ALJDEC decisions subject to certification as final

2017A-5527-CHC-ROC · Registrar of Contractors · 2018-04-30

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

Frederick William Merkle,

COMPLAINANT,

v.

R G B Construction Inc,

License No: 119983

RESPONDENT.

No. 2017A-5527-CHC-ROC

ADMINISTRATIVE LAW JUDGE DECISION

HEARING: April 13, 2018

APPEARANCES: Frederick W. Merkle, Complainant, Robert Bowser,

Respondent and Qualifying Party.

ADMINISTRATIVE LAW JUDGE: Randolph D. Wolfson

_____________________________________________________________________

FINDINGS OF FACT

Respondent RGB Construction, Inc. [hereinafter “RGB”] is the holder of License Number 119983 issued by the Arizona Registrar of Contractors (Registrar).

On or about December 17, 2014, Complainant Frederick William Merkle [hereinafter “Merkle”] entered into a contract with Respondent to construct a new 2,993 square foot home at Lot 17, Whitney Estates Ranch in Sunflower, Arizona.

Mr. Merkle agreed to pay RGB the sum of $626,965.00 for the construction. The payments under the agreement called for RGB to be paid in phases as follows:

A 10% ($62,696.50) nonrefundable (sic) shall be paid to builder at time of signing of this contract and, building permit approval, to be applied toward subcontract material deposits, scheduling and commitments and construction commencement. A 15% ($94,044.75) due upon completion of dirt work and retention wall completion. 20% ($125,393.00) due upon pouring of house floor. 20% ($125,393.00) due upon half completion of Strada erected. 20% ($125,393.00) at completion of Strada. 10% ($62,696.50) due when interior doors, shelving, countertops and cabinets installed. 4% ($25,078.60) due at staining of concrete. 1% ($6,269.65) due at Certificate of Occupancy.

On or about November 2, 2017, the Registrar received a Complaint against RGB from Mr. Merkle alleging RGB performed poor work and failed to follow plans and specifications.

On or about December 27, 2017, the Registrar assigned the complaint to Investigator Beau Cruz. After a jobsite inspection, Investigator Cruz issued a written directive to Respondent that provided as follows:

You must notify the Registrar’s assigned Investigator of your compliance with this Directive prior to 5:00 p.m. on January 12, 2018. You are hereby directed to remedy the following violations by the appropriate means:

Contractor is to finish project as per agreement (contract) and, any verbal and written change between parties. Contractor is also to correct the following by the appropriate means.

Complaint Item 4: Numerous cracks remain in GFRC wall and ceiling surfaces, which require filling and reinforcing. Cracks in surface of GFRC (Glass Fiber Reinforced Concrete) on the exterior surface as well as, irregular applied surface on exterior and, significant cracking noted in the interior of the structure. Excessive cracking noted on the southeast (S/E) wall and stem wall joint in the master bedroom with, evidence of surface delamination present, large crack irregular crack from southeast (S/E) wall, corner and, traversing thru octagon junction box and down thru wall to patio door and, cracking at joints and, cracking measured in excess of 1/16” in some areas with wider cracking noted that appeared to be larger and previously patched with cracking reappearing with differing horizontal displacement between cracks, excessive cracking in ceiling surface of master bedroom. Cracking noted on walls and ceilings throughout structure, detached garage/guest bedroom “Casita” structure.

Contractor is to determine reason for excessive cracking in the surface of the GFRC (Glass Fiber Reinforced Concrete) and, ensure has been applied per manufacturer’s instructions and specifications and ensure that application has been certified by the manufacturer.

Complaint Item 5: Entire Strata application uncertified. Due to the issues noted throughout structure(s), contractor is to determine reason for excessive cracking in the surface of the GFRC (Glass Fiber Reinforced Concrete) and, ensure has been applied per manufacturer’s instructions and specifications and ensure that application has been certified by the manufacturer.

