ALJDEC decisions subject to certification as final

2012A-5742-ROC · Registrar of Contractors · 2013-08-13

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: July 24, 2013, at 8:00 a.m. APPEARANCES: Complainant Walker and Sons Inc. dba Katrol Construction appeared through Michael W. Thal, Esq., Lang Baker & Klain, PLC; Respondent Sygnos Inc. appeared through Jay M. Mann, Esq., Jennings, Strouss & Salmon, PLC. ADMINISTRATIVE LAW JUDGE: Diane Mihalsky _____________________________________________________________________

FINDINGS OF FACT Background and Procedure 1. The Arizona Registrar of Contractors (“the Registrar”) issued License No. B-1.154531-C to Respondent Sygnos Inc. (“Sygnos”). 2. The Registrar issued License No. B-1.247198-C to Complainant Walker and Sons Inc. doing business as (“dba”) Katrol Construction (“Katrol”). 3. On or about November 28, 2012, Katrol filed two Complaints with the Registrar against Sygnos alleging that it owed Complainant the following sums: (1) $20,088.43 out of a total contract price of $108,211.00 for repairs to Building 21 at the Carl T. Hayden Veterans’ Administration Center on 650 East Indian School Road, Phoenix, Arizona 85012 (“the VA Center”); and (2) $12,260.54 out of a total contract price of $30,585.50 on a time-and-material basis to tear down and relocate off-site the temporary Operating Room (“OR”) building at the VA Center. The Registrar consolidated the two Complaints and designated them as Case No. 2012-5742. 4. After Sygnos did not resolve Katrol’s Complaints, the Registrar issued a Citation and Complaint against Sygnos, charging a possible violation of A.R.S. § 32-1154(A)(11).[1] 5. On March 26, 2013, Sygnos’ attorney, on its behalf, filed a timely written answer, denying any violation of A.R.S. § 32-1154(A)(11) and affirmatively alleging, among other things, that the Registrar lacked jurisdiction over Katrol’s Complaints for non-payment for work performed on a federally owned project such as the VA Center. 6. The Registrar referred the matter to the Office of Administrative Hearings (“the OAH”), an independent state agency, for an evidentiary hearing. 7. Before the hearing, Sygnos filed a motion to the OAH to dismiss Katrol’s Complaints, arguing that the Registrar lacked jurisdiction over them, Katrol filed an opposition to the motion to dismiss, and Sygnos filed a reply. The Administrative Law Judge took the motion to dismiss under advisement.[2] 8. A hearing was held on July 24, 2013. Katrol submitted ten exhibits and presented the testimony of Kathleen Walker, its president and qualifying party. Sygnos submitted five exhibits and presented the testimony of Darin Walters, its senior project manager on the construction projects at the VA Center. Hearing Evidence 9. Mrs. Walker testified that Katrol has performed seven or eight subcontracts on federal projects for which Sygnos was the general contractor since 2008. Mrs. Walker testified that Katrol had a written subcontract for the work at Building 21, but that the work on the temporary OR, which Mrs. Walker called “Phase 7,” was on a time- and-material basis. 10. Sygnos submitted the subcontract for the work at Building 21. Paragraph 9 of the subcontract provided as follows: Sygnos, Inc. may withhold amounts otherwise due under this Subcontract, or any other contractual arrangement between the parties, to cover Sygnos, Inc.’s reasonable estimate of any cost or liability Sygnos, Inc. has incurred or may incur for which Subcontractor may be responsible. Appropriate adjustments to withholdings shall be made when the exact amounts owed are determined.[3]

