ALJDEC decisions subject to certification as final

04F-M0278-ROC · Registrar of Contractors · 2003-12-14

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: November 25, 2003 APPEARANCES: Evan Price, President of Price Pools, Inc. (Complainant”), appeared on behalf of Complainant. Kent Hall, doing business as Dream Catcher Contracting Partners (“Respondent”), was represented by Sharon Shively, Esq. ADMINISTRATIVE LAW JUDGE: Michael L. Barth findings of fact 1. The purpose of the hearing was to determine whether Respondent violated A.R.S. § 32-1154(A)(7) and/or (11). 2. Taking administrative notice of the records of the Office of the Administrative Hearings, this tribunal finds that on or about August 20, 2002 the parties entered into a written contract (“the pool contract”) in which Complainant agreed to construct a pool for the price of $100,000.00 at 3182 S. Lost Gold Drive, Pinal County. 3. It was undisputed that the house at which the pool in issue was constructed was one of 5 houses, valued over a million dollars, constructed by different builders in the same development, participating in the Street of Dreams sales promotion. 4. The Street of Dreams arranged for the houses to be toured by 30,000-60,000 people between October-December, 2002. 5. It was undisputed that one of the benefits derived by Complainant from entering into the foregoing pool contract and thereby participating in the Street of Dreams promotion, was the prominent display of Complainant’s business as the builder of the pool at the house in question and the potential generation of pool construction contracts in the million dollar home market as a result of the promotion. 6. The pool contract was drafted by Complainant. 7. Pursuant to the pool contract, payment for construction of the pool was due on “sale of the house.” 8. Respondent was identified in the pool contract as the owner of the house. 9. The pool contract contained a handwritten notation by Mr. Price that Respondent was also the “Prime Contractor.” 10. It was undisputed that the house did not sell during the Street of Dreams promotion. 11. It was undisputed that the house has been actively marketed since its completion. 12. It was further undisputed that the house was owned by Eugene and Holly Bostwick and subsequently sold by them to Respondent, and that Respondent moved into the house. 13. Complainant contends payment for the pool was not contingent upon sale of the house by Respondent, but was due upon any sale of the house regardless of by whom, including the foregoing sale and, therefore, Complainant was entitled to payment upon the sale of the house to Respondent. 14. Respondent contends that as a result of a joint venture agreement between him and the Bostwicks to design and construct the house in question for sale to a third party he held an ownership interest in the house at the time of the foregoing sale, and that the foregoing transaction was not an actual sale of the house, but was instead a paper transaction to restructure his and the Bostwicks’ ownership interests (their rights and liabilities) in the house under the joint venture agreement. 15. In rebuttal of the above contention by Respondent, Mr. Price testified that at or about the time Complainant entered into the pool contract with Respondent he had been informed by both the Bostwicks and Respondent that Respondent was the builder and that the Bostwicks were the sole owners of the house. 16. Mr. Price further testified that it was for this reason that he annotated the contract that Respondent was the “Prime Contractor” versus the owner of the house at the time the pool contract was signed by the parties. 17. Respondent denied that he had ever informed Mr. Price that the Bostwicks were the sole owners of the house in question. 18. Respondent testified that at or about the time the parties entered into the pool contract he had informed Mr. Price that he and the Bostwicks held ownership interests in the house. 19. Respondent testified that he had entered into a joint venture agreement with the Bostwicks on or about July 1, 2001 to design and construct a house (the house in question), as a part of the Street of Dreams promotion for sale to a third party with the profit or loss on the venture to be divided equally between the Bostwicks and Respondent. 20. Respondent further testified that the agreement required financing of $1,000,000.00 for projected costs and loan payments during construction and for a period of 12 months after construction to be secured by him or the Bostwicks or combination thereof, repayment of which was the joint responsibility of him and the Bostwicks. 21. Respondent testified that he and Bostwicks each initially invested $150,000.00 towards the cost of the venture. 22. Respondent further testified that the Bostwicks advised on or about February, 2003, that they were no longer able to meet their obligation under the joint venture agreement of making one half of the monthly mortgage payment on the above house loan of $1,000,000.00. 23. Respondent also testified that the total cost of the project ultimately totaled approximately $1,524,860.00 and, therefore, the lender upon foreclosure would obtain a house with a value well over those costs for the balance remaining on the $1,000,000.00 loan. 24. Respondent testified that in an attempt to avoid foreclosure on the loan and the incumbent financial losses to the Respondent, Bostwicks and subcontractors who had entered into the same type of contract with Respondent as Complainant, Respondent entered into a transaction with the Bostwicks which took the form of a sale of the house to the Respondent in the amount of the outstanding balance on the loan but was in substance nothing more than a restructuring of Respondent and the Boswicks’ ownership interests, their rights and liabilities, in the project under the joint venture agreement. 