FINACT2017A-3888-ROC.pdf

2017A-3888-ROC · Registrar of Contractors · 2019-02-28

REGISTRAR OF CONTRACTORS OF THE STATE OF ARIZONA

Harold and Jeanette McDaniel, Case No. 2017-3888 COMPLAINANTS, Docket No. 2017A-3888-ROC v. FINAL ADMINISTRATIVE DECISION Kieran Brothers, LLC, AND ORDER License No. ROC 242325, RESPONDENT.

Under A.R.S. § 41-1092.08(B), the Registrar may review and accept, modify, or reject an administrative law judge’s written decision. If the Registrar modifies or rejects that decision, then the Registrar must provide written justification setting forth the reasons for the modification or rejection. BACKGROUND In this case, a hearing was held, and the administrative law judge issued a written decision. See Administrative Law Judge Decision, attached. Case No. 2017-3888 concerns an application for payment from the Residential Contractor’s Recovery Fund for damages caused by Respondent to Complainant’s home. The total contract price for the project, including change orders was $46,471.17. ALJ Dec. 4:9. Complainant personally paid a portion of this contract price, and Complainant’s LLC paid a portion of the contract price. ALJ Dec. 6:17-19. In calculating the Complainant’s actual damages as required under A.R.S. § 32-1132(A), the Registrar did not consider payments made by Complainant’s LLC. ALJ Dec. 4:8-15. The administrative law judge disagreed with the Registrar and concluded that payments made by the Complainant’s LLC should be applied to the actual damages calculation. ALJ Dec. 8:18-26. The Registrar reviewed that decision and hereby modifies it. MODIFICATION AND WRITTEN JUSTIFICATION For the purposes of A.R.S. § 32-1132(A), “actual damages” are the actual cost that the eligible

of 4 REGISTRAR OF CONTRACTORS 1700 W. Washington St. Suite 105 – Phoenix, AZ 85007-2812 Telephone (602)542-1525 1-877-692-9762 person will have to spend to correct the contractor’s defective work and complete the project, minus any

portion of the contract price still unpaid to the original contractor. See generally Ramsey v. Arizona

Registrar of Contractors, 241 Ariz. 102, 106, 384 P.3d 316, 320 (App. 2016). Additionally, the

Registrar owes a fiduciary duty to manage the Fund for the benefit of all eligible homeowners who have

suffered actual damages caused by a licensed contractor’s statutory violations. Before authorizing a

payout, the Registrar must have conclusive proof that the claimant personally incurred actual,

compensable damages.

Here, although Complainants signed the contract and made several payments, Complainants’ LLC

also made payments to Respondent. As the administrative law judge concluded, “[I[t is axiomatic that a

limited liability company is a separate entity and distinct from its owner and therefore, the Tribunal does

not find that the payments on the contract by Complainants’ company was tantamount to a payment by

Complainants.” See ALJ Dec. 7: 4-7. Despite finding Complainants did not pay for the entire contract

price, the administrative law judge proceeded to find that Complainants’ LLCs payment should be

included in the actual damages calculation. See ALJ Dec. 8:18-25. However, this finding is not only

contrary to law, but contrary to decisions issued by the Office of Administrative Hearings when faced

with similar facts. See Case No. 2017A-5277-RFA-ROC, ALJ Dec. 6:6-7 (denying a recovery fund

payout where Complainant’s corporation paid the contractor, rather than Complainant personally.

“Because Complainant did not personally pay Respondent, he has not sustained any damages on account

of Respondent’s statutory violations.”).

Finally, the administrative law judge found that “No evidence was presented that the contract

payment made by [Complainants’ LLC] was a loan, or that Complainants had any expectation of

repayment.” See ALJ Dec. 6:28-29 & 7:1. Under these circumstances, the Registrar does not include third

party payments to complete or repair a respondent’s deficient work as part of a complainant’s actual

damages. Therefore, the Registrar modifies the Administrative Law Judge Decision to disallow any

payments made by Complainants’ LLC as part of Complainants’ actual damages.

