ALJDEC decisions subject to certification as final

2009A-45871651-ROC · Registrar of Contractors · 2014-10-08

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: August 5, 2014, with the record held open until September 8, 2014. APPEARANCES: Complainants Robert G. Sellers and Nancy Sellers were represented by Steven R. Beeghley. Respondent R Tek Services LLC did not appear. The Arizona Registrar of Contractors was represented by Assistant Attorney General Michael D. Raine. ADMINISTRATIVE LAW JUDGE: Tammy L. Eigenheer _____________________________________________________________________ FINDINGS OF FACT 1. In 2005, Robert G. Sellers and Nancy Sellers (“the Sellers”) purchased a home located at 1038 East Vermont Avenue, Phoenix, Arizona (“Residence”) for $240,000.00. 2. As a mother and son, the Sellers entered into an informal agreement involving the purchase of the Residence. The Sellers had a previous property that they owned together that was titled in both their names. Upon selling that property, the Sellers invested the proceeds from that sale into the purchase of the Residence. To secure the best financing available, the title and mortgage to the Residence was put in Ms. Seller’s name alone. The Sellers planned to share expenses associated with the Residence and split any profits from the eventual sale of the Residence. 3. During the time the Residence was held in Ms. Sellers’ name, Mr. Sellers resided in the Residence and made the monthly mortgage payments. 4. On or about May 19, 2005, the Sellers entered into a contract with R-Tek Services LLC (“the Contractor”) for a major addition and renovation to the Residence. The total contract price was $78,530.00, not including the estimated finance charges associated with the project. 5. The project included the demolition of the rear patio and storage area and building a new master bedroom suite in its place. The master bathroom was planned to be on a 45 degree angle to the rest of the house and to include an indoor/outdoor shower with a floor-to-ceiling sliding glass door, dual sinks, an indoor water closet, an outdoor shower and water closet, and more. 6. The Contractor failed to complete the project as designed. Numerous issues were identified during the hearing including the following: a. The master bathroom was not set on a 45 degree angle. This changed other aspects of the layout, including the placement of the bathtub in the room, that were problematic. b. The indoor/outdoor shower with a floor-to-ceiling sliding glass door was installed as a regular shower with a window in place of the door. c. A single sink was installed instead of dual sinks. d. The indoor toilet was not in an enclosed water closet. e. The outdoor shower was not installed. 7. In addition to the deviation from the plans and contract, the Contractor’s work also exhibited various defects. The most obvious and concerning was the improper roof connection between the existing home and the addition that resulted in severe leaks during rainstorms. The leaking damaged the drywall and carpet in the addition. 8. While the Contractor made some attempts to repair the faulty work, the Contractor abandoned the project in June 2008. 9. On or about February 24, 2009, the Sellers filed a complaint with the Registrar alleging abandonment and poor workmanship. Prior to filing the complaint, Mr. Sellers obtained two estimates to repair and complete the work performed by the Contractor. The estimate from Archway West Buildings LLC was based on the work necessary to repair and correct the workmanship issues and totaled $53,277.60. The estimate from Restoration Services Ltd. was based on the work necessary to repair and correct the workmanship issues in addition to completing the project as originally required by the contract and totaled $88,995.60. 10. On or about March 4, 2009, the contractor filed for bankruptcy and the Registrar closed the complaint. 11. On or about February 26, 2010, the Sellers’ attorney informed the Registrar that the bankruptcy had been dismissed and the Registrar reopened the complaint. 12. On or about June 10, 2010, the Sellers sold the Residence for $310,000.00. Before selling the Residence, the Sellers repaired the workmanship issues. Mr. Sellers estimated that he spent approximately $40,000.00 on various projects over time. Mr. Sellers testified he did not have any receipts or other records documenting the repairs done or the cost of those repairs. 13. On or about August 13, 2010, the Contractor was cited for the alleged violations. 14. After the Contractor failed to file a timely written answer to the Citation and Complaint, the Registrar issued a Decision and Order finding that pursuant to A.R.S. § 32- 1155(B), the Contractor’s failure to timely answer the Citation and Complaint was deemed an admission of the charges contained therein. As a penalty for the Contractor’s admitted statutory violations, the Registrar’s Decision and Order revoked the Contractor’s license effective December 28, 2010, as a direct result of the complaint filed by the Sellers. 