Frasceli, Inc. v. State, Department of Revenue Liquor Division ( 1988 )

NO. 88-370
IN THE SUPREME COURT OF THE STATE OF MONTANA
1988
FRASCELI, INC., d/b/a MAMA CASSIE'S
PASTA SHOP & DELI, a Montana corporation,
Petitioner and Respondent,
-vs-
STATE OF MONTANA, DEPARTMENT OF REVENUE,
LIQUOR DIVISION, and DEBRA S. BATTLESON,
L
.
: .,as ..
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d/b/a CHI CHI'S MEXICAN AMERICAN RESTAURANT,
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R q m d e n & s and -Resp ndenks .
APPEAL FROM: District Court of the Eighth Judicial. District,
In and for the County of Cascade,
The Honorable Thomas McKittrick, Judge presiding.
COUNSEL OF RECORD:
For Appellant:
West Law Firm; Candace F. West, Helena, Montana
For Respondent:
Leaphart Law Firm; W. William Leaphart, Helena,
Montana
Alexander & Baucus; Gary Deschenes, Great Falls,
Montana
Eric J. Fehlig, Dept. of Revenue, Helena, Montana
Submitted on Briefs: Mov. 3, 1 9 8 8
Decided: December 13, 1988
Filed:
Clerk
Mr. Chief Justice J. A. Turnage delivered the Opinion of the
Court.
Debra Battleson, d/b/a Chi Chi's Mexican American
Restaurant (Chi Chi's), appeals an order entered by the
Eighth Judicial District Court regarding the final ownership
of one beer and wine license for the Great Falls area. The
order, which overruled the agency decision made by the Direc-
tor of t-he Department of Revenue (DOR), instructed the De-
partment to reinstate the proposed order of the hearing
examiner.
The issues on appeal are:
1. Whether the conduct of the Director of the DOR
constituted reversible error;
2. Whether the District Court abused its discretion by
ordering the hearing examiner's proposal to be adopted.
We reverse in part and affirm in part.
In the fall of 1986, one new retail beer and wine
license became available, based on the quota system, for the
Great Falls area. Based on the notice published by the
Department of Revenue, which oversees and issues these T i -
censes, there were seven applicants.
An evidentiary hearing was held on April 20, 1987, by a
hearing examiner to determine who among these seven appli-
cants would receive the license. A proposed order, alona
with findings of fact, conclusions of law was issued on May
23, 1987, by the examiner. That proposal awarded the license
to Frascell, Inc., d/b/a Mama Cassie's Pasta Shop and Deli
(Mama Cassie's) . Chi Chi's was the only unsuccessful appli-
cant to file exception to the proposed order and further
requested oral argument before the Director of DOR, which was
the official making the final agency decision pursuant. to the
Montana Administrative Procedure Act (MAPA).
The Director heard oral argument on July 31, 1987, and
issued a final agency decision on September 29, 1987, award-
ing the license to Chi Chi's. The agency decision stated
that the proposed findings regarding Chi Chi's were insuffi-
cient and drafted additional findings of fact in favor of Chi
Chi's.
Mama Cassie's appealed this final agency decision and
order to the District Court which heard oral argument. At
that hearing, the parties stipulated that the Director of DOR
conducted a personal, unannounced visit to both Mama Cassie's
and Chi Chi's after he took oral argument on the MAPA appeal
but before he issued his final order reversing the hearing
examiner. It is that conduct, the unnoticed, on-site visit
of both establishments, that Mama Cassie's contests.
The District Court found that conduct to be improper.
In its order, the District Court found that "[tlhese visits
were made without any prior notice to the parties and the
visits were not reflected in the record or evidence as to why
the Director made these visits, it is apparent that he would
not have made the visits unless he felt there was some neces-
sity to supplement the 'record' that was before him at final
arguments." The District Court concluded that the "off-
the-record" visits by the Director irrevocably denied the
parties of (1) the right to prior notice of the intent to
visit; (2) the right to object to such visits; (3) the oppor-
tunity to be present during the visits; ( 4 ) the right to
respond and present evidence and argument on all issues
involved under S 2-4-612 ( I ) , MCA; and, (5) the right to
conduct cross-examination required for a full and true d-is-
closure of the facts as required by § 2-4-612(5), MCA.
Accordingly, the District Court reversed the decision
of the Director because it violated the parties' right to
procedural due process contrary to $ 2-4-704 ( 2 ) (a), MCA, it
was made upon unlawful procedure contrary to 5 2-4-704(2) (c),
MCA, and it was characterized as an abuse of discretion
contrary to 5 2-4-704 (2)(f), MCA.
Lastly, the District Court remanded to the Department
of Revenue with instructions to enter the final decision
adopting the recommendation of the hearing examiner awarding
the license to Mama Cassie's as first proposed. Chi Chi's
appealed.
Chi Chi's contends that the hearing examiner's proposed
findings are deficient as a matter of law and must be over-
turned; that the agency decision can stand on its own, re-
gardless of the visits, because it is based on substantial
evidence; and, finally that the visits conducted by the
Director are not reversible error for various reasons.