Complaint Item 6: French drain not installed according per plans – contributed to water damage below grade cellar & storage area. Water seeping thru floor joint around foundation wall in the storage/cellar area. Noted that stub out for “French Drain” was installed sitting at the top of the slab and not below the 4′′ to 6′′ level of slab as well as the soil around foundation wall has not been backfilled allowing water to pool around area. Respondent is to ensure that the “French Drain” is installed as per plans and, backfill and, ensure that soil slope away from structure.

Complaint Item 7: Main house concrete floor requires grinding – concrete pour’s initial set reached below adequately smoothed Trowel marks, irregularities and cracks on surface of the concrete floor in the structure.

Complaint Item 11: Courtyard unfinished – exposed polystyrene damaged; present incomplete structure not according per plan. Exposed polystyrene panels noted on northwest (N/W) and, southwest (S/W) sides of courtyard. GFRC (Glass Fiber Reinforced Concrete) has not been applied.

Complaint Item 12: Strata corbel overhang on south side of master bedroom not installed. Install Strata corbels above exterior of master bedroom patio window on the south (S) of structure.

Complaint Item 13: Chaises for ductwork not constructed. Ensure that space above ceiling grid in hallway between hallway bathroom and office room, has the capacity to handle 6500cfm as per verbal change order agreed to between parties prior to jobsite inspection.

Complaint Item 14: Evaporative cooler ductwork – not installed; insufficient space above dropped ceiling for 6500cfm device. Respondent is to ensure that there is sufficient in hallway ceiling to handle 6500cfm evaporative cooler.

Complaint Item 15: Bathroom tile purchased by owner in October 2016 – never installed. Bathroom tile has not been installed. Contractor is to complete project per contract, written and/or oral change orders between parties.

Complaint Item 16: Clay tiling of roof, roof overhangs, guest patio, and main house entry not installed. Clay roof tile have not been installed on roof overhangs, guest house patio and, over main house entry. Contractor is to complete project per contract, written and/or oral change orders between parties.

Complaint Item 17: Exterior and interior unpainted – colors and paint selected by owner in October 2016. Contractor is to complete project per contract, written and/or oral change orders between parties.

Complaint Item 18: Lattice for tile overhangs, for patio and, for front entry not installed. Lattice for tile overhangs and patio has not been installed. Contractor is to complete project per contract, written and/or oral change orders between parties.

Complaint Item 19: Whirlpool tub rear access requirement discussed but not implemented. Contractor is to complete project per contract, written and/or oral change orders between parties.

Complaint Item 23: Excess trash and waste improperly maintained – wind moved materials and waste around; neighbor complained. Large amounts of construction waste and construction debris scattered around site that has not been properly secured in dumpster(s) and disposed of.

The Registrar has determined that any workmanship violations alleged in the complaint but not listed above are unsubstantiated and do not require corrective action.

Following the issuance of the written directive, on January 16, 2018, Complainant e-mailed Mr. Cruz advising that no work in response to the CWO had been performed. No compliance inspection, therefore, was conducted.

On January 17, 2018, The Registrar issued a Citation against Respondent, charging four possible violations of A.R.S. § 32-1154(A)(2), Rule 4-9-108, titled “Minimum Construction Standards,” in the Arizona Administrative Code, and thereby of A.R.S. § 32-1154(A)(3), A.R.S. § 32-1154(A)(12), A.R.S. § 32-1154(A)(12) [specifically, failure to utilize the statutory contract language required by A.R.S. § 32-1158(A), and A.R.S. § 32-1154(A)(17).

A hearing was conducted on April 13, 2018 to determine the merits of the allegations contained in the Complaint.

Investigator Cruz was not subpoenaed, did not appear and, therefore did not testify at the hearing.

Complainant testified that at the time of the Contract in this matter, Mr. Merkle had intended to obtain a construction and then replacement loan to fund the Contract. For reasons Mr. Merkle did not identify, he was not able to secure a loan for the project. So, after the Contract had been executed, Mr. Merkle determined to move forward on the construction project using his own cash position to fund the phased payments called for under the Contract. However, Mr. Merkle admits that he was not able to make timely payments from his own personal resources. So, instead of paying RGB its draws as called for in the Contract, he paid RGB in a piecemeal fashion. Mr. Merkle stated that RGB worked with him on making his payments. By Mr. Merkle’s reckoning, he asserts:

[a]s of May 11, 2016, one year after the start of the project (May 21, 2015), RGB Construction had received $429,000 in funds from the owner. These funds exceeded coverage of 65% of the project’s cost ($407,527.25 of the total project cost of $626,965.00) which was to be paid to RBG Construction “... upon half completion of Strada,” as stated in the original contract of December 17, 2014. The owner does not recall whether half of the application of Strata was completed at that time, but since that date, the owner has paid or received credit (e.g., owner

purchases of tile and appliances) for an additional $114,916.13. With the difference between $429,000.00 and $407, 527.25 ($21,472.75), the owner has paid or been given credit for an additional $136,388.88 for a total of $543,916.13, applicable to payment for the project. Exactly $519,000.00 of the $543,916.13 was paid to RGB Construction by July 12, 2016,... According to the contract, 85% of the contract ($532,920.25) was to be paid “at completion of Strada.” At this time, a year and one half since July, 2016, Strata has not been completed. The owner has advanced RGB Construction 20% ($125,393.00) and an additional $10,995.88 in good faith that RGB Construction would complete this phase of the contract. This advance of funds more than covers the $25,210.17 that RGB Construction claims that the owner needs to pay in order to continue the project. As soon as the Strata phase of construction is complete, and the problems with the project noted by the ROC have been corrected and approved by the ROC, additional funds will be forthcoming.

Mr. Merkle agreed that he requested the change orders and extras and the amount charged for them of $25,210.17 is correct and uncontested. [See, Complainant’s Disclosure, Exhibit C and two Change Orders attached to the Complaint]. He admits that he received the change orders and extras materials and labor as requested from RGB. He admits he has not paid RGB the $25,210.17 for the extras and change orders. Mr. Merkle’s theory is that the $25,210.17 for change orders and extras should be subtracted or set-off by RGB from the payments Mr. Merkle has already made - which Mr. Merkle contends are $136,358.88 in excess of RGB’s contractual draw rights.Mr. Merkle refuses to pay for the $25,210.17 in extras and change order expenses because RGB’s work has stopped on the project.

Testifying for the Respondent was Mr. Robert Bowser, Qualifying Party and officer of the Respondent licensee’s Corporation. Mr. Bower stated that he stopped work on the Complainant’s project in July of 2017 because Mr. Merkle ran out of money and was not paying him. He testified that he had provided Mr. Merkle material and labor for $25,210.17 worth of change orders and extras that Mr. Merkle refused to pay for. Mr. Bowser stated that he had already paid for the materials and labor for the extras and change orders and, therefore, he was out of pocket for the $25,210.17 charges which remain unpaid.

Regarding the CWO, Mr. Bowser testified that because he was not being paid by the Complainant, he stopped work on the project. He asserted that with the exception of item number 5 of the CWO, all of the matters listed pertain to work that was yet to be completed because work stopped for non-payment. In his Answer to the Complaint, Respondent advised that the Respondents response to the items listed in the CWO would commence “...once Mr. Merkle pays his change orders and finds his remaining funds to complete.”

Regarding item number 5, Mr. Bowser testified that he contacted the manufacturer of the “Strata” product for them to evaluate the application of its product and to determine why the product was cracking. The “Strata” product [“GFRC” - Glass Fiber Reinforced Concrete], he explained, was a construction technique new to the industry whereby foam panels are applied to framing for walls, then the Strata product is applied to the foam panels which, when dried/cured, become hard and stable. When dried, then paint, stucco, plaster and other wall coverings can be applied just as with any other construction materials. Mr. Bowers was requested by the manufacturer to provide a sample of the board from the problem area. A sample board was provided. Mr. Bowers said that the manufacturer representative tested and inspected the Strata four time. The Strata manufacturer has yet to determine what is causing the product cracks and apparent imperfections.

