ALJDEC decisions subject to certification as final

2011A-3374-ROC · Registrar of Contractors · 2012-02-14

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING DATES: December 2, 2011, at 8:00 a.m. and February 1, 2012, at 8:00 a.m. APPEARANCES: Complainant Legacy Traditional Charter School was represented by Richard G. Erickson, Esq., and Eric H. Spencer, Esq., Snell & Wilmer, L.L.P.; Respondent M 13 Construction, Inc. was represented by Michael J. Holden, Esq., and Kevin M. Kasarjian, Esq., Holden Willits, P.L.C. ADMINISTRATIVE LAW JUDGE: Diane Mihalsky _____________________________________________________________________

FINDINGS OF FACT Background and Procedure In September 2008, the Arizona Registrar of Contractors (“the Registrar”) issued License No. B-1.249208-C for commercial general contracting to M 13 Construction, Inc. (“Respondent”). Respondent’s address of record is in Springville, Utah. On June 10, 2011, the Registrar received a complaint from the attorney representing Aaron Hale of Legacy Traditional Charter School (“Complainant”) against Respondent alleging that it had failed to pay subcontractors, to perform repairs, or to provide documents that Complainant needed to obtain a permanent certificate of occupancy for the school facility that Respondent constructed at 17760 North Regent Drive in Maricopa, Arizona (“the project”). The Registrar assigned the complaint to its inspector, Dennis Cook, for investigation. Inspector Cook performed a jobsite inspection on June 29, 2011. On July 11, 2011, Inspector Cook issued a Corrective Work Order (“CWO”) that required Respondent to correct certain items within fifteen calendar days, in relevant part as follows: 1. Complete the paving and drainage items listed on the City of Maricopa Engineering Department Final Walk Through Punch List. 2. Correct the buckled and bubbled cap sheet . . . at all Rolled roofing areas. 3. In order for the complainants [sic] to obtain a permanent Certificate of Occupancy, the contractor should furnish the owners with all close out documents required by the contract and by the local building authority.

