FINACT2013A-4626-ROC.pdf

2013A-4626-ROC · Registrar of Contractors · 2014-07-15

BEFORE THE REGISTRAR OF CONTRACTORS

OF THE STATE OF ARIZONA

IN THE MATTER OF THE CIVIL PENALTY ) ) CASE NO: 2013-4626 CITATION ISSUED TO: ) Daniel Louis Klabunde ) ) DOCKET NO. 2013A-4626-ROC RESPONDENT ) ) ) ORDER ) The Registrar adopts the Administrative Law Judge's attached Recommended Order with the following modifications: On page 6, line 24 “(KB-1.233476-ROC)” shall be replaced with “(KB- 1.233475-D)”. The Registrar rejects Conclusion of Law No. 2 and substitutes the following modification: “The case of Butch Randolph & Associates, Inc. v. International Fidelity Ins. Co. is distinguishable from this case on numerous grounds, most notably because the homeowners in this case are foreclosed from the protection of the Residential Contractor’s Recovery fund and therefore do not enjoy “no less protection than if [they] had contracted separately for installation and materials.” See 212 Ariz. 550, 553 ¶3, 136 P.3d 232, 233 (App. 2006). Further, several of the licensees named on the victims’ contracts knew nothing of the contracts, and had suspended licenses at the time Klabunde accepted the

victims’ money. As such, Butch Randolph does not shield Mr. Klabunde from liability.”

Justification: Butch Randolph does not shield Mr. Klabunde from liability because important

policy concerns mandate that Butch Randolph be read narrowly, and the case at bar is readily

distinguished.

I.

Four important policy reasons mandate that Butch Randolph be read narrowly. First, a consumer

who contracts with a material supplier, who then in turn contracts with an installation contractor, loses the

protection of the Residential Contractor’s Recovery fund. Next, if Butch Randolph is read broadly, it

abrogates the need for general contractors. Next, the legislative history of A.R.S. § 32-1121(A)(4)

of 8 REGISTRAR OF CONTRACTORS 1700 W. Washington St. Suite 105 – PHOENIX, AZ 85007-2812 Telephone (602)542-1525 1-877-692-9762 indicates that the legislature intended to preclude material suppliers from acting as general contractors.

Finally, The Registrar did not appear in Butch Randolph, and as such was not able to assist the court by

providing its interpretation.

A. A homeowner that contracts with a material supplier does not enjoy the same protections as a homeowner that contracts directly with a licensee. The Butch Randolph court premised its holding on the assumption that the landowner at issue

would enjoy “no less protection than if he had contracted separately for installation and materials.” Butch

Randolph, 212 Ariz. 553. While this may be true for commercial projects, it would not hold true if Butch

Randolph had involved a residential project, as the Residential Contractor’s Recovery Fund may have

come into play.

The Recovery Fund is the Registrar’s primary tool to protect homeowners injured by licensed

contractors. Even if the worst happens, and a contractor goes out of business or disappears, the Fund acts

like a safety net to cushion the injured homeowner. However, the Fund has its limits; before a consumer

can access the Fund, he must show that he contracted with a residential contractor whose license was in

good standing at the time of contract execution. See A.R.S. § 32-1132(A).

The legislative history and subsequent case law make clear that a fund applicant must have

privity of contract with at least one licensed contractor. See McMurren v. JMC Builders, Inc., 204 Ariz.

345, 349, 63 P.3d 1082, 1086 (Ct. App. 2003) ([W]hen the legislature created the Fund, its intent was

partly to “protect[]…owners and lessees of property who contract” with residential contractors to build or

improve their residences); see also 1981 Ariz. Sess. Laws, ch. 221, § 1, (The purpose of the Fund is “to

provide improved protection for owners and lessees of property who contract for the construction or

alteration of residential structures); Arizona Legislative Council Summary Analysis of H.B. 2112 1981

(“The only persons who would have access to the recovery fund proceeds would be owners or lessees of

property who contract with a contractor. . .”).