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of 4 REGISTRAR OF CONTRACTORS 1700 W. Washington St. Suite 105 – Phoenix, AZ 85007-2812 Telephone (602)542-1525 1-877-692-9762 CONCLUSION AND ORDER

The Registrar hereby modifies the Administrative law Judge Decision by:

• Replacing page 7, line 8 through page 9, line 3 with “For purposes of A.R.S. § 32-1132(A),

‘actual damages’ are the actual cost that the eligible person spent to correct the contractor’s

defective work and complete the project, minus any portion of the contract price still unpaid to

the original contractor. Because payments made by Complainants’ LLC are disallowed and may

not form the basis of a recovery fund award, Complainants have not demonstrated sufficient

evidence to support a finding that they are eligible for an award from the recovery fund.”

• Replacing the Recommended Order, page 9, lines 5 through 7 with “IT IS ORDERED that

Complainants’ appeal is dismissed.”

The Registrar hereby accepts the remainder of the Administrative Law Judge Decision which

becomes effective on April 8, 2019.

FINAL NOTE

On page 1, line 11, replace “January 8, 2018” with January 8, 2019.” On page 1, line 29 and page

2, line 3, replace “32-1154(A)(2) with 32-1154(A)(1).” On page 2, line 13, replace “Respondent” with

“Complainant.”

Dated February 27, 2019.

Registrar of Contractors /s/ Joseph Citelli Joseph Citelli Chief Counsel Chief of Legal Department and Recovery Fund Copy mailed via USPS First Class mail February 27, 2019 to: Respondent Kieran Brothers LLC 1035 N McQueen Rd Ste 114 Gilbert, AZ 85233 Complainant Harold and Jeanette McDaniel PO Box 1025 Laveen, AZ 85339

of 4 REGISTRAR OF CONTRACTORS 1700 W. Washington St. Suite 105 – Phoenix, AZ 85007-2812 Telephone (602)542-1525 1-877-692-9762 AND copy electronically mailed this same date to: Respondent at email address on record with the Registrar Complainant at email address on record with the Registrar Office of Administrative Hearings Roger A. Geddes, Administrative Law Judge Registrar’s Counsel Thomas Raine, Assistant Attorney General

Case No. 2017-3888 / AN

of 4 REGISTRAR OF CONTRACTORS 1700 W. Washington St. Suite 105 – Phoenix, AZ 85007-2812 Telephone (602)542-1525 1-877-692-9762 RECEIVED 1.28.2019 ROC LEGAL

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

Harold and Jeanette McDaniel, No. 2017A-3888-ROC

COMPLAINANT ADMINISTRATIVE LAW JUDGE DECISION v.

Kieran Brothers LLC License No. 242325

RESPONDENT

HEARING: January 8, 2018, 9:00 A.M. APPEARANCES: Complainants Harold and Jeanette McDaniel appeared on

their own behalf; Assistant Attorney General Thomas C. Raine appeared on behalf of

the Arizona Registrar of Contractors. No appearance was made on behalf of

Respondent

ADMINISTRATIVE LAW JUDGE: Roger A. Geddes

_____________________________________________________________________

FINDINGS OF FACT

1. Kieran Brothers, LLC (Respondent), is the holder of License Number

242325 issued by the Registrar of Contractors (Registrar). 2. On or about July 31, 2017, Complainants Harold and Jeanette McDaniel filed a complaint with the Registrar against Respondent for abandonment with regard to a remodel at Complainants’ residence in Laveen, Arizona. (Registrar’s Exhibit 2). According to the complaint, the contract amount between Complainants and Respondent was $38,830.82, of which $37,696.85 was paid. 3. After an inspection performed by the Registrar, the Registrar issued a Citation and Complaint on September 11, 2017, charging Respondent with a violation of A.R.S. § 32-1154(A)(2) and A.R.S. § 32-1154(A)(3). (Registrar’s Exhibit 4).

