ALJDEC decisions subject to certification as final

2010A-7100516-ROC · Registrar of Contractors · 2011-09-27

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: September 7, 2011

APPEARANCES: Attorney Ivan Kolesik appeared on Complainants behalf; no one appeared on behalf of Respondent; the Residential Contractors’ Recovery Fund intervened in this matter and was represented by Assistant Attorney General Mary D. Williams.

WITNESSES: Glenn Hawkins, Recovery Fund Claims Reviewer

ADMINISTRATIVE LAW JUDGE: Eric A. Bryant _____________________________________________________________________

Complainants Stan and Charlotte McMurray seek a payout from the Residential Contractors’ Recovery Fund (“Fund”) for damages caused by defective workmanship of Respondent Dream Catcher USA, Inc. As noted above, Respondent did not appear. This tribunal entered the claim file received from the Registrar of Contractors into the record, along with Complainants’ Exhibits A, B, and C. The claim file shows that Complainants requested the hearing for this matter in order to challenge the amount of the payout recommended by the Fund. Complainants are challenging the Fund’s recommendation for payout in the amount of $0. They claim that the payout should be at the statutory cap of $30,000.00 because their damages exceed that amount. At the start of the hearing, the parties clarified for the Administrative Law Judge the issue that is in dispute. The Fund noted that due to its interpretation of the statute governing Fund payouts, and for the reasons described below, the Fund had not fully evaluated the bids Complainants provided in support of their claim; nor did the Fund notify Complainants that it was rejecting any of the submitted bids and explain the reasons for rejection. Thus, the parties agree that should the legal issue presented by this case be found in favor of Complainants, the claim should be remanded to the Fund for evaluation of the bids and notification of payout based on the merits of those bids. Thereupon, Complainants may request a hearing on that issue if they disagree with the evaluation. At hearing, Complainants and the Fund addressed only the legal issue of statutory interpretation, as described below,. There is no factual dispute between the parties for purposes of this hearing. Based upon the entire record, the Administrative Law Judge makes the following Findings of Fact, Conclusions of Law, and Recommended Decision for denial of payout from the Fund. FINDINGS OF FACT 1. Respondent was the holder of license B.187364-R issued by the Registrar of Contractors (“ROC”). The license was revoked on July 3, 2008. 2. In 2006, Respondent built a new home for Complainant. Complainant moved into the home and occupied it. In August 2006, Complainants filed a complaint with the ROC alleging numerous and substantial issues with Respondent’s workmanship. Significant workmanship issues were verified by ROC inspection and a Corrective Work Order was issued. Ultimately, Respondent’s license was revoked when Respondent failed to make corrections. Complainants then filed a Recovery Fund claim in January 2010. 3. In October 2009, a foreclosure action against the home was completed and Complainants lost ownership. No work had been done to repair Respondent’s poor workmanship. Along with their claim, Complainants submitted bids that they had obtained before the foreclosure.[1] 4. The Fund reviewed the claim and determined that Complainants did not have any “compensable damages” because they had not paid for repair work to be performed before the foreclosure. Due to the foreclosure, the Fund concluded, Complainants no longer have actual damages that the Fund can award because Complainants can no longer make the repairs. 5. Complainants requested a hearing, arguing that the Fund is misinterpreting the applicable statute. The parties’ arguments are addressed below. CONCLUSIONS OF LAW 1. The burden of proof at an administrative hearing is generally upon the person who brings the action.[2] Further, the standard of proof at hearing is by preponderance of the evidence.[3] Therefore, Complainants bear the burden of showing, by a preponderance of the evidence, that they have actual damages as defined by statute.[4] Complainants have not met that burden. 2. Complainants are injured persons within the definition in A.R.S. § 32-1131(3). 3. Under the facts and circumstances of this case, the Registrar of Contractors is empowered to determine and award an appropriate payment to Complainant from the Fund pursuant to A.R.S. §§ 32-1132 and 32-1154(F). There is a cap of $30,000 for recovery from the Fund.[5] 4. Damages that may be awarded from the Fund are limited by the language of A.R.S. § 32-1132(A): . . . An award from the fund is limited to the actual damages suffered by the claimant as a direct result of the contractor's violation but shall not exceed an amount necessary to complete or repair a residential structure or appurtenance within residential property lines. . . .

