ALJDEC decisions subject to certification as final

2016A-327-ROC · Registrar of Contractors · 2016-07-01

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: May 11, 2016, at 8:00 a.m. and June 23, 2016, at 10:00 a.m. APPEARANCES: Info for You LLC (“IFY” or “Complainant”) appeared through Sharma Dutton (“Mrs. Dutton”), its qualifying party and member; Renegade Water Services LLC (“Respondent”) was represented by Joseph A. Velez, Esq. ADMINISTRATIVE LAW JUDGE: Diane Mihalsky _____________________________________________________________________

FINDINGS OF FACT Background and Procedure On or about October 20, 2006, the Arizona Registrar of Contractors (“the Registrar”) issued License No. CR54.225781-D for dual water conditioning equipment to Respondent. Respondent is in the business of installing reverse osmosis systems for drinking water, water softening systems for whole house water treatment, and other water conditioning systems in customers’ homes and businesses. Since late 2011 or early 2012, Respondent employed Mrs. Dutton and her husband, Michael Alan Dutton (“Mr. Dutton”), doing business as IFY, as salespersons to meet with property owners and to secure contracts for Respondent to provide and to install water conditioning systems. Mrs. and Mr. Dutton also managed Respondent’s website to market the water conditioning systems. Mrs. and Mr. Dutton are currently listed as Complainant’s members. Complainant was not yet licensed in Arizona during time of the events that led to the claim for nonpayment that Complainant later filed with the Registrar. On or about September 29, 2014, Mrs. Dutton filed a series of 23 complaints with the Registrar that alleged that Respondent owed $9,187.17 to Mrs. and Mr. Dutton for commissions on completed sales of Respondent’s water conditioning systems to property owners. The Registrar designated the series of complaints collectively as Case No. 2014-3917. On or about October 20, 2014, the Registrar issued License No. CR54.295039- D for dual water conditioning equipment to IFY. Since October 2014, Respondent and Complainant have been business competitors. Mrs. Dutton requested a hearing on at least two of the individual complaints in Case No. 2014-3917. The Registrar forwarded the two complaints to the Office of Administrative Hearings (“OAH”), an independent state agency, for an evidentiary hearing. Mrs. Dutton may have withdrawn at least some of the complaints; in any event, according to the docket in OAH Case No. 2014A-3917-ROC, the Registrar only forwarded two of the complaint forms to OAH. Case No. 2014A-3917-ROC proceeded to a hearing before Administrative Law Judge (“ALJ”) Thomas Shedden. On or about January 6, 2016, ALJ Shedden vacated the hearing on the merits and remanded the matter back to the Registrar for the following reason: The Citation in this matter alleges that Respondent may have violated Ariz. Rev. Stat. section 32-1154(A)(10). Complainant initially asserted two bases for the alleged violation: a series of twenty-three contracts for which it asserted that it had not been paid and a warranty matter in which Complainant alleged that it was owed $474.00.

In a document filed with the Registrar on March 5, 2015, Complainant withdrew from its complaint the allegations related to the twenty-three contracts. Complainant did not refile or otherwise reassert the contract claims. Complainant acknowledged that the warranty claim could not support an (A)(10) violation. . . .[1]

