### T E X A S C O U R T O F A P P E A L S , T H I R D D I S T R I C T , A T A U S T I N

NO. 03-11-00512- CV

Christopher Z aal, Appellan t

v. Texas Depart m ent of In surance, Appellee

F ROM TH E DISTRI CT COURT O F TRAVIS CO UNTY, 200 TH JUDICI AL DISTRICT NO. D-1 -GN-1 0-0 0368 2, H ONO RAB LE GISELA D. TRI ANA, JUDGE P RESIDING

M E M O R A N D U M O P I N I O N Christopher Anthony Z aal appea ls from a district court jud gm en t affirming a final order of the Texas I nsuranc e Commi ssioner revoking his insurance license. We wi l l af firm the district court’s judg ment.

BACK GR OUND

Christopher Anthony Z aal has held a Gene ral L ife, H e a lth, and Acc ident license since 1986. Z aal ha s no previous complaints ag ainst him, and he has no c riminal history

.

On May 7, 2009, the Texas Depa rtment of I nsuranc e (TDI ) notified Z aal of a public hear ing alleg ing that he eng ag ed in dishonest or fra udulent acts or prac tices with respe ct to his sale of uni versa l leases and with reg ard to annuity applications for his clients. The Com missioner has the authority to revoke an ag ent’s license if the licensee eng ag es in “fr audulent

. . . acts or prac tices.” Tex. I ns. Code §§ 4005.101(b)( 5), .102.Following the hear ing, t h e Ad m i n istrative L aw J udg e (AL J ) issued a Proposal for

Dec ision finding that Z aal eng ag ed in dishonest acts or prac tices with reg ard to the Robert Wey man and Edwin Winn annuities and that he eng ag ed in fra udulent acts or prac tices with reg ard to his sales of uni versa l lease s. Id. § 4005.101(b)( 5 ). The AL J rec ommended that Z aal’ s license be revoke d. The Commi ssioner of I ns u ra nce adopted the AL J ’s finding s of fac t and conclusions of law and order ed Z aal’ s license revoke d. Z aal filed a petition f or judicial revie w; the district c ourt aff irmed the Commiss ioner’s or der. Z aal a ppeals. We will aff

irm the judg ment.

ISS UES ON APP EAL I n two issues, Z aal asser

ts that we must reve rse the district court’s judgme nt beca use the TDI (1) f ailed to prove that he committed fra ud in connec tion with the sale of universa l leases and (2) failed to prove that he eng ag ed in d i s h o n es t or fra udulent conduct in connec tion with his clients’ annuity applications or that his clients sustained any damag es. We construe these issues as complaints that the Commi ssioner’s order is not supported by substantial evi d en ce . Z aal has the burden to de monstrate that the r ecor d lacks substantial evide nce.

STANDARD OF REVIEW Review of the Commi sioner’s order is go v erned by section 2001.174 of the Administrative Procedur es Ac t (APA), which pr ovides:

A cour t may not substit ute its judg ment for the judgme nt of the state ag ency on the weig ht of the evide nce on que stions commit ted to ag ency discretion, but: (1) may aff irm the ag ency

decision in whole or in pa rt; and

2(2) shall reve rse or rema nd the case for further proce eding s if substantial rig hts of the appellant have been prejudice d beca use the admi n i s t rative finding s, infere nces, conclusions, or de cisions are : (A) in violation of a

constitutional or statutory provision; (B ) in excess of the a g ency ’s statutory authority ; (C) made throug h unlawful proc edure ; (D) a ffe cted by

other e rror

of law; (E) not rea sonably supported by substantial evidenc e considering the reliable and proba tive evidenc e in the re cord a s a whole; or (F ) ar bitrary or ca pricious or char acte rized by abuse of discretion or clea rly unwar rante d exercise of

discretion.