If a homeowner contracts with a material supplier, who then contracts with an installation

contractor, the homeowner does not have a contract with a licensed contractor. If the worst happens—as it did repeatedly in this case—the safety net disappears, and the homeowner is left free falling. The

legislature could not have intended A.R.S. § 32-1121(A)(4) to sanction such a situation.

B. If Butch Randolph were read broadly, it would abrogate the need for general contractors and frustrate the purpose of the A.R.S. § 32-1101 et seq.

General contractors occupy a special place in the Registrar’s regulatory scheme. They are part of a limited class of contractors that can manage an entire construction project and subcontract for work outside the scope of their licenses. A general contractor’s license allows a contractor to perform the work of nearly every specialty contractor with a few exceptions. See A.A.C. § R4-9-103(B). A general contractor managing a project oversees all construction, and is responsible for all of the construction work on a project; the “buck,” as they say, stops with a general contractor. For these reasons, the fees and bond requirements for a general contractor’s license are greater than that of a specialty license. See A.A.C. §§ R4-9-112 and R4-9-130. A general contractor’s license is not given lightly; it functions as a badge of general competency that signals to consumers that they are in good hands. If Butch Randolph were given a broad reading, there would be no need to obtain a general contractor’s license. A material supplier could simply sell a homeowner each discrete part of a home— trusses drywall, paint, pipes, concrete, etc…—and contract with a separate licensed specialty contractor to install each part. The material supplier would not need to demonstrate any level of expertise before

acting as a contractor, and a material supplier working as a general contractor would have no professional

responsibility for any of the work it supervised. Since a homeowner who contracts with a material

supplier is foreclosed from the Recovery Fund, the material supplier would never have to worry about

paying back a recovery fund payout. The material supplier would have lower overhead, and could price

licensed general contractors out of the marketplace. Simply, a contractor would have no incentive to get a

general contractor’s license; as he could forgo licensing fees and bond requirements and operate free from

regulation by the Registrar.

The primary purpose of state regulation of construction contractors through licensing is to protect

the public from unscrupulous and unqualified persons acting as contractors. Northen v. Elledge, 72 Ariz.

of 8 REGISTRAR OF CONTRACTORS 1700 W. Washington St. Suite 105 – PHOENIX, AZ 85007-2812 Telephone (602)542-1525 1-877-692-9762 166, 232 P.2d 111 (1951); State v. Heritage Shutters, Inc., 23 Ariz.App. 544, 534 P.2d 758 (1975).

Allowing material suppliers to act as general contractors beyond the reach of the Registrar frustrates this

purpose by allowing unvetted and unregulated individuals function at the highest levels of the

construction industry. This cannot be what the legislature intended.

C. The legislative history of A.R.S. § 32-1121(A)(4) indicates that the legislature sought to preclude material suppliers from acting as general contractors.

The legislature recognized that A.R.S. § 32-1121(A)(4) could allow material suppliers to function

as general contractors, and amended the statute in 1991 accordingly. Prior to the 1991 amendments,

A.R.S. § 32-1121(A)(4) exempted from licensing:

Any materialman, manufacturer or retailer furnishing finished products, materials or articles of merchandise who does not install or attach such items. Any retailer not required to be licensed under this paragraph who enters into a sales contract or transaction involving the installation or attachment of such items to a structure shall, in carrying out the terms of the sales contract or transaction, work only with licensed contractors or a person otherwise exempted from licensing and shall inform the purchaser that the installation may be performed by a subcontractor whose name and address the purchaser may request. A.R.S. § 32-1121(A)(4) (1989) (emphasis added). The 1991 amendments removed the provision—

emphasized above—sanctioning a material supplier’s sale of the installation services of a subcontractor. 1

The legislature’s removal of this language indicates intent to preclude materialmen from acting as general

contractors. See Daou v. Harris, 139 Ariz. 353, 357, 678 P.2d 934, 938 (1984) (The legislature is

presumed to know the existing laws when it enacts or modifies a statute.) see also State v. Garza

Rodriguez, 164 Ariz. 107, 111, 791 P.2d 633, 637 (1990) (Courts “presume that by amending a statute,

the legislature intends to change the existing law.”). Further, the Senate Fact Sheet prepared for the 1991

The amendment read:

Any materialman, manufacturer or retailer furnishing finished products, materials or articles of merchandise who does not install or attach such items or installs or attaches such items if the total value of the sales contract or transaction involving such items and the cost of the installation or attachment of such items to a structure does not exceed seven hundred fifty dollars including labor, materials and all other items. The materialman, manufacturer or retailer shall inform the purchaser that the installation may also be performed by a licensed contractor whose name and address the purchaser may request.