15. On or about January 28, 2011, Ms. Sellers filed a lawsuit against the Contractor in Maricopa County Superior Court. On or about December 23, 2011, the Maricopa County Superior Court entered a Judgment by Default awarding Ms. Sellers the principal sum of $50,000.00 plus post-judgment interest and attorneys fees and costs. 16. On or about May 15, 2012, the Registrar filed a Notice of Intent to Object with the Maricopa County Superior Court objecting to an order from the court that the Registrar issue a payment from the Residential Contractors’ Recovery Fund (“the Fund”) because Ms. Sellers filed her lawsuit beyond the two-year statutory limitation established in A.R.S. § 32- 1136(A). 17. On or about December 3, 2012, the Sellers, through their attorney, acknowledged that the lawsuit in Maricopa County Superior Court was filed beyond the two-year statute of limitations and filed Administrative Recovery Fund claim 2009- 45871651 against the Contractor with the Fund requesting $30,000.00. The Registrar designated the Sellers’ claim as Case No. 09-4587. 18. On or about December 19, 2012, Doug Ulmer, claim reviewer with the Registrar, mailed a document request letter to the Sellers and their attorney requesting that they provide a copy of the sales contract for the Residence and any additional documentation they might have to prove that the home was sold for less than fair market value due to the poor workmanship of the Contractor. 19. On or about January 31, 2013, Marc D’Amore, Recovery Fund Administrator with the Registrar, mailed a document request letter to the Sellers and their attorney indicating that the HUD-1 Settlement Statement was insufficient to allow the Fund to complete a review of the claim for compensable damages. Mr. D’Amore requested that they provide a copy of the sales contract for the Residence and any additional documentation they may have that quantifies any diminution in value of the Residence that was the direct result of the poor and/or incomplete work of the Contractor. 20. On or about February 4, 2013, Mr. D’Amore spoke to the Sellers’ attorney and indicated an independent appraisal of the property’s diminution in value based on the project deficiencies caused by the Contractor would help the Registrar complete its review of the claim. 21. On or about July 11, 2013, Mr. Ulmer spoke to the Sellers’ attorney because an appraisal had not been received. Mr. Ulmer wanted to determine if the Sellers still intended to submit an appraisal or if the Registrar should proceed with the information it had available. The attorney indicated he hoped to have the appraisal within the next 30 days. 22. On or about August 28, 2013, the Sellers’ attorney faxed a copy of the “Escrow Rider To Purchase Contract and Receipt for Deposit Dated 05/06/10” to the Registrar. On the cover sheet, the attorney indicated that they expected to have an expert report regarding the change in value within the next month. 23. As of October 7, 2013, the Registrar had not received any additional information of the property’s diminution in value based on the project deficiencies caused by the Contractor. 24. On October 7, 2013, the Registrar issued a Notice and Order of Denial of Recovery Fund Claim (“Order of Denial”). In the Order of Denial, the Registrar set forth the four eligibility criteria set forth in A.R.S. § 32-1131 et seq. necessary for a claimant to recover from the Fund. The Registrar concluded that “[b]ased on all available evidence in the records of the Registrar, the [Sellers] appear to meet all of the above eligibility criteria,” while noting that it is an applicant’s burden to prove, by a preponderance of the evidence, that they are eligible to access the Fund. 25. As to the actual damages, the Registrar found in the Order of Denial that because the Sellers had sold the property, actual damages could not be calculated based on the cost to complete or repair the project and the estimates could not be used to determine damages. It was further noted that the Sellers had failed to provide any evidence showing the diminution of value of the Residence when they sold the Residence other than their own assertion of what they believed they could have received had the Contractor completed the work as contracted. 26. The Registrar went on to describe its own investigation into what the estimated market value of the Residence was at the time it was sold in June 2010. The Registrar reviewed information obtained from Zillow.com and Trulia.com to estimate the market value of the Residence at the time of the sale was between $230,000.00 and $240,000.00. The Registrar also compared the Residence to eight other properties in the same neighborhood that sold around June 2010 for amounts between $105,000.00 and $217,000.00. Thus, the Registrar concluded that the Sellers sold the property for more than the fair market value and could not establish a diminution of value. 27. The Sellers requested a hearing on the Registrar’s Order of Denial. The Registrar referred the matter to the Office of Administrative Hearings, an independent agency, for an evidentiary hearing. 