ALJDEC decisions subject to certification as final

2016A-1723-RFA-ROC · Registrar of Contractors · 2017-09-13

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

Donnie Gene Patrick,

PLAINTIFF,

v.

.

Diamond B Steel Shades and More Inc ,

License No: 221194

DEFENDANT.

No. 2016A-1723-RFA-ROC

ADMINISTRATIVE LAW JUDGE DECISION

FINDINGS OF FACT

1. The Registrar issued License No. 221194 to Respondent.

2. On May 20, 2016, Complainant filed a complaint with the Registrar against Respondent for abandonment with regard to a construction of a garage at Complainant’s residence. According to the complaint, Complainant had entered into a contract with Respondent on April 6, 2016, for the construction of a garage structure on a pre-existing concrete slab at Complainant’s residence.

3. On July 14, 2016, the Registrar issued a Directive to Respondent to complete the project per the contract, per properly executed change orders, and and in accordance with local building codes.

4. When no further work was performed by Respondent, on August 3, 2016, the Registrar issued a Citation and Complaint charging Respondent with a violation of A.R.S. § 32-1154(A)(2).

5. A hearing was held on October 17, 2016, before the Arizona Office of Administrative Hearings. On November 7, 2016, Judge Tammy L. Eigenheer issued a ruling finding that Respondent had violated A.R.S. § 32-1154(A)(2) for building a structure without a permit and in non-compliance of local building codes and recommended that Complainant’s license be suspended for three days. (Registrar’s Ex. 1).

6. On December 8, 2016, the Registrar issued a Final Administrative Decision and Order finding that Respondent had violated A.R.S. § 32-1154(A)(2) as charged in the complaint, effective as of January 17, 2017. (Registrar’s Ex. 1). Pursuant to the order, the Registrar suspended Respondent’s license for a period of three days.

7, On or about March 13, 2017 Complainant filed a claim to the Residential Contractors’ Recovery Fund (“Recovery Fund”) with the Registrar. (Registrar’s Ex. 2). The claim form indicated that that he sought recovery from the Recovery Fund in an amount at least $15,695.00. Complainant also indicated he had not received and would not receive any payment from Respondent’s bond company.

8. The claim was supported by three bids from Performance Steel Buildings LLC, dated December 23, 2016 (Registrar Ex. 3), Harris Steel Buildings, LLC, dated January 5, 2017 (Registrar Ex. 4), and Home Builders, LLC, dated September 11, 2015 (Registrar Ex. 5). The bid amounts were $26,727.66, $35,875.00, and $35,932.00, respectively, for the removal of the existing structure and the building of a new structure. The bids of Performance Steel Buildings LLC, and Harris Steel Buildings, LLC, also segregated the cost to remove the existing structure in the amounts of $5,190.69 and $6,137.00, respectively. 9. On June 13, 2017, the Registrar issued a Notice of Claim for Administrative Payout. The Registrar determined that Complainant would receive a payout of $27,242.65 from the Recovery Fund. (Registrar’s Ex. 7).

10. Respondent filed a timely request for hearing on the Registrar’s Notice of Claim for Administrative Payout.

11. Registrar referred the matter to the Office of Administrative Hearings, an independent state agency, for an evidentiary hearing regarding the amount and/or propriety of the payment from the Recovery Fund. A hearing was held on August 24, 2016.

12. At the hearing, the Registrar presented the testimony of the Claims Reviewer of the Recovery Fund, Jessica Ortiz (hereinafter “Ms. Ortiz”), and submitted seven exhibits.

13. Ms. Ortiz stated that she had personally reviewed Complainant’s claim for payment from the Recovery Fund. Ms. Ortiz said that she determined that Complainant was eligible for payment from the Fund for his actual damages.

14. Ms. Ortiz testified that the Registrar must review all documentation that is necessary on a claim for a payout from the Fund before the Registrar makes a decision for a payout. Ms. Ortiz stated that she reviewed the entire file in this matter, including the three bids. Ms. Ortiz determined that a proper payout from the Recovery Fund for Complainant’s actual damages is the sum of $27,242.65.