Tex. Gov’t Code § 2001.174; see Tex. I ns. Code § 36.203; Mey er v. Texas Dep’ t of Ins. , No. 03-10-00642- CV, 2011 WL 5865240, at *10 (Te x . App.—Austin Nov. 23, 2011, pet. denied) (mem. op.). “Substantial evidenc e,” as used in 2(E) above, is “a rea sonablene ss test or a rational basis test.” City of El Paso v. Public Util. Comm’n , 883 S.W .2d 179, 185 (Tex. 1993) (citing Railroad Comm’n v. Pend Orei l l e Oi l & Gas Co. , 817 S.W .2d 36, 41 (Tex. 1991)). Although substan t i al evidenc e is more than a mere scintilla, the evidenc e in the rec ord actua lly may preponde rate ag ains t t h e decision of the ag ency and nonetheless amount to substantial evidenc e. Texas Health Facilities Comm’n v. Charter Med.- Dallas, Inc. , 665 S.W .2d 446, 452 (Tex. 1984). We c onsider not whethe r the a g ency rea ched the corr ect c onclusion, but whether some rea sonable basis exis ts in the rec ord for the action taken by the ag ency . Id. We may not substitut e our judgme nt

as to the we i gh t of the evidenc e for that of the ag ency . City of El Paso , 883 S.W .2d at 185. The

3finding s, infere nces, co n cl u sions, and decisions of an administrative ag ency are presumed to be

supported by substantial evidenc e, and the burden is on the contestant to prove otherwise. Charter Medic al , 665 S.W .2d at 453. 1

Among others, the Commissioner made the f ollowing f

indings: 1 18. Mr. Wey

man had no other communication with [Zaa l] or his staf f about the annuity product a nd did not authorize its purchase. 19. Mr. Wey

man did not authorize [Zaa l] or h i s s taff to scan Mr. Wey man’s signature onto the a

nnuity purcha se docume nts. 20. The sig nature on the annuity purcha se docume nts was not Mr. Wey man’s. 21. [Zaa l’s] written explanation t o AI L I C, in response to Mr. Wey man’s complaint, was not ac curate. 30. Mr. W inn repl i ed t o Gre at American that he had not signe d the application or orig inal form and tha t they contained a

false sig nature

. 31. Mr. Winn did not authorize t h e p u rc hase of the annuity product or the withdrawa l amount. 32. Mr. Winn did not authorize [Zaa l] or his staff to elec tronically scan his signature onto the a

nnuity purcha se docume nts. 34. The sig nature on the annuity purcha se docume nts was not Mr. Winn’s. 36. [Zaa l] prepa

red and submitt ed false documents in apply ing for the annuity in Mr. Winn’s name. 74. [Zaa l’s] o nly meeting with Majesty Trave l’s direc tors was limit ed and super ficial. 75. [Zaa l] relied on the asser tion that Majest y T ravel was independe nt and the fac t that it had been se lected by Resort Holding s. 76. [Zaa l] did virtually no investigation of Majesty Trave l or World Phantasy Tours. 4DISCUSSIO N

Weym an and Winn Annu ities

TDI deter mined that Z aal e ng ag ed in dishonest a cts or pra ctices w ith respec t to the annuity transac tions involving his clients Robert Wey man and Edwin Winn, and it asser ts on appea l that the rec ord contains substantial evidenc e to support the ruling

. Z aal arg ues that the unauthorized annuity transac tions in issue wer e mere ly honest mistakes made by another person in his office

. Z aal also asser ts that t h e re co rd contains no evidenc e of his dishonest conduct, and that the rec ord is uncontrove rted that he did not authorize the chang es to his client’s annuities.

Z aal notes that the term “dishonest” is not define d in the I nsuranc e Code. The ag ency sug g ests t h at dishonest conduct may be g iven its ordinary dictionary definition as an act char ac t er i z ed by a lack of truth, honesty , or trustworthiness, and includes an act that is unfair or dece ptive. Mirriam-Webster’ s Collegia te Dictionary 359 (2008); see also Brown v. Texas Dep’ t of Ins. , 34 S.W .3d 683, 689 (Tex. App.—Austin 2000, no pet.).

Robert Wey

man, an assistant public school principal, was Z aal’ s client and had been making $500 reg ular withdrawa ls from his pay for some tim e. Zaa l we n t to Wey man’s office to discuss a new prod u ct , but it was not a convenie nt time for Wey man to confe r. Wey

man had no further communication with Z aal or his office about the matter. The next month, Z aal, or someone in his employ , submitt ed an ap p l i ca tion in Wey man’s name to Annuity I nvestors L ife I nsuranc e Company , a subsidiary of Gre at Americ an Financ ial Resource s, to obtain for Wey man a Flex Max

94. [Zaa l] materia lly misled clients conce rning the quality and safet y of the universal lease product without knowledg e of the truth of his repr esenta tions.