We do not reach the issues of whether the hearing
examiner's findings are deficient as a matter of law to
support an award of the license or whether the Director's
order is sufficient as a matter of law to support his award
of the license. We conclude his decision to be based on
unlawful procedure constituting reversible error. We affirm
the District Court's conclusion that the manner in which the
Director conducted his off-the-record visits prejudiced
substantial rights of the appellant for the reasons below.
I. "Off-the-Record" Visits
A. Standard of Review
The standard of review is found in the MAPA at
S 2-4-704, MCA, which authorizes the District Court to modify
or reverse an agency decision which prejudices substantial
rights of the appellant in any one of seven ways. That
statute provides in pertinent part:
The [district] court may reverse or
modify the decision if substantial
rights of the appellant have been preju-
diced because the administrative find-
ings, inferences, conclusions or
decision are:
(a) in violation of constitutional or
statutory provisions;
(b) in excess of the statutory authority
of the agency;
(c) made upon unlawful procedure;
(dl affected by other error of law;
(el clearly erroneous in view of the
reliable, probative, and substantial
evidence on the whole record;
(f) arbitrary or capricious or charac-
terized by an abuse of discretion or
clearly unwarranted exercise of discre-
tion; or
(g) because findings of fact, upon
issues essential to the decision, were
not made, although requested.
A finding based on any one of these seven reasons is suffi-
cient for the District Court to modify or reverse. As was
noted earlier, the District Court in the case at bar gave
three reasons to reverse based on subsections (2)(a), (c) and
(f).
B.Due Process Rights
Chi Chi's argues that due process could not have been
denied to Mama Cassiels by the Director's inspections because
Chi Chi's was likewise uninformed about the date of the
visits and opportunity to be present. Thus, argues Chi
Chi's, they were equal in the end.
However, the language of 5 2 - 4 - 7 0 4 ( 2 ) specifically
refers to any "prejudice done to substantial rights of the
appellant." Mama Cassie's, as petitioner below, was the
appellant to which this statute refers. Due process inter-
ests certainly are substantial rights, as contemplated by the
statute. Thus, we clearly have an issue controlled by
§ 2-4-704(2) and whether the conduct prejudiced Chi Chi's and
Mama Cassie's equally is irrelevant.
The agency order must be vacated because it was founded
on unlawful procedure which violated Mama Cassie's due pro-
cess interests. In Highbarger and Bohannon v. Thornock
(1972), 92 Id. 829, 498 P.2d 1302, the Idaho Supreme Court
found the trial judge's viewing of an accident site without
prior notice to the parties was improper. We find the rea-
soning in that case persuasive and hold MAPA officials ren-
dering decisions to the same standard of conduct.
Highbarger was a wrongful death case arising out of a
single-car accident. The trial judge was considering a
formal motion for involuntary dismissal and in aid of his
determination viewed the scene of the accident. The Idaho
Court found:
A judge trying a case without a jury may
not properly view premises without
notice to the parties or use the result
of his inspection in weighing the testi-
mony of a witness. Citing Jones on
Evidence, § 462, at 857 (5th Ed.).
Prior notice to the parties was the focus in
Highbarger. It insures that parties know of the viewing in
order to object to it if they deem it inappropriate under the
circumstances, and notice further allows the parties to be
present to assure that the court does not view the incorrect
object or premises. As pointed out by the appellants in
Highbarger, they had absolutely no way of knowing whether the
trial judge actually found the accident site.
We find that prior notice for a viewing is the general
rule. See, 18 A.L.R.2d 552, § 4 at 562:
Regarding administrative decision or
finding based on evidence secured out-
side of the hearing and. without the
presence of interested party or counsel:
"Even though an administrative authority
has the statutory power to make indepen-
dent investigations, it is improper for
it to base a decision upon findings or
facts so obtained, unless such evidence
is introduced at a hearing or otherwise
brought to the knowledge of the inter-
ested parties prior to decision, with
opportunity to explain and rebut."
Chi Chi's owner argues that she had no way of knowing that
the Director based his reversal and additional findings on
facts or data obtained through his viewing. More importantly
to the Court, we have no way to be certain that he did not.
We cannot comprehend the extent or the impact of the
Director's inspection because there is no record of it. Lack
of prior notice coupled with lack of any documentation is
fatal to an ordinarily permissible inspection. When this
type of conduct occurs under a MAPA proceeding, it violates
certain other safeguards built in by statute: the right to
respond and present evidence and argument on all relevant
issues ( S 2-4-612(1), MCA), and the right to conduct a
cross-examination sufficient for the full and true disclosure
of facts ( S 2-4-612 (5), MCA) .
We agree with the trial court's reasoning and rulings
on these issues.
11. Reinstatement of the Proposed Order
Chi Chi's argues that, even if the reversal of the
Director's order is proper, it was an abuse of discretion for
the trial judge to ord-er reinstatement of the proposed order.
We agree. Ordering the adoption of the hearing examiner's
proposal simply is not an alternative authorized by statute.
Thus, we remand to the agency on this issue for a final
determination. The agency will have an objective and de-
tached officer review the record, disregarding the Director's
viewings. If the officer finds it necessary to supplement
the record, the officer may take additional testimony or
conduct a proper viewing with prior notice and a full record.
We affirm the District Court order insofar as it va-
cates the final agency decision and remand to the DOR for
proceedings consistent with this opinion.
A
hief Justice
We concur: