ALJDEC

00F-G0230-ROC · Registrar of Contractors · 2000-09-29

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: May 11, July 13, September 28 and 29, 2000 APPEARANCES: Robert and Roberta Damesek, Complainants in their own behalf Dave and Jarrett Gorman, in on behalf of Jada Homes, Inc. ADMINISTRATIVE LAW JUDGE: Allen Reed _____________________________________________________________________

Preliminary Matters 1. The Notice of Hearing in this case was issued on February 14, 2000. 2. The Complainant had additional complaints which were set forth in a letter to the Registrar dated February 26, 2000, and were received by the Office of Administrative Hearings on March 2, 2000. 3. The Citation and Complaint was not amended prior to the hearing and the Respondent was not notified of the substance of the additional complaints until the hearing. 4. This matter came on for hearing on May 11, 2000. Testimony and documentary evidence were received on the record. 5. The hearing proceeded on matters initially noticed for hearing. The additional complaints which were raised in the aforementioned letter were also presented by way of evidence. 6. The hearing was recessed to allow for the amendment of the Citation and Complaint to encompass those matters raised in the Complainant’s February 26, 2000, letter and the statutory provisions for alleging violations as to the additional complaints. 7. The Order Amending Citation and Complaint was entered on May 16, 2000, and the further hearing was set for July 13, 2000. 8. On July 13, 2000, further hearing was held but the matter was still not concluded. Further hearing was held on September 28 and 29, 2000. 9. On September 29, 2000, Mrs. Roberta Damesek became ill during the proceedings and the Complainants absented themselves from the proceedings approximately a half an hour prior to the close of the record. The Complainants did not wish to have a continuance of the hearing and stipulated that the Respondent could conclude its case in their absence. Findings of Fact 1. The Complainants own 2.7 acres of real property in Carefree, Arizona, and wanted to build a home at the site. Robert Damesek had some home construction (but not custom home), experience 2. In 1998, the Complainants became acquainted with a Hank Wheele (Wheele), who had contracting experience out of state and was not licensed in Arizona. Wheele told the Complainants he was working with the Respondent, Jada Homes, Inc. (Jada), which had recently been licensed and was just starting in business. 3. Wheele introduced the Complainants to Jarrett Gorman (Jarrett), the Qualifying party for the Respondent and Jarret’s father Dave Gorman (Dave). 4. The Complainants wanted to build a custom home according to plans prepared by Renaissance Homes. The Complainants gave the plans to Dave and Jarrett. 5. On October 23, 1998, the Complainants and the Respondent entered a contract (Exhibit 1), whereby the Respondent would build the Complainant’s home for $472,689.00 which included state, county and local fees, and a construction fee of $45,000.00 or 15% over the “hard cost” of construction. $84,900.00 of the total cost was assumed by the Complainants who were to pay for specified items such as the pool, floor covering, plumbing fixtures and household appliances. After deducting the Complainant’s portion and taxes, the total Jada building cost, including the construction fee, was $366,793.00. The construction fee ($45,000.00), was to be paid in six equal installments. There was no specific provision in the contract for the timely payment of actual construction costs. A deposit of $36,679.00 was acknowledged as received by the Respondent in Exhibit 1. The Respondent received its license in September, 1997, this was the Respondent’s first custom home (possibly its first home). 6. The parties never entirely agreed on a draw schedule. However they were not too far apart in their respective positions. The schedules were based on completion of work with the sequence being drainage and grading, slab, framing, drywall, cabinets and final inspection. The Complainants estimated draws in the amount $54,469.43 per phase and the Respondent $50,545.00 per phase. These schedules also differ in total costs (Exhibit 3). 7. The initial plans which were provided by the Complainants were incomplete and inadequate. The plans did not conform with height restrictions, they did not show a septic tank, the footing required for some interior load bearing walls, proper size studs for a portion of the interior walls, or an identifiable step down from a closet to the hall. The plans had to be modified a number of times and were rejected by the town of Carefree three times resulting in a number of changes which affected the construction of the home. Parts of the roof had to be altered which affected other aspects of the construction. 8. In December, 1998, the placement of the septic tank was approved by Maricopa County and the sewage disposal permit was issued. However, the placement of the septic tank as approved in December, 1998, was not the same as the placement on later dated plans which were apparently used during part of the construction. According to the Complainant, this resulted in additional cost after the error was discovered, for constructing drill pits and related features for the location which was initially required by the county. According to the Complainants, the original cost of the septic system was to have been $2,800.00 (Exhibit 1, Bid Items shows a cost of $3,500.00). The cost of present system is already at $8,400.00 but may run as high as $15,000.00 because of difficulty in achieving necessary depth at the required location. The issue of the placement of the septic tank was not resolved by the evidence. It could not be explained why the septic tank as approved in December, 1998, was changed to a unapproved location in a later drawing of the site, thereby necessitating construction changes to place the septic tank back at the location where it had been originally approved. 