512 annuity product that would incre ase Wey man’s withdrawa l to $1000 a month. The applica tion and disclosure notice purported to be signe d by W eym an , b u t the signatures wer e not his. Z aal’ s signature a

ppear ed on the doc uments as the ag ent. Wey man testified that he did not authorize the purcha se, and he did not authorize Za al or his staff to scan his sig nature onto the documents. When Wey

man discovere d the incre ase, he stopped pay ment and did not lose money

on the transac tion. Neve rtheless, he filed a complaint with Annuity I nvestors, which questioned Z aa l about the t ransa ction. Z aal’ s written explanation to the insurance company claimed that he was authorized and direc ted by W eym an t o expedite the transac tion, and that he had acte d with his client’s full knowledg e and approva l. This explanation conflicte d with his posit ion at the hea ring and on appea l, wher e he claims that the application mu s t b e an h o n est mistake by someone in his office

. Wey

man testified that Z aal’ s claims wer e untrue, and that Wey man never authorized or knew of the tra nsaction. Edwin Winn, an air conditioner mecha nic for a school district, was another of Z aal’ s clients. Winn had set up an annuity purcha se with Z aal y ear s befor e, in which he had $60 withdrawn biweekly from his pa

y . Z aal, or someone in his employ , submitt ed an application in Winn’s name to obtain a Commodore Distinction I I annuity with a biweekly withdrawa l of $700. The application and disclosure notice purport to be signe d by Winn, and Z aal’ s signature appea r on the application documents as a g ent.

Gre at Americ an Financ ial Resource s wrote Winn a letter, reque sting him to submit the require d form to his pay roll office

. Winn res p onded that he had not signe d the application or orig inal form and a sserted tha t the documents contained false sig nature s. Wi nn filed a c omplaint.

6Z aal claimed to the company that Winn had ag ree d to purcha se the annuity

. His explanation in his

response to Great America n was not ac curate. Winn did not a uthorize Z aal or

his staff to sca

n his signature onto the purcha se documents. He had never hear d of this ty pe of annuity , and he did not authorize the purcha se of the annuity or the withdrawa l of $700. Z aal asser ted at the hear ing and on appea l that the unauthorized annuity applications wer e honest mistakes made by a former colleag ue, Henr ek Rotem, but the evidenc e fr om this wit ness and other s disputes Za al’s cla ims.

Rotem, who had worke d with Z aal, descr ibed the off ice sy stem where by

files wer e controlled by and proce ssed only at the direc tion of the ag ent who had obtained the client’s consent. Rotem stated that he would only proce ss a purcha se reque st afte r g ett i n g t he customer’ s consent, afte r which he would deliver the file to the ag ent for final proce ssi n g. He testified that he never switched a

client’s investment fr om one produc t to another a nd never incre ased the amount of the investment without permission.

The TDI found that Z aal prepa red and submitt ed false documents in apply ing for the annuity in Wey man’s name and in applying f or the a nnuity in Wi nn’s name.

Universal Leases

During 2000-2004, Z aal was president of Z &Z I nterna tional. Zaa l s o l d various 2 financ ial products, including universal lease s. Zaa l s o ld about thirteen universal lease s betwee n 2000 and 2003, and he also purcha sed one f or himself. Z aal offe red the universal lease as an age n t o f Yuca tan Resorts, S.A. de C.V. (Yuc atan Resorts), a company located in Cancun, Mexi co. Yuca tan Resorts was also known as

Z aal is now a

consultant for Z & Z I nterna tional. 2 7Resort Holdings I nterna tional (Resort Holdings)

. These and other entities wer e owned by Michae l

Kelly

. The universal lease entitled the purcha ser to vacation accom m o dations in one of Yuca tan Resorts’ properties i n Cancun, Mex ico, for a specific unit for a specific wee k and term, simil ar to

a t i m es h ar e interest in a resor t. Z aal rec eived a six teen perc ent commission for the sale of ea ch universal lea se.

