ALJDEC decisions subject to certification as final

2010A-308475506-ROC-rf · Registrar of Contractors · 2013-02-14

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

RECOVERY FUND ELIGIBILITY HEARING: October 29, 2012, at 8:00 a.m.; the record was held open until January 25, 2013, to allow the parties to submit legal memoranda. APPEARANCES: Complainants Pioneer Family Investments LLC, Krishna Pinnamaneni (individ.), and The Krishna M. and Bhavani K. Pinnamaneni Revocable Living Trust were represented by Everett S. Butler, Esq., The Butler Law Firm; Respondent The Untouchables Inc. appeared through George Bowling, its qualifying party and officer; the Arizona Registrar of Contractors was represented by Elizabeth A. Campbell, Esq., Assistant Attorney General. ADMINISTRATIVE LAW JUDGE: Diane Mihalsky _____________________________________________________________________

FINDINGS OF FACT 1. The Arizona Registrar of Contractors (“the Registrar”) issued License No. C-65.160351-R for residential glazing to The Untouchables Inc. (“Respondent”). George Walter Bowling (“Mr. Bowling”) is Respondent’s qualifying party and officer. 2. The Krishna M. and Bhavani K. Pinnamaneni Revocable Living Trust (“the Trust”), through its trustees, Krishna M. Pinnamaneni, M.D. (“Dr. Pinnamaneni”) and his wife, Bhavani K. Pinnamaneni, M.D., acquired legal title to a parcel of land located at 13220 North 136th Place, Scottsdale, Arizona (“the property”) on which they planned to build a residence.[1] Dr. Pinnamaneni and his family intended to live in the residence. 3. Dr. Pinnamaneni and his wife formed Pioneer Family Investments LLC (“Pioneer”) to act as the Trust’s agent in developing the property and building their residence (“the project” or “the residence”).[2] 4. The members of Pioneer are all Dr. Pinnamaneni’s immediate nuclear family. Dr. Pinnamaneni is the managing member of Pioneer.[3] 5. Dr. Pinnamaneni and his wife formed the Trust and Pioneer to protect their assets because both are physicians who could be the target of lawsuits. 6. On or about March 24, 2010, Mr. Bowling, on behalf of Respondent, entered into a contract with Pioneer to perform glazing work at the project, which the contract described as “Neppalli: Residence for: Pioneer Family Investments, LLC Drs. Pinnamaneni.”[4] Dr. Pinnamaneni signed the contract as managing member of Pioneer.[5] 7. Between August 28, 2009, and July 30, 2011, Dr. Pinnamaneni signed numerous checks that were drawn on Pioneer’s bank account and made payable to Respondent or to alleged substitute contractors and suppliers for glazing work on the project.[6] 8. Dr. Pinnamaneni deposited his personal funds into Pioneer’s bank account to cover the checks. 9. On or about August 27, 2010, Pioneer filed a Complaint with the Registrar against Respondent (“the Complaint” or “the workmanship complaint”).[7] Dr. Pinnamaneni signed the Complaint as Pioneer’s managing member. 10. Dr. Pinnamaneni asked the Registrar to amend the Complaint and to schedule a hearing in his capacity as managing member of Pioneer.[8] 11. Pioneer’s Complaint proceeded to an administrative hearing on April 20, 2011. Dr. Pinnamaneni, as managing member, appeared on behalf of Pioneer.[9] 12. Based on the evidence presented at the hearing, the Administrative Law Judge concluded that Respondent had violated the charged provisions of A.R.S. § 32-1154(A). On or about June 14, 2011, the Registrar adopted the Administrative Law Judge’s decision.[10] 13. After the Registrar issued the Order in Pioneer’s workmanship complaint, Respondent filed for protection under Chapter 7 of the United States Bankruptcy Code. On or about October 19, 2011, Pioneer filed a motion to the U.S. Bankruptcy Court for relief from the automatic stay.[11] Pioneer argued in the motion that relief from the stay was not necessary because under the Bankruptcy Code, the filing of a petition for bankruptcy does not stay a government agency’s revocation of a professional license or its exercise of police power. Complainants argued in their legal memorandum that none of them were required to seek relief from the stay and that Pioneer only requested such relief “out of an abundance of caution.”[12] 14. On or about January 23, 2012, the U.S. Bankruptcy Court issued an order granting Pioneer’s motion and lifting the automatic stay “as it applied to [Pioneer’s] complaint to the Arizona Registrar of Contractors regarding its contract with and the work performed by [Respondent].”[13] 15. As a result of Respondent’s failure to comply with the Registrar’s June 14, 2011 Order, Respondent’s License No. C- 65.160351-R was revoked.[14] 16. On or about February 1, 2012, Dr. Pinnamaneni filed a claim to the Residential Contractors’ Recovery Fund (“the Fund”) on his own behalf.[15] 17. On or about February 10, 2012, the Registrar sent a letter to Dr. Pinnamaneni’s and Pioneer’s attorney, rejecting Dr. Pinnamaneni’s claim to the Fund.[16] 18. On or about May 9, 2012, Dr. Pinnamaneni’s attorney amended the claim to the Fund to include Pioneer and the Trust as additional claimants and argued that because Dr. Pinnamaneni built the project to be his residence, was a trustee of the Trust, and was the managing member of and provided funding to Pioneer, Respondent’s violations of A.R.S. § 32-1154(A) damaged Dr. Pinnamaneni and the Trust.[17] 19. On or about July 30, 2012, the Registrar issued a Notice to Complainants of Recovery Fund Ineligibility for the following reason: Complainants do not meet the legal definition of a “person injured” as required by § 32-1131.3.[18]

