ALJDEC decisions subject to certification as final

07F-0278-ROC · Registrar of Contractors · 2007-10-10

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: March 5, April 20, September 25th and 26, 2007 APPEARANCES: Jay Adelman, Esq. and Mike Hensley, Esq., appeared for the Complainant. Mark Deatherage, Esq. and Walter Ulrich, Esq., appeared for the Respondent. [1] ADMINISTRATIVE LAW JUDGE: Allen Reed _____________________________________________________________________ Preliminary Matters A significant portion of the discussion in this case concerns matters which are not of direct relevance to the allegations in the Citation and Complaint because they occurred before the Respondent was licensed by the Registrar of Contractors (ROC). These matters are discussed so that a more complete picture can be presented with respect to the allegations which are directly relevant to the allegations arising after the Respondent was licensed. In essence what began as a family dispute in which the ROC had no interest and over which the ROC had no jurisdiction, evolved into an issue before the ROC by virtue of the Respondent becoming licensed and the subsequent actions of the Respondent as a licensed contractor with respect to the Complainant as a licensed contractor. The pre licensure actions of the Respondent’s the principals as well as the Complainant’s principal, are relevant in determining the state of mind, intent and motivation of the parties, in reaching the legal conclusions in this case.

Findings of Fact 1. Wayne Ingram (Ingram), is the majority shareholder and president of the corporate Complainant, Ingram Lath and Plastering, Inc. (ILP), a Registrar of Contractors (ROC) licensed[2] plastering contractor. 2. Sometime in 1999 to 2000, after illness, Ingram was undecided as to whether he wanted to sell the business. In January, 2001, the business was valued at about $1,000,000.00 for the purpose of establishing a family trust.[3] 3. Ingram spoke with his daughter Allyson Walts (Allyson) and son in law Butch Walts (Butch), who lived in Houston, Texas. Allyson asked her father not to sell the business. At the time Butch and Allyson were operating a tennis academy. 4. Allyson and Butch came to Phoenix and began working for the Complainant who, over the next year to a year and a half, showed them how to operate the business. Ingram gave Allyson approximately 12% of the stock and made her a vice president in the company. Butch was employed as a superintendent. 5. Based on the most competent evidence, the plan was to turn the business over to Allyson and Butch over an unspecified period of time by gifting stock and allowing Butch and Allyson to purchase corporate stock from Ingram with a portion of corporate accumulated earnings. This plan was never put in writing and is not shown to be legally binding. 6. Allyson and Butch were paid salaries, were able to write checks and could give bonuses to employees and themselves. Ingram wanted the company to continue to maintain a financial reserve account for various business and corporate needs. According to ILP’s accountant, Butch and Allyson were to receive ILP net profits. 7. According to Allyson, the reserve operating account was subsequently put into her name because it would garner greater interest. 8. Between approximately 2001 through much of 2005, Ingram obtained certain “perks”[4] from the corporate Complainant. These may have run to $10,000.00 a year. Allyson’s testimony put the perks at $25,000.00 a year but this figure was not shown to be accurate. In addition, Ingram drew director’s fees claimed to be $25,000.00 a year. The figure was not challenged but it was also not clearly proven by any supporting evidence. An additional assertion was that Ingram’s wife, Theresa, was also receiving director’s fees but again there was no supporting evidence. Ingram testified he was paid a salary of $1,000.00 a week until 2001 but did not receive year end bonuses after 2000. 