STATE OF RHODE ISLAND
AND PROVIDENCE PLANTATIONS
PROVIDENCE,
SC DISTRICT COURT
DR.
LEE H. ARNOLD :
V.
: A.A. No. 02-13
DEPARTMENT
OF LABOR AND TRAINING BOARD OF REVIEW AND CATHLEEN BRODEUR :
and
DR. LEE H. ARNOLD :
V. : A.A. No. 02-23
DEPARTMENT OF LABOR AND TRAINING, BOARD OF REVIEW AND LUIS A. SOUSA :
D E C I S I O N
DEROBBIO, C.J.
This matter is before the Court on the complaints of Dr. Lee H. Arnold, in his
capacity as Director, Rhode Island Department of Labor and Training, filed pursuant
to Rhode Island General Laws § 42-35-15, seeking judicial review of final
decisions rendered by the respondent, Board of Review, Department of Labor and
Training, which upheld the findings of the Referee that the complainants, Cathleen
Brodeur and Luis A. Sousa were not entitled to receive employment security benefits.
After hearing on a motion to consolidate the above-named cases filed by the
petitioner, Dr. Lee H. Arnold in his capacity as Director of Rhode Island Department
of Labor and Training, said motion was granted on March 13, 2002; the facts
being similar and the issue being the same.
The claimant filed a claim for Employment Security benefits on October 25, 2001.
On November 14, 2001 the Director determined that the monies reported and paid
to the Tax Division listing the claimant as an employee could not be used for
the purpose of computing unemployment benefits. The Director determined that
an employee and employer relationship did not exist because the employer's status
as a corporation had been revoked, thereby resulting in a sole proprietorship
(causing the claimant to become both the employer and employee). On November
21, 2001 the claimant appealed the decision.
A hearing was held before a Referee on December 11, 2001. The claimant, his
wife, and their legal counsel were present. On December 18, 2001 the Referee
reversed the Director's decision finding that the claimant was an employee because
he continued to pay all necessary Federal taxes and Employment Security taxes.
The Referee determined that the monies earned by the claimant are to be considered
wages. On December 19, 2001 the Director appealed the decision of the Referee
to the Board of Review.
A hearing was held before the Chairman of the Board of Review on January 9,
2002. The claimant, his wife, claimant's counsel, counsel for the Director,
a Director's representative and the tax coordinator for the Tax Division were
present and provided testimony and argument.
The Referee held the claimants were entitled to receive unemployment security
benefits, and was thus qualified pursuant to Rhode Island General Laws §
28-44-3.
Thereafter, a timely appeal was filed and the matter was heard by the Board
of Review. The Board determined that the Referee's decision was a proper adjudication
of the facts, and upheld the Referee's decision. Thereafter, Dr. Lee H. Arnold
in his capacity as Director of Rhode Island Department of Labor and Training
filed a complaint for judicial review; jurisdiction for review of the decisions
of the Board is vested in the District Court by Rhode Island General Laws §
28-44-52.
The standard of review is provided by Rhode Island General Laws § 42-35-15(g),
a section of the state Administrative Procedures Act, which provides as follows:
42-35-15. Judicial review of contested cases.
(g) The court shall not substitute its judgment for that of the agency as to
the weight of the evidence on questions of fact. The court may affirm the decision
of the agency or remand the case for further proceedings, or it may reverse
or modify the decision if substantial rights of the appellant have been prejudiced
because the administrative findings, inferences, conclusions, or decisions are:
(1) In violation
of constitutional or statutory provisions;
(2) In excess of the statutory authority of the agency;
(3) Made upon unlawful procedure;
(4) Affected by other error of law;
(5) Clearly erroneous in view of the reliable, probative, and substantial evidence
on the whole record; or
(6) Arbitrary or capricious or characterized by abuse of discretion or clearly
unwarranted exercise of discretion.
Thus, on questions
of fact, the District Court ". . . may not substitute its judgment for
that of the agency and must affirm the decision of the agency unless its findings
are clearly erroneous." Guarino v. Department of Social Welfare, 122 R.I.
583, 584, 410 A.2d 425 (1980) citing Rhode Island General Laws § 42-35-15(g)(5).