11. Mr. Walters testified that Sygnos always had written subcontracts for all work on its federal projects and denied that Katrol’s work on Phase 7 was pursuant to a verbal subcontract for time and materials. Sygnos did not submit a written subcontract for Phase 7 because Mr. Walters testified that he did not know that its attorney did not have a copy of the subcontract. 12. Katrol submitted two invoices dated September 4, 2012, that Mrs. Walker testified were for its work on Building 21 and Phase 7 in the amounts $20,088.43 and $12,260.54 respectively.[4] 13. Mrs. Walker testified that before Katrol submitted these two invoices, Sygnos had always paid Katrol promptly for its work under previous subcontracts. 14. After Katrol filed the Complaints with the Registrar against Sygnos, Mrs. Walker testified that Katrol’s attorney filed a subpoena with the VA Center to obtain documents regarding the VA Center’s payments to Sygnos. Mrs. Walker testified that Sygnos’ pay applications for the VA Center projects showed that it had been paid in full for Katrol’s work under the subcontracts.[5] Mrs. Walker pointed out that Mr. Walters had signed the applications, including the following certifications: (2) All payments due to subcontractors and supplies from previous payments received under the contract have been made, and timely payments will be made from the proceeds of the payment covered by this certification, in accordance with the subcontract agreements and the requirements of Chapter 39 of Title 31, United States Code.

(3) This request for progress payments does not include any amounts which the prime contractor intends to withhold or retain from a subcontractor or supplier in accordance with the terms and conditions of the subcontract . . . .[6]