9. In general, the evidence showed that Ingram had minimal contact with operating the corporate Complainant during the 2001 to 2005 period, and that Allyson and Butch essentially ran the company as they saw fit. 10. Ingram testified that Allyson and Butch were not maintaining the reserve and in the latter part of 2005, the ILP accountant, Darrell Back (Back), by way of warning, told him to look at the profit and loss statements for the company. The accountant testified at the hearing that he did not give such a warning to Ingram[5]. 11. Ingram testified that Allyson was charging personal expenses to the company. The allegations were rather general and except for certain admissions such as Allyson’s car tires, car insurance (Exhibit 17), and the like, there was little specific evidence regarding exact amounts of corporate finances (aside from salary and bonuses) shown to have been for spent for the personal use of Allyson or Butch.[6] 12. Butch was preparing and entering contracts on behalf of ILP with other contractors based on the facts he had apparent authority to do so. Impliedly he had actual authority[7]. Prior to March 18, 2005[8], Butch on behalf of ILP submitted a proposal to Madison Couturier Custom Homes to do lath and stucco work at 122nd Street and Dynamite Road (Golf Club-Scottsdale). The initial price term was $24,484.00. Prior to November 11, 2005, Butch submitted proposals to Madison Couturier Custom Homes on behalf of ILP for plastering and stucco work at Lot 165 Saguaro Forest (the Keller residence). The initial price terms of the proposals were $33,133.00 and $67,266.00. Prior to August 5, 2005, Butch submitted a proposal to Madison Couturier Custom Homes on Lot 196 Whisper Rock (the Konerko residence), for lath and stucco work. The initial price term was $87,660.00. (The proposals are part of Exhibit 6). 13. On or about September 23, 2005 Butch, Allyson, Ingram and their accountant had a meeting in an attempt to resolve what had become a family dispute regarding the corporate Complainant (ILP), including the slow transition of ownership. The parties could not reach an agreement, and Butch and Allyson stated they would have to obtain their own ROC license. Ingram told them to go ahead.[9] 14. On October 24, 2005, Allyson and Butch as members of the Respondent LLC, Ingram and Walts Plastering LLC (IWP), obtained a Class K-36 license from the Registrar of Contractors (ROC). 15. The Annual Report filed by ILP with the Arizona Corporation Commission in November 2005, did not list Allyson as an officer of the corporation. Ingram had removed her after Allyson had said she no longer wanted to be involved.[10] 16. Dan Couturier testified he had done some work with Ingram and ILP in 1999. After that time he worked solely with Butch representing ILP. Couturier believed IWP simply represented a name change[11] and that Butch was merely continuing to represent the same entity under a different name. 17. Christy Smith (Smith), a custom home builder (Casa del Oro), testified she had initially done business Ingram and ILP but that Butch had been the “go to guy” the past few years. Smith-Casa del Oro had a number of contracts with ILP. Among them were contracts for lots 122 and 12 Whisper Rock, and lot 286 Mirabel. Smith testified she received information that ILP was forming into a new entity. Smith told Butch that purchase orders which required signing could be amended later to reflect the new entity. Beginning May 15, 2006, Smith-Casa del Oro began paying IWP for the work done on the referenced projects. The amount paid on work done on construction at lot 12 was $18,151.00 and at 122, $5,013.00 (Exhibit 4)[12]. 18. Ray Combs of CRC testified he had worked solely with Butch at ILP over the past five to six years and that as far as he knew, IWP simply constituted a name change for ILP. On May 11, 2005 Butch submitted a proposal on behalf of ILP to CRC Contracting Inc., on Lot 147 Mirabel Village(Harris project). The initial price term was $27,482.00. From May 23, 2006 to July 10, 2006, CRC issued checks totaling approximately $12,836.00 to IWP on the Harris project. At the same time it appears that insurance for the continuing project was being paid for by ILP (Part of Exhibit 3). 19. On January 27, 2006, after having been removed as vice president, Allyson wrote an ILP check in the amount of $6,000.00 to IWP (Exhibit 18) . Allyson testified this was a the bonus for herself and Butch.

