ALJDEC decisions subject to certification as final

09F-1210-ROC · Registrar of Contractors · 2009-08-24

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: August 19, 2009 APPEARANCES: The Complainants represented themselves. Noel Hebets, Esq. appeared for the Respondent. ADMINISTRATIVE LAW JUDGE: Allen Reed _____________________________________________________________________ Findings of Fact 1. The applicable time frame for this case commences in the latter part of 2006. The Complainants were acquainted with a person identified as Scott Ziff (Ziff), a mortgage broker. 2. Ziff was affiliated with John Fleming (Fleming) in a business identified as John Scott Development LLC (John Scott LLC). 3. Fleming owned raw land in the Rio Verde area of Maricopa County. 4. Ziff informed the Complainants of the opportunity to purchase a one acre lot in the Rio Verde area from Fleming. 5. Ziff referred the Complainants to the Respondent for construction of a home on the Rio Verde property. 6. On January 25, 2007, the Complainants executed a contract with the Respondent for the construction of a home on the Rio Verde property. The Complainants had not seen the property prior to entering the contract with the Respondent, nor had they obtained a deed for the land or financing for the construction of the home. According to the contract, the “Sales Price” (construction cost) was $549,025.00 of which $60,000.00 was to be the Respondent’s management / contractor / supervision fee. An attachment to the contract listed Pre Construction “Soft Costs” at $30,300.00. These “Soft Costs” were itemized for the building and septic permits, site plan engineering, percolation and soil tests, grading and drainage plan, surveying and staking, and structural engineering. The Soft Costs did not include an identifiable referral fee or management fee. 7. The Respondent’s contract with the Complainants appears to be identical to a previously cancelled contract with a party identified as Fares Fadoul. This is noted because in conjunction with Complainants’ Exhibit 1, it indicates a somewhat standardized method of operation among the Respondent, John Scott LLC (Ziff and Fleming), and lenders with respect to the sale of land by John Scott (Ziff and Fleming) and construction of homes by the Respondent in the Rio Verde area. 8. Under the contract, the completion of the construction of the home was to be 210 days from the “start date.” The start date is when the building permit was issued. 9. On February 28, 2007, the Complainants obtained financing through Countrywide Home Loans.[1] The loan expiration date was August 28, 2008. This was the latest date for the completion of construction of the Complainants’ home. The Respondent was aware of the loan expiration date. 10. Fleming had signed a warranty deed dated January 19, 2007 conveying the subject property to the Complainants. However, the deed was not notarized until March 1, 2007 after the Complainants had obtained financing. It was recorded on March 2, 2007. The deed sets the consideration for the conveyance at “$10.00 and other valuable considerations.” According to the Complainants, the cost of the land was $275,000.00. 11. The Respondent received $50,000.00 as the initial payment from Countrywide. Neither the Complainants nor the Respondent could reasonably explain why the initial payment exceeded the “Soft Costs” of the contract by nearly $20,000.00. The Respondent claimed the excess payment may have constituted a deposit. Normally a deposit is security for future performance, as well as a sign of good faith. The contract between the parties was executed over a month before financing was obtained and the resultant $50,000.00 payment to the Respondent. The only reference to a deposit in the contract between the Complainants and Respondent is a general reference to an earnest money deposit which may be retained as liquidated damages if a loan commitment is not obtained. However, in the instant case a loan commitment was clearly obtained from which the $50,000.00 payment was made to the Respondent. The Respondent’s explanation makes no sense. The contract in the instant case does not provide for payment of an earnest money deposit. The contract clearly references and identifies “Soft Costs” and not a deposit. Based on the evidence of record, the Respondent’s assertion that any portion of the $50,000.00 received by the Respondent constituted a deposit, which was subject to becoming liquidated damages, is considered disingenuous and is not accepted.[2]