ALJ Shedden’s January 6, 2016 order noted in a footnote that “Complainant asserted, in effect, that the Registrar’s office had informed it that there was no need to refile or reassert the contract claims.”[2] On or about January 27, 2016, Mrs. Dutton on behalf of Complainant filed another 23 individual complaints based on 23 specific amounts for commissions, website maintenance, and uniforms due under invoice no. 820 (August 26, 2014) (seven items for $409.61, $409.61, $421.35, $585.67, $397.87, $463.31, and $451.57), invoice no. 811 (August 12, 2014) (twelve items for $627.90, $241.20, $477.45, $491.53, $149.70, $89.40, $89.40, $353.75, $618.29, $595.02, $99.16, and $89.40), and 821 (August 29, 2014) (four items for $397.87, $409.61, $423.61, and $421.35).[3] The total amount alleged to be owed according to the complaints was $8,713.63. According to the accounting that Mrs. Dutton submitted to the Registrar, Respondent owed $9,944.12 (including a $4,000.00 payment made in August 2014).[4] Mrs. Dutton on Complainant’s behalf subsequently requested a hearing on its complaint against Respondent. On or about March 14, 2016, the Registrar issued a Citation for Alleged Violation of A.R.S. § 32- 1154(A)(10) against Respondent. Respondent’s attorney filed a timely written answer to the Citation denying that any cause existed to discipline its license.[5] The Registrar referred the 23 complaints to OAH for an evidentiary hearing. A hearing was held on May 11, 2016, and June 23, 2016. Mrs. Dutton on Complainant’s behalf testified and submitted seven exhibits. Respondent presented the testimony of Roland Donahue (“Mr. Donahue”), its qualifying party/member, and submitted eighteen exhibits. / / / / Hearing Evidence As noted above, Mrs. and Mr. Dutton formerly doing business as IFY were employed as Respondent’s salespersons. On or about December 19, 2011, Mrs. Dutton on behalf of IFY and Mr. Donahue on behalf of Respondent signed a Subcontractor Agreement. The Subcontractor Agreement included the following provisions: (1) Respondent would provide leads obtained from trade shows and from its website to IFY; (2) IFY would design Respondent’s website, but if the agreement was terminated, Respondent retained rights to the website and IFY would “make available all files necessary to reestablish website hosting elsewhere”; (3) The parties would not make any misrepresentations about each other to customers; (4) The agreement could be terminated by either party with 30 days’ written notice; and (5) Respondent would pay IFY a 30% commission on all retail sales made by IFY; and (6) Respondent should make payment within 7 days of receiving IFY’s invoice.[6] The Subcontractor Agreement did not provide for payment of interest on overdue amounts. The parties’ business relationship continued without significant incident until July 2014. Mrs. and Mrs. Dutton sold water conditioning systems for Respondent and Respondent paid IFY’s invoices for commissions. In July 2014, Mr. Donahue became concerned about the accuracy of IFY’s invoices. Mr. Donahue testified that Mrs. Dutton became hostile when he attempted to question her about the invoices. Mr. Donahue testified that IFY did not correct its invoices. Mr. Donahue testified that he informed Mrs. Dutton that he had hired an accountant to audit IFY’s invoices in a telephone conversation in early August 2014. Mr. Donahue testified that she became very upset. In August 2014, the accountant informed Respondent that it had discovered irregularities on IFY’s invoices, including commissions on amounts that had not been paid to Respondent, either because the customer had not paid, Respondent had not completed the work, or the customer had not entered into a contract for the work, and double billings, including for IFY’s maintenance of Respondent’s website.[7] Mr. Donahue testified that he considered Respondent’s three-plate water filtration system to be proprietary because he had spent a lot of time talking to engineers at Respondent’s long-time parts and equipment supplier, Nelsen Corporation (“Nelsen”) about the system. Mr. Donahue testified that he felt the system gave Respondent a competitive advantage. Mr. Donahue testified that he has done business with Nelsen since 2006, when Respondent was first licensed. Mr. Donahue testified that employees of Nelsen knew Mrs. Dutton because she worked as Respondent’s salesperson. Mr. Donahue testified that on the day after his telephone conversation with Mrs. Dutton about hiring the accountant to audit IFY’s invoices, his contacts at Nelsen called him to inform him that Mrs. Dutton had been making enquiries about the components of Respondent’s water filtration system.[8] Mr. Donahue testified that his contacts informed him that they would not sell the 3-plate water filtration system to others. Mr. Donahue testified that after the conversation with his contacts at Nelsen, he changed the locks on Respondent’s office to protect information that he considered to be proprietary because at that time, Mrs. and Mr. Dutton had unrestricted access to the office. Mr. Donahue testified that on August 15, 2014, after he confronted Mrs. Dutton, she became agitated, upset, and aggressive. Mr. Donahue acknowledged that at that time, Respondent owed some money for IFY’s invoices, but disputed the amount. On August 16, 2014, Mrs. Dutton on behalf of IFY sent Respondent a 3½ page single-spaced email, accusing Respondent of intentionally breaching the Subcontractor Agreement because more than 50 days had passed since IFY issued an invoice.[9] According to the letter, Respondent owed $12,022.87 for unpaid invoices. Mrs. Dutton informed Respondent that she had disabled the website, in relevant part as follows: I have changed the website to have only your contact information. . . . You will need to obtain a web hosting account and a web designer. I will make available all items that were on your website so that you can migrate your website elsewhere. Make sure they know it’s programmed in WordPress. Your current website hosting bill is due and will be included in the outstanding balance. This will give you 30 days to make other arrangements.[10]

