ALJDEC

00F-F0319-ROC · Registrar of Contractors · 2001-01-11

STATE OF ARIZONA IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: October 13, 2000, January 9, 2001 and January 10, 2001. APPEARANCES: The Complainants appeared in their own behalf. The Respondent appeared through Beverly Hall, its authorized employee and one of the L.L.C. members.

ADMINISTRATIVE LAW JUDGE: Robert I. Worth _____________________________________________________________________

The above-entitled matter came on for hearing over three separate sessions. Evidence and testimony were presented, and based upon the entire record, the following Findings of Fact, Conclusions of Law and Recommended Order are made.

FINDINGS OF FACT

1. Pursuant to a written proposal and contract, Respondent agreed to and did commence an extensive remodeling project, as general contractor, on a residence recently purchased but not yet occupied by Complainants. Two separate contractual documents, both authored by Respondent and both dated November 11, 1999, were signed by the respective parties on November 12, 1999. The parties’ agreements were

based upon plans and specifications prepared by a designer retained by Complainants, as amplified by several discussions between the parties with respect to the intended scope and details of the overall project.

2. The main contract specified a total cost price of $141,510.00, payable in stated percentages as the work progressed. The other simultaneously executed contract, relating to other aspects of the overall contemplated construction, was for a total price of $15,807.00, and was also payable in specified progress installments according to a percentage schedule. Subsequent to the execution of these contracts, another written statement setting forth numerous items of extra-cost additions to the originally proposed and agreed cost prices was presented on March 7, 2000 and agreed upon. These extra items were to be included in the project for the added sum of $7,996.00, the entire amount of which was fully paid by Complainants to Respondent.

3. It was not effectively disputed that out of the combined total prices of $157,317.00 set forth in the two above-described contract documents, Complainant had paid to Respondent the aggregate sum of $149,450.50 (combining $134,434.50 plus $15,016.00), representing all but the last specified 5% progress payments, totaling $7,866.50 (combining $7,075.50 plus $791.00). Additional payments from Complainants to Respondent consisted of the $7,996.00 charges for extras, described in the previous Finding of Fact, plus another payment of an invoice from Respondent dated November 2, 1999 (prior to executing the formal contracts) in the sum of $816.00 for some initial site preparation work not specified as part of the applicable contracts.

4. The amounts ultimately to be payable by Complainants under the parties’ arrangements, including the written contracts, the extra charge statement and the initial site work invoice, totaled $166,129.00. The evidence demonstrated that the actual

funds transmitted as payments to be applied against these contracts, statements and invoices were in the combined sum of $158,262.50, or over 95% of the agreed monetary consideration due under the construction arrangements. (Respondent was shown to have subsequently repaid the sum of $2,000.00 directly to Complainants).

5. It was not effectively disputed that Respondent failed to achieve completion of the contemplated project, having ceased work when the interior, although approaching completion stages, was not only less than 80% finished but also was not habitable, and when substantial work remained incomplete or not even started on the exterior. It also appeared that Complainants had made an early tender of the full progress payment due at the exterior stucco stage after being induced to do so by a special request from Respondent.

6. Credible evidence revealed that Respondent engaged in a regular, repeated pattern of failing to deposit the entire proceeds of most every progress payment into its business account, but rather, portions of such undeposited payments that were in an aggregate amount of over $28,000.00 were instead taken by Respondent’s qualifying party personally either in cash or by deposit into his personal account. In fact, there was no instance where the entire progress payment amount was deposited into Respondent’s business account. In this regard, he (Respondent) had expressly requested that any of the scheduled installment payments in amounts over $10,000.00 be split by Complainant into smaller sums so as to avoid any potential delay in the ability to make immediate withdrawals from Respondent’s bank.

7. In addition to the above-described differences in the progress payment amounts received as compared with the sums actually deposited, numerous checks in

mostly small but also some large amounts, together aggregating a significant total monetary sum, were written from the business account, made payable to “cash” and taken by Respondent’s qualifying party without any sufficient attempt to link an expenditure to any of the outstanding and accumulating billings for construction work and materials on Complainant’s project. Most all of these cash withdrawals, totaling over $25,000.00, when combined with other checks made payable directly to Respondent, were admittedly taken by Respondent either for living and personal expenses or to help satisfy other financial obligations that were entirely unrelated to this project.

8. Although Respondent had formulated its proposals and had anticipated realizing an eventual profit margin of 20%, the total amounts not deposited but taken by Respondent from each progress payment or subsequently taken from deposited funds did not even remotely coincide with such percentage.[1] Moreover, it is found and determined that the propriety of taking any anticipated profits in advance of completion is dependent upon and only permissible after the making of adequate financial provisions for the timely payment of all labor and materials charges by subcontractors and suppliers.

9. The testimonial and documentary evidence tended to indicate that it would have been highly doubtful if any significant profits would have been realized if appropriate and timely payments had been made by Respondent against all invoices

for work performed while Respondent was serving as the project’s general contractor and for those invoices reasonably anticipated for subsequent work and materials to properly complete the job in accordance with the plans and the proposals. In any event, the maximum profit sum of under $32,000.00 based upon a 20% hopeful final profit percentage applicable to the contracts was greatly exceeded by the more than $53,000.00 taken by Respondent from the various progress payments and from the business accounts in cash.