25. Respondent testified that in order for the Bostwicks to satisfy their obligations to the lender even though Respondent had an ownership interest in the house as a result of being jointly responsible pursuant to the joint venture agreement for repayment of the loan, it was necessary, due to the loan having only been issued to the Bostwicks, for Respondent to make the transaction in the form of a sale of the house from the Bostwicks to Respondent. 26. Respondent testified that in return for Respondent releasing the Bostwicks from their obligations under the joint venture agreement which included repayment of the loan, the Bostwicks agreed to forfeit their ownership interest in the house to Respondent with the possibility of recouping their initial investment if the house was later sold for profit by Respondent. 27. Respondent explained that in order to accomplish the foregoing, he was required to and did obtain financing from a different lender. 28. Respondent testified that as a result of the above described paper transaction, he was now making mortgage payments totaling approximately $18,000.00 per month on two homes, his residence and the house in question. 29. Respondent also testified that the lender required him to move into the house in question in order to obtain the new loan to purchase the house. 30. Respondent also testified that in any event furnishing a house increases the chance of a sale. 31. Respondent testified that in October, 2003 he entered into an agreement with Great Estates Auction Company, a company which specializes in the auction of million dollar homes, to auction the house in question on or about December 9, 2003, and Respondent corroborated his testimony by presentation of the agreement, Exhibit 6. 32. Between Respondent and Mr. Price, this tribunal finds Respondent to be the more credible witness. Respondent’s testimony regarding his ownership interest in the house prior to its sale and discussions with Mr. Price regarding same is corroborated by the pool contract drafted by Complainant identifying Respondent as holding an ownership interest in the house as well as the Joint Venture Agreement, Exhibit 5, presented by Respondent. The fact that the pool contract was annotated by Mr. Price to reflect that Respondent was the “Prime Contractor” does not preclude Respondent from also being an owner of the house. In addition, Respondent’s remaining testimony was uncontroverted by Complainant. 33. Mr. Price’s testimony that he had been informed by Mr. Hall and the Bostwicks that the Bostwicks were the sole owners of the house is contradicted by the pool contract drafted by Complainant. In addition, Complainant failed to call the Bostwicks to corroborate the testimony of Mr. Price in this regard. 34. Based on the foregoing, this tribunal finds that Respondent as a result of the Joint Venture Agreement did hold an ownership interest in the house prior to its sale by the Bostwicks to Respondent and that although the transaction between the Respondent and Bostwicks took the form of a sale it was in substance nothing more than a restructuring of Respondent and Bostwicks’ ownership interests in the house under the Joint Venture Agreement as distinguished from an actual sale. 35. This tribunal finds that contrary to the assertion of Complainant, according to the language of the pool contract, payment was not due to Complainant upon any sale of the house regardless of by whom but was due only upon sale of the house by the owner. Respondent having been identified in the contract as the owner, payment was, therefore, not due until a sale of the house by Respondent. However, even if the interpretation of the contract proposed by Complainant is accepted, payment was not due to Complainant as the transaction between Respondent and the Bostwicks was not an actual sale but only a restructuring of rights and liabilities between the owners of the house, Respondent and Bostwicks, under their Joint Venture Agreement.

Conclusions of Law 1. Because payment was not due to Complainant under the pool contract until an actual sale of the house by Respondent, and an actual sale did not occur, Respondent did not violate A.R.S. § 32-1154(A)(11). Even if the transaction between the Bostwicks and Respondent could be treated as an actual sale of the house, Respondent did not violate A.R.S. § 32-1154(A)(11) as payment was not due under the pool contract until a sale by Respondent. 2. Not having failed to pay monies when due for materials and/or services rendered in connection with the Respondent’s construction operation, Respondent did not commit a wrongful or fraudulent act in violation of A.R.S. § 32-1154(A)(7). Recommended Order In view of the foregoing, it is recommended that Case No. M04-0278 be dismissed.

Done this day, December 15, 2003

______________________________________ Michael L. Barth Administrative Law Judge

Original transmitted by mail this ____ day of ____________, 2003, to:

Registrar of Contractors Israel G. Torres ATTN: Jennifer Brown 800 West Washington, 6th Floor Phoenix, AZ 85007

By ___________________________

-----------------------

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