the contrary, I determine that the Hearing Officer's conclusions are legally correct.
In Rubin v. United States, 449 U.S. 424 (1989). the petitioner was convicted of making false representations to a bank concerning shares of stock that were pledged as collateral for loans. The false representations were found to have violated the anti-fraud provisions of the Securities Act of 1933. Id. at 429. Upholding the conviction, the United States Supreme Court held that "obtaining a loan secured by a pledge of stock unmistakably involves a `disposition of [an] interest in a security, for value' within the statute's definitions of `sale' and `offer'; although pledges transfer less than absolute title, the interest transferred is nonetheless an `interest in a security' and it is not essential under the terms of the Securities Act that full title pass to a transferee for the transaction to be an `offer' or `sale.'" Id. That principle is plainly applicable to the Horner-Milligan transactions. The pledge of the XComp stock for a fraudulent loan was a sale within the contemplation of the Delaware Securities Act, which provides that "`sale' or `sell' includes every contract of sale of, contract to sell or disposition of a security or interest in a security for value." 6 Del. C. § 7302 (a)(11).
IV. CONCLUSION
For the foregoing reasons, the Hearing Officer's Order is affirmed. IT IS SO ORDERED.
The Court will enter an Order, to be submitted by Counsel, enjoining Horner and XComp to comply with the Hearing Officer's Opinion and Order of January 28, 1999. The Order shall be made enforceable as a final judgment. See 6 Del. C. § 7320 ("Whenever it appears to the Commissioner that any person has engaged or is about to engage in any act or practice constituting a violation of any provision of this chapter or any rule or order hereunder, the commissioner may in his or her discretion bring an action in the Court of Chancery to temporarily restrain or to enjoin the acts or practices and to enforce compliance with this chapter or any rule or order hereunder."). Horner has ignored the Order for over three years, and it appears likely that the he will continue that noncompliance absent an injunction.