On July 27, 2011, Complainant’s attorney informed the Registrar that Respondent had made no attempt to comply with the CWO. Complainant’s attorney requested that the Registrar issue a formal citation against Respondent and refer the matter for hearing. On September 7, 2011, the Registrar issued a Citation and Complaint against Respondent, charging violations of A.R.S. § 32-1154(A)(1), (2), (9), (23), and (3), namely A.A.C. R4-9-108, and 32-1154(A)(13), namely A.R.S. §§ 32- 1124(B), 32-1129.02(B), and 32-1154(D). Respondent’s attorney filed a timely written answer to the Citation and Complaint, denying any statutory violations and affirmatively alleging that because Respondent had billed a total of $2,191,408.75 for its work on the project but had only been paid a total of $1,566,146.42, Respondent was excused from performing further work on the project. The Registrar referred the matter to the Office of Administrative Hearings (“OAH”), an independent state agency, for an evidentiary hearing. Both parties submitted prehearing memoranda. Respondent argued that the failure by the developer on the project, United States Charter Group (“USCG”), to pay Respondent’s pay applications excused Respondent from further work on the project, including repairs. Complainant argued that Respondent and USCG were related entities and submitted extensive quotations from articles published in the Salt Lake Tribune, reporting that Respondent’s principal, Mike Morley, and USCG’s principal, Glenn Way, were current or former Utah state legislators who sponsored legislation that encouraged charter school development. The articles further reported that Respondent and USCG then contracted with charter school owners to construct their schools and that many of USCG and Respondent’s construction projects experienced financial shortfalls and construction deficiencies. A hearing was held in the OAH on December 2, 2011, and February 1, 2012. Inspector Cook testified. Complainant submitted 43 exhibits and presented the testimony of four witnesses: (1) Rob Dolson, a public works inspector for the City of Maricopa (“the City”) Engineering Department, who inspected the project; (2) Brad Hinton, a development expediter for the City; (3) E. William (“Bill”) Gregory, Jr., Complainant’s facilities director; and (4) Aaron Hale, Complainant’s executive director. Respondent submitted 41 exhibits and presented the testimony of Colleen Douglas, Respondent’s comptroller. Hearing Evidence The Contracts for Construction of the Project Mr. Hale moved to Maricopa from Houston, Texas in March 2005. Because he considered the public schools in Maricopa to be “horrible,” in May 2005, Mr. Hale formed a partnership with Mr. Gregory to start Complainant charter school in Maricopa. In 2009, USCG approached Mr. Hale about constructing Complainant charter school. At the time that USCG approached Mr. Hale, USCG and Respondent had together constructed between 10 and 14 other charter schools, mostly in Utah. USCG initially suggested to Complainant, and Complainant agreed, that USCG would own the school facility and lease it back to Complainant for its operation of the charter school. USCG is not a licensed contractor in Arizona. Mr. Hale testified that USCG chose Respondent as the general contractor on the project and that Complainant had no say in the matter. The project was split into two phases. On or about June 1, 2009, USCG and Respondent entered into an AIA A121 Standard Form of Agreement between Owner and Construction Manager for the first phase. USCG was listed as the Owner and Respondent was listed as the Construction Manager. Respondent’s scope of work included construction of four classroom buildings on the south side of the project site, associated site work, and various off-site improvements. USCG and Respondent’s June 1, 2009 contract provided that USCG would pay Respondent its costs plus 7% for profit and overhead. During the summer of 2009, Respondent substantially completed the four classrooms on the south side of Complainant’s campus. The site work was not completed, however, until the second phase of the project. In August 2009, Complainant started using the classrooms under a temporary certificate of occupancy from the City and opened the four class rooms to students. On or about August 25, 2009, USCG as Owner and Respondent as Construction Manager entered into a second AIA A121 Standard Form of Agreement for construction of an administration building that would house administrative offices and a large gymnasium on the project. USCG and Respondent’s August 25, 2009 contract provided that a Guaranteed Maximum Price was not required and that USCG would pay Respondent its costs plus 7% for profit and overhead. USCG and Respondent’s August 25, 2009 contract required Respondent to submit pay applications based on completed work by the fifth day of the month and USCG to pay such applications within 20 days. USCG and Respondent’s August 25, 2009 contract expressly did not require Respondent to post a performance bond for the project. Respondent’s June 1, 2009 contract and August 25, 2009 contract with USCG did not show its Arizona license number, preceded by the acronym “ROC.” USCG urged Complainant to purchase the project because such purchase would allow a bond to be obtained to finance the project. At some point, Complainant agreed to purchase the project from USCG.[1] Mr. Hale testified that although Complainant paid USCG to be added as a dual obligee on the bond, USCG never added Complainant to the bond. On or about August 28, 2009, USCG as Design-Builder and Complainant as Owner entered into an AIA A141 Standard Form of Agreement for construction of the charter school’s administration building. USCG and Complainant’s August 28, 2009 contract included a Guaranteed Maximum Price of $2,270,574.00 and required USCG to pay any costs in excess of the Guaranteed Maximum Price without any reimbursement from Complainant. The contract also required USCG to submit pay applications to Complainant in accordance with the “schedule of values” that allocated the Guaranteed Maximum Price among various portions of the work. Events Leading to the Complaint to the Registrar Until approximately January or February 2010, Respondent had no direct contact with Complainant. Ms. Douglas testified that although USCG and Respondent’s contracts did not prohibit Respondent from contacting the actual owner or occupant of a charter school project, such contact had led to strain and had been detrimental to the project. Complainant’s representative on the project was Project Control, Inc. (“PCI”). Respondent started construction of the second phase of the project. In October, November, and December 2009, Respondent submitted pay applications to USCG. USCG and PCI approved the pay applications and the bond company released payments that allowed USCG to pay Respondent the total amount of its October, November, and December 2009 pay applications. On or about January 21, 2010, USCG submitted a pay application for payment for work performed on the project through January 15, 2010. The total amount of USCG’s January 2010 pay application was $159,049.07 for Respondent’s work. The bond company refused to pay USCG’s January 2010 pay application due to previous overbilling, but indicated that money would most likely be reimbursed.