ALJDEC decisions subject to certification as final

07F-0027-ROC · Registrar of Contractors · 2007-07-19

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: April 30, 2007 and July 2, 2007. APPEARANCES: The Floor Studio was represented by attorney Matthew Ellingson; Artcraft Granite Marble and Tile was represented by attorney Scott Frerichs. ADMINISTRATIVE LAW JUDGE: Thomas Shedden _____________________________________________________________________ Artcraft Granite Marble and Tile Company entered a contract to provide services at a hotel under construction. Artcraft then entered a sub- contract with Floor Studio in which Floor Studio agreed to install carpet and tile at the hotel. Artcraft and Floor Studio each filed a Complaint against the other.

FINDINGS OF FACT Artcraft Granite Marble and Tile Company (“Artcraft”) holds License No. 136040 (Class L-48) issued by the Registrar of Contractors (“ROC”). Justin Woelfel is Artcraft’s qualifying party; his son, James Woelfel is Artcraft’s vice-president. The Floor Studio, Inc. holds License No. 126362 (Class L-08) issued by ROC. James Baca is Floor Studio’s qualifying party. Artcraft entered a contract with Hotel Development Services in which Artcraft agreed to install flooring at a Holiday Inn Express under construction (the “project”). A group called SCM managed the project for Hotel Development Services. (Hereafter, Hotel Development Services and SCM are referred to as the “general contractor.”) After Artcraft entered the contract with Hotel Development Services, it then entered a sub-contract with Floor Studio, in which Floor Studio agreed to install the carpeting and vinyl tile at the project. Each contractor filed a complaint against the other, and after the Notices of Hearing were issued the matters were consolidated for a single hearing. Complaint No. 07-0027 On or about July 6, 2006 Floor Studio filed with ROC Complaint No. 07-0027 alleging that Artcraft had failed to pay Floor Studio for the work Floor Studio completed at the project. On October 4, 2006 ROC issued Citation and Complaint No. 07-0027 alleging that Artcraft may have violated A.R.S. § 32-1154(A)(7), (11) and (17). On January 19, 2007 ROC issued a Notice of Hearing setting matter 07-0027 for hearing on February 20, 2007. Complaint No. 07-0703 On or about September 27, 2006 Artcraft filed with ROC Complaint No. 07- 0703 alleging that Floor Studio bid and worked on the project while Floor Studio’s license was suspended.

On December 20, 2006 ROC issued Citation and Complaint No. 07-0703 alleging that Floor Studio may have violated A.R.S. § 32-1154(A)(7), (13) (namely A.R.S. § 32-1124(B)) and (18). On March 28, 2007 ROC issued a Notice of Hearing setting matter 07-0703 for hearing on April 30, 2007. The matters were consolidated and the hearing was held on April 30 and July 2, 2007. Mr. Baca and Mr. James Woelfel each testified; Artcraft also presented the testimony of Ms. Angie Murphy a customer service underwriter for SCF (the state workers compensation underwriter) and Mr. David West, who was employed by Floor Studio and worked on the project for Floor Studio. Ninety exhibits were admitted into evidence. Mr. James Woelfel’s Testimony Mr. Woelfel testified that Artcraft bid on and was awarded the contract for granite and carpet work at the project. Artcraft does not do carpet work and subcontracted that work to Floor Studio. Artcraft choose to work with Floor Studio because Artcraft had a previous relationship with Mr. West, who was employed by Floor Studio. At the time Artcraft accepted Floor Studio’s bid to do the carpet and tile work, Mr. Woelfel and his father thought that Artcraft was allowed to subcontract with Floor Studio because Artcraft, although not licensed for carpet, was licensed by ROC. The Woelfel’s now understand that Artcraft contracted beyond the scope of its license when it hired Floor Studio. The preponderance of evidence shows that Artcraft contracted beyond the scope of its license. See A.R.S. § 1-215(17)(knowingly requires knowledge only of the act, not that the act is prohibited). Artcraft became involved in a dispute with the general contractor on the project and Artcraft was not paid for its or Floor Studio’s work on the project. Artcraft hired counsel to pursue a claim for $74,000.00 against the general contractor. Artcraft eventually settled that claim for $68,000.00, but Artcraft had to pay its own attorney’s fees.

According to Mr. Woelfel, Artcraft settled the matter for $68,000.00 because Artcraft learned that Floor Studio was not licensed during part of the time that Floor Studio was working for Artcraft. Mr. Woelfel believed that because Floor Studio was not licensed during the entire project, Artcraft was left in a weak position to negotiate with the general contractor because Artcraft would not have been able to prevail in a civil lawsuit. Mr. Woelfel agreed that Artcraft has not paid Floor Studio for the work on the project, but asserts that Floor Studio had agreed to allow Artcraft time to pursue its claim against the general contractor before Artcraft would be required to pay Floor Studio. But before the settlement was entered, Floor Studio filed Complaint No. 07-0027 with ROC. Mr. Woelfel believed that Mr. Baca had agreed that Artcraft would “front” the attorney’s fees for the dispute with the general contractor, but that Floor Studio would provide a contribution once the matter was resolved. After the settlement with the general, Artcraft offered Floor Studio $31,000.00 to settle the Floor Studio contract. Floor Studio rejected that offer. Mr. Woelfel testified that the $31,000.00 settlement offer was discounted from the full contract amount because Artcraft learned that Floor Studio did not have workers compensation or liability insurance during the project and Artcraft needs to be protected if it is audited by its insurance carriers, and because Artcraft had paid about $14,000.00 in attorney’s fees to reach the settlement with the general contractor. Mr. Woelfel estimates that an insurance audit would cost Artcraft between $2,000.00 and $5,000.00. Mr. Woelfel agreed that the contract between Floor Studio and Artcraft calls for Floor Studio to be paid when Floor Studio completed its work. Mr. Woelfel also testified that according the general contractor Floor Studio did not complete its work. Artcraft was back-charged for some of Floor Studio’s work (and some of its own work), but Mr. Woelfel attributed this to the general contractor not giving Artcraft or Floor Studio enough time to finish the work after the general contractor called Artcraft back to the project to finish a small amount of work.

Mr. Tim Barrow, the general contractor’s project manager allowed alcohol to be consumed on the job and, in Mr. Woelfel’s opinion, was not competent. Mr. Baca’s Testimony Floor Studio has three licenses; only License No. 126362 (Class L-08) was used for the project. License No. 126362 was suspended from July 29, 2005 through September 12, 2005. Mr. Baca learned of the suspension from a customer. According to Mr. Baca, the suspension was as a result of Floor Studio’s failure to file its 2004 annual corporate report, which resulted in the corporation being dissolved. Mr. Baca was the statutory agent and he did not report a change of address, which resulted in Floor Studio not receiving notices of delinquency related to its corporate filings. On or about August 3, 2005, during the time Floor Studio’s License No. 126362 was suspended, Floor Studio bid on the project, which bid was accepted by Artcraft. See Artcraft Exhibit 36. Mr. Baca’s recollection was that Floor Studio did not start work on the project until September 20, 2005, which as after its license was reinstated, because the carpet was not delivered until that date. But Mr. West testified that Floor Studio started work some time before September 16, 2005, although he was not sure of the exact date. According to Mr. West’s testimony, Floor Studio started work without the carpet on the project site, worked for several days and then returned to the project site about a week later when the carpet had been delivered. Floor Studio hired Gonzalo Vaca to do the carpet and tile work at the project. Mr. Vaca then hired his own crew. Floor Studio has used Mr. Vaca’s services on anywhere from 80 to 200 jobs over the last 6 years. Floor Studio submitted at least three invoices to Artcraft, one of which was submitted prior to completion of the work, and a second after the project was completed. Floor Studio submitted into evidence insurance certificates that purport to show that Floor Studio kept its workers compensation policy active at all times relevant to this

matter. See Floor Studio Exhibit 11. (Floor Studio’s Exhibit 11 consists of several pages one of which was admitted as Artcraft Exhibit 69B.) According to Mr. Baca there was a short gap in coverage, but that was because the Floor Studio renewal application was not acted on due to an SCF employee at being on maternity leave. But Ms. Murphy testified that she checked the SCF records and Floor Studio was not insured from about December 15, 2004 through October 28, 2005, and that one of the certificates of insurance Floor Studio had entered into evidence was not authentic. See Artcraft Exhibit 69B. Mr. Baca agreed that he had been at a meeting when Artcraft’s intention to pursue a claim against the general contractor was discussed. Mr. Baca also agreed that Artcraft’s claim was for money owed to both Artcraft and Floor Studio for work at the project. According to Mr. Baca, at that meeting he sat quietly and only asked one or two questions, and he did not agree to any fee sharing arrangement or that Floor Studio would allow Artcraft to pursue its claim against the general contractor before Artcraft was required to pay Floor Studio. But Mr. West provided testimony that tends to show that Mr. Baca did have an agreement with Artcraft by which Floor Studio would be paid when Artcraft was paid. Mr. Baca also testified that he did not feel that Artcraft provided him with enough information about the progress of the claim against the general, and when he got the $31,000.00 settlement offer from Artcraft, he felt that Artcraft was attempting to make Floor Studio pay the entire attorney’s fees, and so he filed Complaint No. 07-0703 with ROC. Mr. Baca cannot be considered a credible witness based on Ms. Murphy’s testimony with respect to the workers compensation insurance and Mr. West’s testimony with respect to the agreement with Artcraft. The preponderance of evidence shows that Floor Studio did not have workers compensation insurance from about December 15, 2004 through October 28, 2005. The preponderance of evidence shows that Floor Studio did agree to allow Artcraft to collect from the general contractor prior to Artcraft paying Floor Studio, and that Mr. Baca knew that Floor Studio would be responsible for some portion of the

attorney’s fees. But the preponderance also shows that this forbearance agreement was entered after Floor Studio had substantially completed its work at the project, at which time Artcraft was contractually obligated to pay Floor Studio. Numerous checks written on Floor Studio accounts in 2005 that had been returned for insufficient funds were entered into evidence. See e.g., Artcraft Exhibits 102 through 107. These Exhibits demonstrate that an excerpt from Floor Studio’s Quick Books accounting program was not reliable. Floor Studio License No. 126362 was due to be renewed by August 31, 2005, but ROC did not receive Floor Studio’s renewal until October 31, 2005. See Artcraft Exhibit 50. Floor Studio License No. 126363 was also due to be renewed by August 31, 2005, but ROC did not receive Floor Studio’s renewal until October 31, 2005. See Artcraft Exhibit 52. Mr. Baca agreed that Mr. Barrow was not a good project manager and that Mr. Barrow allowed drinking on the job. Ms. Murphy’s Testimony Ms. Murphy is an underwriter with SCF, which issues workers compensation policies. Ms. Murphy reviewed Floor Studio’s file. That file shows that Floor Studio was issued a policy in July 2004, but that policy was terminated in December 2004 because Floor Studio did not make its payments. The SCF records show that Floor Studio did not have workers compensation insurance during June 2005. Ms. Murphy reviewed Artcraft Exhibit 69B, a certificate of insurance that purports to show that Floor Studio did have coverage during June 2005 and her opinion is that that document is not authentic. Ms. Murphy based that opinion on her review of the file showing that Floor Studio did not have coverage and discrepancies in how the certificate was prepared including that Artcraft Exhibit 69B has a policy number that would not have been used after the initial policy was cancelled in December 2004.

The preponderance of evidence shows that Artcraft Exhibit 69B is not an authentic insurance certificate. Mr. West’s Testimony Mr. West is now self-employed but worked on the project as an employee of the Floor Studio. Mr. West prepared the bid that was accepted by Artcraft. Mr. West was not quite sure when Floor Studio actually started work on the project, but he knew it was before September 16, 2005 because he moved into a new house on that date. As best as Mr. West could recall, Floor Studio worked doing stripping and padding for 2 or 3 days on which there was no carpet at the site. Floor Studio then pulled off the project for about a week and returned after the carpet was delivered. Based on this testimony and the evidence showing that the carpet arrived on September 20, 2005, the preponderance of evidence shows that Floor Studio was working on the project as early as September 10th, which was before its license was reinstated. Several of Floor Studio’s paychecks to Mr. West were returned for insufficient funds and eventually the bank would not allow Mr. West to present checks drawn on Floor Studio’s account. Mr. West was also aware that Floor Studio had not paid all of its suppliers and was experiencing financial difficulties in 2005. At some point Mr. Baca told Mr. West and other Floor Studio employees that there was going to be a lawsuit against the general contractor but that that would take a long time. Mr. West could not recall all the details but did understand that Floor Studio and Artcraft had entered some sort of agreement with respect to that lawsuit. Mr. West believed that Floor Studio completed all its work at the project, but that the entire project was not carpeted because there was not enough material. Floor Studio was responsible only to install the material it was provided, not for ensuring that there was enough material. CONCLUSIONS OF LAW The complainant bears the burden of proof, and the standard of proof on all issues in this matter is by a preponderance of the evidence. See A.A.C. R2- 19-119. Consequently, Floor Studio must prove by a preponderance of evidence the allegations in

Citation and Complaint 07-0027, and Artcraft must prove those allegations in Citation and Complainant 07-0703. A preponderance of the evidence is “[e]vidence which is of greater weight or more convincing than the evidence which is offered in opposition to it; that is, evidence which as a whole shows that the fact sought to be proved is more probable than not.” Black’s Law Dictionary 1182 (6th ed. 1990). Citation and Complaint 07-0027 Citation and Complaint 07-0027 alleged that Artcraft may have violated A.R.S. § 32-1154(A)(7), (11) and (17). Under A.R.S. §32-1154(A)(7), a contractor is subject to discipline for “the doing of a wrongful or fraudulent act…resulting in another person being substantially injured.” Floor Studio has not shown by a preponderance of evidence that Artcraft committed any wrongful or fraudulent act that caused Floor Studio substantial injury. Although Floor Studio alleged that Artcraft’s failure to pay the contract amount caused Floor Studio financial harm, the preponderance of evidence shows that Floor Studio was experiencing financial difficulties before it started work on the project. Under A.R.S. §32-1154(A)(11), a contractor is subject to discipline for “Failure by a licensee … to pay monies in excess of seven hundred fifty dollars when due … when the licensee has the capacity to pay or, if the licensee lacks the capacity to pay, when the licensee has received sufficient monies as payment for the particular construction work project or operation for which the services or materials were rendered or purchased.” The preponderance of evidence shows that at the time Floor Studio agreed to allow Artcraft to collect from the general contractor prior to paying Floor Studio, Artcraft was in violation of A.R.S. §32- 1154(A)(11) because that agreement came after Artcraft was obligated to pay Floor Studio. In this disciplinary proceeding the fact that Floor Studio’s license was suspended is not material. See Twin Peaks Construction v. Weatherguard Metal, 154 P.3d 378, 498 Ariz. Adv. Rep. 3 (App. 2007). Artcraft’s offer of $31,000.00 represents an undisputed debt and that amount should be paid. Whether or not Artcraft owes any additional amount is dependent on the terms of the parties’

forbearance agreement and resolution of that issue should be considered in a civil court of competent jurisdiction. Under A.R.S. § 32-1154(A)(17), a contractor is subject to discipline for “Knowingly contracting beyond the scope of the license or licenses of the licensee.” The preponderance of evidence shows that Artcraft knowingly contracted beyond the scope of its license when it entered the contract with Floor Studio. Because Artcraft has violated A.R.S. § 32-1154(A) discipline of Artcraft’s License is appropriate. Citation and Complaint 07-0703 Citation and Complaint 07-0703 alleged that Floor Studio may have violated A.R.S. § 32-1154(A)(7), (13) (namely A.R.S. § 32-1124(B)) and (18). The preponderance of evidence does not show that Floor Studio committed a wrongful or fraudulent act that caused Artcraft substantial injury. The preponderance of evidence shows that the Floor Studio was not appropriately licensed when it bid and worked on the project and that Floor Studio did not have workers compensation insurance, but the preponderance of evidence does not show that these acts caused Artcraft any actual injury. Mr. Woelfel testified that Artcraft was at risk of an insurance audit, but this is speculative, and not an actual injury. Under A.R.S. § 32-1154(A)(13) a contractor is subject to discipline for “Failure in any material respect to comply with [Title 32, Chapter 10].” Citation and Complaint 07-0703 alleged Floor Studio violated A.R.S. § 32- 1124(B). Artcraft presented no evidence to show that Floor Studio committed the alleged violation. Under A.R.S. § 32-1154(A)(18) a contractor is subject to discipline for “Contracting or offering to contract or submitting a bid while the license is under suspension or while the license is on inactive status.” The preponderance of evidence shows that the Floor Studio was not appropriately licensed when it bid and worked on the project. Because Floor Studio has violated A.R.S. § 32-1154(A) discipline of Floor Studio’s License is appropriate.

RECOMMENDED ORDER

IT IS RECOMMENDED that commencing on the effective date of the entered Order in this matter that Artcraft’s Class L-48 License No. 136040 be suspended until Registrar of Contractors receives written proof that Artcraft has submitted payment of $31,000.00 to Floor Studio for its violation of A.R.S. §32-1154(A)(11). IT IS FURTHER RECOMMENDED that if Artcraft provides written proof Artcraft has submitted payment of $31,000.00 to Floor Studio on or before the effective date of the entered Order in this matter, then the above-provided indefinite license suspension shall not take place. IT IS FURTHER RECOMMENDED that commencing on the effective date of the entered Order in this matter Artcraft’s Class L-48 License No. 136040 be suspended for 7 days for its violation of A.R.S. §32-1154(A)(17). IT IS FURTHER RECOMMENDED that commencing on the effective date of the entered Order in this matter case that Floor Studio’s Class L-08 License No. 126362 suspended for 7 days for its violation of A.R.S. §32- 1154(A)(18). In the event of certification of this Administrative Law Judge Decision by the Director of the Office of Administrative Hearings, the effective date of the Order will be 40 days from the date of that certification.

Done this day, July 19, 2007

______________________________________ Thomas Shedden Administrative Law Judge

Original transmitted by mail this ____ day of ____________, 2007, to:

Fidelis V. Garcia, Director Registrar of Contractors Legal Department 800 West Washington, 6th Floor Phoenix, AZ 85007

By ___________________________ -----------------------

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