A.R.S. § 32-1121(A)(4) (1991). amendments even states that purpose of the amendment was to limit the exemption from licensure for

materialmen, manufacturers or retailers. Ariz. State Senate Fact Sheet for H.B. 2110 (1991). The

background provided in the Fact Sheet also specifically acknowledged the danger of materialmen

swallowing up General Contractors: Under current law, it is possible for entire structures to be built from finished products or materials. The proposed bill intends to provide additional consumer protections by narrowing this exemption and giving the registrar of contractors the authority to regulate those companies that sell these materials in excess of a value of $500. . . . Id. (emphasis added). The Butch Randolph court refused to consider the senate fact sheet in rendering its decision because it was deemed contrary to the text of the statute. However, the fact sheet demonstrates that the amendment had 2 purposes: to eliminate the ability of materialmen to act as general contractors, and to allow the registrar to regulate materialmen that provide goods over the stated dollar amount. The fact sheet was offered—and rejected—to prove the second purpose of the 1991 amendments, not the first, and the court does not appear to have considered it on this issue. Rather, it appears that the court let the equities, unique to that case, motivate its decision. Thus, the statute’s first purpose—removing the ability of materialmen to act as general contractors—was not contradicted by the court in Butch Randolph and the court’s holding should not be misconstrued to overturn clear legislative intent

D. The Registrar’s interpretation of the statute was not available to the Butch Randolph court.

The Registrar was not a party to Butch Randolph, thus the court decided the case without the

benefit of the Registrar’s interpretation. While the Court of Appeals “resolves questions of statutory

construction de novo, [it gives] deference to an agency's interpretation and application of statutes that it

implements.” Bridgestone Retail Tire Operations v. Indus. Comm'n of Arizona, 227 Ariz. 453, 456, 258

P.3d 271, 274 (Ct. App. 2011). When the language of a statute is subject to various interpretations, an

agency’s interpretation of its own statute is entitled to “considerable deference by the judiciary.” See

Coppock v. Mundell, 1 CA-CV 12-0667, 2013 WL 3155836 (Ariz. Ct. App. June 20, 2013) (quoting Ariz.

Water Co. v. Ariz. Dep't of Water Res., 208 Ariz. 147, 154–55, ¶¶ 30–31, 91 P.3d 990, 997–98 (2004)).

of 8 REGISTRAR OF CONTRACTORS 1700 W. Washington St. Suite 105 – PHOENIX, AZ 85007-2812 Telephone (602)542-1525 1-877-692-9762 At the time Butch Randolph was decided, the statute no longer had the provisions allowing a

materialman to act as a general contractor; it was silent on the issue. The statute was thus subject to

various interpretations, and if the Registrar was present in the action, its interpretation would have been

accorded “considerable deference.” If a part of the action, the Registrar would have taken the position—

as it has for years—that A.R.S. § 32-1121(A)(4) does not enable a material supplier to hire a contractor to

install the materials it supplies. The Registrar would also have explained to the court the mischief a

ruling to the contrary would work on the Registrar’s statutory scheme.

For the forgoing reasons, the Registrar construes Butch Randoph’s holding narrowly to state only

that an A.R.S. § 32-1153 defense is not available to a surety for a general commercial contractor, who in

the context of a commercial project, purchased both materials and installation services from a material

supplier, and did not pay for the material supplied, in an action by the material supplier, to recover only

the cost of the materials supplied.

II.