15. Ms. Ortiz testified that she created a Recovery Fund Cost spread sheet in order to determine Complainant’s’ actual damages. (Registrar Ex. 6). Ms. Ortiz testified that the original contract amount was $9,350.70, of which Complainant had paid $4,675.00. Ms. Ortiz testified that she calculated Complainant’s actual damages by subtracting the amount Complainant had yet to pay on the contract ($4,675.70) from the lowest of the three bids, Performance Steel Buildings, LLC ($31,918.35). Ms. Ortiz stated that $4,675.70 was disallowed from Complainant’s actual damages because $4,675.70 was the amount still owing on Complainant’s contract with Respondent.

16. All exhibits submitted by Complainant and Respondent were admitted into evidence. The Tribunal took administrative notice of the Registrar of Contractor’s file.

17. Respondent submitted into evidence three bids from Extreme Metalworks, LLC, dated August 8, 2017 (Respondent’s Ex. 1), Mata Construction, LLC, dated July 31, 2017 (Respondent’s Ex. 2), and Shotcrete Specialties, dated August 9, 2017 (Respondent’s Ex. 3). The bid amounts were for $4,750.00, $2,500.00, and $5,000.00, respectively, and represented the cost of removal of the structure built by Respondent. Respondent presented no bids for the repair or replacement of the structure Respondent had built. According to Mr. Bishop, these contractor’\s did not visit the site, but instead prepared their bids from photographs.

18. Respondent contends that the Administrative Payout in the amount of $27,242.65 would result in a windfall to Complainant. Specifically, he argues that Respondent contracted to build a structure for $9,350.70 and now Complainant seeks a replacement structure to be built at a cost $21,536.97 (lowest bid of $26,727.66 less cost of $5,190.69 to remove structure built by Respondent).

19. Robert Bishop on behalf of Respondent testified that the scope of work in the bids to build a new structure went well beyond the scope of the contract between Complainant and Respondent. He testified that the new bids involved saw cutting existing concrete and pouring six foot columns and that his structure only involved 18 inch footings around the perimeter of the structure and a 4 by 4 center column. He further testified that the structure he built merely sat on the slab but that the structures proposed actually was supported by the columns.

20. Mr. Bishop further testified regarding the signed original contract. (Registrar Ex. 2, p. 5). The contract provides for a “40’ x 43’ garage written by Mr. Bishop but does not include detailed specifications. He indicated further on the contract in his handwriting that there would be no engineering drawings and that the “Building only will meet code.” He testified that he was responsible for the building only, and that he was not responsible for the pre-existing slab upon which he was placing the building and which he believed would not conform to local building codes.

21. Complainant contends that there is no windfall in awarding $27,242.65 and that that amount represents his actual damages due to Respondent’s defective performance. He argues that Respondent contracted to build a structure and that that amount represents the cost to remove the structure built by Respondent with a replacement garage structure built by a new contractor.

CONCLUSIONS OF LAW

1. This matter lies within the Registrar’s jurisdiction. See A.R.S. § 32-1101 et seq.

2. After the Registrar has determined the amount of the payout from the Fund to which Complainants are entitled, Respondent bears the burden of proof to establish that the Registrar’s calculations were erroneous or not supported by a preponderance of the evidence. See A.A.C. R2-19-119(A) and (B)(1); see also Vazanno v. Superior Court, 74 Ariz. 369, 372 (1952).

3. “A preponderance of the evidence is such proof as convinces the trier of fact that the contention is more probably true than not.” Morris K. Udall, Arizona Law of Evidence § 5 (1960). 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.” Black’s Law Dictionary at page 1220 (8th ed. 1999).

4. The Registrar’s final decision in the underlying workmanship case established that the installation of the system did not comply with the Registrar’s workmanship standards and that Complainants potentially were persons who had been injured by Respondent’s violation of A.R.S. § 32-1154(A)(2). The only issue in the hearing on Complainants’ claim to the Recovery Fund is the measure of his damages.