The Court will not substitute its judgment for that of the Board as to the weight
of the evidence on questions of fact. Cahoone v. Board of Review of the Department
of Employment Security, 104 R.I. 503, 246 A.2d 213 (1968). Stated differently,
the findings of the agency will be upheld even though a reasonable mind might
have reached a contrary result. Cahoone v. Board of Review of Department of
Employment Security, 104 R.I. 503, 246 A.2d 213, 215 (1968). See also D'Ambra
v. Board of Review, Department of Employment Security, 517 A.2d 1039, 1041 (R.I.
1986).
The Court has recognized that a liberal interpretation shall be utilized in
construing and applying the Employment Security Act:
. . . eligibility for benefits is to be determined in the light of the expressed
legislative policy that "Chapters 42 to 44, inclusive, of this title shall
be construed liberally in aid of their declared purpose which declared purpose
is to lighten the burden which now falls upon the unemployed worker and his
family." G.L. 1956, § 28-42-73. The legislature having thus declared
a policy of liberal construction, this court, in construing the act, must seek
to give as broad an effect to its humanitarian purpose as it reasonably may
in the circumstances. Of course, compliance with the legislative policy does
not warrant an extension of eligibility by this court to any person or class
of persons not intended by the legislature to share in the benefits of the act;
but neither does it permit this court to enlarge the exclusionary effect of
expressed restrictions on eligibility under the guise of construing such provisions
of the act. Harraka v. Board of Review of Department of Employment Security,
98 R.I. 197, 201, 200 A.2d 595, 597 (1964).
The issue before the Court is whether the Board's determination that the Referee's
decisions were proper adjudications of the facts and that the claimants were
entitled to benefits pursuant to 28-44-3 was supported by reliable, probative,
and substantial evidence in the record and whether or not it was clearly erroneous.
The Board of Review concluded as follows. In the consolidated cases:
"The Board affirms the decision of the Referee. Since the revocation of
the articles of incorporation, the Director has received tax fund contributions
from the corporation and has treated the contributions as wages. In receiving
the contributions the Director treated the employer as a corporation. The Director,
being an agency of the state, had constructive knowledge that another agency
of the state had revoked the article of incorporation. The Tax Division, a state
agency, collected taxes thereby treating the claimant's compensation as wages.
It is incongruous for the Director to assert that the tax fund contributions
are not from wages, upon the filing of a claim for Employment Security benefits.
Before the Board the claimant represented that she had taken steps to have the
corporation reinstated. The Board takes official notice that this process involves
action by the legislature and such action may take an undetermined amount of
time. In the event the claimant does not reinstate the corporation, the Director
may move, at a later date, to reopen the case under Rule 17 of the Board of
Review Rules of Procedures."
The Referee concluded in each of the cases:
"Section 28-44-3 Wages considered in computing benefits states:
'Notwithstanding any provisions of chapters 42 - 44 of this title to the contrary,
the term "wages" as used in the phrase "wages for employment
from employers" shall mean, with reference to the benefit provisions of
those chapters, only those wages which are paid subsequent to the date upon
which the employing unit, by whom those wages were paid, has satisfied the conditions
of §28-42-3(15) with respect to becoming an employer subject to those chapters.'
The credible evidence presented at this hearing shows that the claimant incorporated
his business in December 1995. His corporate charter was revoked due to the
fact that the claimant's accountant failed to submit yearly reports to the Secretary
of State's office. The claimant was unaware the corporate charter had been revoked
until he filed his claim for Employment Security benefits on October 25, 2001.
As evidence of this fact he continued to pay all necessary Federal taxes and
employment Security taxes. He has continued to hold his business out as a corporation.
I find that the claimant has been operating his business as a corporation and
that he was an employee of this corporation. Since the claimant was an employee
of the corporation, he should be entitled to receive Employment Security benefits
under the above Section of the Act."
The evidence is uncontradicted that each claimant was employed by a corporation
(employer), which certificate of incorporation was revoked by the Secretary
of State due to its failure to file annual reports as required by 7-1.1 of the
Rhode Island General Laws.
It is uncontradicted that each of the de facto corporations were filing returns
and paying necessary state and federal taxes. The claimants have not been filing
or paying taxes as a self-employed entity. It is also uncontradicted that the
Division of Taxation, a state agency, does not automatically reject payments
from corporations which are not in good standing.