[2] As of the date of the hearing, Respondent had not been paid anything for its January 2010 pay application to USCG. Ms. Douglas testified that beginning in January 2010, USCG and Respondent started to have friction about USCG’s overbillings to the bond company under its August 28, 2009 Guaranteed Maximum Price contract with Complainant. Ms. Douglas also testified that beginning in January 2010, she had conversations with PCI about her concerns. Ms. Douglas testified that PCI informed her that the project was underfunded and that it was holding the January 2010 draw to be able to complete the project. At the end of February and March 2010, Respondent submitted additional pay applications to USCG. The bond company paid USCG, allowing it to pay Respondent for the total amount of its February and March 2010 pay applications. At the end of April, May, June, and July 2010, Respondent submitted pay applications to USCG for work completed during those time periods in the amounts of $154,761.59, $103,239.03, $91,640.40, and $116,572.24, respectively. USCG did not pay Respondent for these pay applications. The invoice summaries that PCI provided to Complainant for Respondent’s April, May, June, and July 2010 pay applications stated that the applications were not processed through the bond. PCI attached to its invoice summaries certain e-mails between Ms. Douglas and PCI dated February 2010, that stated that the Guaranteed Maximum Price on USCG and Complainant’s August 28, 2009 contract was “short.” Ms. Douglas testified that she understood that USCG was supposed to contribute additional money to fund the bond. Ms. Douglas testified that PCI and USCG assured Respondent that the funding problems would be resolved. Ms. Douglas testified that Respondent pushed its subcontractors, even though they had not been paid, so that Complainant could obtain a temporary certificate of occupancy for the administration building. In April or May 2010, Mr. Hale became concerned about whether Respondent would be able to complete Complainant’s project. USCG informed Complainant that only $300,000.00 remained on the bond, but more than $600,000.00 was owed to Respondent and its subcontractors. On June 10, 2010, the City issued a temporary certificate of occupancy for the administration building. The City provided a punch list to Complainant of the items that Complainant would need to provide to obtain a permanent certificate of occupancy, including as-built plans and correction of paving and drainage issues on the City’s engineering final walk-through list. Respondent presented an accounting that showed that USCG failed to pay Respondent a total of $625,262.33 for its January, April, May, June, and July 2010 pay applications for completed work. Respondent’s accounting also showed that in July 2010, Respondent’s subcontractors had not been paid a total of $578,681.10 for the work that was included in Respondent’s pay applications to USCG. Respondent’s contracts with its subcontractors included a “pay if paid” clause. On July 7, 2010, Respondent’s president, Mike Morley, sent a letter to Glenn Way of USCG, notifying him that Respondent was providing seven days notice that it would terminate all work on the project unless it received payment. The letter was not copied to PCI or to Complainant. During the spring and summer of 2010, many of Respondent’s subcontractors and suppliers filed mechanics’ liens against Complainant after Respondent did not pay them for their work or materials on the project. These subcontractors included San Tan Roofing, Inc., License No. L-42.078867-C (“San Tan Roofing”), the subcontractor who installed the roof on the administration building. San Tan Roofing eventually sued Complainant in Pinal County Superior Court to foreclose its lien. Complainant obtained the subcontractors’ names from Respondent. Complainant directly negotiated with most of the subcontractors to pay them to remove their liens from the project. Events after the CWO At no time after the CWO was issued or before the hearing in this matter did Respondent comply with the CWO by completing the paving and drainage items listed on the City’s engineering final walk-through, correcting the cap sheet at the rolled roofing area on the administration building, or providing close-out documents to Complainant to enable it to obtain a permanent certificate of occupancy. Because Complainant needed to be ready to open the school for the 2011- 2012 school year, it hired consultants to inspect the site and to generate as-built plans and other documents that the City required to issue the permanent certificate of occupancy. Complainant also hired contractors to complete the punch list items that the City required to issue the permanent certificate of occupancy. In July 2011, less than fifteen days after Inspector Cook issued the CWO, the City issued the permanent certificate of occupancy to Complainant. Mr. Hinton testified that because the paving and drainage issues on the City’s engineering punch list did not involve health or safety, the City agreed to split paving and drainage away from the other requirements for the final certificate of occupancy. In November 2011, the City and USCG agreed that the City would use the remaining bond funds to correct paving and drainage issues during regularly scheduled street maintenance. As of the date of the hearing, the paving and drainage had not been corrected. As of the date of the hearing, the rolled roofing on the administration building also had not been corrected. On July 22, 2011, Complainant’s inspector, BBACA Engineering, issued a report that opined that the poor appearance of the roof was due to several causes, including improperly applied underlayment, roof deck movement, the absence of spacers between the roof deck boards, and poor roof ventilation. Respondent acknowledged that the roof did not comply with the Registrar’s workmanship standards. Respondent argued that after it terminated its contract with USCG, it had no right to return to the project, even to perform corrective work to comply with the CWO. On or about November 30, 2011, Respondent