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LLC v. State, Alcoholic Beverage Control Board

Supreme Court of Alaska

August 9, 2019


          Appeal from the Superior Court No. 3AN-17-05294 CI of the State of Alaska, Third Judicial District, Anchorage, William F. Morse, Judge.

          Brian Stibitz, Reeves Amodio LLC, Anchorage, for Appellant.

          Harriet D. Milks, Assistant Attorney General, and Jahna Lindemuth, Attorney General, Juneau, for Appellee.

          Before: Bolger, Chief Justice, Winfree, Stowers, Maassen, and Carney, Justices.


          CARNEY, JUSTICE.


         After an Anchorage strip club applied to have its liquor license renewed the Alcohol and Beverage Control Board received multiple objections to the renewal. Former employees, the Department of Labor, and the Municipality of Anchorage each alleged wage law violations, untrustworthy management, and unsafe policies. After three hearings before the Board and one before an administrative law judge, the Board denied renewal because it was not in the public interest. The club appealed to the superior court, which affirmed the Board's decision. The club now appeals to us, arguing it was unreasonable to find that renewal was not in the public interest and that the club was denied due process in the administrative proceeding. We affirm the superior court's decision to uphold the Board's determination.


         A. Facts

         1. The Club's Management

         Fantasies on 5th Avenue, LLC is a "strip club business" operating under various names since 1989. For most of the time between 1989 and 2013 Kathy Hartman owned the club. In July 2013 Hartman transferred 100% ownership of the club to her son Travis Gravelle. This transfer occurred approximately one year after a federal judgment was entered against Hartman in a wage and hour lawsuit over the club's claim that its dancers were "independent contractors." Gravelle remains the sole owner of Fantasies.

         Gravelle testified that he received no income from his ownership, knew nothing about the business's operation, had no control over its finances or any of its bank accounts until after the start of the administrative proceedings regarding the license renewal, and was only physically present in the club a few times in the past several years. A former employee testified that Gravelle was not allowed to drink at the club or even be on the premises.

         Despite Gravelle's ownership, evidence showed that Fantasies has been run by Hartman's boyfriend, Eugene Greaves. Greaves referred to himself as the general manager of Fantasies, but testified that he received no income from the position. As manager, Greaves classified the DJs, janitors, security, and other workers as contractors rather than employees, denying them employee benefits. He also required dancers to sign agreements to be tenants of the club and pay hourly rent to use the facilities for dancing.

         Fantasies paid no wages to its dancers; their income came solely from tips. Moreover, they were required to pay rent to Fantasies at the end of each shift from the tips they had received. If dancers did not make enough to pay rent, they were required to pay the remainder from the next shift's tips in addition to paying that next shift's rent.

         Objections to the club's license renewal included allegations about unsafe and illegal practices at the club including that Fantasies did not allow workers to make 911 emergency calls from the club. The Board noted two such incidents: no calls were made when a dancer fell on her head from six feet above the floor or when an intoxicated customer passed out and suffered seizures. Another complaint noted that Fantasies' contract with its manager provided a "bonus" when the club made more than $2, 000 in one night, apparently violating the licensing statute which states that "[a] person other than a licensee may not have a direct or indirect financial interest in the business for which a license is issued."[1]

         2. The Current Liquor License

         From March 2014 through the denial of its liquor license in July 2016, Fantasies held liquor license number 1078. Gravelle was Fantasies' sole owner when it obtained the license. Despite Gravelle's ownership, Greaves worked with the Board to obtain the license transfer. The Board staff member who interacted with Greaves testified that she had not even heard Gravelle's voice until the Board's February 2016 meeting. Greaves had obtained a power of attorney from Gravelle and signed all the necessary paperwork on Gravelle's behalf. The Board staff member testified that this "raised red flags" and that she had never seen that done in her five years of processing applications.

         In early November 2015 the Department of Labor and Workforce Development's Wage and Hour Administration (DOL) notified Fantasies of its intent to conduct a wage audit of the club for the period between December 2013 and November 2015. The wage investigation was ongoing when Fantasies applied to renew its liquor license.

         B. Proceedings

         In November 2015 Fantasies applied to renew its liquor license. Board staff noticed an irregularity in the application and contacted Gravelle for clarification. Although Gravelle had signed the form, affirming that he had "examined this application... and it [was] true, correct, and complete," he responded that a friend had filled out the form on his behalf while he was out of town. Board staff considered his answer to be "a huge red flag" because the applicable statutes and regulations require the license owner to be personally responsible for its use, and because there had been previous cases with other licensees violating AS 04.11.450, prohibiting non-licensees from having a financial interest in the business.

         After more thoroughly examining Fantasies' application, Board staff grew "very concerned about prohibited financial interest" and decided it was necessary for the application to go before the Board. The Board scheduled a hearing in February 2016 to consider the license renewal application. Prior to the hearing the Board received objections from DOL, the Municipality of Anchorage, and four former Fantasies workers.

         DOL objected based on its investigation, which had revealed that Fantasies' dancers should have been classified as employees and that "thirty or more workers did not receive minimum wage, or any wage, to which they were entitled." The Municipality objected to renewing the license until the wage and hour violations were resolved. And four former workers filed objections alleging that (1) non-licensees had financial interests, (2) wage and hour laws continued to be broken, and (3) renewal was not in the best interest of the public. At the hearing the DOL investigator, the Municipality's attorney, and Fantasies' attorney testified. Because DOL's investigation had not been completed, the Board deferred its decision until its next scheduled meeting in April.