5. A.R.S. § 32-1132(A) describes the measure of damages that an eligible homeowner is entitled to recover from the Fund in relevant part as follows:

The residential contractors' recovery fund is established, to be administered by the registrar, from which any person injured by an act, representation, transaction or conduct of a residential contractor licensed pursuant to this chapter that is in violation of this chapter or the rules adopted pursuant to this chapter may be awarded in the county where the violation occurred an amount of not more than thirty thousand dollars for damages sustained by the act, representation, transaction or conduct. 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. Actual damages shall not be established by bids supplied by or the value of work performed by a person or entity that is not licensed pursuant to this chapter and that is required to be licensed pursuant to this chapter. If the claimant has paid a deposit or down payment and no actual work is performed or materials are delivered, the award of actual damages shall not exceed the exact dollar amount of the deposit or down payment plus interest at the rate of ten per cent a year from the date the deposit or down payment is made or not more than thirty thousand dollars, whichever is less.

6. Actual damages means the reasonable cost of completing the contract or repairing the contractor’s defective performance less the contract price unpaid. Ramsey v. Ariz. Registrar Contractors, 241 Ariz. 102, 106 (2016). This construction is consistent with the principle of expectation damages which are intended to put the injured party in as good a position as he would have been had the contract been performed. Id. at 107 (citing Restatement (Second) of Contracts § 347, cmt. (a)).

7. However, the measure of damages to protect the “expectation interest” of a party is not necessarily the sole measure of damages. In addition, the law recognizes a “reliance interest” which is “the interest in being reimbursed for loss caused by reliance on the contract by being put in as good a position as he would have been in had the contract not been made.” Restatement (Second) of Contracts § 344(b). “[A]ctual damages are such compensation for the injury as would follow from the nature and character of the act and which return the injured party to pre-injury position.” Bobrow v. Herrod, 239 Ariz. 180, 183 (2016) (quoting Havasu Heights Ranch and Dev. Corp. v. Desert Valley Wood Prods., Inc., 179 Ariz. 456, 459 (1994)).

8. When an injured party has a right to damages based on his expectation interest, it is generally measured by the loss in value to him of the other party’s performance caused by the other party, any other loss caused by the breach, and any other cost or loss he has avoided by not having to perform. Restatement (Second) of Contracts § 347.

9. This loss of value in a construction context can in some situations be measured by the cost to complete the contract or repair defective performance as was the case in Ramsey v. Ariz. Registrar Contractors, 241 Ariz. 102. However, the measure is not without limitations:

If a breach results in defective or unfinished construction and the loss in value to the injured party is not proved with sufficient certainty, he may recover damages based on

the dimunition in the market price of the property caused by the breach, or

(b) the reasonable cost of completing performance or by remedying the defects if that cost is not clearly disproportionate to the probable loss in value to him.

Restatement (Second) of Contracts § 348(2) (cited by Ramsey v. Ariz. Registrar Contractors, 241 Ariz. 102, 107 (2016).

When the cost to complete the contract or remedy defective performance is disproportionate to the loss, a limitation is imposed to avoid a windfall:

Sometimes, however, such a large part of the cost to remedy the defects consists of the cost to undo what has been improperly done that the cost to remedy the defects will be clearly disproportionate to the probable loss in value to the injured party. Damages based on the cost to remedy the defects would the give the injured party a recovery greatly in excess of the loss in value to him and result in a substantial windfall. Such an award will not be made.

Restatement (Second) of Contracts § 348, cmt. c. (emphasis added).

10. This reasoning of the Restatement does not support a rigid rule that actual damages in a construction context are always measured by the reasonable cost of completing performance or remedying defective performance. The Tribunal finds that Complainant’s cost of completing performance or remedying the defects is clearly disproportionate to the probable loss in value to him. Complainant contracted with Respondent for a structure for the amount $9,350.70 and now seeks funds from the Recovery Fund to remove and rebuild a structure at a cost $31,918.35 (less $4,675.00 unpaid on the contract with Respondent). Because the structure built by Respondent must be removed, it has no value to Complainant. Indeed, there may have been a dimunition in value of Complainant’s property due to the existence of a structure that did not comply with the local building codes. Therefore, a more appropriate measure of damages would be based on a reliance interest, namely, putting Complainant in as good a position as he would have been in had the contract not been made.