filed a complaint to the Registrar against San Tan Roofing for its improper construction of the roof on the administration building. Ms. Douglas wrote numerous letters to San Tan Roofing’s insurer, Hill Insurance Services, to make a claim. As of the date of the hearing, Hill Insurance Services had not agreed to pay the claim. On November 15, 2011, Respondent filed a civil complaint in Maricopa County Superior Court Case No. CV2011-020017 against USCG and Complainant, asserting common-law claims for breach of contract against USCG and unjust enrichment against Complainant. On November 16, 2011, Complainant filed a civil complaint in Maricopa County Superior Court Case No. CV2011-020021 against USCG, Respondent, PCI, and San Tan Roofing, alleging that USCG and Respondent had a “questionable track record” in building charter schools, mismanaged the project, and misappropriated funds, causing Complainant to incur substantial costs. Complainant asserted claims against Respondent for violation of the Arizona Prompt Payment Act, A.R.S. §§ 32-1129.01 to 32-1129.06, and common-law negligence. Complainant attached to its complaint to the Registrar a printout of Respondent’s website that did not show Respondent’s license number, preceded by the acronym “ROC.” Ms. Douglas testified that although Respondent is not currently conducting any contracting activities in Arizona, it has modified its website to include its Arizona license number, preceded by the acronym “ROC.” According to the Registrar’s website, Respondent’s license is current and in good standing. One complaint was closed as resolved/settled/withdrawn. Complainant’s complaint appears to be the only complaint pending against the license. CONCLUSIONS OF LAW The disputes between Complainant and Respondent that involve workmanship issues lie within the Registrar’s jurisdiction.[3] Because USCG is not a licensed contractor, the Registrar does not have jurisdiction to resolve disputes between Complainant and USCG or between Respondent and USCG. Complainant bears the burden of proof to establish Respondent’s statutory violations by a preponderance of the evidence.[4] Respondent bears the burden to establish affirmative defenses by the same evidentiary standard.[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] Complainant’s contract for construction of the charter school was with USCG and included a Guaranteed Maximum Price. Respondent’s contract to construct the charter school was also with USCG, but Respondent’s contract was a cost-plus contract under which the price was not fixed or guaranteed. Although the contradictory terms in Respondent’s and Complainant’s respective contracts may have made inevitable the financial issues that led Respondent to terminate construction on the project, the parties must resolve in their superior court actions the issues of causation, damages, and comparative fault. With respect to the charged violation of A.R.S. § 32-1154(A)(9),[7] Complainant did not establish that Respondent failed to complete construction of the charter school for the price stated in its contract with USCG. Although Respondent acknowledged that its subcontractors were not paid on Complainant’s project, Respondent established that USCG did not pay Respondent’s pay applications for the subcontractors’ work. Therefore, Complainant did not establish that Respondent violated A.R.S. § 32- 1154(A)(13), namely A.R.S. § 32-1129.02(B), by failing to pay subcontractors and suppliers within seven days of its receipt of progress payments from USCG.[8] Because Respondent established that USCG violated the August 25, 2009 contract by failing to make progress payments to Respondent, providing grounds for Respondent to terminate the contract, Complainant did not establish that Respondent violated A.R.S. § 32-1154(A)(1) by abandoning the contract.[9] Respondent established that Complainant obtained a permanent certificate of occupancy shortly after the CWO was issued. Respondent also established that the City and USCG have made an agreement to resolve remaining paving and drainage issues on the project. Although Complainant may be entitled to civil damages for the costs of resolving punch list items to obtain the permanent certificate of occupancy, the Registrar is not authorized to award such damages.[10] Commercial expediency does not establish a right to restitution under A.R.S. § 32-1156.01. Complainant did not establish that Respondent departed from plans or specifications for the project or the City’s building code with respect to any of the items in the complaint or CWO, in violation of A.R.S. § 32- 1154(A)(2).[11] Respondent is responsible for its subcontractors’ work. Respondent’s roofing subcontractor’s refusal to correct deficient workmanship does not relieve Respondent’s responsibility to Complainant, the property owner. Although nonpayment may provide a valid defense to a charge of abandonment, nonpayment does not excuse a contractor’s failure to correct workmanship deficiencies pursuant to the two-year warranty that A.R.S. § 32-1155(A) requires. Therefore, Complainant established that Respondent’s initial construction of the roof over the administration building and failure to repair the roof to comply with the CWO violated A.R.S. § 32-1154(A)(3), namely A.A.C. R4-9-108,[12] and A.R.S. § 32-1154(A)(23).[13] Respondent acknowledged that it had violated A.R.S. § 32-1154(A)(13), namely A.R.S. § 32-1124(B) by failing to have on its website its Arizona license number, preceded by the acronym “ROC.”[14] RECOMMENDED ORDER Based on the foregoing, it is recommended that on the effective date of the Registrar’s final order in this matter, the Registrar suspend Respondent M 13 Construction, Inc.’s License No. B-1.249208-C until it repairs the roof on the administration building at Complainant Legacy Traditional Charter School and remedies its violations of A.R.S. § 32- 1124(B). It is further recommended that the Registrar not suspend Respondent’s license and, instead, close Complainant’s complaint against Respondent in Case No. 2011-3374 if on or before the effective date of the Registrar’s order, Respondent furnishes written proof that is satisfactory to the Registrar of both of the following: 1) Respondent has repaired in a professional and workmanlike manner the roof on the administration building at Complainant charter school; and 2) Respondent has revised its website, contract form, invoice form, proposal form, business cards, letterhead, advertising, and any other documents used in its contracting business to comply with the requirements of A.R.S. § 32-1124(B). It is further recommended that the Registrar require Respondent to pay the sum of $250.00 as a civil penalty pursuant to A.R.S. § 32-1154(D).

