ALJDEC decisions subject to certification as final

2015A-3489-ROC · Registrar of Contractors · 2016-06-03

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: May 18, 2016, at 8:00 a.m. APPEARANCES: The Arizona Registrar of Contractors (“the Registrar”) was represented by Thomas C. Raine, Esq., Assistant Attorney General; Keith Davern (“Respondent”) was represented by Evan L. Thompson, Esq., Thompson Krone, PLC. ADMINISTRATIVE LAW JUDGE: Diane Mihalsky _____________________________________________________________________

FINDINGS OF FACT Background and Procedure On or about August 13, 2015, Attorney G. Lawrence Schubart (“Mr. Schubart”) filed a complaint with the Registrar that on April 30, 2008, Respondent and his company, Branson Development, LLC (“Branson”), had contracted with Mr. Schubart’s client, ACMI/Silverbell Vista, LLC (“ACMI”), to finish building out the remaining units in Silverbell Vista subdivision in Tucson, Arizona.[1] Mr. Schubert attached to the complaint a copy of Branson’s Second Amended Complaint against ACMI and others in Pima County Superior Court Case No. C2014-0206 dated November 4, 2014, seeking to recover under various theories 20% of the net sales of units in Silverbell Vista under the Construction Management Agreement.[2] Mr. Schubart also attached numerous documents relating to the Silverbell Vista project with Respondent’s or Branson’s name on them. The complaint was assigned to the Registrar’s Investigator, Johnnie Rodney Hamilton (“Investigator Hamilton”), for investigation. On or about November 17, 2015, Investigator Hamilton issued a Cease & Desist Order and a civil citation against Respondent for violating A.R.S. § 32-1151, based on his activities at the Silverbell Vista subdivision, and assessed civil penalties in the amount of $19,500.00. The Registrar served the Cease & Desist Order, civil citation, and notice of assessment of civil penalties on Respondent by process server.[3] Respondent requested a formal hearing. The Registrar referred the matter to the Office of Administrative Hearings, an independent state agency, for an evidentiary hearing. A hearing was held on May 18, 2016. The Registrar submitted six exhibits and presented Investigator Hamilton’s testimony. Respondent submitted five exhibits, testified on his own behalf, and presented the testimony of Steven Russo, Esq., CPA (“Mr. Russo”), an attorney and certified public accountant whose firm initially provided financing to the Silverbell Vista subdivision project. Additional Hearing Evidence According to the Arizona Corporation Commission’s records, Respondent is the manager and a member of Branson.[4] According to the Registrar’s records, neither Branson nor Respondent has ever been listed on a contractor’s license in Arizona. On or about December 2, 2014, nine months before Mr. Schubart filed his complaint regarding Respondent’s alleged activities in 2008 through 2013, the Registrar had cited Respondent doing business as KS Healthy Homes LLC for contracting without a license and/or advertising without a license. As a result, Respondent paid a civil penalty.[5] Investigator Hamilton prepared a written report of his investigation.[6] His testimony was consistent with his report. During the recession, ACMI through its principals, including Joe Nehls (“Mr. Nehls”) and Lyle Gephardt (“Mr. Gephardt”), purchased the unfinished Silverbell Vista subdivision out of foreclosure. Respondent testified that Mr. Nehls and ACMI approached him to act as the owner’s representative in the project to complete and to market the subdivision. On or about April 14, 2008, Respondent submitted an offer to Mr. Nehls to build out the remaining 30 of the 40 units at the Silverbell Vista subdivision for $15,000.00 per unit plus 20% of net proceeds from the sale of the units. The offer stated that Art Bantlin, CPA of Russo Bantlin PLLC would oversee the project’s finances and pay bills and that Respondent would “coordinate” construction with Walter Koch (“Mr. Koch”) of Bluestone Design and Construction LLC, License Nos. B.184216-R and B-2.214604-C (“Bluestone”).