28. At the hearing, the evidence addressed the eligibility of the Sellers and the calculation of any compensable damages. As to the Sellers’ eligibility, the question centered on the fact that Ms. Sellers was the only title holder of record and had never lived in the Residence.[1] As to the calculation of compensable damages, the question centered on the appropriate measure of damages and how those damages would be determined. 29. As to eligibility, the Registrar argued that because Ms. Sellers was on the title and held the mortgage to the Residence but never occupied the Residence and because Mr. Sellers occupied the Residence but was never on the title, neither of them qualified as a “person injured” under the statute governing the Fund.[2] Mr. Ulinger testified that the Registrar interprets the statute to require direct, titled ownership, and the Registrar asserted that the agency’s interpretation of an ambiguous statute must be given deference unless it is clearly erroneous. 30. The Registrar acknowledged that the term “person injured” included those who held a property interest through community property, tenants in common or joint tenants, lessees, and homeowners’ or unit owners’ associations, but argued this list was an exhaustive expansion of “any owner” defined by the Registrar as title holders. Even assuming equitable title holders would qualify as an owner, the Registrar contended Mr. Sellers was not an equitable owner based on his informal agreement with Ms. Sellers. 31. The Sellers argued that the term “any owner” was expansive of only title holders by the plain language of the statute and included those who held equitable title in a property. The Sellers referenced Tax Court decisions finding that one who pays a mortgage pursuant to an informal agreement with the legal obligor on the debt may be considered an equitable owner for purposes of claiming the mortgage interest deduction on income tax returns. 32. With respect to the calculation of damages, the Registrar represented that prior to the hearing, it had no knowledge that the Sellers had paid for repairs to the home before it was sold. According to the Registrar, had that information been communicated to the Registrar and evidence of the cost of those repairs provided, the Registrar could have determined the amount of a payout, if any, from the Fund based on that information. 33. Because the Registrar was unaware of the repairs performed prior to the sale of the Residence, it went forward with a diminution of value analysis. In determining the value of the Residence at the time it was sold, the Registrar reviewed data from the real estate websites Zillow.com and Trulia.com. Based on that analysis, the Registrar concluded that the Sellers sold the Residence for more than its value at the time of the sale. Therefore, the Registrar maintained the Sellers suffered no loss. The Registrar witness admitted having no knowledge as to the methodology employed by the websites to calculate the historic value data. 34. In contrast, the Sellers presented the testimony and report of Dale C. Cooper, an appraiser, who evaluated the value of the Residence before the defects and after the defects. Mr. Cooper evaluated the value of the Residence using the “Before Date” of December 1, 2008, and the “After Date” of February 10, 2009. Mr. Cooper also evaluated the value of the Residence on June 18, 2010, the date of the Residence was sold. 35. Mr. Cooper concluded that before the Contractor began work, the value of the Residence was $275,000.00, and that after the Contractor performed the work not in conformity with the contract and with defects, the value of the Residence was $170,000.00 for a total diminution of value of $105,000.00. 36. Mr. Cooper also addressed the value of the Residence at the time it was sold for $310,000.00 after Mr. Sellers performed repairs to the workmanship issues. Based on a comparison of a hypothetical version of the Residence that would have been built according to the plans and specs to other homes in the area, Mr. Cooper determined the Residence would have been worth $345,000.00. Accordingly, Mr. Cooper concluded that the Contractor’s failure to comply with the plans and contract resulted in the diminution of value at the time of the sale of $35,000.00. 37. Mr. Cooper testified that when the Residence was sold for $310,000.00, that was the approximately the value of the Residence as it existed at that time. 38. The Registrar argued in its closing brief that the failure of the Contractor to build the addition in accordance to the original plan should not be considered because “a buyer would not care if the home was built as envisioned by a prior homeowner.” Registrar’s Closing Argument at p. 5. The Registrar went on to assert that a potential buyer would see a newly remodeled bathroom and would “have no idea that . . . the bathroom was not laid out at a 45 degree angle to the rest of the home.” Id. at p. 5-6. 