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,-vsSTATE OF MONTANA, DEPARTMENTOF REVENUE, LIQUOR DIVISION, and DEBRA S. BATTLESON, d/b/a CHI CHI'S MEXICAN AMERICAN RESTAURANT, 

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APPEAL FROM: District Court of the Eighth Judicial.District, In and for the County of Cascade, The Honorable ThomasMcKittrick, Judgepresiding.

COUNSEL OF RECORD:

ForAppellant:

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

Filed: Submitted onBriefs: Mov. 3, 1988 Decided: December 13,1988

ClerkMr. 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 decisionmade by the Director of t-heDepartment of Revenue (DOR), instructed the Department 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 thehearing examiner's proposal tobe adopted. We reverse in part and affirm inpart. 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 Ticenses,therewere seven applicants. An evidentiary hearingwas held onApril 20, 1987,

### by a hearing examiner to determine who among these seven applicants 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

(MamaCassie's)

# . Chi Chi's was the only unsuccessful applicant to file exception to the proposed order and further requested oral argumentbefore the Director of DOR,whichwas the officialmaking the finalagency decisionpursuant.to the Montana Administrative ProcedureAct (MAPA).The Director heard oral argument on July 31, 1987, and issued a final agency decision on September 29, 1987,awarding the license to Chi Chi's. The agency decision stated that the proposed findings regarding Chi Chi's were insufficientand drafted additional findingsof 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, theparties stipulated that the Directorof DOR conducted a personal,unannouncedvisit toboth 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, thatMama Cassie's contests. The District Court found that conduct to be improper. In its order, the District Court found that "[tlhesevisits

were made without any prior notice to the parties and the visitswere not reflected in the record or evidence as towhy the Directormade these visits, it is apparent that he would not have made the visits unless he felt therewas some necessity to supplement the 'record' that was before him at final arguments." The District Court concluded that the "offthe-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 suchvisits; (3)the opportunity 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-isclosureof the facts as requiredby § 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

### wasmade upon unlawfulprocedure 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'sproposed findings are deficient as a matter of law and must be overturned; that the agency decision can stand on its own, regardless of the visits, because it is based on substantial evidence; and, finally that the visits conducted by the Director are not reversibleerror forvarious 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 themanner 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 pertinentpart: The [district] court may reverse or modify the 

### decision if substantial

### rights of the appellanthave been prejudiced because the administrative findings, 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 characterized by an abuse of discretion or clearly unwarranted exercise of discretion; or (g) because findings of fact, upon issues essential to the decision, were notmade, although requested.

A 

### finding based on any one of these seven reasons is sufficient for the District Court to modify or reverse. As was noted earlier, the District Court in the case at bar gave three reasons to reversebased on subsections (2)

### (a), (c)and

(f).

B. 

### Due ProcessRights Chi Chi's argues that due process could not have been denied toMama Cassielsby theDirector'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 2-4-704(2) 

### specifically refers to any "prejudice done to substantial rights of theappellant." Mama Cassie's, as petitioner below, was the appellant to which this statute refers. Due process interests certainly are substantial rights, as contemplatedby the statute. Thus, we clearly have an issue controlled by § 2-4-704(2) and whether the conductprejudiced Chi Chi's and Mama Cassie's equally is irrelevant. The agency ordermust be vacated because itwas founded

on unlawful procedure which violated Mama Cassie's due process 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 reasoning in that case persuasive and hold MAPA officials rendering 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 casewithout a jurymay not properly view premises without notice to the parties or use the result ofhis inspection inweighing the testimony of a witness. Citing Jones 

# on Evidence, § 462,at 857 (5thEd.). 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 absolutelynoway of knowing whether the trial judge actually found the accident site.We find that prior notice for a viewing is the general rule. See, 18A.L.R.2d 552, § 

### 4 at 562: Regarding administrative decision or finding based on evidence secured outside of the hearing and. without the presence of interested party or counsel:

"Even though an administrative authority has the statutorypower to make independent 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 interested 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 isno 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 (S2-4-612(1), MCA), and the right to conduct a cross-examination sufficient for the full and true disclosure of facts (S2-4-612(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, itwas an abuse ofdiscretion for the trial judge to ord-erreinstatement 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 detached 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 aproper viewing with prior notice and a fullrecord. We affirm the District Court order insofar as it vacates the final agency decision and remand to the DOR for proceedings consistent with this opinion.

We concur: 

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hief Justice