Office of Administrative Hearings 1740 West Adams Street, Lower Level Phoenix, Arizona 85007 (602) 542-9826 RECEIVED 1.28.2019 ROC LEGAL

4. Due to Respondent’s failure to file a timely Answer, the Registrar issued a Final Administrative Decision and Order on October 4, 2017, finding that Respondent had violated A.R.S. § 32-1154(A)(2) and A.R.S. § 32-1154(A)(3) as charged in the

Complaint,. (Registrar’s Exhibit 5). Pursuant to the Order, the Registrar revoked

Respondent’s license.

5. On or about January 3, 2018, Complainants filed a claim to the

Residential Contractors’ Recovery Fund (“Recovery Fund”) with the Registrar.

(Registrar’s Exhibit 6). The claim form indicated that they sought recovery from the

fund in the amount of $23,601.93.

6. On September 10, 2018, the Registrar issued a Reissued Notice of Claim

for Administrative Payout. The Registrar determined that Complainants would receive

a payout of $5,104.64 from the Recovery Fund. (Registrar’s Exhibit 1).

7. On September 12, 2018, Respondent filed a timely request for hearing on

the Registrar’s Notice of Claim for Administrative Payout. (Complainants’ Exhibit 12).

8. The 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 January 8, 2019, at 9:00 A.M. 9. At the hearing, the Registrar presented the testimony of Legal Assistant to in the Legal Department of the Recovery Fund, Marlee McCormick. Complainants appeared and testified on their own behalf and presented the testimony of Carla Shuler. The Tribunal received and admitted Registrar’s exhibit numbers 1 - 7 and Complainants’ exhibit numbers 1 - 15.1 10. Marlee McCormick testified on behalf of the Registrar that Jessica Ortiz, formerly with the Register, had been the previous examiner on the claim but that she, Ms. McCormick, had personally reviewed Ms. Ortiz’s determination for payment to Complainants from the Recovery Fund. She testified that she substantiated Ms. Ortiz’s calculation of $13,766.83 as allowable costs to complete/repair the project comprised of $12,525.03 as compensable costs incurred by Complainants and an RECEIVED 1.28.2019 ROC LEGAL

additional amount of $1,241.80 in bids to repair. (Registrar’s Exhibit 7). However, because Complainants had not paid the entire amount on the contract, she stated the amount unpaid on the contract was deducted from the cost to complete/repair. Thus,

she stated that Ms. Ortiz arrived at an actual damages calculation of $5,104.64 as

follows:

$13,766.83 (recoverable costs to complete/repair)

$ 38,830.82 (initial calculation of contract price)

- $ 30,168.63 (Complainants payments on contract)

$ 8,662.19 (unpaid amount on contract)

- $ 8,662.19 (unpaid amount on contract)

$ 5,104.64 (final payout recommendation)

11. Ms. McCormick further stated that in arriving at the above calculation,

Complainants’ payment of $9,510.10 to unlicensed contractors to complete/repair

Respondent’s work was disallowed as well as an October 15, 2015, payment to

Respondent on the contract in the amount of $7,528.25 that was paid by J L McDaniel

Enterprises, LLC. (Registrar’s Exhibit 6 (ROC 0034)). She stated that Complainants in

their individual capacity had made three other payments to Respondent on the contract that were allowed in the calculation of actual damages. 12. Ms. McCormick further testified that the recommended payout amount of $5,104.64 was incorrect and was actually a lower amount because a change order to the contract had not been accounted for. She stated also that Complainants had recently submitted an additional invoice and payment in the amount of $437.60 substantiating a cost incurred by Complainants to complete/repair Respondent’s work. 13. The Register revised its calculation of the payout amount at the hearing and while Complainants were offered the opportunity to continue the hearing in order to have additional time for preparation to address the new calculation, Complainants declined that offer and stated that they wished to proceed with the hearing. 14. With respect to the revised calculation, Ms. McCormick testified that there was an additional change order to the contract in the amount of $7,640.35, (Registrar’s The Tribunal also took administrative notice of the Registrar’s file. RECEIVED 1.28.2019 ROC LEGAL

Exhibit 6 (ROC 0036)), which was initially overlooked and which increased the contract amount to $46,471.17. She further stated Complainants had submitted substantiation of a payment in the amount of $437.60 as an additional cost to complete/repair

Respondent’s work, (Complainants Exhibit 15), which would increase the calculation of

allowable costs to complete/repair Respondent’s work from $13,766.83 to $14,204.43.