20. Complainants requested a hearing on the Registrar’s determination that they were ineligible for a payout from the Fund. The Registrar referred the matter to the Office of Administrative Hearings, an independent state agency, for an evidentiary hearing. 21. A Recovery Fund Eligibility Hearing was held on October 29, 2012. Dr. Pinnamaneni testified on Complainants’ behalf. Mr. Bowling testified on Respondent’s behalf. The Registrar submitted twelve exhibits, cross-examined Dr. Pinnamaneni, and questioned Mr. Bowling. At the parties’ request, the Administrative Law Judge held the record open until January 25, 2013, to allow them to submit legal memoranda. 22. Mr. Bowling testified that he was aware that the Trust owned the property where Respondent contracted to perform construction work. Mr. Bowling testified that he understood that Pioneer had a connection to the Trust, but that he did not know who was acting through or on behalf of whom when he signed the contract on behalf of Respondent. CONCLUSIONS OF LAW This matter lies within the Registrar’s jurisdiction.[19] Complainants bear the burden of proof to establish their eligibility to recover a payout from the Fund by a preponderance of the evidence.[20] “A preponderance of the evidence is such proof as convinces the trier of fact that the contention is more probably true than not.”[21] A.R.S. § 32-1131(3) defines a “person injured” who is eligible to recover from the Fund as follows: [A]ny 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 . . . 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.