[7] On or about April 30, 2008, Respondent on behalf of Branson as “Construction Manager” and Mr. Nehls on behalf of ACMI as “Owner” signed a Construction Management Agreement. Although the Construction Management Agreement referred to Bluestone as “Contractor,” Mr. Koch did not sign the agreement. In the Construction Management Agreement, Respondent and Branson agreed to oversee construction of Silverbell Vista subdivision according to the contract documents, to schedule, direct, and supervise the work of Bluestone and subcontractors to make sure that such work was timely completed according to specifications, to schedule inspections by the City of Tucson, to review invoices for ACMI, and to ensure that Respondent was personally on site. Respondent also agreed to “ensure and hereby warranties that the Work will comply with the Arizona Registrar of Contractors Minimum Workmanship Standards for Licensed Contractors, and such warranty shall be for two (2) years after the completion of the Work.”[8] Under the Construction Management Agreement, Branson and Respondent would receive $15,000.00 per unit plus 20% of net proceeds from sales on the units. From their per unit payments, Branson and Respondent would pay to pay Bluestone $4,000.00 per unit. Investigator Hamilton testified that the Respondent and Branson’s responsibilities described in the Construction Management Agreement correlated to those of a general contractor as defined by A.R.S. § 32-1101. Respondent testified that the Construction Management Agreement was not artfully drafted by attorneys and that he did not actually act as the general contractor on the Silverbell Vista subdivision project. Respondent testified that he was the owner’s representative on the completion of the Silverbell Vista subdivision project but that Bluestone was the general contractor. Mr. Schubart also attached to the complaint that he filed with the Registrar proposals from subcontractors signed by or addressed to Respondent, personal checks from Respondent and his wife to subcontractors, invoices from subcontractors addressed to Respondent or Branson, lien releases addressed to Respondent and Bluestone, and other documents referring to Respondent or Branson.[9] Investigator Hamilton testified that it appeared that Respondent was performing the duties described in the Construction Management Agreement by paying and supervising subcontractors. Respondent testified that his role at the Silverbell Vista subdivision project was to be the owner’s representative and to ensure that the project was completed efficiently and profitably. Respondent testified that Mr. Koch pulled the permits and supervised the subcontractors. Respondent submitted an affidavit from Mr. Koch, the managing member of Bluestone, attesting that it was the general contractor on the Silverbell Vista subdivision project. Mr. Koch also attested that Bluestone procured all necessary building permits, finalized plan designs, directed subcontractors, and obtained lien waivers, and that Mr. Nehls on behalf of ACMI directly paid Bluestone to act as general contractor.[10] Respondent also submitted Purchase Agreements & Escrow Instructions that identified Bluestone as the general contractor, Joe Nehls of ACMI as the seller, and Respondent’s wife, Victoria Davern, as the designated real estate broker.[11] Respondent testified that his role was only to review the sales agreement. Respondent submitted approximately 80 invoices from subcontractors at the Silverbell Vista subdivision addressed to Bluestone, some of which referred to Respondent as “owner/client.”[12] Respondent testified that he would have reviewed the invoices as the owner’s representative. Investigator Hamilton testified that the $19,500.00 in civil penalties was based on 13 checks in the aggregate amount of $294,450.03, issued by ACMI between December 22, 2008, and October 17, 2010, to Respondent or Branson and endorsed by Respondent that were included in an addendum that Mr. Schubart filed with the Registrar,[13] as follows: 1. Check number 1158 dated August 13, 2009, to Respondent in the amount of $19,449.99; 2. Check number 1179 dated September 4, 2009, to Respondent in the amount of $36,666.67; 3. Check number 1321 dated November 16, 2009, to Respondent in the amount of $59,093.62; 4. Check number 1358 dated December 11, 2009, to Respondent in the amount of $18,333.36; 5. Check number 1397 dated January 5, 2010, to Respondent in the amount of $11,000.00; 6. Check number 1452 dated February 12, 2010, to Respondent in the amount of $14,666.67; 7. Check number 1648 dated August 13, 2010, to Respondent in the amount of $3,856.67; 8. Check number 1712 dated January 14, 2011, to Respondent in the amount of $3,666.66; 9. Check number 1733 dated February 9, 2011, to Respondent in the amount of $3,666.67; 10. Check number 1492 dated March 18, 2010, to Branson in the amount of $7,333.33; 11. Check number 1545 dated April 29, 2010, to Branson in the amount of $7,333.34; 12. Check number 1795 dated May 31, 2011, to Branson in the amount of $7,333.32; and 13. Check number 1885 dated October 17, 2011, to Branson in the amount of $3,666.67. Investigator Hamilton explained that he assessed a $1,500.00 civil penalty against Respondent for each of the thirteen checks. Investigator Hamilton acknowledged that he did not know what the thirteen payments to Respondent or Branson were for. Mr. Russo testified that his firm was approached in 2008 to provide financing for the Silverbell Vista subdivision project after Brad Gephardt acquired the project through foreclosure. Mr. Russo testified that ACMI approached Respondent to act as the owner’s representative and construction manager on the project. Mr. Russo testified that as the lender, his firm insisted that ACMI and Respondent/Branson execute the Construction Management Agreement. Mr. Russo testified that his firm required a construction escrow account and a general contractor to supervise, make payments to, and obtain lien releases from subcontractors. Mr. Russo testified that a construction escrow account was set up for the Silverbell Vista subdivision project and that Bluestone had the only check- writing authority on the construction escrow account. Mr. Russo explained that Respondent as the owner’s representative was required to approve Bluestone’s payments from the escrow account. Mr. Russo testified that if Respondent advanced monies to the subcontractors to keep the project going, Bluestone would reimburse Respondent.[14] Mr. Russo testified that Mr. Koch and Bluestone were paid through the construction escrow account, not through Respondent. Mr. Russo testified that at some point, his firm stopped being the lender for the Silverbell Vista subdivision project, when Mr. Nehls as the managing member of ACMI took over the project. Mr. Russo testified that between late 2008 and 2013, Mr. Nehls made payments on behalf of ACMI to subcontractors, providers, and to Respondent/Branson. CONCLUSIONS OF LAW The Registrar has jurisdiction to decide this matter.[15] The Registrar bears the burden of proof to establish Respondent’s statutory violations by a preponderance of the evidence.[16] Respondent 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] A preponderance of the evidence is “[t]he greater weight of the evidence, not necessarily established by the greater number of witnesses testifying to a fact but by evidence that has the most convincing force; superior evidentiary weight that, though not sufficient to free the mind wholly from all reasonable doubt, is still sufficient to incline a fair and impartial mind to one side of the issue rather than the other.”[19] A.R.S. § 32-1151 prohibits contracting without a license, providing in relevant part as follows: It is unlawful for any person, firm, partnership, corporation, association or other organization, or a combination of any of them, to engage in the business of, submit a bid or respond to a request for qualification or a request for proposals for construction services as, act or offer to act in the capacity of or purport to have the capacity of a contractor without having a contractor's license in good standing in the name of the person, firm, partnership, corporation, association or other organization as provided in this chapter, unless the person, firm, partnership, corporation, association or other organization is exempt as provided in this chapter. Evidence of securing a permit from a governmental agency or the employment of a person on a construction project shall be accepted in any court as prima facie evidence of existence of a contract.