9. Construction did not begin until April, 1999. Wheele was acting as a “construction advisor” although it was not until September 20, 1999, that Jada formalized Wheele’s position as a ”Construction Advisor” (Exhibit H). Wheele was to receive $15,000.00 if the Respondent received $45,000.00 profit (the $45,000.00 construction fee). 10. Due in part to the changes required by Carefree, the contract was modified in June and July, 1999. The contract was changed from an itemized contract to a total cost contract in the amount of $315,331.60. The Respondent’s profit was to be 15% or a minimum of $45,000.00. There was no new or modified draw schedule with the modified contract. 11. The Respondent did not provide a performance or payment bond as required by its contract (Exhibit 1, Attachment 4B, Article 4) . During the instant hearing this omission was described as an oversight. When during construction, the fact was pointed out by the Complainant, the Respondent was unprepared to spend what it estimated to be $8,000.00 for the cost of the bond. 12. When most but not all of the excavation and drainage was completed, the Respondent had a subcontractor Swartz Concrete, Inc. (Swartz), pour the floor slab. According to the Recommended Decision in Case No. 00F-G0251- ROC, by Administrative Law Judge (ALJ), George Schade, Swartz failed to install a vapor barrier and failed to properly install rebar to reinforce the concrete slab. Additionally, Swartz also did other concrete work improperly but those items were corrected by the Complainants. The Registrar of Contractors (Registrar), adopted the ALJ’s Recommended Order in that case and no additional findings are made on the issue except that a certain piece of evidence (the professional engineer’s report on the concrete), which was relied on in that case had been changed slightly but not materially by the engineer, at the behest of the Complainant. 13. The concrete for the back patio was not poured because the pool had not been installed and under the contract, the pool was one of the items which was the responsibility of the Complainant. The Respondent was of the opinion that the installation of the patio concrete should wait until after the pool was built. The concrete for the front portico was also not completed. 14. Underground air return ducts were improperly installed. They were too close to each other, the edge of the duct was too low to the concrete, and interior barriers had not been removed prior to installation. 15. Head walls which were built for a roadway over culverts, are out of plumb by approximately one to one and a half inches for four feet and were not completed above ground level. The footings for the headwallls passed inspection by the town of Carefree. 16. The home was to have a “silent floor system” but standard trusses rather than TJI joists were used. 17. A vent pipe was placed a foot and a half from where it should have been and had to be cut out and replaced. An electrical conduit was incorrectly placed through an area which was to be a fireplace. The vent pipe was relocated by the responsible subcontractor. 18. On October 29, the first roof sheeting and shear inspection by the town of Carefree, resulted in non approval. Due to confusion on the part of Carefree inspectors, the roof sheet and shear was approved on November 8, 1999, but again disapproved in February, 2000 (Exhibit 12). 19. The framing of the home was not completed. Columns had temporary bracing, chimney chases and some windows were not framed, fire blocking and other framing was incorrect, anchoring and interior walls were incomplete, there was improper nailing with gaps in exterior shear and sheathing. Additional framing workmanship problems are noted in Exhibit 8 (punch list with photographs). Framing was disapproved in January, 2000. 20. There was some evidence that some lumber was returned to Alliance Lumber by the Respondent and the Respondent received a credit. However the amount of the credit was not satisfactorily established and the lumber was returned after the contract had been modified to a total cost contract. Alliance Lumber declined to disclose the specifics to the Complainant. 21. An issue relating to the windows and doors is reflective of the possibly confused relationship of the parties. According to the testimony of Frank Liethen (Liethen), the Complainants told him to lower the cost of the doors which were being purchased by the Complainants directly and to compensate for this by increasing the cost of the windows which were to be the responsibility of the Respondent. This testimony was not directly contested or refuted but Exhibit 1 shows that both doors and windows were part of the Respondent’s bid items. Nevertheless the Respondent argued that the Complainants were trying to save on their portion of the expenditures by raising the Respondent’s portion. The actual facts concerning this matter were not established at the hearing because the parties stipulated that windows were no longer at issue. 