20. A check for $6,687.20 from Colton Construction dated June 23, 2006 was voided and was reissued to ILP (Exhibit 5). 21. Additional exhibits (10,11, 12, and 15), show IWP received not only money owed to ILP, but also the benefit of materials and labor paid for by ILP[13]. 22. On March 8, 2006, Butch wanted Ingram on behalf of ILP, to sign an agreement assigning all rights and responsibilities of ILP for current projects, to IWP. A number of other conditions (lease and equipment rights, indemnification, etc.) were also set forth in the document. Ingram declined to sign the document. 23. IWP sent out flyers stating “Please make note for your records that we are changing our name: Ingram and Walts Plastering, LLC” A new address was also listed for IWP. This is clearly an incorrect statement. IWP was a new entity and not the same entity as ILP. Allyson testified she informed clients orally that IWP was in fact a new entity. It is apparent from the testimony cited above that some clients did not receive Allyson’s purported verbal clarification. 24. Beginning in April 2006, new proposals were submitted by IWP (Butch) to Madison Couturier on the Golf Club, Keller, and Konerko projects. The existing referenced ILP-Madison Couturier contracts were voided by Butch and replaced with new contracts between IWP and Madison Couturier on the above projects (See Exhibit 6). This is a clear conflict of interest. The remaining financial benefit of the contracts would flow to IWP rather than ILP. Butch could not void these ILP contracts while still employed by ILP. He was acting on behalf of IWP to the detriment of ILP. Butch acknowledged that IWP invoiced for some work done by ILP, that ILP equipment and materials was used on some IWP jobs . 25. A counterargument is that Ingram had declined to cooperate with Butch and Allyson and essentially told them to start their own company. Their choice under the circumstances was to walk away from ILP believing the customers would be abandoned because Ingram could not or would not complete the contracts. This would damage ILP as well as Butch and Allyson, and IWP[14]. Another choice would be to continue working for ILP until the remaining ILP jobs were completed. The fact remains that neither Butch nor Allyson know what would have happened if ILP had the opportunity to finish the projects without them. 26. On May 26, 2006, Allyson sent Ingram an e-mail (Exhibit 2) which stated she and Butch were resigning from ILP with the proviso that Ingram was not to dissipate corporate assets in derogation of Allyson’s minority shareholder rights. Allyson stated ILP still had two ongoing jobs (Bernstein residence and Fisher custom homes). Allyson testified that $192,000.00 remained in accumulated earnings and $2,000.00 in the ILP checking account. This was not confirmed by any supporting evidence nor was it substantially refuted aside from the general assertion by Ingram that Allyson and Butch left close to nothing. ILP did receive a workman’s compensation refund because of overpayment when Allyson and Butch were operating the company. 27. Ingram testified Allyson and Butch took all the files and other paperwork for most of the ILP jobs. This was denied by Allyson and Butch. Aside from the accusation there is no clear evidence of what if any paperwork was missing and who may have taken it. Absent more specific evidence there is no reason to consider the accusation as proof of any violation[15]. 28. On August 26, 2006 ILP suspended business and requested that accounts owing on ILP contracts but amended to IWP, be paid to ILP and if payments were made to IWP on ILP contracts, to contact ILP’s (Ingram’s) attorneys.[16]