15. Sygnos did not allege at the hearing that it had not been paid for Katrol’s work on the construction projects at the VA Center. Sygnos did not present any evidence to dispute the amounts that Katrol’s invoices showed were due for its work on the VA Center projects. 16. Instead, Mr. Walters testified that Sygnos was withholding payment based on backcharges against Katrol for two projects in Texas and Louisiana that Katrol had finished in 2011 and 2010, respectively. Sygnos submitted its letter to Katrol dated November 26, 2012, explaining that it was claiming $474,446.00 in backcharges on the Fort Sam Houston project in San Antonio, Texas, including various late charges and $175,000.00 in attorneys’ fees and expert witness fees incurred in Sygnos’ defense of lawsuit filed by Katrol’s subcontractor, A/C Technical Services (“A/C Tech”).[7] 17. Sygnos submitted a signed Settlement Agreement between it and Katrol dated January 17, 2012, in which, among other things, Katrol agreed “to provide Sygnos with any and all documentation and witness support needed to prosecute [Signos’] counterclaims against A/C Tech” for late fees on the Fort Sam Houston project.[8] Mr. Walters testified that after Katrol’s principals breached the settlement agreement by declining to testify against A/C Tech, Sygnos was forced to make an unfavorable settlement with A/C Tech to resolve its claim against Sygnos. 18. Sygnos pointed to an e-mail dated October 25, 2012, from Darin Walters to the federal employees who were overseeing the VA Center projects, informing them that on the advice of counsel, Sygnos was withholding funds from Katrol on the VA Center projects due to exposure on other projects.[9] 19. Mrs. Walker testified that Sygnos did not incur any late charges on the Fort Sam Houston project and that she had never been shown any documents to substantiate the claimed attorneys’ fees and expert witness fees incurred in defense of A/C Tech’s lawsuit. Mrs. Walker testified that after she learned that Sygnos did not incur any late fees, she declined to perjure herself by testifying in support of its prosecution of its counterclaim against A/C Tech. 20. Mr. Walters testified that Sygnos was also withholding funds from Katrol for work that it had performed on a project in Fort Polk, Louisiana in 2010, because warranty work that Katrol had performed on three concrete panels failed and was rejected by the Army Corps of Engineers. Sygnos claimed $14,400.00 to repair the panels and $9,000.00 for additional charges for administrative oversight as backcharges against Katrol on the Fort Polk project.[10] 21. Sygnos did not submit any evidence to establish that its claimed backcharges against Katrol on the Fort Sam Houston project in Texas or on the Fort Polk project in Louisiana were based on a reasonable estimate of any cost or liability that Sygnos had incurred or may incur for which Katrol may have been responsible. 22. On or about February 7, 2013, after Katrol filed the Complaints with the Registrar, Sygnos filed a civil action against Katrol and its principals in Maricopa County Superior Court Case No. CV2013-001154 for declaratory judgment, common-law breach of contract, and common- law misrepresentation. The complaint acknowledged that Katrol had completed its work on the VA Center projects.[11] 23. On or about April 8, 2013, Katrol and its principals filed an answer and counterclaims against Sygnos for common-law breach of contract and unjust enrichment and violation of Arizona’s Prompt Pay Act, A.R.S. §§ 32-1129.02 or 34-221, in Maricopa County Superior Court Case No. CV2013-001154.[12] 24. Katrol’s attorney indicated that although as of the date of the hearing in this matter, Sygnos had done nothing to prosecute its claims in Case No. CV2013-001154, Katrol agreed that those claims should be resolved in the civil action, rather than in Katrol’s administrative Complaints against Sygnos. 25. Administrative notice is taken of Sygnos’ prior License record as reflected on the Registrar’s public website on August 13, 2013. Such prior License record reflects that Sygnos’ License No. B-1.154531-C was current. CONCLUSIONS OF LAW Sygnos moved to dismiss Katrol’s Complaints based on the following legal arguments: (1) Katrol’s claims for payment for its work on the VA Center projects, as well as Sygnos’ claim for offsets for costs that it allegedly incurred on the Fort Sam Houston and Fort Polk projects, were governed by the federal Prompt Pay Act; (2) The federal Prompt Pay Act allowed a general contractor on a federal project “to include in their subcontract, provisions which . . . permit the [general contractor] to make a determination that part or all of the subcontractor’s request for payment may be withheld in accordance with the subcontract agreement . . . ,” 31 U.S.C. § 3905(d)(2); and, therefore, (3) Because federal jurisdiction was exclusive, the Registrar lacked jurisdiction to determine Katrol’s claim for a violation of A.R.S. § 32-1154(A)(11). Katrol opposed Sygnos’ motion to dismiss based on the following arguments: (1) The federal Prompt Pay Act provided that “this section shall not limit or impair any contractual, administrative, or judicial remedies otherwise available to a contractor or a subcontractor in the event of a dispute involving late payment or nonpayment by a prime contractor or deficient subcontract performance or nonperformance by a subcontractor,” 31 U.S.C. § 3905(j); (2) The Arizona Prompt Pay Act does not allow a general contractor to offset payments due under one subcontract against offsets that the subcontractor allegedly owed under other subcontracts, A.R.S. § 32- 1129.02(B)[13]; and (3) The Registrar has exclusive jurisdiction to decide whether a contractor’s license should be disciplined for a violation of A.R.S. § 32-1154(A).[14] Sygnos’ decision to resolve its claims against Katrol for offsets in state court undermines its claim that under the federal Prompt Pay Act, federal jurisdiction is exclusive. Sygnos did not point to any conflict between the provisions of the federal Prompt Pay Act and that Arizona Prompt Pay Act that would deprive the Registrar of jurisdiction to resolve this matter. Therefore, it is recommended that the Registrar deny Sygnos’ motion to dismiss because this matter lies within the Registrar’s jurisdiction.[15] Sygnos did not inform Katrol that it would not be paid for its work on the VA Center projects and did not claim the offsets allegedly due on the Fort Sam Houston and Fort Polk projects until more than two months after Katrol submitted its final invoice for the VA Center projects and a year or two after Katrol completed and was paid for the Fort Sam Houston and Fort Polk projects. Sygnos did not file a lawsuit against Katrol to recover its claimed offsets until more than two months after Katrol filed its Complaints with the Registrar. Signos did not establish that its claimed backcharges against Katrol on the Fort Sam Houston project in Texas and on the Fort Polk project in Louisiana were based on reasonable estimates of any costs or liability that Sygnos had incurred or may incur for which Katrol may have been responsible. Under the circumstances, because Sygnos has not evidenced any desire to resolve in good faith its payment disputes with Katrol, it is recommended that the Registrar decide Katrol’s claim for nonpayment in violation of A.R.S. § 32-1154(A)(11), rather than deferring to the pending civil action between the parties in superior court. Katrol bears the burden of proof to establish Sygnos’ statutory violation by a preponderance of the evidence.[16] Sygnos bears the burden to establish affirmative defenses by the same evidentiary standard.[17] “A preponderance of the evidence is such proof as convinces the trier of fact that the contention is more probably true than not.”[18] Katrol established that Sygnos owed a total of $32,248.97 pursuant to its subcontract for Katrol’s work on the two VA Center projects. Sygnos did not dispute this amount and did not present evidence to establish a right to any offsets for the Fort Sam Houston or Fort Polk projects. Therefore, Katrol established that Sygnos violated A.R.S. § 32-1154(A)(11) by failing to pay Katrol $32,348.97. RECOMMENDED ORDER Based on the foregoing, it is recommended that on the effective date of the final Order in this matter, License No. B-1.154531-C of Respondent Sygnos Inc. shall be suspended for thirty (30) days, or until Respondent pays Complainant Walker and Sons Inc. dba Katrol Construction the sum of $32,348.97, without prejudice to Sygnos’ right to liquidate and recover the claimed offsets in Maricopa County Superior Court Case No. CV2013- 001154.[19] It is further recommended that if on or before the effective date of the Order, the Registrar receives from Sygnos written proof that is satisfactory to the Registrar that Respondent has paid $32,348.97 to Katrol in certified funds, Sygnos’ license shall not be suspended but, instead, Katrol’s Complaint in Case No. 2012-5742 shall be closed. It is further recommended that, in addition to any license suspension that may result from this matter, Sygnos’ Class B-1 license be placed on disciplinary probation for a period of sixty (60) days, commencing on the date on which Sygnos files notice of compliance or thirty days after the effective date of the final Order, when the disciplinary suspension is lifted, whichever event is earlier. 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, August 13, 2013.

