ALJDEC

02F-RF0125-ROC · Registrar of Contractors · 2002-04-26

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: April 23, 2002 APPEARANCES: Christy Anderson, Complainant (Plaintiff in the Recovery Fund action) appeared on behalf herself and Christopher Anderson Robert Watt, Qualifying Party, appeared on behalf of the Respondent (Defendant in the Recovery Fund action) Montgomery Lee, Assistant Attorney General, appeared on behalf of the Residential Contractors’ Recovery Fund ADMINISTRATIVE LAW JUDGE: Allen Reed _____________________________________________________________________ Preliminary Facts This matter came on for a Residential Contractors’ Recovery Fund (Fund) hearing. It was stipulated by the parties that there had been no Citation or Complaint issued in this case or a finding or deeming of an underlying violation which would allow for access to the Fund. The Complainants had filed their complaint with the Registrar of Contractors on August 1, 2001, but the matter was administratively closed by ROC on August 3, 2001, as “unresolved” because the Respondent’s license was revoked effective July 30, 2001. Absent an underlying violation, no claim can be properly considered for the purpose of any recovery from the Fund. A.R.S. §32-1132 requires that damages be the consequence of an act, representation transaction, etc. that are in violation of the contracting laws. A.R.S.§32- 1154(E) only allows for an administrative award “…to remedy the violation”. Absent a proven or deemed violation, there is no legal basis for an award from the Fund. The Complainant urged that if a Citation and Complaint had issued, the pertinent allegations would concern A.R.S. §32-1154(A)(1) abandonment without legal excuse, (A)(7), a wrongful or fraudulent act with substantial injury, and (A)(9) failure to complete for the price stated. The allegations of violation of (A)(11), failure to pay for materials or services and (A)(16), false advertising, did not appear applicable. The Respondent waived its right to prior notice and agreed to proceed with the hearing on the allegations of underlying violations in order to reach the issue of possible recovery from the Fund. Findings of Fact 1. On December 18, 2000, the Complainants entered a contract with a land developer, White Hawke at Moon Valley, LLC (White Hawke LLC), to purchase a home to be built by the Respondent Construction Services Corporation (CSC). The home was one of approximately 140 that were to be constructed on a 20 acre site in Phoenix Arizona. Approximately 70 homes were ultimately completed. 2. The Complainants dealt with a White Hawke LLC salesperson, Don Zack (Zack), and paid a total deposit of $10,000.00 (apparently in two installments), which was placed in escrow. By check dated January 30, 2001, the Complainants paid an additional $3,245.00 to White Hawke LLC for certain upgrades for the home. 3. In March and April of 2001, the Complainants were inquiring of Zack at White Hawke LLC, when the building permit would be issued and when construction would begin. The evidence indicates the Complainants were given misleading and most likely less than truthful answers (Zack claimed to have misplaced the permit application, then it was claimed that the permit was at the city waiting to be picked up). There was no evidence that the permit was applied for or was ever issued. 4. The Complainants decided to cancel the contract under its terms, for failure of White Hawke LLC (or alternatively CSC), to commence construction. They submitted a cancellation document (Exhibit 4, Mutual Cancellation Instructions), dated April 28, 2001, to Zack. The Complainants sought a refund of $8,245.00 ($5,000.00 for part of the deposit, and the $3,245.00 for the upgrades). The document was modified (only $5,000.00 was to be returned to Complainants from escrow), and signed by Robert Watt (Watt), who had taken over as manger of White Hawke LLC for G.R. Grossman. The $3,245.00 was not being returned because White Hawke LLC had insufficient funds. It is noted that Watt was the signatory for White Hawke LLC on February 7, 2001, Change Order No. 2, which included the upgrades for which the Complainants had paid the extra $3,245.00 which was not being returned only two months later. 5. Watt is the Qualifying Party and 42% shareholder with his wife, of CSC (Watt’s brother holds 48% of the stock, G.R. Grossman is listed with 10% ). Watt is also the Qualifying Party and 100% shareholder for White Hawke Development, Inc. (White Hawke, Inc.), which holds a Class B License No. 091071. White Hawke, Inc. is listed as being in bankruptcy according to the ROC computer printout. Finally, Watt was a member and then became the managing member of White Hawke LLC. in April, 2001, after G.R.Grossman left the position of manager. White Hawke LLC filed a Chapter 11 Petition in Bankruptcy, in December 2001. 6. The Complainant urged that the relationship between CSC and White Hawke LLC was not at arms length and that the businesses were essentially alter egos for each other (or for Watt and others). According to the Complainant, White Hawke Inc. obtained a permit to do some swimming pool remodeling at one of the homes in the Moon Valley development even though CSC is listed as the builder. This single example does not establish a pattern whereby the business entities could be considered to be acting interchangeably or as a single entity. 7. Watt testified that each business entity had separate financial accounts, there were no loans or intermingling of money of other assets, no profit sharing or stock transfers among the entities. The evidence also showed that the three entities were housed in the same office, shared the same telephone line(s) and had the same accountant. It is unknown which entity paid what portion of these common expenses or how the expenses were apportioned. Watt and Grossman in combination, controlled or had controlling interest of the principal entities in this case, White Hawke LLC and CSC. The construction contract between CSC and White Hawke LLC was not available at the hearing. Conclusions of Law-Underlying Violation The relevant allegations have been referenced in the Preliminary Facts presented at the beginning of this Recommended Decision. 1. White Hawke, Inc. is not directly relevant to the case and does not need to be specifically discussed. 2. Based on the evidence and the circumstances of this case, it is concluded that there has been conduct which would constitute a violation of A.R.S.