Conclusions of Law The Citation and Complaint alleges violations of A.R.S §32-1154(A)(7), a wrongful act with substantial injury, (A)(16), false advertising where members of the public may be misled or injured. 1. The Complainants have the burden of proof by a preponderance of the evidence under Culpepper v. State, 187 Ariz. 431 (1996 App.)[17] and A.A.C. R2-19-119. 2. A “preponderance of the evidence is such proof as convinces the trier of fact that the contention is more probably true than not.” Morris K. Udall, Arizona Law of Evidence, §5 (1960). It is “evidence 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). 3. The evidence in an administrative hearing must be “substantial, reliable, and probative” (A.R.S. §41-1092.07(F)(1)). This means the Complainant has the affirmative responsibility to present sufficient competent evidence to meet the preponderance standard. The less demanding evidentiary standard in the administrative hearing does not mean that any type of evidence is entitled to serious consideration or significant weight. Although hearsay is admissible in administrative proceedings, the hearsay must be of a nature which would strongly indicate if not establish the information is accurate and reliable. 4. “Substantial evidence is evidence possessing something of substance and relevant consequence and which furnishes substantial basis of fact from which issues tendered can be reasonably resolved.” Black’s Law Dictionary, Special Deluxe Fifth Edition, (St. Paul Minn.: West Publishing Co., 1979) p. 1281, citing State v. Green, 218 Kan. 438, 544 P. 2d 356, 362. 5. In the opinion of this Administrative Law Judge (ALJ), the parties (Complainant) chose a poor venue to resolve what is clearly a family dispute which has an attenuated relationship to the ROC, simply because family members are in the business of contracting. Nevertheless, there is a tenuous connection with contracting and the matter was heard over a period of four days. The time, effort and expense for both sides, plus the utilization of limited ROC and State resources can hardly be said to have been worth the endeavor. The case is one where a father believes he has been taken advantage of by his daughter and son in law and seeks vindication and possibly vengeance. The State is a poor resource for such a purpose. The facts tend to show that Butch and Allyson ran the business as their own, anticipating it would theirs over time. The Complainant was satisfied to have little to do with the business for approximately five years except to collect whatever money he believed he was entitled to. 6. Nothing done by Allyson or Butch prior to becoming a licensed LLC can be considered a violation under (A)(7) a wrongful act or (A)(16) (false advertising) while affiliated with ILP. The focus is primarily on things done by Butch and Allyson acting as IWP after a contractor’s license was issued, to determine if a violation exists. The focus is therefore on acts committed by IWP and the impact of those acts on ILP 7. The most egregious action by Allyson and Butch, was acting in their dual capacities for ILP and IWP. Allyson wrote a $6,000.00 ILP check to IWP for their bonuses. Clearly this is taking assets from ILP (whether a legitimate bonus or not) and transferring the asset directly to IWP, a now competing contractor. The reason for this circuitous bonus payment was not specifically explained (accounting and tax reasons) but it was not shown to be justified or appropriate under the facts of the case.[18] It is concluded this was a wrongful act under the statute and the $6,000.00 constitutes a substantial injury. 8. The transfer of various contracts to IWP and receipt of payment on those contracts to IWP was also wrongful act. The substantial injury is the amounts paid to IWP on the ISP contracts which were performed in significant part with materials, labor, insurance, and other ILP assets. The Respondent did not establish that the work performed by IWP justified the payments made to IWP so as to negate the substantial injury. No specific amount is attached to the injury because although specific amounts paid to IWP were due ILP, and legally the entire contract amount was due ILP, IWP has a potential claim by way of quantum meruit for the work actually done and expenses of IWP in completing the various projects. Restitution will only be ordered where the amounts due are reasonably certain. 9. Understandably, it is difficult to clearly separate the family dispute from the relationship of the parties as licensed contractors. However, the line was clearly crossed by taking things of value (utilizing assets, transferring contracts, obtaining payment on those conracts, and a direct payment of $6,000.00) from ILP for the benefit of IWP. Even thought the ultimate beneficiaries are presumed to be Allyson and Butch, the Respondent was used as a conduit to effectuate the wrongful and injurious conduct. 10. The Respondent, IWP, (Allyson and Butch as principals) had a choice. They could stay with ILP until the contracts were completed and ILP was paid or they could resign form ILP and not transfer ILP contracts to or use ILP assets for IWP. For the reasons stated and to the extent that the licensed entity IWP benefited from the acts of Allyson and Butch at the expense of ILP, the Respondent, IWP, is in violation of A.R.S. §32-1154(A)(7). 11. As to the (A)(16), the violation is also proven. The information sent by Allyson and Butch to contractors claiming a business name change was clearly false and deceptive. It was advertising in the sense that it was an announcement by IWP for the purpose of obtaining business from a segment of the business world (public) which would provide ongoing business to IWP. A potential harm to the that public was the fact that in paying IWP on ILP contracts, contractors were exposed to legal and financial liability for failing to pay ILP. The violation should require no further analysis. Recommended Order It is recommended commencing the effective date[19] of the Order issued in this matter that the Respondent’s Class K-36 license shall be suspended until the Respondent pays or tenders payment in the amount of Six Thousand ($6000.00) dollars, to the Complainant[20]. It the Respondent pays or tenders payment as required by the Order in this case, the suspension shall not take place.

