ALJDEC decisions subject to certification as final

2018A-3863-ROC · Registrar of Contractors · 2019-07-24

49-IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: April 22, 2019 at 9:00 AM through 5:00 PM, and June 28, 2019 at 9:00 AM through 5:00 PM.[1] APPEARANCES: James Hanson, Esq. appeared on behalf of WBE Steel Services, Inc. (“Complainant”) with Virginia DeRusha, Kevin DeRusha, and Nathanial DeRusha as witnesses. John Ryan, Esq. appeared on behalf of Haydon Building Corp (“Respondent”); as assisted by paralegal Jennifer Zook, with Lesley Keeble, Connie Peña, and Jason Wallace. Kameron Johnson observed. ADMINISTRATIVE LAW JUDGE: Jenna Clark. _____________________________________________________________________ After review of the hearing record in this matter, the undersigned Administrative Law Judge makes the following Findings of Fact and Conclusions of Law, and issues this Recommended Order to the Director of the Arizona Registrar of Contractors (“Registrar”). FINDINGS OF FACT Background and Procedure 1. Pursuant to Ariz. Admin. Code R4-9-117, Administrative Notice is taken of Respondent’s active license file as shown on the Registrar’s public website June 28, 2019. On April 22, 2016, the Registrar issued License No. 304249 for General Dual KA Dual Engineering contracting license to Respondent.[2] Gus Thomas Schultz is listed as the Qualifying Party/Manager on the license, along with Norece Cody Hatch who is listed as the Manager on the license.[3] The address of record for the license is 3868 S Lindsay Rd, Gilbert, Arizona 85297-1509.[4] There is an active $14,000.00 surety bond listed for the license issued by RLI Insurance Company.[5] There is one prior discipline listed against the license.[6] There is also one open case against the license which is presumed to be Complainant’s. 2. On December 23, 2015, the parties entered into a $797,150.00 lump sum subcontract agreement for Complainant to provide steel- related labor and materials for a commercial project for the Franciscan Renewal Center (“Owner”) at Lady of the Angels Church (“the project”) located at 5802 E Lincoln Dr., Scottsdale, AZ 85253. Owner was responsible for approving and issuing payments on the parties’ payment applications. 3. On August 11, 2017, the Registrar received a complaint from Complainant, Complaint No. 2017-4148, alleging non-payment of services and/or materials totaling $126,233.50.[7] Complainant included copies of the parties’ contract agreement, invoices, change orders, pay applications, and a Notice of Intent to Suspend Work for Non-Payment letter.[8] 4. On August 15, 2017, the Registrar issued a Non-Payment Complaint Notification letter to the parties, advising that Respondent could supply any affirmative defenses or raise other issues to the Registrar by August 29, 2017.[9] Respondent timely responded. 5. On or about September 01, 2017, the Registrar issued a Citation for Alleged Violation of A.R.S. § 32-1154(A)(10) to Respondent for Complaint No. 2017-4148.[10] Respondent’s written Answer was due on or before September 18, 2017.[11] Respondent supplied its Answer to the Registrar on September 18, 2017.[12] 6. On September 19, 2017, the Registrar referred Complaint No. 2017- 4148 to the Office of Administrative Hearings (“OAH”), an independent state agency, for an evidentiary hearing on November 08, 2017. Per the Notice of Hearing the issue to be determined is whether the Registrar has cause to discipline Respondent’s license based on the following charges: Charge 1: A violation of A.R.S. § 32-1154(A)(10) (“Failure by a licensee or agent or official of 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 or, if the licensee lacks the capacity to pay, when the licensee has received sufficient monies as payment for the particular construction work project or operation for which the services or materials were rendered or purchased.”).

The matter was set for Status by OAH to afford the parties time to resolve their dispute outside of the hearing tribunal. 7. On April 20, 2018, the Registrar received another complaint from Complainant, Complaint No. 2018-3863, alleging non-payment of services and/or materials totaling $59,935.67 in violation of the Arizona Prompt Pay Act (i.e. Ariz. Rev. Stat. § 32- 1129.02).[13] Complainant included copies of pay applications issued by Respondent to Owner, and payment information Complainant received from Owner.[14] 8. On or about September 24, 2018, the Registrar issued a Citation for Alleged Violation of A.R.S. § 32-1154(A)(12); namely A.R.S. § 32-1129.02(A), to Respondent for Complaint No. 2018-3863.[15] Respondent’s written Answer was due on or before October 06, 2018.[16] Respondent supplied its Answer to the Registrar on October 05, 2018.[17] 9. On October 23, 2018, the Registrar referred Complaint No. 2018- 3863 to the OAH for an evidentiary hearing on December 20, 2018. The issue to be determined, per the Notice of Hearing, is whether the Registrar has cause to discipline Respondent’s license based on the following charges: Charge 1: A violation of A.R.S. § 32-1154(A)(12), namely A.R.S. § 32- 1129.02(A) (“Notwithstanding the other provisions of this article, performance by a contractor, subcontractor or material supplier in accordance with the provisions of a construction contract entitles the contractor, subcontractor or material supplier to payment from the party with whom the contractor, subcontractor or material supplier contracts.”).