10. Various substantial amounts due and payable to various identified subcontractors were not timely paid by Respondent who, during the first few days of April, 1999, disclosed these past and accruing charges in a verbal report to Complainants while the jobsite work was progressing. Shortly prior to such reported problems, Complainants had become aware of a very tense and hostile atmosphere on the jobsite attributable to the growing arrearages of payments. Moreover, Respondent confirmed that he was then without any funds to satisfy the outstanding claims, nor was he financially able to pay anticipated future invoices for subsequent work and materials necessary to complete the project. It is found and determined that such financial inability was the direct result of Respondent’s misappropriation of progress funds received from Complainant and earmarked for jobsite work performed and/or to be performed.

11. It was shown that payments for work or materials were past due, owing and unpaid for portions or phases of the overall construction, including but not limited to roofing, sheet metal, appliances, painting, electrical and stucco.

12. The testimony was somewhat conflicting with respect to the exact manner of Respondent’s departure from its general contracting role for this project and the ending

of the construction relationship between the parties. It did, however, appear that such departure was after Respondent had expressly communicated to Complainants that he was wholly unable to pay those of the subcontractors then demanding monies, and that he was not financially capable to continue further jobsite functions without some infusion of funds from other sources.

13. The Registrar of Contractors is not the appropriate forum in which to have claims for overcharges or other claims for monetary damages adjudicated and awarded. Any such claims, computations, counterclaims, defenses or set-offs must be pursued before a civil court of competent jurisdiction. However, several issues raised at the administrative hearing warrant some discussion and also the entry of findings in this decision, without any attempt to reduce the various monetary damage claims to a sum certain or to otherwise liquidate such claims.

14. The documentary evidence tended to show that at the time of Respondent’s termination from the project, the aggregate total of no less than $20,000.00, exclusive of unpaid proposals for work still in progress, was due and payable to numerous subcontractors and suppliers.[2] Additionally, the anticipated and actually realized costs to complete the project according to the applicable plans and specifications was shown to be no less than $35,000.00 (after adjustment for inappropriate expenditures for payments made to persons not lawfully entitled to receive same, for items admittedly comprising owner-extras or for items not unambiguously required by the applicable

contractual plans and specifications). These combined amounts greatly exceeded the relatively small contractual balances remaining payable by Complainants to Respondent.

15. Whether or not Complainants had actually told Respondent to leave the project, Respondent’s report of a realistic financial inability to make required payments or to otherwise accomplish a prompt completion of the entire project is found to constitute the functional equivalent of a constructive abandonment or a constructive refusal to perform its contract without legal excuse. This is especially true in light of the fact that the causative factors for such inability were Respondent’s poor accounting practices as well as his own injudicious, premature and impermissible use of progress payments that should have remained earmarked primarily for use in furtherance of the construction of the Complainant’s residence.

16. Any asserted state of mind of the part of Respondent to have always intended to ultimately resume or continue its jobsite efforts towards completing this construction project and never to have intended any abandonment or refusal to perform its contractual responsibilities must be held to be wholly illusory and unrealistic, not unlike an individual’s stated and even honest intent to keep dry while jumping into a swimming pool. In any event, even an outright discharge of Respondent by Complainants would not have been an unjustified action under all the circumstances so as to enable the delayed completion and occupancy of the dwelling as well as to mitigate their potential damages.

17. The most heatedly debated and presented single issue related to the allocations of charges on the billing for the rough-in electric work. It is found under the

evidence that the finalized rough-in electrical invoices had undergone at least two alterations from the original that was billed entirely to Respondent. The first modified invoice had allocated a little over 55% of the total to Complainants as owner-added extras, and a subsequently revised and purportedly final invoice had allocated about 70% to Complainants. All such changed billings were the product of unilateral and somewhat arbitrary instructions and demands from Respondent to its subcontractor, under threat of not paying any portion of the billing, and without any input, consultation with or confirmation from Complainants. In order to keep the project work moving, Complainants did directly remit a major portion of the electrician’s allocated billing under protest. This overall manner of dealing on the part of Respondent, who had remained primarily liable to pay the electrical subcontractor with whom it had concluded contractual arrangements, is not to be condoned, and the totality of the evidence revealed several instances of duplicated charges that should have been encompassed within the proposed construction covered by the parties’ contract, for which Complainants had paid as part of their transmitted progress payments.

18. It remains highly questionable whether Respondent, as required by law, had remitted all or any part of the State sales taxes that was to have been collected and remitted from proceeds received under the lump sum contracts applicable for this project.

19. It is determined that, although the construction of a new driveway by Respondent, after demolition of the previously existing driveway, was contemplated by the parties during conversations prior to the proposal and contract, the details for this feature were undecided at that time, and the proposed and accepted price is found not to have encompassed any costs for providing and installing a driveway.