Mrs. Dutton also demanded money for uniforms and reimbursement for a water softener that Respondent had installed in Mrs. and Mr. Dutton’s personal residence. If Respondent did not pay all amounts owed plus 12% interest, she would file complaints to the Registrar, to the Better Business Bureau, to Angie’s List, and in superior court. On August 18, 2014, Mrs. Dutton on behalf of IFY demanded that Respondent pay $6,000.00 by the next day at 3:00 p.m. and agreed that the parties could continue to negotiate the amounts of any remaining amounts due. On August 18, 2014, Respondent issued a check made payable to “The Info for You” in the amount of $4,000.00. IFY cashed the check.[11] On August 29, 2014, Mrs. Dutton on behalf of IFY informed Respondent that its balance on the account was $13,187.18, and demanded that Respondent pay $4,000.00 before September 1, 2014, and $1,000.00 before the first of the month every month thereafter. On August 27, 2014, Respondent issued a check made payable to IFY in the amount of $4,000.00 and deposited the check directly into IFY’s bank account.[12] Mr. Donahue testified that he agreed to the settlement because it was the easiest way to avoid a hearing or litigation in superior court. Mr. Donahue testified that even though he did not necessarily agree with the amount that Mrs. Dutton said was owed, he felt that it was a good business decision for Respondent to begin making payments while it attempted to resolve apparent discrepancies in IFY’s invoices. Mr. Donahue testified that because Nelsen’s employees felt that Mrs. Dutton’s enquiries in August were unethical, Nelsen refused to do business with her or IFY. The record does not contain any communication from Mr. Donahue to Nelsen regarding IFY or Mrs. Dutton. On September 12, 2014, Mrs. Dutton on behalf of IFY sent an email to Mr. Donahue at Respondent, alleging that Respondent had defamed IFY to personnel at Nelsen and had tortiously interfered with IFY’s business relationship with Nelsen. Mrs. Dutton demanded that Mr. Donahue sign a letter that she had written, that included the following admissions: 27.1 Respondent owed IFY $9,187.18 and breached its contract with IFY without cause, causing IFY to suffer a hardship in expanding its business operations in the Phoenix area, and that Respondent “was fully aware” of IFY’s intent to expand its business; 27.2 IFY had conducted its business dealings with Respondent “in a more than fair and equitable way per all the terms of the written contract in place” and that despite Respondent’s breach, IFY had extended the payment terms so that Respondent could remain in business; and 27.3 Prior to Respondent’s breach, IFY “had suggested a new tri-plate Vortech configuration to address the issues that have arisen in Vortech Mixed Media beds,” that IFY “offered to use its credit-worthiness to obtain the equipment exclusivity rights necessary as [Respondent] didn’t have the financial resources to do so,” that “[t]here was no patent or proprietary system configuration in place at the time [Respondent] breached its contract.”[13] Mrs. Dutton closed the September 12, 2014 letter with the following statement of intended actions if Mr. Donahue did not sign the scripted letter: I am done wasting time on this situation. . . . You have a legal duty to state the truth for the record. Otherwise, you will be responsible for tortious interference with a contract with Nelsen’s, which threatens our business and family’s livelihood. I have given you every opportunity to mitigate your damages. Please do what is best for you, your family, and your company. If you meant it every time you said “you want to be able to look yourself in the mirror with a clean conscience [,”] then now is the time to prove it.

If you don’t sign this letter or some letter of this type with the facts of the situation showing the true nature of your wrongdoing and our clean status clearly spelled out, signed, and in my inbox by Monday, September 15th and 8am, I will assume that you are intentionally refusing to clear up the misunderstanding.

I will then pursue all the legal remedies at my disposal. These remedies include:

• Immediate termination of the current repayment plan in place between [Respondent] and [IFY] for [Respondent’s] contract breach

• Immediate termination of all privileges afforded under said repayment plan which include termination of website and emails

• 26 current individual complaints to be filed with the AZ ROC for each construction contract you have failed to pay within 7 days after being billed . . . .

• 1 complaint to be filed with the AZ ROC for [Respondent] removing and keeping our equipment without fixing the problem or refunding our money

• Better Business Bureau – 2 complaints (1 as homeowner for personal softener and 1 as vendor for non-payment)

• Angie’s List – 2 complaints (1 as homeowner for personal softener and 1 as vendor for non-payment)

• File Suit for Breach of Contract

• Looking into other legal remedies that include tortious interference with a Contract and Defamation, which will carry financial penalties. I know for sure that I can prove these. There might be other legal remedies that also apply.

This is a very serious situation. I’m not asking again. The law provides remedies so companies operating under bad faith cannot profit from their actions. We both know [Complainant] has gone above the call of good faith. While I drafted this email we forwarded another customer to you under the terms of our agreement together. At this point you should be singing our praises to anyone who’d listen. We’ll let a judge decide if necessary. Please do what is right![14]