Done this day, October 11, 2007

______________________________________ Allen Reed 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 ___________________________

----------------------- [1] Jay Adelman and Mark Deatherage were present for all four days of hearing [2] The Complainant has two ROC licenses, ROC 069740 and ROC 040974 [3] Exhibit 6: Investment value with Allyson and Butch as the investors, as opposed to Fair Market Value. According to Ingram, $500,000.00 was in an accumulated earnings account for his retirement which could not be accessed by Allyson. [4] Gas, possibly insurance, petty cash etc. [5] Exhibit 20 shows a cash basis loss of $82,540.70 for the 12 months ending June 30, 2005. This was 7.9% of gross revenues. The accountant, Darrell Back testified ILP converted to an accrual basis at the end of the calendar year. Back was also the IWP accountant. [6] Ingram’s allegations regarding Allyson using corporate assets for a Mercedes automobile, ski trips, a beach house etc., were not substantiated by any competent evidence. In addition Ingram’s assertion that ILP lost money for five years since 2001 was not confirmed by independent evidence.

[7] It cannot be reasonably argued that the business could be run for over four years by Butch and Allyson without Ingram knowing and acquiescing to Butch’s authority especially since he was apparently benefiting from the continuation of the business by continuing to draw “perks” and director’s fees. On the one hand Ingram asserts he was significantly involved in the business and on other occasions he knew little about what was going on. Ingram cannot legitimately argue both positions at the same time. [8] The “prior to” language is based on the dates of acceptance of the proposal by Dan Couturier. [9] This comment is relied upon as evidencing approval by Ingram for Butch and Allyson to leave. Irrespective of any approval to leave ISP, it does not constitute approval to transfer ISP contracts or financial assets to a competing licensed entity. [10] Testimony of Darrell Back, Accountant [11] Paragraph 16 addresses IWP sending out name change information. [12] The unidentified lot with payments of $2,393.00 to IWP appears to have been lot 286. [13] Whether IWP also benefited from ILP insurance coverage was not satisfactorily established. A relevant exhibit (no. 14) is of record but was not specifically addressed with respect to the benefit derived by IWP. [14] It would be difficult for Butch to reestablish confidence from customers if he abandoned them as ILP and did not make some provision for the completion of work. Customers would not be concerned with the legalities of family and corporate disputes if work is not getting done. The assertion that ILP could not have finished the contracts is conjectural although Ingram’s assertions that ILP would have finished them is also conjectural. There is no assurance the necessary ILP employees, Gutierrez and Correa, would stay on the job. The fact that Allyson and Butch as IWP also took two ILP senior employees, contributes to a conclusion of likely wrongful conduct by IWP in that by taking ILP employees, it made it more difficult for ILP to complete the contracts thereby creating the condition whereby IWP could claim ILP couldn’t complete the contracts. Allyson testified ILP (Ingram) declined to finish the Bernstein and Fisher jobs and IWP had to finish them. It is unclear if this was because ILP no longer had the resources due to actions by Allyson and Butch (IWP). [15] The Paul Lovato Homes lien issue is of questionable relevance. The estimated lien amount of $20,543.00 is entry dated May 9, 2005, long before the Respondent IWP was formed. The amount of $5,500.00 entry dated March 8, 2006, merits some consideration as do other lien amounts including the amount of $5,000.00 on Clubhouse Scottsdale, entry dated February 21, 2006. [16] Also see Exhibit 10, the letter from counsel for ILP. [17] The Culpepper case applies to an administrative agency. However, since any violation established in this case may result in a sanction by the agency, the ruling in the case applies equally to the Complainant. [18] Tax and accounting issues were not directly discussed. [19] Forty (40) days from the date of the Order issued in this matter, or from the date of certification if certified by the Director of the Office of Administrative Hearings. [20] The $6,000.00 (the bonus check made out to IWP) does not represent the maximum which might be due the Complainant. It is however, an amount certain which can be awarded under A.R.S. §32-1156.01. Any further sums sought by the Complainant will have to be sought in a more appropriate (civil) forum.

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