(Emphases added.) The evidence established that the Trust owns the residence, Pioneer contracted with Respondent and filed a Complaint with the Registrar, and Dr. Pinnamaneni and his family reside in the residence. The issue is whether any of the Complainants constructively own and reside in the residence and were damaged by Respondent’s failure to adequately build the glazing in the residence. “Words contained in statutes are to be given their ordinary meaning unless the context in which they are used suggests another meaning.”[22] The Registrar’s statutes should be read together in light of their purpose “‘to regulate the conduct of those engaged in the business of contracting so as to discourage certain bad practices which might be indulged in to the detriment of the public.’”[23] Even if a Natural Person who Resides in a Residence Is a Trustee of a Trust that Owns the Residence, He Must Establish that He Was Personally Injured by the Contractor’s Failure to Adequately Build the Residence to Be a “Person Injured” under A.R.S. § 32-1131(3). A.R.S. § 32-1154(B)(2) defines “owner” to include limited liability companies and other legal entities[24] and contemplates that an owner of a property may be a trust, corporation, limited liability company, or other business association that is not a natural person. Only a natural person can reside at a property, not a corporation or limited liability company, however, and A.R.S. § 32-1131(3) does not expressly include members or trustees of legal entities among the owners who are entitled to recover from the Fund. In interpreting a statute, “[w]e first consider the language of the statute and, if it is unclear, turn to other factors, including ‘the statute's context, subject matter, historical background, effects, consequences, spirit, and purpose.’"[25] If the Fund makes a payout to Dr. Pinnamaneni, A.R.S. § 32-1139(B) automatically suspends Respondent’s license by operation of law until it repays the amount of the payout, plus ten percent interest. A.R.S. § 32-1139(B) further provides that for purposes of the Registrar’s licensing statutes, Mr. Bowling is personally liable for the payout.[26] This requirement is consistent with other statutes in Title 32, Chapter 10, that require corporate license applicants to list their officers, members, or directors on their license applications[27] and that the persons listed on a contractor’s license are personally responsible for its statutory violations.[28] Although Mr. Bowling is personally responsible for Respondent’s violations of A.R.S. § 32-1154(A) and personally liable for any payout from the Fund that the Registrar may make to reimburse a claimant for the damages caused by Respondent’s statutory violations, even though Respondent is a corporation, Mr. Bowling and Respondent cannot assert a civil claim against Dr. Pinnamaneni due to his decision to protect his personal assets by creating Pioneer to enter into the contract with Respondent to improve the property.[29] The legislature recognized the difference between natural persons and the legal entities with which they may be associated when it declined to allow the natural persons listed on a corporate license to avoid responsibility for the corporation’s acts. “Statutes are not interpreted in a vacuum . . . and legal relationships mandated by one statute cannot be ignored in interpreting another.”[30] “Where a term is used in one provision of a statute and omitted from another, that term should not be read into the section where it is omitted.”[31] The legislature knew how to pierce the corporate veil and ignore the corporate form when it saw a reason to do so in the Registrar’s statutes, but the language that the legislature used in A.R.S. § 32-1131(3) does not indicate that it intended to make eligible for Fund payouts natural persons who were not personally damaged by a contractor’s statutory violations, even if they reside at the residence and are trustees of a trust that owns the residence. Because Respondent Only Contracted with Pioneer, Dr. Pinnamaneni is not a “Person Injured” under A.R.S. § 32-1131(3) Merely because He is the Beneficiary of Pioneer’s Contract. A.R.S. § 32-1132(A) allows the Registrar to award a payout from the Fund to “any person injured by an act, representation, transaction or conduct of a residential contractor licensed pursuant to this chapter . . . .” The Registrar argued that when the Legislature established the Fund, it intended that only persons who had contracted with the contractor whose license was disciplined as a result of a contracting law violation would be eligible to recover a payout from the Fund. The Registrar quoted the Legislature’s statement of intent when it created the Fund to support its argument as follows: It is the purpose and intent of the legislature to continue the registrar of contractors agency in order to protect the public health, safety, and welfare by providing for the continued licensing, bonding and regulation of contractors engaged in residential contracting. It is the further purpose of the legislature to provide improved protection for owners and lessees of property who contract for the construction or alteration of residential structures by establishing the contractors’ recovery fund and the contractors’ recovery fund board.