39. On July 29, 2014, the Office of Administrative Hearings issued a Minute Entry Granting Continuance of the Recovery Fund Eligibility/Payout Hearing (“Minute Entry”). A copy of the Minute Entry was sent to the Contractor at its address of record. 40. A recovery fund payout hearing was held at 8:30 a.m. on August 5, 2014. Complainants testified, presented the testimony of Mr. Cooper, and submitted three exhibits. The Registrar presented the testimony of Eric Ulinger, Supervisor for the Fund, and submitted twelve exhibits. 41. The Contractor did not request to appear telephonically at the hearing and did not request that the hearing be continued. Although the hearing continued throughout the day, the Contractor did not appear through an authorized member, employee, or attorney. Consequently, the Contractor did not present any evidence. CONCLUSIONS OF LAW This matter lies within the Registrar’s jurisdiction.[3] The Minute Entry mailed to the Contractor at its address of record was reasonable. The Contractor is deemed to have received notice of Recovery Fund Eligibility/Payout Hearing.[4] Complainants bear the burden of proof and must establish eligibility to recover from the Fund by a preponderance of the evidence.[5] “A preponderance of the evidence is such proof as convinces the trier of fact that the contention is more probably true than not.”[6] A preponderance of the evidence is “[t]he greater weight of the evidence, not necessarily established by the greater number of witnesses testifying to a fact but by evidence that has the most convincing force; superior evidentiary weight that, though not sufficient to free the mind wholly from all reasonable doubt, is still sufficient to incline a fair and impartial mind to one side of the issue rather than the other.”[7] A.R.S. § 32-1131(3) provides as follows: "Person injured" means any owner of residential real property which is classified as class three property under section 42-12003 and which is actually occupied or intended to be occupied by the owner as a residence including community property, tenants in common or joint tenants who are damaged by the failure of a residential contractor or a dual licensed contractor to adequately build or improve a residential structure or appurtenance on that real property. Included in this definition are lessees of residential real property who contract directly with a residential contractor or indirectly with a subcontractor of that contractor and homeowners' or unit owners' associations after transfer of control from the builder or developer for damages to the common elements within the complex.

The Arizona Court of Appeals has determined that the times when the owner of residential property must meet the requirements of A.R.S. § 32-1131(3) to be eligible to recover a payout from the Fund are: (1) When the owner enters the contract with the contractor for the work to be performed, or (2) When the contractor performs the work or commits the statutory violation that injured the owner.[8] An agency’s interpretation of its statutes and regulations is entitled to deference. See Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 844 (1984); cf. Ariz. Water Co. v. Ariz. Dep't of Water Res., 208 Ariz. 147, 154 91 P.3d 990, 997 (2004). Therefore, in the absence of evidence that the Department’s interpretation is plainly erroneous, the Administrative Law Judge will not disturb that interpretation. The Registrar’s interpretation that “any owner” is limited only to title owners and those otherwise identified by the statute has not been established to be plainly erroneous. Accordingly, this interpretation will be given deference. Because Ms. Sellers was the title holder of the Residence but did not occupy it, and Mr. Sellers occupied the Residence but was not the title holder, neither of them are eligible for an award from the Fund. In the event the Registrar determines equitable title is sufficient to meet the eligibility requirements of the statute, Mr. Sellers demonstrated he was an equitable title holder. The funds used for the down payment in purchasing the Residence came from the proceeds from the sale of another property he owned with Ms. Sellers. Further, Mr. Sellers paid the mortgage the entire time he resided in the Residence pursuant to his agreement with Ms. Sellers. While there were no profits from the sale of the Residence, the agreement between Mr. Sellers and Ms. Sellers was that they would have split any proceeds equally. Additionally, Ms. Sellers testified that if they receive a payment from the Fund, they will split that payment equally. All of these factors lead to the conclusion that Mr. Sellers was an equitable title holder in the Residence and therefore is eligible for payment from the Fund. Should Mr. Sellers be found eligible for an award from the Fund, the calculation of damages is addressed. The Registrar argued that because the Sellers failed to inform the Registrar that repairs had been completed prior to the sale of the Residence, the Sellers should not be rewarded for providing false information to the Registrar. It appears from the timeline of events that a miscommunication occurred between