Respondent did not dispute that he did not possess a contractor’s license at any time that he was engaged as ACMI’s Construction Manager on the Silverbell Vista subdivision project. A.R.S. § 32-1101(3) defines “contractor” in relevant part as follows: "Contractor" is synonymous with the term "builder" and means any person, firm, partnership, corporation, association or other organization, or a combination of any of them, that, for compensation, undertakes to or offers to undertake to, purports to have the capacity to undertake to, submits a bid or responds to a request for qualification or a request for proposals for construction services to, does himself or by or through others, or directly or indirectly supervises others to:

(a) Construct, alter, repair, add to, subtract from, improve, move, wreck or demolish any building, highway, road, railroad, excavation or other structure, project, development or improvement, or to do any part thereof, including the erection of scaffolding or any other structure or work in connection with the construction.

Respondent may have acted as a contractor on April 30, 2008, when he entered into the Construction Management Agreement with ACMI because the agreement seemed to include among his prospective responsibilities activities that A.R.S. § 32-1101(3) defines as contracting. ACMI and its principals had at least as great a role as Respondent in drafting the Construction Management Agreement. The Registrar did not establish that Respondent actually performed these activities to the exclusion of Bluestone or that Bluestone was only the nominal general contractor on the project. Mr. Schubart may have been motivated to file the unlicensed contracting complaint against Respondent with the Registrar based on selective documents to gain an advantage in the civil litigation by foreclosing Respondent’s and Branson’s claims for compensation in Pima County Superior Court Case No. C2014-0206 for the balance of the 20% share in net proceeds under the Construction Management Agreement.[20] Licensed contractor Bluefield stands ready to provide the warranty required by A.R.S. § 32-1155(A) for the construction at the Silverbell Vista subdivision: No evidence indicated that any member of the public was harmed by Respondent’s possible unlicensed contracting activity. Under the circumstances, a finding of a violation of A.R.S. § 32-1151 would be inequitable in this administrative proceeding based on the representations made in the Construction Management Agreement, especially since the possible violation did not result in the Registrar assessing any separate civil penalty against Respondent. A.R.S. § 32-1166(A) authorizes the Registrar to assess a civil penalty against a person who has been found to have contracted without a license in violation of A.R.S. § 32-1151, in relevant part as follows: In addition to all other remedies, when it appears to the registrar, either upon complaint or otherwise, that any person, firm, partnership, corporation, association or other organization, or a combination of any of them, has engaged in or is engaging in any act of contracting, practice or transaction which constitutes a violation of this chapter, or any rule or order of the registrar, the registrar may serve upon such person, firm, partnership, corporation, association or other organization not currently licensed under this chapter, by certified mail or by personal service, a cease and desist order requiring the person, firm, partnership, corporation, association or other organization to cease and desist immediately, upon receipt of the notice, from engaging in such act, practice or transaction. In conjunction with the cease and desist order, the registrar may issue a citation for a violation. Each citation shall be in writing and shall clearly describe the violation for which the citation was issued. Each citation shall contain an order to cease and desist and an assessment of a civil penalty in an amount of at least two hundred dollars for each violation but not more than two thousand five hundred dollars for the multiple violations committed on the same day. . . .

The Registrar did not establish that any of the thirteen checks that ACMI paid to Respondent or Branson were for contracting activities as defined by A.R.S. § 32-1101 at the Silverbell Vista subdivision project. The thirteen violations of A.R.S. § 32-1151 that resulted in the $19,500.00 in civil penalties that were assessed against Respondent are not supported on this record. RECOMMENDED ORDER Based on the foregoing, it is recommended that the citation against Respondent Keith Davern for violations of A.R.S. § 32-1151 shall be quashed and that the imposition of thirteen civil penalties the aggregate amount of $19,500.00 for these unlicensed contracting violations shall be rescinded.

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 five days from the date of that certification. Done this day, June 3, 2016.

/s/ Diane Mihalsky Administrative Law Judge

Transmitted electronically to:

Jeffrey Fleetham, Director Registrar of Contractors ----------------------- [1] See the Registrar’s Exhibit 3. [2] See the Registrar’s Exhibit 3, Attachment 3. [3] See the Registrar’s Exhibit 1. [4] See the Registrar’s Exhibit 6. [5] See the Registrar’s Exhibit 5. [6] See the Registrar’s Exhibit 2. [7] See the Registrar’s Exhibit 3, Attachment 2 at 1. [8] The Registrar’s Exhibit 3, Attachment 2 at 7. [9] See the Registrar’s Exhibit 3, Attachment 4 at 1-69. [10] See Respondent’s Exhibit 1. [11] See Respondent’s Exhibit 2. [12] See Respondent’s Exhibit 4. [13] See the Registrar’s Exhibit 4 at 9-22. [14] See Respondent’s Exhibit 3 (Bluestone’s checking account records). [15] See A.R.S. § 32-1101 et seq. [16] See A.R.S. § 41-1092.07(G)(3); 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] Black’s Law Dictionary at page 1220 (8th ed. 1999). [20] Mr. Schubart denied that he filed the complaint with the Registrar to gain an advantage in the civil litigation. See the Registrar’s Exhibit 3 at 1-2. In light of the timing of the complaint and well-established Arizona statutes and case law, however, Mr. Schubart’s denial appears to be disingenuous. See A.R.S. § 32-1153, which provides as follows:

No contractor as defined in section 32-1101 shall act as agent or commence or maintain any action in any court of the state for collection of compensation for the performance of any act for which a license is required by this chapter without alleging and proving that the contracting party whose contract gives rise to the claim was a duly licensed contractor when the contract sued upon was entered into and when the alleged cause of action arose.

Arizona courts recognize the use of the doctrine of collateral estoppel under which a party may use a determination by an administrative agency to preclude a different result in a civil suit. See, e.g., Romley v. Arpaio, 202 Ariz. 47, 54, 40 P.3d 831, 838 (App. 2002); Hawkins v. State of Arizona, Department of Economic Security, 183 Ariz. 100, 103, 900 P.2d 1236, 1239 (App. 1995) (quoting Gilbert v. Board of Medical Examiners, 155 Ariz. 169, 174, 745 P.2d 617, 622 (App. 1987)).

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