§32-1154(A)(7) if the conduct is attributable to the Respondent. White Hawke LLC alone or White Hawke LLC and CSC were the recipients of the $3,245.00 paid by the Complainants. The failure to return the funds to the Complainants is not excused. To the extent the funds were termed as “non refundable”, this provision is unenforceable in this case because either White Hawke LLC or CSC, breached the agreement by failing to timely commence construction. A non refundable clause for extras or upgrades which are not provided because the party who is to provide them breaches the contract, is without any cogent legal basis and cannot be enforced. There is no dispute or doubt that White Hawke LLC or CSC owes the Complainants $3,245.00. 3. In view of the above conclusion that the evidence if applied to CSC, shows a violation of (A)(7), no conclusion is reached or necessary on a specific violation of (A)(1) or (A)(9). This is because the evidence suggests that the insolvency and subsequent bankruptcy filing by White Hawke LLC may constitute a sufficient legal excuse. No specific evidence was presented to establish the same excuse for CSC although testimony indicated it was also insolvent. The relationship between (A)(1) and (A)(9) is evident. Abandonment or refusal to perform, of necessity would include a failure to complete for the price stated, in this case. To the extent that no conclusion is reached on (A)(1), the same applies to (A)(9). 4. The only issue is whether CSC is to be held liable for a violation of (A)(7) with respect to the Complainant’s claim, for the acts and obligations initiated by White Hawke LLC. 5. The law provides for various types of legally recognized entities which have legal rights as may be required to conduct their affairs, similar to the rights of a person. Among these entities are corporations and Limited Liability Companies. The law has certain requirements for these entities to become and maintain a separate legal identity. Generally speaking, the law presumes and recognizes these entities to be separate and distinct unless the facts prove otherwise. The “alter ego” legal concept essentially means that a person is using a corporation merely as an extension of themselves and their personal will. There is no practical or legal framework to separate or distinguish the acts of the individual from the acts of the corporation. The “alter ego” doctrine is generally applied to corporations but may by extension be applied to the relationship of one business entity with another or the relationship of individuals with various entities. 6. The question is what does the law look at in order to determine when the relationship between business entities and/or individuals and entities, is such that no clear legal or practical distinction can or should be made between them? 7. Alter ego cases or cases concerned with “piercing the corporate veil” are legion. In Dietel v. Day, 16 Ariz. App. 206 (1972 App.) the court observed that “ The alter-ego status is said to exist when there is such a unity of interest and ownership that the separate personalities of the corporation and owners cease to exist”. Employer’s Liability Assurance Corporation v. Lunt, 82 Ariz. 320 (1957), the Arizona Supreme Court identified some factors to consider in making alter ego determinations. The factors included the common identity of officers and shareholders and their ability to control corporate assets and operations, the area of operation, office location, equipment, address and telephone number. The cases also reaffirm the general rule that the corporate fiction will be disregarded “…when the observance of the corporate form would sanction fraud or promote injustice.” Conversely, the fact that one or a few persons own the corporate stock does not mean the corporate entity can be disregarded (Dietel supra). 8. In the instant case, the Respondent was the sole builder for the Moon Valley development. Although this does not establish a basis to conclude that CSC and White Hawke LLC were acting as a single entity, it supplements other common factors such as the same persons being instrumental in each entity (Watt and Grossman), the use of the same office, phone number, and accountants. Added to this is the fact that although the three entities named in this case purportedly functioned independently with independent finances, they are all coincidentally insolvent (two are, or were, in bankruptcy). 9. Considering the evidence in its entirety along with the totality of the circumstances of this case, and the potential injustice to the Complainants, it is concluded that the White Hawke LLC and CSC were conducting their affairs in a manner so that they were no longer identifiable distinct, separate and independent entities, but rather they were acting in a manner consistent with a single entity as the alter ego of Watt and possibly to a lesser degree, Grossman. Implied in this conclusion is the conclusion that White Hawke LLC received the funds from the Complainants which were also for the actual or constructive benefit of CSC even though no work was done on the home. This combination of factors creates a sufficient nexus between the Complainants and CSC to sustain the violation against CSC and allow recovery from the Fund. Conclusions of Law-Recovery Fund A.R.S. §32-1132 establishes the Residential Contractors’ Recovery Fund from which a person who is injured by a residential contractor as a consequence of a violation of the contracting laws, may be awarded damages. A.R.S.§32-1154(E) allows the Registrar of Contractors to make an award from the Fund to remedy a violation. The Fund denied recovery on the grounds that the amount being sought was termed as “non refundable” in the contract and the money sought was paid to White Hawke LLC which was not a contractor. 1. Based on the findings and conclusions stated above, the Complainants (Plaintiffs for the purpose of the Fund), are entitled to recovery of damages from the Fund. Recommended Order In view of the foregoing it is recommended that commencing on the effective date of the Order entered in this matter that the agency commence and finalize payment from the Recovery Fund to Plaintiffs, in the amount of $3,245.00.

Done this day, April 26, 2002

______________________________________ Allen Reed Administrative Law Judge

Original transmitted by mail this ____ day of ____________, 2002, 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