1981 Ariz. Sess. Laws, ch. 221, § 1 (emphasis added). A.R.S. § 32-1154(B) requires the Registrar to investigate “the written complaint of any owner . . . that is a party to a construction contract or a person who suffers a material loss or injury as a result of a contractor's failure to perform work in a professional and workmanlike manner or in accordance with any applicable building codes and professional industry standards . . . .” (Emphases added.) The Shelby case that both parties cited in support of their positions quoted 1981 Ariz. Sess. Laws, ch. 221, § 1.[32] The Arizona Supreme Court in Shelby noted that the Fund claimants in that case had filed an action against the general contractor who had built the condominium project, the project developer, and the condominium association.[33] Although the claimants in Shelby did not have a contract with the general contractor because they purchased their units from the developer, the Arizona Supreme Court held that “[i]ndividual unit owners are persons injured under the statute with respect to damage to the common elements appurtenant to their units” who could recover damages up to the statutory individual claim limit from the Fund.[34] The individual condominium owners in Shelby were the successors in interest to the developer, who had entered into the contract with the contractor to construct the condominiums in anticipation that the units would be sold. In this case, Dr. Pinnamaneni was not a party to Pioneer’s contract with Respondent and Pioneer never transferred its rights and liabilities under the contract to Dr. Pinnamaneni. Although Dr. Pinnamaneni presented evidence that Pioneer entered into the contract with Respondent as Dr. Pinnamaneni’s agent, as noted above, Dr. Pinnamaneni was not personally liable for Pioneer’s obligations to Respondent under their contract to improve the residence. Although in some cases a person who did not contract with the contractor whose license was disciplined for a violation of A.R.S. § 32-1154(A) may be a “person injured” under A.R.S. § 32-1131(3), this is not such a case. For a Claimant to be a “Person Injured” under A.R.S. § 32-1131(3), A.R.S. §§ 32-1154(F) and 32-1132(A) Require a Claimant to Have Filed a Workmanship Complaint with the Registrar. A.R.S. § 32-1154(B) requires the Registrar to investigate written complaints received from persons who claim injury “as a result of a contractor's failure to perform work in a professional and workmanlike manner or in accordance with any applicable building codes and professional industry standards . . . .” A.R.S. § 32-1154(F) provides that “if a contractor's license has been revoked or has been suspended as a result of an order to remedy a violation of this chapter the registrar may order payment from the residential contractors' recovery fund to remedy the violation.” A.R.S. § 32-1132(A) allows persons “injured by an act, representation, transaction or conduct of a residential contractor licensed pursuant to this chapter that is in violation of this chapter or the rules adopted pursuant to this chapter” to recover a payout from the Fund. These three statutes read together strongly imply that a Fund claimant must have filed a workmanship complaint with the Registrar to be potentially a “person injured” under A.R.S. § 32-1131(3). The Registrar has long taken the position that for a claimant to be potentially eligible for a payout from the Fund, he must have filed a workmanship complaint against the contractor that resulted in the Registrar imposing discipline against the license under A.R.S. § 32-1154(A). “[T]he construction placed on a statute by the executive body which administers it, if acquiesced in for a long period of time, will not be disturbed unless such construction is manifestly erroneous.”[35] Complainants have not cited and the Administrative Law Judge has not found any case in which an appellate court ordered a payout from the Fund to a claimant based on a workmanship complaint filed by another against the contractor.[36] Because neither Dr. Pinnamaneni nor the Trust filed complaints with the Registrar or obtained a Order that disciplined Respondent’s license for its violations of A.R.S. § 32-1154(A), Dr. Pinnamaneni and the Trust are not “persons injured” under A.R.S. § 32-1131(3) who are potentially eligible for a payout from the Fund. RECOMMENDED ORDER Based on the foregoing, it is recommended that on the effective date of the Registrar’s Order, Case No. 2010-[number redacted] be closed because Complainants Pioneer Family Investments, LLC, Krishna Pinnamaneni, and Pinnamaneni Family Trust have not established that any of them are eligible for a payout from the Residential Contractors’ Recovery 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, February 14, 2013.

/s/ Diane Mihalsky Administrative Law Judge

Transmitted electronically to:

William A. Mundell, Director Registrar of Contractors ----------------------- [1] See the Registrar’s Exhibit 8. [2] See Exhibit A attached to Complainants’ Legal Memorandum Regarding Eligibility. [3] See the Registrar’s Exhibit 6 at P34. [4] The Registrar’s Exhibit 5 at P26. [5] See id. at P32. [6] Because the issue at hearing was whether any of the Complainants was eligible to recover a payout from the Residential Contractors’ Recovery Fund, the Administrative Law Judge does not analyze the payments or attempt to liquidate any of the Complainants’ claimed damages. [7] See the Registrar’s Exhibit 1. [8] See the Registrar’s Exhibit 2. [9] Because Ariz. R. S. Ct. 31(d)(11) allows individual members and officers to represent the entities with which they are associated, Dr. Pinnamaneni was allowed to represent Pioneer and Mr. Bowling was allowed to represent Respondent at the hearing. [10] A.R.S. § 32-1154(A)(23) includes among the grounds for suspension, revocation, or other disciplinary action against a contractor’s license, “[f]ailure to take appropriate corrective action to comply with this chapter or with rules adopted pursuant to this chapter without valid justification within a reasonable period of time after receiving a written directive from the registrar.” [11] See Exhibit C attached to Complainants’ Legal Memorandum Regarding Eligibility. [12] Complainants’ Legal Memorandum Regarding Eligibility at 7, l. 21. [13] See the Registrar’s Exhibit 9. [14] See Exhibit B attached to Complainants’ Legal Memorandum Regarding Eligibility. [15] See the Registrar’s Exhibit 4. [16] See the Registrar’s Exhibit 10. [17] See the Registrar’s Exhibit 11. Although Pioneer was added as a claimant to the claim to the Fund, Complainant’s attorney conceded that Pioneer was not eligible for a Fund payout. See Complainants’ Reply in Support of Complainants’ Legal Memorandum Regarding Eligibility at 2, ll. 8- 12. [18] The Registrar’s Exhibit 12. [19] See A.R.S. §§ 32-1101 to 32-1169. [20] 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). [21] Morris K. Udall, Arizona Law of Evidence § 5 (1960). [22] Sunpower of Arizona v. Registrar of Contractors, 166 Ariz. 437, 440, 803 P.2d 430, 443 (App. 1990). [23] See Sunpower, 166 Ariz. at 440, 803 P.2d at 443 (quoting Security Ins. Co. of New Haven v. Day, 6 Ariz. App. 403, 406, 433 P.2d 54, 57 (1967)). [24] A.R.S. § 32-1154(B)(2) defines “owner” as follows: [A]ny person, firm, partnership, corporation, association or other organization, or a combination of any of them, that causes a building, structure or improvement to be constructed, altered, repaired, maintained, moved or demolished or that causes land to be excavated or otherwise developed or improved, whether the interest or estate of the person is in fee, as vendee under a contract to purchase, as lessee or another interest or estate less than fee, pursuant to a construction contract. [25] McMurren v. JMC Builders, Inc., 204 Ariz. 345, 350 ¶ 12, 63 P.3d 1082, 1087 (App. 2003) (citing Norgord v. State ex rel. Berning, 201 Ariz. 228, P7, 33 P.3d 1166, ¶ 7 (App. 2001), quoting Hobson v. Mid-Century Ins. Co., 199 Ariz. 525, P8, 19 P.3d 1241, ¶ 8 (App. 2001)). [26] A.R.S. § 32-1139(B) provides in relevant part as follows: Any person who is or was, at the time of the act or omission, named on a license that has been suspended because of a payment from the recovery fund is not eligible to receive a new license or retain another existing license that also shall be suspended by operation of law, nor shall any suspended license be reactivated, until the amount paid from the fund is repaid as provided in this subsection. [27] See A.R.S. §§ 32-1101(A)(5) and 32-1122(B)(1)(d). [28] See A.R.S. § 32-1154(A)(21). [29] See Dietel v. Day, 16 Ariz. App. 206, 208, 493 P.2d 455, 457 (1972) (“[A] legitimate purpose of incorporation is to avoid personal liability and if the corporate fiction is too easily ignored and personal liability imposed, then incorporation is discouraged.”). [30] Hughes v. Industrial Commission, 113 Ariz. 517, 520, 558 P.2d 11, 14 (1976) (citing McClain v. Church, 72 Ariz. 354, 236 P.2d 44 (1951)). [31] U.S. Parking Systems v. City of Phoenix, 160 Ariz. 210, 211, 772 P.2d 33, 34 (App. 1989) (citing Dunlop v. First Nat’l Bank of Arizona, 399 F. Supp. 855 (D. Ariz. 1975)). [32] See Shelby v. Registrar of Contractors, 172 Ariz. 95, 97, 834 P.2d 818, 820 (1992). [33] See id. at 96, 834 P.2d at 819. [34] See id. at 101, 834 P.2d at 824. [35] Industrial Commission v. Harbor Insurance Co., 104 Ariz. 73, 76, 449 P.2d 1, 4 (1968); see also Arizona Water Co. v. Arizona Department of Water Resources, 208 Ariz. 147, 154 ¶30, 91 P.3d 990, 997 (2004) (“‘[C]onsiderable weight should be accorded to an executive department’s construction of a statutory scheme it is entrusted to administer’” (quoting Chevron, U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 844, 104 S. Ct. 2778, 81 L. Ed. 2d 694 (1984))). [36] As noted above, the individual condominium owners in Shelby had filed civil complaints against the general contractor.

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