/s/ Diane Mihalsky Administrative Law Judge

Transmitted electronically to:

William A. Mundell, Director Registrar of Contractors ----------------------- [1] A.R.S. § 32-1154(A)(11) includes among the grounds for suspension, revocation, or other disciplinary action against a contractor’s license, “[f]ailure by a licensee . . . to pay monies in excess of seven hundred fifty dollars when due for materials or services rendered in connection with the licensee’s operations as a contractor when the licensee has the capacity to pay or, if the licensee lacks the capacity to pay, when the licensee has received sufficient monies as payment for the particular construction work project or operation for which the services or materials were rendered or purchased.” [2] The legal arguments in the parties’ filings are addressed below in the Conclusions of Law. [3] Sygnos’ Exhibit A at 3. [4] See Katrol’s Exhibits 9 and 10. [5] See Katrol’s Exhibits 22 and 23. [6] Id. [7] See Sygnos’ Exhibit B. [8] Sygnos’ Exhibit E. [9] See Katrol’s Exhibit 24. [10] See Exhibit B at 2. [11] See Katrol’s Exhibit 24. [12] See Katrol’s Exhibit 25. [13] A.R.S. § 32-1129.02 provides in relevant part as follows: A. Notwithstanding the other provisions of this article, performance by a contractor, subcontractor or material supplier in accordance with the provisions of a construction contract entitles the contractor, subcontractor or material supplier to payment from the party with whom the contractor, subcontractor or material supplier contracts. B. 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. . . . 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. . . . [14] See, e.g., Twin Peaks Constr. Inc. of Nevada v. Weatherguard Metal Constr., Inc., 214 Ariz. 476, 479 ¶ 11, 154 P.3d 378, 381 (App. 2007) (citing 1974 Op. Ariz. Att’y Gen. 74-28). [15] See A.R.S. §§ 32-1151 to 32-1169. [16] See A.R.S. § 41-1092.07(G)(2); A.A.C. R2-19-119(A) and A.A.C. R2-19- 119(B)(1); see also Vazanno v. Superior Court, 74 Ariz. 369, 372, 249 P.2d 837 (1952). [17] See A.A.C. R2-19-119(B)(2). [18] Morris K. Udall, Arizona Law of Evidence § 5 (1960). [19] It is not clear that Sygnos’ claimed offsets would constitute compulsory counterclaims in a civil action under Ariz. R. Civ. P. 13(a). Even if they would, the Rules of Civil Procedure do not apply in a matter before the Office of Administrative Hearings absent an order by the Administrative Law Judge. See A.A.C. R2-19-102(C).

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