11. The Tribunal does not find this to be a case where Respondent simply underbid the project. The evidence supports a finding that the scope of work in the three bids submitted by Complainant far exceeded the scope of work in the contract between Complainant and Respondent. The latter contract was one page and simply stated that a garage was to be built at a given size without more detailed specification. However, Mr. Bishop testified he did not contract to provide engineering drawings, did not contract to perform any work on the concrete platform, and in general did not contract to build the type of structure that was contemplated in the three bids. The three bids submitted provided detailed specifications of a structure far exceeding that which Respondent agreed to build; it was not simply a case that Respondent built a structure that did not conform to local codes and the three bidders were replacing it with an identical structure that conformed to such codes. The disparity between the contract amount of Respondent’s contract and the contract amount of the three bids reflects a much more elaborate structure to replace Respondent’s structure; it does not reflect that Complainant underbid the project. Awarding damages based on the cost to remove Respondent’s structure and replace it with not just a structure that conformed to local codes - but a more complex structure - would result in a windfall to Complainant.

12. It might be noted that a finding of damages based on returning Complainant back to a position as he would have been in had the contract not been made is not inconsistent with what Complainant originally sought from the Recovery Fund. Complainant’s claim sought in “excess of $15,965.00.” In Respondent’s underlying claim it stated:

Thus, per A.R.S. 32-1156.01, Mr. Patrick should receive restitution for Mr. Bishop’s failure to comply with the contract. In other words, Mr. Patrick should be compensated as though he never met Mr. Bishop and the deal needs to be “unwound.” Thus, in order to make Mr. Patrick whole, he should receive the $4,675.00 he paid to Mr. Bishop, the $5,290.00 in attorney’s fees that have been incurred, and at least $6,000.00 to remove the existing structure, which is a total of at least $15,965.00.

(See Complainant’s original Claim, p. 6). Thus, Complainant’s original claim in essence acknowledged a reliance measure of damages as being more appropriate than an expectation measure of damages. He further acknowledged that he would be made “whole” (without regard to non-recoverable attorney’s fees) by the return of the amount of $4,675.00 he paid to Respondent and at least $6,000.00 to remove the garage for a total of $10,675.00. The Tribunal does not interpret Complainant’s qualifier language in his claim, “at least,” to leave open an additional request for $20,000.00 to $30,000.00 to build a new structure.

13. The Tribunal acknowledges that in most cases regarding claims against the Recovery Fund, the cost to complete the contract or repair any defects will likely be the true measure of damages. This is so because such a cost will typically not be disproportionate and will not be greater than the loss of value to Complainant. However, this case is not that type of case. Applying the measure of damages in this case based on a reliance interest and returning Complainant to the position he would have been had the contract not been made “eliminates the risk that a homeowner will receive a windfall as a result of the residential contractor's misconduct at the expense of the licensed contractors who contribute to the Fund.” See Ramsey at 108.

14. It is noted that had no actual work been performed by Respondent and Complainant had paid a deposit, “the award of actual damages [could]... not exceed the exact dollar amount of the deposit or down payment plus interest.” A.R.S. § 32-1132(A). This statutory limitation or exception to an award of damages based on expectation is not applicable here. However, the Tribunal recognizes that the circumstance here in which the structure built by Respondent has to be completely removed is tantamount to having Respondent having done no work at all.

RECOMMENDED ORDER

In view of the foregoing, it is recommended that on the effective date of the final order in this matter, the Residential Contractors’ Recovery Fund shall pay the amount of $9,865.69 to Complainant Donnie Gene Patrick, the amount being comprised of the sum Complainant paid to Respondent ($4,675.00) and the amount of the lowest bid submitted by Complainant to remove the structure built by Respondent ($5,190.69).

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, September 13, 2017.

/s/ Roger Geddes_____

Administrative Law Judge

Transmitted electronically to:

Jeffrey Fleetham, Director

Registrar of Contractors