It is further recommended that if Respondent fails to pay the entire amount of the civil penalty on or before thirty days following the effective date of the Registrar’s final order, the Registrar revoke Respondent’s license, effective on such deadline date. No future license shall be issued to any entity consisting of persons associated with Respondent, as defined in A.R.S. § 32-1101(A)(5), unless Respondent tenders payment of any outstanding prior civil penalty. 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, 2012.

/s/ Diane Mihalsky Administrative Law Judge

Transmitted electronically to:

William A. Mundell, Director Registrar of Contractors ----------------------- [1] The record in this matter does not include the purchase agreement. [2] See Complainant’s Ex. 14. [3] See 32-1101 et seq. [4] 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). [5] See A.A.C. R2-19-119(B)(2). [6] Morris K. Udall, Arizona Law of Evidence § 5 (1960). [7] A.R.S. § 32-1154(A)(9) includes among the grounds for suspension, revocation, or other disciplinary action against a contractor’s license, “[f]ailure in a material respect by the licensee to complete a construction project or operation for the price stated in the contract, or in any modification of the contract.” [8] A.R.S. § 32-1154(A)(13) includes among the grounds for suspension, revocation, or other disciplinary action against a contractor’s license, “[f]ailure in any material respect to comply with this chapter.” A.R.S. § 32-1129.02(B) provides as follows: If a subcontractor or material supplier has performed in accordance with the provisions of a construction contract, the contractor shall pay to its subcontractors or material suppliers and each subcontractor shall pay to its subcontractors or material suppliers, within seven days of receipt by the contractor or subcontractor of each progress payment, retention release or final payment, the full amount received for such subcontractor's work and materials supplied based on work completed or materials supplied under the subcontract. Payment shall not be required pursuant to this subsection unless the subcontractor or material supplier provides to the contractor or subcontractor a billing or invoice for the work performed or material supplied in accordance with the terms of the construction contract between the parties. Each subcontractor or material supplier shall provide a waiver of any mechanic's or materialman's lien conditioned on payment for the work completed or material supplied. The contractor or subcontractor may require that such conditional waivers of lien be notarized. Any diversion by the contractor or subcontractor of payments received for work performed pursuant to a contract, or failure to reasonably account for the application or use of such payments, constitutes grounds for disciplinary action by the registrar of contractors. Violations of this section shall be grounds for suspension or revocation of a license or other disciplinary action by the registrar pursuant to section 32- 1154, subsections B, C and D. [9] A.R.S. § 32-1154(A)(1) includes among the grounds for suspension, revocation, or other disciplinary action against a contractor’s license, “[a]bandonment of a contract or refusal to perform after submitting a bid on work without legal excuse for the abandonment or refusal.” [10] See J.W. Hancock Enterprises, Inc. v. Arizona State Registrar of Contractors, 142 Ariz. 400, 406, 690 P.2d 119, 125 (Ct. App. 1984). [11] A.R.S. § 32-1154(A)(2) includes among the grounds for suspension, revocation, or other disciplinary action against a contractor’s license, “[d]eparture from or disregard of plans or specifications or any building codes of any state or any political subdivision of the state in any material respect which is prejudicial to another without consent of the owner or the owner’s duly authorized representative and without the consent of the person entitled to have the particular construction project or operation completed in accordance with such plans and specifications and code.” [12] A.R.S. § 32-1154(A)(3) includes among the grounds for suspension, revocation, or other disciplinary action against a contractor’s license, “[v]iolation of any rule adopted by the registrar.” A.A.C. R4-9-108 requires that “[a]ll work shall be performed in a professional and workmanlike manner” and that “[a]ll work shall be performed in accordance with any applicable building codes and professional industry standards.” [13] 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.” [14] A.R.S. § 32-1124(B) requires that licensed contractors include their license number “preceded by the acronym ‘ROC’“ on “all written bids submitted by the licensee and . . . on all advertising, loan forms, lending institution forms, letterheads and other documents used by the licensee in the conduct of business regulated by this chapter.”

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