Owner s of a universal lease had three options. They could use their unit themselves, rent it themselves, or e mploy a third-pa

rty independe nt manag ement compa ny to rent and ma

nag e their unit. Z aal’ s client s el ec t ed the third option. Owner s could choose their own third-par ty manag ement company , but Z aal ref err ed hi s cli ents to Majesty Trave l, later known as World Phantasy T o u rs. These companies wer e repr esente d to be third-par ty independe nt companies

rec ommended by Resort Holdings, but they wer e in f act owned by Michae l K elly

. Kelly is now in fede ral prison. 3 The a

ppeal of a univer sal lease was the high rate of return on the investment. Z aal promoted universal lease s to his clients, including Charles Winkl e, Charles J ohnson, and J oan J ohnson, a retire d school teac her, as a safe and secur e long- term investment that would rea liz e high returns eac h y ear . He did not caution t h em t o diversify their investments to secur e their retire ment funds. He promoted the lease as a retire ment investment t h at would be safe r than reg ulated investments such as stocks and mutual funds, and that the clients would rec eive g ener ous

This Court previously aff

irmed a case based on simil ar fac ts in which an insurance ag ent’s 3 license w as re voked for

selling unive rsal lea ses for the se same e ntities. See M eye r v. Texas De

p’t of I ns. , No. 03-10-00642- CV, 2011 WL 5865240 (Tex. A pp.—Austin N ov. 23, 2011, pet. denied) (mem. op.). 8returns on the lease for y ear s. None of these clients have rec eived the returns promised and all have

lost their investment funds.

I n order to promote the universal lease as a safe and s ec u re i n v estment, Z aal was obliga ted to perf

orm sufficie nt investigation of Resort Holdings, the universal lease prog ram and the proper ties, as well as the manag ement companies and the ag ree ment to pay fix ed rate s of return on the investment. The rec ord shows that Z aal adequately investigated Resort Holdings, but he did not adequately investigate the universal lease , and he did not investiga te Majesty Trave l or World Phantasy Tours. He relied on Resort Holdings’ repr esenta tions conce rning the universal lease and its repr esenta tion that Majesty Trave l was an independe nt company , and on the fac t that it had been selec ted by Resort Holdings. He admits that he relied on Resort Holdings’ i n v es t i g ation and

rec ommendation of the third-par ty manag ement company and on its repr esenta tions conce rning the third-par ty company , and he told his client s t h at R esort Holdings rec ommended Majesty Trave l. When questioned by reg ulators in 2004, Z aal said that he had never met any one from Majesty Trave l. At th e h ea ri ng in 2009, he claimed that he had met with the company ’s direc tors, but he also admitted that the meeting was mer ely a brie f g ree ting. The third-par

ty manag ement company , not Resort Holdings, was responsible for pay ment of the compensa tion to the lease holders. Majesty Trave l and World Phantasy ag ree d to pay the owner either nine or eleve n perc ent of the purcha se price of the unit eac h y ear . Five perc ent was for an option allowing World Phantasy or Majesty Trave l to repur chase the unit afte r 36 months, althoug h they

had no oblig ation to do so; four or six perc ent was f or re ntal compensa tion.

9Z aal did not tell his c lients any thing diff ere nt from the wr itten material in the lea se and promotional documents. The promotional materia ls promised an “attra ctive, high rate of return” and “long -term assura

nce” up to twenty -five y ear s. He did not mislead his clients about their rig ht to r edee m the ir investment. He told his clients that R esort Holdings had a rig ht of first ref usal but was not require d to buy back the lease

. Howeve r, he le d his clients to believe that the i nvestment

was sec ure de spite inadequa te knowledg e.