12. In early April of 2007, the Respondent obtained the services of Graham Engineering and Surveying, Inc. (Graham Inc.) to prepare the site plan required by Maricopa County before the county would issue a building permit. The site plan included three initial phases beginning with topography and progressing to locating the house on the site, grading and drainage, hardscape plan, and such additional information as may be required due to unique lot features. 13. Graham Inc. civil engineer Richard Heisler (Heisler) testified that in late 2006 Maricopa County Planning and Zoning hired a new manager of the Drainage Review section and as a consequence the county review process for obtaining building permits became more involved, onerous, and brought the process to a “grinding halt.” 14. On May 1, 2007 John Scott LLC sent documentation to the Respondent whereby the Respondent would pay to John Scott LLC the amount of $25,000.00 in two installments of $12,500.00 for “professional and development services provided for” the Complainants on the subject property. Payment of the initial $12,500.00 is acknowledged in the document. The initial payment became due when the second construction draw “is gained.” At the hearing the Respondent referred to the payment as a “referral fee.” There is no evidence of a second construction draw. 15. According to the Respondent, this “referral fee” payment to John Scott LLC was made from his management fee. However, the Respondent presented no competent evidence that any portion of the management fee was part of the Soft Costs or that the initial overpayment of the Soft Costs was authorized for the purpose of paying a referral fee. The fact is that in the Respondent’s compilation of actual expenditures for Soft Costs (Exhibit Y), he specifically separates $7,500.00 as his management fee from the $12,500.00 fee to John Scot LLC. Clearly the $7,500.00 claimed as the management fee is insufficient to pay the initial $12,500.00 payment toward the referral fee. The issue becomes even more suspect in light of the fact that payment of $12,500.00 is acknowledged in a document which purports to be an agreement to pay that amount. As previously alluded to in paragraph 7, the Respondent and John Scott LLC (Ziff and Fleming) appear to have had a standardized but somewhat loose business relationship whereby financial transactions occurred and legal obligations were undertaken but formalities were not necessarily accomplished until after money changed hands. It is clear the Complainants did not know of and did not agree to this payment of a referral fee as a part of their contract. The evidence (specifically Complainants’ Exhibit 1), shows the nature of the arrangement between the Respondent, John Scott LLC (Ziff and Fleming), and to some extent Countrywide and other lenders with respect to a number of other land purchases and construction contracts. The Respondent testified that 29 of his 33 Rio Verde projects were through Ziff. Of 13 ongoing projects during the same time frame as the Complainants, only three were completed and 10 contracts were terminated after the Respondent sent a letter (Exhibit V) with termination of the contract offered as an option. According to the Complainants, they did not receive this letter. 16. Complainant William Bryant testified that over the relevant time period the Respondent gave numerous assurances that the construction of the home would be completed before the loan expiration date. Complainants’ Exhibit 1 shows the Respondent was clearly aware of the problems (delays) with the Drainage Review process[3] at the time of the contract with the Complainants. 17. In January 2008 (a year after the contract) the Respondent submitted an application for a building permit to Maricopa County. The application was resubmitted in February, 2008. A receipt for $500.00 toward the building permit and a receipt for $550.00 toward the septic permit are dated February 15, 2008. According to the Respondent, the county building code had been changed. The county did not issue the building permit for construction of the Complainants’ home. 18. On March 26, 2008, the Respondent met with the Complainants and again gave assurances that the construction could be timely completed. Only five months remained before the loan expiration. 19. Graham Inc. submitted information for five site plan reviews to Maricopa County between early March 2008 and early June 2008. The plans included “flipping” the floor plan[4] of the home for drainage reasons without the Complainants’ knowledge. Despite the revisions and reviews, the county did not issue a building permit. It was determined the home needed to be moved further to the south, but this would require a variance. On July 22, 2008 Heisler requested a variance. This is five weeks before the expiration of the time for completion of construction. It is uncertain if a formal decision was made on the variance request. 20. The Complainants were unable to obtain an extension time for the loan from Countrywide. Maricopa county did not issue a building permit and construction of the home never commenced. On August 21, 2008, the Complainants terminated the contract with the Respondent and requested return of any money paid to the Respondent. 21. According to the Complainants, their current liability on the loan is $360,000.00. The amount consists of the $275,000.00 paid to Fleming for the land, the $50,000.00 paid to the Respondent, plus interest that accrued on the loan. 22. The Respondent submitted Exhibit Y which lists actual expenditures on the project. These came to $38,096.87, but included $12,500.00 for the John Scott LLC referral and $7,500.00 for the Respondent’s management fee which were not part of the original “Soft Costs”. It is noted that these latter two costs almost equal the amount in excess of the original “Soft Costs” set forth in the attachment to the contract. Based on Exhibit Y, the actual “Soft Costs” paid by the Respondent are $18,096.87. The Complainants would therefore argue they are entitled to $31,903.13. Conclusions of Law The Citation and Complaint alleges violations of A.R.S. §32- 1154(A)(1), abandonment; (A)(2), departure from plans, specifications, or codes which is material and prejudicial; (A)(7), a wrongful act resulting in substantial injury. 1. The Complainant has the burden of proof, and the standard of proof on all issues is by a preponderance of the evidence. Vazzano v. Superior Court, 74 Ariz. 369, 249 P.2d 837 (Ariz. 1952); Culpepper v. State, 187 Ariz. 431, 930 P.2d 508 (App. 1996). 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). 2. 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. 3. “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. 4. The evidence is insufficient to establish abandonment or refusal to perform. Although the failure to timely obtain the necessary building permit raises serious questions about the Respondent’s motivation and commitment to accomplishing the contract, the evidence shows other factors not directly attributable to the Respondent, contributed to the delay. There is no violation of (A)(1). 