A review of the record finds that there was an absence of fraud in each of these
cases, and their individual actions were in good faith.
The procedure for revocation of a certificate of incorporation is provided for
in Section 7-1.1-87(a)(3) and (b).
7-1.1-87. Revocation of certificate of incorporation. - (a) The certificate
of incorporation of a corporation may be revoked by the secretary of state upon
the conditions prescribed in this section when it is established that . . .
(3) The corporation has failed to file its annual report within the time required
by this chapter, or has failed to pay any fees, when they have become due and
payable; or
(b) No certificate of incorporation of a corporation shall be revoked by the
secretary of state unless:
(1) He or she has given the corporation not less than sixty (60) days notice
of the revocation by mail addressed to its registered office in this state;
and
(2) The corporation fails prior to revocation to file the annual report or pay
the fees, or file the required statement of change of registered agent or registered
office, or file the articles of amendment or articles of merger, or correct
the misrepresentation.
The following procedure for the issuance of certificates of revocation is provided
in:
See 7-1.1-88
7-1.1-88. Issuance of certificates of revocation. - (a) Upon revoking any certificate
of incorporation, the secretary of state shall:
(1) Issue a certificate of revocation in duplicate;
(2) File one certificate in his or her office; and
(3) Mail to the corporation at its registered office in this state a notice
of the revocation accompanied by one of the certificates.
(b) Upon the issuance of the certificate of revocation, the authority of the
corporation to transact business in this state ceases.
There are conditions precedent to the actual revocation of a certificate of
incorporation only when it is established there is:
1. Failure to pay fees when they become due.
2. Failure to file an annual report.
3. Sixty (60) days notice of such revocation by mailing such notice and certificate
of revocation to the registered office in this state.
Only upon the compliance with the conditions set forth statutorily in Sections
7-1.1-87, 7-1.1-88 does the authority of the corporation to do business cease.
The record does not demonstrate that there was compliance with these conditions.
The record is clear that the parties acted in good faith and existed under color
of law and in pursuance of an effort made in good faith. They acted as de facto
corporations. (See Black's Law Dictionary).
In accordance with Section 7-1.1-88-1 entitled "Withdrawal of Certificate
of Revocation," the Secretary of State may withdraw its revocation within
five (5) years and reinstate the corporation retroactive as if the incorporation
had not been revoked.
This provision of the law of Rhode Island recognizes the existence of a de facto
corporation.
See 7-1.1-88.1 provides as follows:
7-1.1-88.1. Withdrawal of certificate of revocation. - (a) Within five (5) years
after issuing a certificate of revocation as provided in § 7-1.1-88, the
secretary of state may withdraw the certificate of revocation and retroactively
reinstate the corporation in good standing as if its certificate of incorporation
had not been revoked, except as subsequently provided.
The Board in its exercise of discretion, properly, in these cases, suggested
that they seek to reinstate their respective charter (See Section 7-1.1-88-1).
The Board did not abuse its discretion in granting benefits when the claimants
acted in good faith in complying with the provisions of the Employment Security
Act, and relied also upon the division to accept all necessary federal taxes
and Employment Security Taxes, and there was an absence of fraud.
Under the facts presented in these cases and the totality of circumstances,
there being an absence of fraud, the claimants must be considered employees
and the money earned considered wages.
A review of the entire record demonstrates that there is substantial, probative
and reliable evidence to support the findings of fact, conclusions and decision
of the Board of Review.
On findings of fact, as to the weight of the evidence, this Court shall not
substitute its judgment for that of the administrative agency.
The scope of judicial review by the Court is limited by Section 28-44-54 which
in its pertinent part provides:
28-44-54. Scope of judicial review - Additional evidence - Precedence of proceedings.
- The jurisdiction of the reviewing court shall be confined to questions of
law, and, in the absence of fraud, the findings of fact by the board of review,
if supported by substantial evidence regardless of statutory or common law rules,
shall be conclusive.
Upon careful review of the evidence, this Court finds that the decision of the
Board was not "clearly erroneous in view of the reliable, probative and
substantial evidence on the whole record," and that said decision was not
"arbitrary or capricious or characterized by abuse of discretion or clearly
unwarranted exercise of discretion." Rhode Island General Laws § 42-35-15(g)(5)(6).
Accordingly, the decision of the Board is hereby affirmed.