Z aal’ s belief that the universal lease was not a secur ity was unfounded and was based in part upon a law firm’s repr esenta tion that “[the universal lease ] will more likely than not be found to not constitut e the sa le of a security .” This questionable assertion did not raise Z aal’ s conce rns. A lawy ers’ s 2001 letter to that eff ect was based on the assumption that the promotion and marke ting of the lease did not emphasize the economic benef its to be derive d from the eff orts of a third-par

ty leasing ag ent. Howeve r, Z aal’ s marke ting eff orts did in fac t emphasize the economic benef its to be derive d from the third-par ty manag ement ag ent. T he manner in which Z aal was marke ting the universal lea se prog ram wa s differ ent from the f acts de scribed by

the lawy er. I n response to lear

ning about a website raising secur ities conce rns about the product, Z aal undertook no independe nt investigation. He revie wed the attorney ’s second letter which ag ain conclude d that the universal lease was not a secur ity based on the assumption that the promotion and marke ting eff

orts did not emphasize the economic benef its derive d from a third-par ty leasing ag ent, which wa s not the case with Z aal.

Z aal was not awa

re of the cea se and desist order s ag ainst Kelly issued in sever al states to stop the sale of one of Ke l l y ’s previous investment vehicles, known as the promissory note

10prog ram, for failure to reg ister them as secur ities. Z aal did not attempt to find out what states wer e

investigating the universa l l ease as unreg istered secur ities. He relied on Resort Holdings’

assura nces. TDI found that Z aal should have investigated the secur ities conce rns befor e continuing to sell the universal lea se produc t, and he should have infor med purc haser s of the sec urities issue. Z aal did n o t inform his clients of any secur ities issues. He relied on a letter from Resort Holdings to the l ease holders alleging that a disg runtled employ ee w as attempting to smear its reputation. Howeve r, the letter made no mention of the secur ities conce rns. The rec ord contains information conce rning sever al of Z aal’ s clients who purcha sed universal lease s. One of Z aal’ s clients, J oan J ohnson, boug ht a universal lease in D ece mber 2000; she boug ht a second l ea s e ei ght months later, using the maxi mum available lump sum from her teac her r etireme nt acc ount. Her husba nd, Charles Johnson, bought a lea se i n Fe bruar y 2002, then purcha sed a second lease seven months later. Z aal d i d n o t i n fo rm either of the J ohnsons of any potential secur ities problems or any other probl ems reg arding the investment, either befor e or betwee n purcha ses. Neither would have boug ht a univers al lease had they known of potential

secur ities issues. Charles Winkl e also testified ab out his dealing s with Z aal in purcha sing a universal lea se.

Universa l lease owner s rec eived statements from Majesty Trave l or World Phantasy ref lecting t h e acc umulated value of their universal lease acc ounts. I n fac t, any values wer e being funded by new investors. I n 2006, the universal lease holders rec eived statements ref lecting that their investments were worthless.

11The Commi ssioner’s finding s of fac t and conclusions of law set out in his order

explain the Commi ssioner’s decision-making proce ss and the result he rea ched. See State Banking Board v Allied Bank M

arble Falls , 748 S.W .2d 447, 449 (Tex. 1988). The Commi ssioner deter

mined that Z aal materia lly misled his clients conce rning the quality and saf ety of the universal lease product investment, without knowledg e of the truth of his repr e s e n ta

ti o n s . T h e Co mm is s ione r measure d Z aal’ s actions ag ainst the acc epted definition of fra ud:

a materia l misrepre sentation, which was false, and which was asser ted as a positive asser

tion without knowledg e of its truth, which was intended to be acte d on, which was relied on, and which c aused injury

. See Italian Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am. , 341 S.W .3d 323, 337 (Tex. 2011); Brown , 34 S.W .3d at 689. The Commi ssioner found that Z aal eng ag ed in fra udulent acts or prac tices, in violation of Texas I nsuranc e Code section 400 5

. 1 0 1 (b )( 5 ), with reg ard to his sale of universal lea ses. Substantial evidence in the rec ord supports this finding.

CONCLUSION We hold that the rec ord contains substantial evidenc e to support the Commi ssioner’s decision revoking Z aal’ s license. We overr ule Z aal’ s issues and aff

irm the district court’s judgme nt.

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Marily n Aboussie, J ustice Be fore J ustices Goodwin, F ield, and Aboussie* Affir med Filed: Oc tober 29, 2013 *Be fore Marily

n Aboussie, Chief J ustice (re tired), Third Court of Appea ls, sitti ng by assig nment. See Tex. Gov’t Code § 74.003(b) 12