the Registrar and the Sellers. When the Sellers originally filed the complaint against the Contractor, they provided two estimates for repairs. After the Contractor claimed bankruptcy, the complaint was closed. The bankruptcy was then dismissed, and the complaint reopened. At the time a citation was issued against the Contractor, the Sellers had sold the Residence. It was then that they were informed the damages would be calculated based on the diminution of value. It is unclear from the record if the Sellers were ever informed they could establish their damages by showing proof of the repairs that were performed prior to the sale of the Residence. This miscommunication cannot be the basis of barring the Sellers from accessing the Fund. As to the diminution of value, the Sellers provided the testimony and report of a certified appraiser who presented a comprehensive review of how he determined the value of the home prior to the Contractor’s work, after the Contractor’s poor workmanship and failure to conform to the plans, and at the time the Residence was sold. All determinations of diminution of value exceeded the $30,000.00 limit for payments from the Fund. The Registrar on the other hand relied on two commercial websites to arrive at what it believed to be the value of the Residence at the time it was sold. Nothing in the Registrar’s evidence established the accuracy or reliability of the information from the websites it relied on. Further, the Registrar’s argument that the Contractor’s failure to perform the work in conformity with the plans in the contract should have no effect on the valuation of the Residence fails. The Sellers contracted and paid for the project to be completed in the manner dictated by the contract. Had the Contractor completed the work as prescribed, the value of the Residence at the time it was sold would have been more as testified to by Mr. Cooper. According to the Registrar’s argument, if a homeowner contracted and paid for a swimming pool and spa and the contractor installed only a swimming pool, there would be no diminution in the sales price of the home because the buyer would have no idea that the contractor was also supposed to install a spa. However, one can safely conclude that if the home had a spa, a buyer would be willing to pay more for the home. A homeowner is entitled to receive the benefit of the bargain for which he or she contracted. Because Mr. Sellers failed to establish that he was an owner who occupied the Residence, he failed to establish that he was eligible for an award from the Fund. RECOMMENDED ORDER In view of the foregoing, IT IS RECOMMENDED that the Registrar of Contractors maintain the conclusion that Complainants are not eligible for recovery from the Fund. In the event of certification of the 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, October 8, 2014.

/s/ Tammy L. Eigenheer Administrative Law Judge

Transmitted electronically to:

William A. Mundell, Director Registrar of Contractors ----------------------- [1] The facts relevant to this question are set forth in the previous Findings of Fact. [2] A.R.S. § 32-1131(3) provides as follows:

"Person injured" means any owner of residential real property which is classified as class three property under section 42-12003 and which is actually occupied or intended to be occupied by the owner as a residence including community property, tenants in common or joint tenants who are damaged by the failure of a residential contractor or a dual licensed contractor to adequately build or improve a residential structure or appurtenance on that real property. Included in this definition are lessees of residential real property who contract directly with a residential contractor or indirectly with a subcontractor of that contractor and homeowners' or unit owners' associations after transfer of control from the builder or developer for damages to the common elements within the complex. [3] See 32-1101 et seq. [4] See A.R.S. §§ 41-1092.04; 41-1092.05(D). [5] See A.R.S. § 41-1092.07(G)(2); A.A.C. R2-19-119(A) and (B)(1); see also Vazanno v. Superior Court, 74 Ariz. 369, 372, 249 P.2d 837 (1952). [6] Morris K. Udall, Arizona Law of Evidence § 5 (1960). [7] Black’s Law Dictionary at page 1220 (8th ed. 1999). [8] See McMurren v. JMC Builders, Inc., 204 Ariz. 345, 350, 63 P.3d 1082, 1087 (App. 2003) (citing A.R.S. § 32-1132(A)). In that case, after the residence in which the homeowner had been living at least part-time was damaged by fire, the homeowner hired the contractor to perform repairs. Because the dwelling was uninhabitable after the fire, the homeowner lived temporarily in a motor home parked in the driveway. The residence subsequently was turned into a group home. The court held that the homeowner had established that he was eligible for a payout from the Fund because he had lived in the residence when he entered the contract for the contractor to repair the damages and while the contractor performed the repairs. See id. at 351, 63 P.3d at 1088.

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