Butch Randolph is readily distinguished from the case at bar. Butch Randolph was a contract

dispute between two sophisticated businesses, in which a general contractor’s surety attempted to skip out

on a bill by asserting an A.R.S § 32-1153 defense to the debt. The case did not involve a residential

project; it involved a municipal park. See Butch Randolph & Associates, Inc. v. Int'l Fid. Ins. Co., 212

Ariz. 550, 551, 136 P.3d 232, 233 (Ct. App. 2006). Neither party was the landowner. The case could not

have resulted in a claim to the Residential Contractor’s Recovery Fund. Id. at 553.

The landowner in Butch Randolph contracted with a general contractor, who then contracted with

a material supplier that contracted with another licensed contractor for installation. If the material

supplier had failed to perform, the general contractor would have been forced to perform so that the

consumer was not harmed. Similarly, if the licensed installer hired by the material supplier had failed to

perform, the consumer would have been protected by the licenses of both the general contractor and the

licensed installer. As a practical matter, because the land owner contracted directly with a licensed

general contractor, who was responsible for the entire project, the landowner enjoyed “no less protection than if [it] had contracted separately for installation and materials.” Id.

Here the case is much different, the victims are consumer homeowners. The Respondent is a

revoked contractor with nearly a quarter of a million dollars in Recovery Fund payouts that has twice

pleaded guilty to contracting without a license. The basic protections that the Butch Randolph decision was premised on—that a licensed contractor was involved in the transaction—does not apply to the contracts Klabunde entered into. The contracts in this case were with unlicensed individual, thus the first layer of protection present in Butch Randolph—the presence of a licensed general contractor responsible for the entire project—is absent here. The Carillo, Kidane, Schneider, Oliverio, Burch, Mchugh, Heron- Weeber/Freidt, Verdugo and Bayse contracts all provided for the work to be done by a contractor who was unaware of the contract and never agreed to perform work under them. The Kidane and Schneider contracts indicated that the work would be performed by a contractor whose license was suspended for non-renewal. Thus, the second layer of protection present in Butch Randolph—the presence of a licensed contractor responsible for the installation of materials—is absent here as well. Further, the homeowner victims in this case are foreclosed from the Recovery Fund because they have no contract with a licensed contractor. See A.R.S. § 32-1132(A). 2 Simply, the landowners in this case do not enjoy “no less protection than if [they] had contracted separately for installation and materials.” Butch Randolph, 212 Ariz. 553.

This case represents the worst case scenario that the legislature took action to prevent in 1991.

Based on the foregoing, Butch Randolph’s holding does not control the outcome of this case, and does not

shield Klabunde from liability.

Respondent is therefore ordered; based on this Decision, as modified, to remit payment of the

civil penalty, to:

Registrar of Contractors PO Box 6748

As a practical matter, even if the Recovery Fund did not require privity of contract with a licensed contractor—it does—these homeowners would still be foreclosed from the recovery fund because they were not damaged by the failure of residential contractor or a dual licensed contractor. Rather, they were damaged by the failure of Mr. Klabunde, an unlicensed individual.

of 8 REGISTRAR OF CONTRACTORS 1700 W. Washington St. Suite 105 – PHOENIX, AZ 85007-2812 Telephone (602)542-1525 1-877-692-9762 Phoenix, AZ 85505-6748

IT IS SO ORDERED this 15th day of July, 2014.

REGISTRAR OF CONTRACTORS

/s/ Marc A. D’Amore

Marc A. D’Amore Chief of the Legal Department

Copy mailed via USPS First Class mail this 15th day of June, 2014 to: Respondent Daniel Louis Klabunde; Daniel Louis LLC, DBA: 1/2 Price Cabinets 2423 W. Bramble Berry Ln. Phoenix, AZ 85085-7025

Mark A. Hanson Schern Richardson Finter Decker PLC 1640 S. Stapley Dr., Ste. 132 Mesa, AZ 85204-6673

AND copy electronically mailed this same date to:

Registrar’s Counsel John Tellier, Esq., Assistant Attorney General

Office of Administrative Hearings M. Douglas, Administrative Law Judge

Registrar’s Investigations Department

Case No. 2013-4626 /mkc