5. With respect to (A)(2), the major deviation from the plans and specifications concerned the “flipped” floor plan. The Complainants were unaware of this but the home was never built and no prejudice is shown. There is no violation of (A)(2). 6. With respect to (A)(7), counsel for the Respondent argued that the Complainants terminated the contract and the Respondent is therefore entitled to the $50,000.00 payment based on the facts existing at the time of termination. Counsel also argued the term “wrongful act” as used in the statute requires malfeasance and not merely misfeasance. 7. Black’s Law Dictionary, Special Deluxe Fifth Edition, (St. Paul Minn.: West Publishing Co., 1979) p. 1446, citing County of Dupage v Kussel, Ill. App. 3d 272, 298 N.E.2d 323, 326 defines a wrongful act in pertinent part as “Any act which in the ordinary course will infringe upon the rights of another to his damage…” 8. Any suggestion that the Complainants have somehow been injured by the Respondent because they did not receive their “dream house” does not merit serious consideration. This is because it is difficult to quantify such an issue in the context of a substantial injury or to accept that the Complainants had this type of an emotional commitment to the project in light of the fact that they purchased the land and entered the contract without ever having seen the property. 9. The initial question is whether the Respondent’s conduct in entering the contract with the Complainants knowing of the potential for delays in obtaining the necessary approvals and permits from the county, was a wrongful act. It is concluded that knowledge of the potential difficulties does not equate to knowledge that the project was doomed to fail. 10. The next issue is whether the Respondent’s inability to obtain the necessary approvals and permits over the specified time period while continuing to assure the Complainants that the job could be timely completed, was a wrongful act. Although it appears the Respondent and Graham, Inc. could have addressed the site plan issues in this case more vigorously, the facts do not establish that the inability to obtain the necessary approvals and permits is solely attributable to the Respondent or Graham, Inc. However, the facts do establish that as late as March of 2008, the Respondent was still giving the Complainants assurances that the home could be completed in time. Such assurances make the Respondent’s conduct somewhat more suspect. The attempt to obtain a variance a month before the loan expired makes little sense unless the loan was going to be extended. Although the Respondent’s conduct in continuing to give assurances of completion to the Complainants when the facts were clearly indicating otherwise is deemed wrongful,[5] the Complainants did not establish that the outcome of their case would have been different had the Respondent informed them sooner of the inability to timely complete the project. In addition, the Complainants must bear some responsibility because they were fully aware of the passage of time and the fact that no construction was taking place. The evidence does not establish that the Respondent’s acts or failure to act were solely or sufficiently responsible for the substantial injury (the failure to complete before the expiration of the loan) or that the substantial injury could have been avoided. Given the facts of the case (the delays attributed to Maricopa County) there is no specific evidence of how the expiration of the loan could have been avoided had the Respondent taken a particular action or done something differently. 11. It is concluded the Respondent’s payment of $12,500.00 to John Scott LLC which payment was not a part of the contract with the Complainants and was made without informing the Complainants or obtaining their approval was a wrongful act within the meaning of the statute. The injury is a financial injury in the amount of $12,500.00. The Respondent’s receipt of the management fee, or at least a portion of the $7,500.00 fee, may also be considered wrongful because it was not part of the “Soft Costs” and the Respondent did not show he was entitled to that amount in light of his failure to successfully perform for a period of 18 months. However, the Administrative Law Judge (ALJ) is unable to make a reasonable determination of what amounts the Respondent might be legitimately entitled to. Based on Exhibit Y, the total actual expenditures by the Respondent (including the management fee and the referral fee) amounted to $38,096.87. This leaves $11,903.13 unaccounted for from the initial $50,000.00 payment received by the Respondent. The Respondent did not establish a right to retain this amount and it is found to constitute a wrongful act with additional financial injury. 12. Although the Complainants did not exercise prudent care in their own behalf, this does not constitute a defense to the Respondent’s wrongful conduct and it is concluded the Complainants have proven a violation of (A)(7) and established a right to restitution under in A.R.S. §32-1156.01 in the amount of $24,403.13 (the $12,500.00 paid to John Scott LLC from the Complainants’ funds and the $11,903.13 which was not actually spent from the initial $50,000.00). Recommended Order It is recommended commencing the effective date of the Order issued in this matter that the Respondent’s Class B- License shall be suspended until the Respondent pays or tenders payment to the Complainants in the amount of Twenty- Four Thousand–Four Hundred-Three and 13/100’s ($24,403.13) Dollars. The Order is effective forty (40) days from the date of the Order or from the date of certification if certified by the Director of the Office of Administrative Hearings. Done this day, September 2, 2009

______________________________________ Allen Reed Administrative Law Judge

Original transmitted by mail this ____ day of ____________, 2009, to:

William A. Mundell, Director Registrar of Contractors c/o Legal Department 3838 N. Central Ave. Phoenix, AZ 85012

By ___________________________

----------------------- [1] The subsequent melt down of the real estate, mortgage, and credit markets was alluded to during the hearing but it was not specifically cited as a cause of the problems which arose in this case. [2] Complainants’ Exhibit 1 is a copy of a communication from the Respondent to Countrywide wherein the Respondent states “Most or all of the deposits that were advanced to me on these contracts were not received by me in any ‘deposit’ capacity.” The funds were “expended for purposes that were permitted under these contracts…” . There is no mention of a $25,000.00 referral fee in the contract (see paragraphs 14 and 15). [3] Wherein the Respondent states: “At the outset, I alerted Scott to this potential for delay, and even advised that any acquisition and construction loans be separated, so that the latter would not be funded until the permits were more certain.” [4] What had been the westside of the home was now on the eastside. [5] The expenditure of unspecified amounts including the Respondent’s payment to himself of an unspecified portion of the management fee of $7,500.00 when it became apparent the construction would not be timely completed, is also considered wrongful.

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