Mr. Bowers testified that he believed 95% of the Strata application is complete, but that until the Strata phase is completed, none of the other work on the project can move forward.

Administrative notice is taken of Respondent’s prior License record as reflected on the Registrar’s public website on April 30, 2018. Such prior License record reflects that Respondent’s License No. 119983 was first issued on December 16, 1996. There is no record of any disciplinary action taken against this licensee based upon a citizen’s complaint. The license was briefly placed in a suspended status for four days, April 20, 2017 through April 24, 2017, because Respondent’s bond had expired.

CONCLUSIONS OF LAW

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

Complainant bears the burden of proof to establish Respondent’s statutory violation by a preponderance of the evidence. See A.R.S. § 41-1092.07(G)(2); 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). “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 claim of set-off against monies that otherwise would be owed is an affirmative defense for which the party asserting the right to a set-off bears the burden to prove.

The party asserting an affirmative defense to a claim has the burden to establish the elements of that defense. See A.A.C. R2-19-119(B)(2).

The amounts paid to RGB under its contract may or may not be determined in another forum to have been earned and ripe for draw under the contract. But, since Mr. Merkle did not pay RGB according to the contract’s terms and conditions but paid RGB irregularly in piecemeal fashion, these payments, by a preponderance of the evidence, appear to be made for materials, labor and costs of performance under the contract. The extras and change orders were not part of the original contract of these parties. Respondent Merkle has not, by a preponderance of the evidence, proven it is entitled to a set-off in an amount claimed by Merkle to be $25,210.17 from payments already made to RGB.

Arizona’s “Prompt Pay Act” provides that a Contractor may suspend its work on a construction project or terminate the contract if the Owner does not make timely payment of the amount certified and approved. A.R.S. § 32- 1129.04(A). The Act only applies to owner-occupied dwellings if the Contractor includes certain language on the front page of all its estimates and invoices. Under the Prompt Pay Act, the Contractor is required to provide written notice to the Owner at least seven calendar days before the Contractor’s intended suspension or termination, and a Contractor shall not be in breach of the contract for suspending performance or terminating the contract for nonpayment.

The assertion of a right to stop work for non-payment pursuant to the Prompt Pay act in this case is an affirmative defense against Mr. Merkle’s contention that RGB workmanship is poor, that RGB failed to comply with the CWO and that RGB abandoned this project without legal justification.

The required A.R.S. § 32-1154(A)(1) statutory notice appears in none of the Respondent’s exhibits, including invoices and statements. No evidence has been offered to establish RGB’s written notice was provided to Mr. Merkle at least seven calendar days before the Contractor’s intended suspension or termination. In fact, no written notice from RGB to Mr. Merkle indicating its intention to stop work on the contracted project is of record in this case.

RGB has failed to meet its burden of proof, by a preponderance of the evidence, that it was entitled to terminate its work on Mr. Merkle’s project and its contract by the authority of the Prompt Pay Act for the reasons that:

The required language required by A.R.S. § 32-1154(A)(1), by a preponderance of the evidence, was not provided by RBG to Mr. Merkle;

By a preponderance of the evidence RGB did not provide written notice to the Owner at least seven calendar days before the Contractor’s intended suspension or termination.