         About a week after the February Board hearing, Fantasies' lawyer sent DOL a letter asking it to stop its investigation "or Fantasies [would] take appropriate legal action against [DOL] and [the assigned investigator] personally." As a result, the DOL staff member temporarily halted the investigation until directed to continue despite Fantasies' threatened action.

         Before the April meeting DOL asked the Board to "withhold any transfer of the liquor license for [Gravelle] . . . pending resolution of unpaid wages." DOL's continuing investigation was still "in the process of auditing records to determine wages due to workers" and "estimate[d] a minimum amount of unpaid wages at $500, 000 plus liquidated damages, for failure to pay minimum wage." The Board nevertheless held a continued hearing in April. A former Fantasies dancer testified on behalf of herself and three other former dancers, each of whom had filed written objections with the Board. The Board once again deferred its decision until its next scheduled meeting at the request of the Municipality, which had not yet held a public hearing on the protest.

         In May DOL concluded its investigation into Fantasies' wage and hour violations. It found that: workers' services were misclassified as contract labor, no records of hours were kept, dancers were not paid at all and instead forced to pay rent as tenants, managers failed to maintain daily and weekly records of hours worked, and the club either did not maintain or destroyed certain records related to the hiring and firing of workers. DOL acknowledged that it had not yet calculated the amount of money Fantasies owed as a result of the violations.

         The Board addressed Fantasies' license renewal for a third and final time at its July meeting. Based on the objections and testimony from all three hearings, the Board determined renewal of Fantasies' license would not be in the public interest.[2] The Board informed Fantasies of its right to a hearing as provided by AS 44.62.330-630.

         Fantasies filed a Notice of Defense and Request for a Hearing in August.[3] It disputed the Board's findings that renewal was not in the public's best interests, that non-licensees had direct or indirect financial interests in the license, and that it had committed wage and hour violations. The administrative hearing took place over three days in 2016 before an administrative law judge (ALJ). A former dancer, the DOL investigator, Greaves, Hartman, Gravelle, and two Board staff members testified.

         Fantasies' lawyer Brian Stibitz cross-examined the former dancer about whether she had been given the choice to work as an employee or an independent contractor. After she repeatedly denied having a choice, he directed her to read a section of the "Entertainer Lease" she had signed that stated she would be liable for liquidated damages and attorney's fees if she asserted in any court action that her relationship with Fantasies was anything other than that of a landlord and tenant. After she read the section he warned her that it applied to the questions he was about to ask. The Board's lawyer objected to its relevance, leading to an extended colloquy between the court and counsel. The ALJ addressed the Board's concern that Stibitz was badgering the witness by noting that it, too, was "worr[ied] about the ... intimidating effect of... waving [the document] in [the witness's] face." The ALJ ordered Stibitz to move on to a different topic.

         Following three days of hearings, the ALJ affirmed the Board's decision denying the renewal. The ALJ issued her decision in November 2016, and the Board adopted it at its February 2017 meeting. The determination was based on:

[DOL]'s finding of ongoing wage-hour violations; public safety concerns related to suppression of 911 calls; Mr. Gravelle's complete lack of knowledge of or involvement in the business; Mr. Greaves's role in "running" the business and the license; an alleged undisclosed financial interest by Mr. Greaves and Ms. Hartman; and alleged undisclosed financial interests through management agreements.

         Fantasies appealed to the superior court.[4] The superior court upheld the Board's decision in January 2018, finding it had a rational basis for concluding that renewing Fantasies' license was not in the public interest.

         Fantasies appeals, arguing that the superior court erred by affirming the Board's decision because the Board violated its right to due process and acted unreasonably by finding renewal would not be in the public interest. Because there is substantial evidence to support the Board's denial of the renewal application and there was no deprivation of Fantasies' right to due process, we affirm the superior court's decision upholding the Board's determination.


         "When the superior court acts as an intermediate appellate court, we independently review the merits of the underlying administrative decision. The specific form our independent review takes is de novo review: We adopt the rule of law that is most persuasive in light of precedent, reason, and policy."[5]

         When reviewing administrative decisions we use the "substantial evidence" test for questions of fact and the "reasonable basis" test for questions of law involving agency expertise.[6] Review of the Board's factual findings is limited to whether there was substantial evidence in the record to support those findings.[7] We do not "weigh the quality of the evidence relied upon by the [Board]; at issue for the purposes of our review is simply whether substantial evidence exists."[8] "Substantial evidence is 'such relevant evidence as a reasonable mind might accept as adequate to support a conclusion.' "[9]

         The reasonable basis test applies to the Board's exercise of discretion in denying Fantasies' license renewal after determining it was not in the public's best interest under AS 04.11.330(a).[10] When reviewing whether an administrative decision was reasonable we ask "whether there was a prejudicial abuse of discretion," which we will find "if the agency has not proceeded in the manner required by law, the order or decision is not supported by the findings, or the findings are not supported by the evidence."[11]

         We apply our independent judgment to questions of constitutional law, such as due process.[12]

         IV. ...

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