20. One charged violation against Respondent, added by amendment at and after the initial hearing session, related to a perceived insufficiency of Respondent’s posted license bond. It was admitted that the surety bond that Respondent had maintained in effect at the time of bidding and partially performing the project for Complainants was in the minimum statutory amount of $5,000.00, thereby covering only a maximum annual volume of $150.000.00. While the combined sum of the contracts concluded with Complainants, as well as the extras, exceeded such maximum volume even if no other work was undertaken that year by Respondent, and while some degree of suspicion must necessarily linger, it must be held that there was an insufficient showing that the “reasonably anticipated” annual volume of business for Respondent as of the time of the renewal of its residential license in September 1998, prior in time to its contract with Complainants, was over the specified maximum amount.

21. Similarly, at the time of Respondent’s most recent renewal in September, 2000, no adequate showing was made that would indicate an expectation of any significant near-future volume given the acknowledged awareness of its ongoing and serious financial problems. A violation by Respondent of the amended charge was, therefore, not sufficiently proven hereunder. It was further shown that Complainants have claimed and recovered the entire proceeds of the $5,000.00 bond as a result of Respondent’s acts or omissions on the instant project.

CONCLUSIONS OF LAW

1. Any licensed contractor receiving monies paid under a construction agreement against the ultimate purchase price is under a fiduciary-type duty to assure that such funds are applied in furtherance of accomplishing the intended construction for the benefit of the individual or entity paying these monies. In effect, such contractor continues to hold the amounts received in trust for the party making these payments until all contractual duties are fully and properly performed.

2. It is not per se impermissible for the contractor receiving progress payments from its customer to take a portion of such payments in anticipation of future profits, but any contractor who does so remains at its peril to assure that sufficient balances remain or that adequate other funding from other sources is available to provide for the finishing of the project and the payment of all outstanding amounts due to subcontractors and suppliers for necessary materials and labor.

3. The evidence of record supported findings that Respondent misappropriated substantial portions of the progress payments made by Complainants, and effectively rendered itself wholly unable to continue performance of the contemplated jobsite work, thereby failing to complete the project for the agreed price. The overall course of conduct on the part of Respondent was the substantial equivalent of an abandonment of or refusal to perform its contractual obligations and further constituted a wrongful act that generated significant financial and personal detriment to the property owners.

4. A hopeful intent, even if sincere, to obtain monies for completion of a job-in-progress from a future or separate job being bid or performed not only would result in an avoidable and unwarranted delay of uncertain duration but also would generate a genuine risk and unfairness to future potential customers of encountering the same payment inability problems adversely affecting the completion of the prior project. This “domino effect” serves to make the contractor a walking time bomb, and poses a critical concern for the Registrar of Contractors in discharging acknowledged duties of protecting the public, both in the contracting and the property owner communities, from harm during and after dealings with such a contractor. In this case, Complainants demonstrated that Respondent, if allowed to continue its contracting activities in this State, poses such a risk to the public.

5. Respondent did, commendably, make partial payments after leaving the project so as to reduce a small portion of outstanding balances. However, the sums necessarily expended by Complainants to finish and occupy to residence far exceeded the contract balance remaining unpaid, and they also were obliged to pay subcontractors and suppliers for prior work when Respondent was on the jobsite although their previously transmitted progress payments should have amply covered these payments.

6. The evidence of record, as presented at the administrative hearing, sufficiently established that Respondent has violated the provisions of A.R.S. §32-1154(A)(1) and (7). However, no violation by Respondent of A.R.S. §32-1154(A)(3); namely, Rule R4-9-112(C), A.A.C., added by amendment, was adequately proven hereunder.

RECOMMENDED ORDER

In view of the foregoing, it is recommended that Respondent’s Class B license be revoked on the effective date of the Registrar’s Order.

Dated: January 23, 2001.

OFFICE OF ADMINISTRATIVE HEARINGS

________________________________ Robert I. Worth Administrative Law Judge

Original transmitted on _____________________

by: _____________________________ , to:

Michael P. Goldwater, Director Registrar of Contractors 800 West Washington Street (6th Floor) Phoenix, AZ 85007

Attn: Joyce Armijo

----------------------- [1] Out of the $158,262.50 paid by Complainants under the contract schedules, 20% of which would have been $31,652.40, Respondent had held out or had withdrawn a combined total of over $53, 000.00 from the various progress payments. It must be presumed that the additional charges set forth in the $816.00 invoice for initial work prior to the signing of contracts and appearing in the statement for $7,996.00 extra-costs were purportedly based upon individually itemized final cost prices that already included anticipated profits.

[2] After Respondent was no longer on the project, he did subsequently, and after its jobsite functions had ended, transmit payments of almost $4,000.00 to certain subcontractor or supplier creditors so as to reduce part of the unpaid balances. Nevertheless, Complainants were required to pay significant portions of the charges left unpaid by Respondent in order to prompt those creditors to continue the jobsite activities so as to attain the benefits of their contractual bargain with Respondent by having the contemplated construction completed, inside and outside, and by enabling their occupancy of the residence.

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Office of Administrative Hearings 1400 West Washington, Suite 101 Phoenix, Arizona 85007 (602) 542-9826