Mr. Donahue did not sign the letter that Mrs. Dutton had scripted in the September 12, 2014 email of Respondent’s admissions of wrongdoings and statements of IFY’s innocence. On September 15, 2014, Mrs. Dutton disabled Respondent’s website and terminated its ability to recover emails. On September 22, 2014, Respondent issued a check for $1,000.00 made payable to “The Info For You” and attempted to remit it to IFY to comply with the terms that Mrs. Dutton had set forth in the August 29, 2014 demand.[15] Mr. Donahue explained that he was trying to do what was right to get Respondent’s website and access to emails back. IFY refused to accept or negotiate the check. Mr. Donahue testified that Respondent could not immediately afford the $2,000.00 that it would take to pay a website designer to create a new website. Between September 15, 2014, and January 10, 2016, Mrs. Dutton refused to return Respondent’s website files or to provide passwords that would allow Respondent to access the website or its emails.[16] Mr. Donahue testified that he is not especially computer literate and before September 15, 2015, had relied upon IFY to manage Respondent’s website as part of its responsibilities under the Subcontractor Agreement. In January 2015, Respondent was able to retain a website designer to create a new website and email server. Mr. Donahue testified that he noticed an immediate drop in Respondent’s sales of water filtration systems after Mrs. Dutton disabled Respondent’s website. Respondent submitted a spreadsheet of its sales between March 2014, and February 2015, that showed a substantial decrease in Respondent’s sales, installation income, and total income between September 2014, and January 2015.[17] Mr. Donahue testified that Respondent had its website up and running on January 15, 2015, resulting in an immediate and substantial increase in sales and income. Mr. Donahue testified that he estimated that the shutdown of the website cut Respondent’s business by 50% and estimated Respondent’s damages that resulted from the shutdown as approximately $21,000.00. CONCLUSIONS OF LAW Complainant’s claim for nonpayment lies within the Registrar’s jurisdiction to resolve.[18] Complainant bears the burden of proof to establish cause to discipline Respondent’s license by a preponderance of the evidence.[19] Respondent bears the burden to establish affirmative defenses by the same evidentiary standard.[20] “A preponderance of the evidence is such proof as convinces the trier of fact that the contention is more probably true than not.”[21] 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.”[22] Although it appears that Respondent may owe Complainant some money for unpaid invoices, Complainant has claimed various amounts at different times, despite Respondent’s payment of at least $8,000.00 since this dispute arose. The record does not allow the debt to be liquidated. Even if Respondent’s debt could be liquidated, Respondent established that Complainant breached the settlement agreement without legal justification by refusing to accept payment and violated the Subcontractor Agreement without legal justification by disabling Respondent’s website. Respondent also established that Complainant’s actions caused Respondent to incur damages. Because the legislature has not empowered the Registrar to adjudicate or award consequential damages,[23] the Registrar lacks jurisdiction to determine Respondent’s potential common-law counterclaims against Complainant, which would be necessary to fully liquidate Complainant’s compensable loss, if any, under A.R.S. § 32-1154(A)(10). Therefore, Complainant did not establish cause to discipline Respondent’s license under A.R.S. § 32-1154(A)(10).[24] RECOMMENDED ORDER Based on the foregoing, it is recommended that on the effective date of the final order in this matter, Complainant Info For You LLC’s complaint in Case No. 2016A-327-ROC against Respondent Renegade Water Services, LLC’s License No. CR54.225781-D shall be dismissed. 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, July 1, 2016.

/s/ Diane Mihalsky Administrative Law Judge

Transmitted electronically to:

Jeffrey Fleetham, Director Registrar of Contractors ----------------------- [1] Complainant’s Exhibit C (footnote omitted). [2] Id. [3] See the Registrar’s electronic record at Intake Complaint Submittal1.pdf, Complaint Submittal2.pdf, and Complaint Submittal3.pdf. [4] See the Registrar’s electronic record at Complaint Submittal4.pdf at 1. [5] See Respondent’s Exhibit 7. [6] See Complainant’s Exhibit B, Respondent’s Exhibit 1. [7] See Respondent’s Exhibit 2. The accountant prepared the report on September 8, 2014. [8] In January 2015, Charlie Jenkins at Nelsen forwarded to Respondent Mrs. Dutton’s August 12, 2014 email requesting specifications and prices for a specific water system. See Respondent’s Exhibit 7. [9] As noted in Finding of Fact No. 8 above, the invoices for which Complainant seeks payment in this matter were dated August 12, 2014, August 26, 2014, and August 29, 2014. [10] Respondent’s Exhibit 9 at 3. [11] See Respondent’s Exhibit 10. [12] See Respondent’s Exhibit 11. [13] Respondent’s Exhibit 12. [14] Respondent’s Exhibit 12 at 2-3. [15] See Respondent’s Exhibit 13. [16] On January 10, 2016, Mrs. Dutton sent an email to Respondent, acknowledging that she had “temporarily” disabled Respondent’s website in September 2014, and offering to return Respondent’s website files. See Complainant’s Exhibit E. [17] See Respondent’s Exhibit 18. [18] See A.R.S. § 32-1101 et seq. [19] 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). [20] See A.A.C. R2-19-119(B)(2). [21] Morris K. Udall, Arizona Law of Evidence § 5 (1960). [22] Black’s Law Dictionary at page 1220 (8th ed. 1999). [23] See J.W. Hancock Enterprises, Inc. v. Arizona State Registrar of Contractors, 142 Ariz. 400, 406, 690 P.2d 119, 125 (Ct. App. 1984). [24] A.R.S. § 32-1154(A)(10) 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 . . . .”

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