15. Thus, Ms. McCormick stated the revised calculation of actual damages

was as follows:

$ 14,204.43 (revised recoverable costs to complete/repair)

$ 46,471.17 (revised calculation of contract price)

- $ 37,696.88 (total payments on contract)

$ 8,774.29 (unpaid amount on contract)2

+ $ 7,528.25 (amount paid by LLC on contract)

$ 16,302.54 (unpaid amount by homeowner on contract)

- $ 16,302.54 (unpaid amount by homeowner on contract)

($ 2,098.11) (final payout calculation)

She concluded that her revised calculations demonstrated no actual damages

sustained by Complainants under the statute and instead resulted in a gain (or saved cost) to Complainants. She thus indicated that there should be no payment to Complainants from the Recovery Fund. 16. Complainant Jeanette McDaniel testified that she did not dispute the disallowed payments that she had made to unlicensed contractors, and explained that she in large part had hired Respondent’s subcontractors. She stated that J L McDaniel Enterprises, LLC, who made one payment to Respondent in the amount of $7,528.25, was her former sole member limited liability company trucking business. She stated that she was unsure whether that payment was recorded as a business expense but stated the check notation indicated it was for “office area improvements.” She further stated she believed the Registrar did not protect her and was negligent in not requiring Respondent to carry more insurance. Ms. McCormick actually testified to an unpaid amount on the contract of $8,774.32, which appeared to be an error in the amount of $ .03. This resulted in her testifying to a net gain of $2,098.14. RECEIVED 1.28.2019 ROC LEGAL

17. Complainant Harold McDaniel testified that the original electrician had overcharged them, as well as the tile and flooring contractors. 18. Carla Shuler, former bookkeeper for Complainant, testified on behalf of

Complainant that the check was from the LLC, that it was a single member LLC, and

that a Schedule C was filed on the tax returns.

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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 Arizona Administrative Code Rule 2-19-119(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 p. 1220 (8th ed. 1999). 4. The Registrar’s final decision in the underlying abandonment and workmanship case established that Respondent abandoned the project and 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)(1) and A.R.S. § 32-1154(A)(3), namely A.A.C. R4-9-108. The only issue in the hearing on Complainants’ claim to the Recovery Fund is the measure of their actual damages. RECEIVED 1.28.2019 ROC LEGAL

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.

6. Complainants did not contest the amount of the total contract price or their amounts expended to complete/repair Respondent’s work that were allowed or disallowed by the Registrar. At issue was the October 15, 2015, contract price payment to Respondent in the amount of $7,528.25 that was paid by J L McDaniel Enterprises, LLC, rather than by Complainants in their individual capacity. 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). The Registrar argued that because this payment was not made to Respondent by Complainants directly, the payment constituted an unpaid amount on the contract, was not a component of Complainants’ actual damages, and was consequently deducted from the cost to complete/repair Respondent’s work. In this case, that payment amount results in the difference between an award payment to Complainants and no award payment at all. 7. No evidence was presented that the contract payment made by J L McDaniel Enterprises, LLC, was a loan, or that Complainants had any expectation of RECEIVED 1.28.2019 ROC LEGAL

repayment. Indeed, Complainants seemed to suggest that the payment was either inadvertent or merely a convenience. Complainants argued that the company was a sole member limited liability company and alluded to the fact that the company and

Complainant Jeanette McDaniel were one in the same. However, it is axiomatic that a

limited liability company is a separate entity and distinct from its owner and therefore

the Tribunal does not find that the payment on the contract by Complainants’ company

was tantamount to a payment by Complainants.