The credible evidence presented at hearing established that at the time of the complaint there were 14 items of Complainant’s project that needed to be completed. Although abandonment, per se, was not claimed in the Merkle Compliant or expressly stated in Investigator Cruz’ findings or Directives, Mr. Cruz does inform and direct RGB in its Directive and CWO that “Contractor is to finish project as per agreement (contract) and, any verbal and written change between parties.” Therefore, sufficient notice of the need to defend an abandonment of the project is reasonably and easily inferred. Inasmuch as there is no legal basis upon which RGB was entitled to stop work on this project and that RGB has readily admitted in its testimony that all work stopped on the project in July of 2017, then Complainant has proven, by a preponderance of the evidence, that RGB abandoned the contract or refused to perform after submitting a bid on work without legal excuse for the abandonment or refusal in violation of A.R.S. § 32-1154(A)(1).

As to the issue of poor workmanship, the evidence established that the items listed in the CWO related to RGB leaving the project before it was completed. Work was stopped by RGB when 80% to 95% of the Strata phase had been completed. The Strata, by a preponderance of the evidence, had to first be completed before the rest of the project could move forward. The CWO items listed were not shown, by a preponderance of the evidence, to be a failure of workmanship standards. To the contrary, the items in the CWO are a consequence of RGB’s determination to stop work on the project until it was paid. Therefore, Complainant has not met its burden of proof, by a preponderance of the evidence, to establish Respondent did not perform the work in a professional and workmanlike manner in violation of A.A.C. R4-9-108, and thereby of A.R.S. § 32-1154(A)(3).

Inasmuch as Complainant has not proven RGB violated A.A.C. R4-9-108, Complainant has not met its burden, by a preponderance of the evidence, to establish that Respondent violated A.R.S. § 32-1154(A)(22).

Although Respondent might be later determined to owe a portion of the unearned retainer to Complainants, as to the unpaid charges to Mr. Merkle from RGB for extras and change orders in the amount of $25,210.17, the parties’ dispute primarily involves a contractual common-law question of quantum meruit. Because the Arizona legislature has not empowered the Registrar of Contractors to resolve contractual disputes between contractors or to award contract damages, if the parties cannot agree to a mutually acceptable settlement, they must resolve their dispute in a judicial forum, not an administrative licensing proceeding.

As it relates to A.R.S. § 32-1154(A)(12) concerning failure in any material respect to comply with the chapter, A.R.S. § 32-1158(A) requires that “Any contract in an amount of more than one thousand dollars entered into between a contractor and the owner of a property to be improved shall contain in writing at least the following information:

.... 9. That the property owner has the right to file a written complaint with the registrar for an alleged violation of section 32-1154, subsection A. The contract shall contain the registrar's telephone number and website address and shall state that complaints must be made within the applicable time period as set forth in section 32-1155, subsection A. The information in this paragraph must be prominently displayed in the contract in at least ten point bold type, and the contract shall be signed by the property owner and the contractor or the contractor's designated representative. This paragraph does not apply to a person who is subject to and complies with section 12-1365. ....

Complainants have presented sufficient evidence, by a preponderance to demonstrate a violation of A.R.S. § 32-1154(A)(12) for the failure on the part of Respondent in a material respect to comply with A.R.S. § 32-1158(A) regarding the required contents of a contract. The evidence presented showed that Respondent had violated A.R.S. § 32-1158(A) because the contract between the parties in excess of $1,000.00 did not include disclosure of the notice of the owner’s right to file a complaint with the Registrar. As a mitigating factor, this Tribunal notes that a Complaint was in fact filed by Mr. Merkle. RGB’s failure to comply is technical in nature and appears to have resulted in no injury or harm to the Complainant.

Review of the Respondent’s prior License record as reflected on the Registrar’s public website on April 30, 2018 is found to be neither aggravating nor mitigating.

RECOMMENDED ORDER

Based on the foregoing, it is recommended that on the effective date of the Order, the license of R G B Construction Inc., License Number 119983 should be suspended for two (2) days.

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 40 days from the date of that certification.

Done this day, May 1, 2018.

/s/ Randolph D. Wolfson

Administrative Law Judge

Transmitted electronically to:

Jeffrey Fleetham, Director

Registrar of Contractors

By:_______________