This means that persons who are injured may recover actual damages that (1) they suffer, and (2) are a direct result of a violation, and (3) do not exceed the cost of repair or completion. 5. “Actual damages” is not defined in the statute. Actual damages are defined by case law as “damages ‘in satisfaction of, or in recompense for, loss or injury sustained; such compensation or damages for an injury as follow from the nature and character of the act, and will put the injured party in the position in which he was before he was injured; * * *.’"[6] Actual damages can also be contrasted with punitive damages; the two categories are mutually exclusive.[7] This means that actual damages are remedial and not punitive. Also, actual damages are not speculative or possible damages.[8] 6. The facts show that the house went into foreclosure and was sold in October 2009. Before that happened, Complainants verified that they spent no money to repair the poor and incomplete work by Respondent. Thus, they incurred no out-of-pocket expenses to repair the damage caused by Respondent. 7. The Fund denied the claim because Complainants had no out-of- pocket expenses for repair of the home prior to the foreclosure. The Fund determined that after the foreclosure, Complainants had no compensable damages under the statute because they no longer owned the home. 8. Complainants disagree with that reading of the statute. Complainants rely instead on the Arizona Court of Appeals decision in McMurren v. JMC Builders, Inc., 204 Ariz. 345, 63 P.3d 1082 (App. 2003). In that case, the Court construed the definition of “person injured” in A.R.S. § 32-1131(3) for purposes of recovery from the Fund. McMurren’s home had been damaged by a fire and JMC Builders, Inc. (“JMC”) had been hired to rehabilitate it. JMC did the job poorly, its license was revoked, and McMurren filed a claim with the Fund. The Fund denied the claim and, after an administrative hearing, the denial was upheld by the Administrative Law Judge and the ROC. They reasoned that McMurren was not eligible for recovery because before he had filed his claim, McMurren had changed the home to a group home (a commercial use) and no longer occupied the home. The court reversed the ROC, holding that McMurren qualified as a “person injured” because he owned and occupied (or intended to occupy) the home at the time of the contract with JMC or when the violation occurred.[9] 9. Although the McMurren case clearly construes only the statutory definition of “person injured” in A.R.S. § 32-1131(3), a definition that is not at issue here, Complainants cite the case here for the Court’s discussion of the statute, especially its discussion in paragraphs 17 through 19: As noted above, the ALJ decided that the relevant time for an owner's occupancy is either when the owner files a claim or when the hearing is held on the claim. We find this decision not only impractical and unworkable, but also unsupported by the language of § 32-1131(3) and inconsistent with the spirit and purpose of the statutes. First, the plain language of § 32-1131(3) does not support the ALJ's decision. The statute speaks of an owner who is "damaged" by a residential contractor but says nothing about when that owner must file a claim with the registrar or the Fund. Second, the ALJ's decision imposes conditions for recovery from the Fund not found in the express language of § 32-1131(3). For example, the ALJ's decision here would have required McMurren, who obviously had sustained damage by the time he occupied his property in August 1998, to nonetheless continue to occupy it for the next year and one-half, through all the proceedings against JMC before the registrar until he filed a claim against the Fund in December 1999. The ALJ's construction would also prevent McMurren from recovering from the Fund simply because he converted his property to a commercial use before he filed his claim. Further, the ALJ's interpretation penalizes owners who are damaged but who transfer ownership of their property before making a claim against the Fund. Such impediments would thwart the Fund's legislative purpose of providing protection for owners whose residences are damaged by a contractor's substandard work. McMurren's conversion of the property to a commercial use from a residence before he filed his claim or at the time of the hearing on his claim should not affect whether he qualified as a "person injured" when the damage occurred. Additionally, the ALJ's interpretation would allow a person who purchases a damaged residence at a discounted price from an owner who hired a contractor who caused the damage to begin occupying that residence and make a claim against the Fund, even though both parties were aware of the damage before the sale. That interpretation would permit an otherwise uninjured but knowledgeable purchaser to orchestrate becoming a "person injured," but would deny compensation to an owner who knowingly sells a damaged residence at a reduced value before filing a claim, even though the owner resided, or intended to reside, in the residence at the time the contractor was hired or when the claim accrued. Because the statute is silent on how long the occupancy must continue or whether it must be exclusive, our interpretation avoids the possibility that an owner will become an occupant long after a claim accrues or only after becoming cognizant of the occupancy requirement. The ALJ's interpretation would encourage the opposite result by allowing a person to buy a residence; hold it exclusively as a lessor for an extended period of time, neither occupying nor intending to occupy it; then move into a portion of it after a claim has accrued and file a claim against the Fund.[10]

Complainants emphasize the italicized portions above. However, it must be noted that this language is dicta in relation to A.R.S. § 32-1132(A) because the Court did not construe that statute. The Administrative Law Judge does not find the dicta persuasive here. 10. In the present case, Complainants have suffered no actual damages as a result of Respondent’s violations because the house went into foreclosure before any repairs had been made. If Complainants had paid for repairs prior to the foreclosure, they would have incurred actual damages from Respondent’s violations, but they did not. Neither did they sell the home at a diminished value that was caused by the violations.[11] Instead, Complainants went into foreclosure and lost ownership of the property. In this situation, Complainants have not suffered actual damages. 11. Complainants do not have actual damages that are compensable by the Fund under A.R.S. § 32-1132(A). RECOMMENDED ORDER In view of the foregoing, IT IS RECOMMENDED that the Registrar of Contractors deny Complainants’ claim.

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, September 27, 2011.

/s/ Eric A. Bryant Administrative Law Judge

Transmitted electronically to:

William A. Mundell, Director Registrar of Contractors ----------------------- [1] Exhibits A, B, and C. Complainants claim far exceeds the statutory cap of $30,000.00. [2] Utah Construction Company v. Berg et al, 68 Ariz. 285, 205 P.2d 367 (1949); Arizona Administrative Code (A.A.C.), OAH Rule R2-19-119(B). [3] Smith v. Arizona Dept. of Transportation, 146 Ariz. 430, 706 P.2d 756 (App. 1985); A.A.C. R2-19-119(A). [4] Culpepper v. State, 187 Ariz. 431, 437, 930 P.2d 508, 514 (Ct. App. 1996). [5] A.R.S. § 32-1132(A). [6] United State Fidelity & Guaranty Co. v. Davis, 3 Ariz. App. 259, 263, 413 P.2d 590, 594 (1966) (quoting 25 C.J.S. Damages § 2 (1966)). [7] Medasys Acquisition Corp. v. SDMS, P.C., 203 Ariz. 420, 55 P.3d 763 (2002) (award of actual damages is required before punitive damages may be awarded). [8] Smith v. Beesley, 226 Ariz. 313, 247 P.3d 548 (2011) (nuisance action that required a showing of possibility of resulting damage did not require a showing of actual damage). [9] 204 Ariz. at 350, 63 P.3d at 1087. [10] Id. at 350-51, 63 P.3d at 1087-88 (emphasis added). [11] Glenn Hawkins testified at hearing that if a Fund claimant sells the home and the sale documents quantify a reduction of the sales price for the cost of repair or completion, the Fund would cover such damages.

-----------------------

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