8. Even finding that such a payment was made by an independent third

party, the broader question would seem to be whether if fact any payment by a third

party on a construction contract made on behalf of a homeowner constitutes an unpaid

amount on the contract that in essence works to the detriment of the homeowner in

calculating their actual damages under A.R.S. § 32-1132(A). The Registrar cited the

Ramsey case for the proposition that an award of actual damages from the Recovery

Fund requires a deduction for the contract price unpaid. However, the Ramsey case is

not specific in terms of whether unpaid on the contract means contract price unpaid “by

the homeowner” or contract price unpaid “to the contractor.”3 In this case, the amounts

are different. 9. The Tribunal finds that the more reasonable interpretation in determining actual damages under the statute is that the deduction from the cost to complete/repair Respondent’s deficient work should be those amounts unpaid to the contractor, as opposed to those amounts unpaid by the homeowner. The Tribunal believes that such a construction of the statute would be more consistent with the “general purpose of making a homeowner who suffers from a contractor’s misdeeds ‘whole.’” Ramsey at 107. 10. This perhaps can be illustrated by the hypothetical example in which a homeowner enters a construction contract, the contract price of which is gratuitously paid entirely by a third party for the homeowner. If the contractor’s work is ultimately

It is noted in the Ramsey case that in determining actual damages, the court indicated that Registrar argued that there should be a deduction from the cost to complete/repair for the “amount left unpaid to the original contractor.” Id. RECEIVED 1.28.2019 ROC LEGAL

deficient and the homeowner incurs legitimate and what are later deemed to be awardable costs to repair the contractor’s work (in an amount less than the contract price), has the homeowner suffered no actual damages because it paid nothing to the

contractor? In construing unpaid on the contract to mean unpaid by the homeowner, in

such a case the homeowner could not suffer any damages until the cost to

complete/repair exceeded the third party payment. Such would not make a homeowner

whole. Rather, a homeowner could only be made whole by recovering their cost to

complete/repair, without regard to who paid the contract price. Further, under these

circumstances, in a legal proceeding for breach of contract due to deficient work, it

would be unfathomable that a court would rule that the repair costs (in an amount less

than the contract price) were not damages and that the homeowner in fact had no

damages because a third party rather than the homeowner had paid the contract price.

11. To state that a homeowner has not been damaged to the extent of any

third party payment of the contract price ignores the damage to the value of the

gratuitous payment. By deducting a third party payment from the cost to

complete/repair a contractor’s work, the homeowner is deprived of the entire value of

that gratuitous payment and in essence is damaged to the extent of the payment. 12. Thus, if the $7,528.25 payment on the contract by Complainants’ limited liability company is not considered to be an amount unpaid on the contract, Complainants’ actual damages under the statute would be as follows: $ 14,204.43 (revised recoverable costs to complete/repair) $ 46,471.17 (revised calculation of contract price) - $ 37,696.88 (total payments on contract) $ 8,774.29 (unpaid amount to contractor on contract) - $ 8,774.29 (unpaid amount to contractor on contract) ($ 5,430.14) (final payout calculation) 13. Even though the revised calculation of actual damages is $5,430.14, the Reissued Notice of Claim for Administrative Payout notified Respondent of a payout amount of $5,104.64. Complainants elected to move forward with the hearing even after recalculations of the payout amount were made. Thus, because Respondent was RECEIVED 1.28.2019 ROC LEGAL

not apprised of the potential payout of any amount above $5,104.64, the Tribunal finds the payout amount to be limited to $5,104.64 to compensate Complainants for their actual damages caused by Respondent’s violations.

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 $5,104.64 to Complainants. 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, January 27, 2019.

/s/ Roger Geddes Administrative Law Judge

Transmitted electronically to:

Jeffrey Fleetham, Director Registrar of Contractors