22. In early November, 1999, the parties had reached an impasse with respect to issues regarding the quality and progress of the work, payment for the work and verification of expenditures for work. Some of the design changes resulted in work having to be done which had not been anticipated or work that did not necessarily sequentially follow the draw schedule. This resulted in unspecified extra costs and possibly savings in certain areas. In any event, the Complainant had paid a total of $126,668.00 to that time and the Respondent was claiming the right to draws through the framing stage, which would bring the total to $163,408.00 (Exhibit EE). The parties exchanged communications regarding their respective positions. In a letter to the Complainant dated November 10, 1999, (Exhibit 5), the Respondent asserts the Complainant owed $44,514.06 toward the framing draw. The framing was not completed although it was substantially completed. The Complainant was of the opinion that the framing draw was not yet payable and wanted some verification of expenditures of other payments which may have had inconsistent figures. The Complainant offered to make payments by checks made out jointly to the Respondent and subcontractors. The Respondent offered to terminate the contract upon payment by the Complainant of $15,547.50 in profit draws and $2,930.99 which the Respondent asserts it spent on behalf of the Complainant. A letter from the Complainant to the Respondent dated November 15, 1999 (Exhibit 29), points out some of the Complainant’s concerns and states the Respondent has breached the contract. A letter to the Complainant from the Respondent dated November 17, 1999 (Exhibit 6), informed the Complainant that without additional funding, the job was on hold. The Complainant filed his complaint with the Registrar of Contractors (Registrar), on December 1, 1999. By letter dated December 2, 1999 (Exhibit C), the Complainant through his son in law, a California attorney, informed the Respondent that it had breached the contract and the Respondent was off the project, was to cease doing any work and vacate the premises. The Respondent sent a letter to the Complainant asserting that it had not abandoned the project but the parties no longer had a working relationship. 23. In late December, 1999, the Complainants hired Joe Giannetti (Giannetti), as a consultant to evaluate the work which had been done by the Respondent. The Complainants had to correct items which had been were improperly installed or of poor workmanship, and they substantially completed the construction of the home. They only recently received a certificate of occupancy but had not yet moved into the home. The Complainants testified that to this point, the near completion of the home and the correction of the items as a consequence of the Respondent’s workmanship has raised the cost to over $40,000.00 above the total cost of the modified contract. It is unclear if money paid to Giannetti is part of this additional cost. 24. It cannot go unnoticed that Giannetti initially testified on behalf of the Complainants when he was employed by the Complainants. However, sometime after the hearing of July 13, 2000, Giannetti and the Complainants had a dispute over payment to Giannetti and it was apparent that his testimony of September 28 and 29, 2000, was not as favorable as it had previously been. 25. Toward the end of the hearing the Complainants stipulated that the records (Exhibit GG), provided by the Respondent appear to be a satisfactory accounting for the money paid to the Respondents by the Complainants as well as the issue of whether the Respondent somehow improperly applied money due as a credit to the Complainants, to its own use (the issue of the lumber credit in paragraph 20 of the Findings of Fact). Conclusions of Law The Citation and Complaint as amended by the Order of May 16, 2000, allege violation of A.R.S.§32-1154(A)(1) abandonment or failure to perform without excuse, (A)(2), disregard of plans and specifications, (A)(3),/ A.A.C. R4-9-108, workmanship, and (A)(7), a wrongful or fraudulent act resulting in substantial injury. The Order allowing the amendment of the Citation and Complaint also allowed for the additional factual allegations based on the Complainant’s letter dated February 26, 2000, which had been sent to the Registrar’s Office. 1. The Respondent contends it was prepared to continue the work if the Complainant had paid the requested draw and had not fired them by the letter of December 2, 1999. The letter was unequivocal that the Respondent was not to continue on the job. The issue is whether the Respondent’s failure to proceed with work after November 8, 1999, or thereabouts is excused. The evidence shows that the parties never agreed to a modified draw schedule after the contract was changed to a total cost contract. The evidence also shows that although the construction did not proceed as anticipated, the excavation, drainage and grading were substantially done, the slab had complaints (the missing vapor barrier and items referenced in Case No.00F-G0251), the framing had not been completed or approved. Both parties had a responsibility to clarify the terms of payment if the terms were to differ from the schedule which had previously been accepted. It is apparent that this project was not proceeding as planned or anticipated and that if it was to succeed the parties would have to make an exceptional effort to reach some accommodations along the way. The Complainants saw the difficulties the Respondent was having and were less and less secure that the Respondent would satisfactorily complete the project at the specified price. Wheele testified that he tried to mediate between the parties and the Complainant was talking about possibly terminating the Respondent some weeks before the December 2, 1999, letter. At the same time the Respondent was offering to terminate the contract by the letter dated November 10, 1999 (Exhibit T). It is fairly evident that the Complainant had limited trust and confidence in the Respondent and was not prepared to pay the total draw through framing until all phases of the work which was to have been done through the framing phase was satisfactorily completed. It was for these same reasons and the fact that the Complainant could not obtain a satisfactory accounting for how prior payments had been spent, that the Complainant wanted to make joint checks to the Respondent and some subcontractors or suppliers. On the other hand, the Respondent was doing its first custom home and began the job with a defective set of plans which had been provided by the Complainants. The plans were rejected three times and had to be revised thereby impeding progress on the construction. The evidence that the Respondent had expended some of its own money and was unable to continue because of non payment by the Complainant was not refuted. It is acknowledged that the Respondent had not fully completed all the phases of the work through the framing and that much of the work did not meet workmanship standards. Under these circumstances neither the Complainant nor the Respondent were putting forth their best effort to try and salvage the relationship and complete the project under the terms of the agreement. Under the facts of this case, the Respondent’s failure to proceed with the work for approximately three weeks prior to being terminated by the Complainant does not constitute abandonment or show a failure to perform without legal excuse. Based on this rather extended exposition of the relationship between the parties, it is concluded that the Respondent did not violate A.R.S.§32-1154(A)(1). 2. The failure in workmanship is established. The Respondent contends that had it not been fired it would have been able to require the correction of the problems. Even if this is accepted, it is apparent that the nature and extent of the deficiencies in the original work cited in the findings of fact is such that it speaks directly to the Respondent’s capabilities in organizing, monitoring and supervising the work which is essentially the basis of a general contractor’s workmanship. Irrespective of any problems with the plans, the overall impact of the Respondent’s control of this job presented problems which added to the time and cost to complete the home. The evidence shows that the Respondent was relying on Wheele who was not a licensed contractor. The conclusion which is drawn from this is that although the Respondent was licensed it did not have sufficient experience or expertise to undertake the job it was attempting. Wheele testified that he had to advise Jarrett to follow up with the subcontractors and pay more attention to the job. Whether the Respondent would have properly corrected the problems, had it not been fired, is conjectural. Under the facts of the case, the Respondent violated A.R.S.§32-1154(A)(3)/ A.A.C.R4-9-108 as well as A.R.S. §32- 1154(A)(7), wrongful act only. 3. The additional cost which is attributed by the Complainants to the failed workmanship of the Respondent has not been satisfactorily established so as to justify restitution. A determination about whether the Complainant’s expenditure to complete the home, which is well over $200,000.00 above what had been paid to the Respondent and asserted to be over $40,000.00 above the contract price, should be treated as a traditional damage issue which is more appropriately heard in a civil proceeding. This conclusion is buttressed by the conclusion that the Respondent did not abandon the work. If the Respondent was deprived of the opportunity to correct its work, an assessment for additional costs resulting after the Respondent’s termination would be dubious at best. 4. The conclusion of Judge Schade in Case No. 00F-G0251-ROC established a violation of A.R.S.§32-1154(A)(2), for failing to follow plans and specifications with respect to the missing vapor barrier. There is no basis to disturb that conclusion. The evidence also showed that the trusses which were used for the “silent floor system” were not as specified. However the actual consequence or materiality and prejudicial effect of this was never established. The Respondent as the general contractor is jointly responsible for the omissions of the subcontractor and with respect to the vapor barrier, is in violation of the statutory provision. In light of the changes that were required to obtain approval of the plans, the fact that the Respondent was terminated and therefore could not make corrections, and because other inadequacies have been addressed as workmanship violations, there are no further violations with respect to the disregard of plans and specifications. 5. In summary, this case shows that mistakes were made by both parties. The Respondent was not adequately prepared for the job it undertook and the Complainants wanted to maintain some control almost as quasi owner- builders in what appeared to be an attempt to limit costs. However, the Respondent had the primary duty in the case and is the licensed party which is answerable to the Registrar. Recommended Order A computer check of the Respondent’s license status as of October 13, 2000, shows the license was suspended on September 30, 2000, for lack of bond ($5,000.00). Any additional suspension does not appear efficacious.

In view of the foregoing it is recommended, commencing on the effective date of the Order entered in this matter and upon any termination of the present suspension of the Class B license of the Respondent, whichever is later, that the Respondent’s Class B license shall be placed on probation for a period of 180 days. It is further recommended that in addition to the above provided penalties, if any, that any continuation or restoration of the Respondent’s contracting right, whether or not probationary, shall be subject to a condition that the Respondent first post an additional surety bond, cash deposit or alternative deposit for a period of twenty-four (24) months, including future renewal periods, in the amount of $3,000.00 above the current surety bond (which bond remains to be paid). Cash or alternative additional deposits if utilized, shall be returned only after the expiration of an additional two year period following the above provided twenty-four (24) month period and only if no claims are then pending.

Done this day, October 18, 2000

______________________________________ Allen Reed Administrative Law Judge

Original transmitted by mail this ____ day of ____________, 2000, to:

Registrar of Contractors Michael P. Goldwater Attn: Joyce Armijo 800 West Washington, 6th Floor Phoenix, AZ 85007

By ___________________________

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