On April 20, 2018, a cash bond of $500.00 was paid to the Registrar on behalf of Complainant.[18] 10. Complaint Nos. 2017-4148 and 2018-3863 were consolidated for hearing by OAH on November 02, 2018, and set to be heard on February 20, 2019. 11. The matters were ultimately heard on April 22, 2019, and June 28, 2019. Hearing Evidence 12. Complainant called Virginia DeRusha, Kevin DeRusha, and Nathanial DeRusha to testify, and submitted thirteen exhibits. Respondent called Lesley Keeble, Connie Peña, and Jason Wallace as witnesses, and submitted twenty exhibits. 13. On December 09, 2015, Complainant was issued a written Letter of Intent and Notice to Proceed regarding the preparation of shop drawings for the project.[19] Complainant did not possess the requisite American Institute of Steel Contractors (“AISC”) certification required under the Subcontract and Master General Conditions agreements, and therefore had to subcontract out the detailing and preparation of shop drawings.[20] This created a slight increase to Complainant’s costs. 14. In December 2015, bolt survey drawings were submitted to for Respondent’s review. In April 2016, supplies were delivered to the project site. On May 05, 2016, Complainant met with Respondent on site because Respondent refused to accept Complainant’s work as compliant with AISC requirements. Neither party wanted to cover the fees associated with obtaining a survey, even though the party contract state Complainant was responsible for verifying existing work. Ultimately, the parties entered into a wager whereby Respondent agreed to cover the cost of the survey once it was proven that Complainant’s work met AISC standards. Afterward, a change order was approved by Respondent to reflect its agreement to cover the cost of the survey. This deviation resulted in a delay in the project. On June 26, 2016, Complainant was given the green light to continue. 15. Per the project’s original schedule, the initial shop drawings were to be completed by February 02, 2016, and submitted for review to Respondent’s engineer and architect.[21] Fabrication was to be completed by March 16, 2016.[22] Steel erection was to commence April 07, 2016.[23] None of these deadlines were met.[24] Poor communication with Respondent’s liaison for its engineer and architect resulted in Complainant not receiving December 2015 communications from Respondent’s engineer and architect until August 2016.[25] 16. On December 21, 2015, Complainant submitted a pay application to Respondent which stated that Respondent was 80% complete with shop drawings.[26] 17. On February 08, 2016, Complainant submitted incomplete shop drawings that could not be reviewed by Respondent’s engineer or architect.[27] 18. On April 04, 2016, Complainant made a partial resubmission to Respondent.[28] The drawings were reviewed by Respondent’s engineer, who asked Complainant for additional information. Complainant provided additional supplemental information on April 15, 2016.[29] The drawings were rejected on April 28, 2016, by Respondent’s engineer because they were incomplete.[30] Complainant resubmitted its shop drawings on May 06, 2016. Respondent’s engineer returned the drawings to Complainant with corrections, and instructed Complainant to resubmit the corrected drawings within two business days. Complainant submitted the final drawings to Respondent on June 10, 2016.[31]

19. Pursuant to the parties’ contracts, payment applications were due on the 20th of each month, and included a 3% fee for all advancements. Complainant applied for a total of three advancements from Respondent; in March 2016, July 2016, and August 2016. All joint checks were issued to suppliers directly from Respondent. 20. On March 01, 2016, Respondent submitted its first pay application to Owner, which sought payment as requested by Complainant in its December 21, 2015, pay application.[32] Complainant was issued payment on March 18, 2016, two days after Respondent was paid by Owner.[33] 21. On March 29, 2016, Complainant submitted its second payment application to Respondent for work performed through March 31, 2016.[34] On March 30, 2016, Respondent informed Complainant that Owner was rejecting all costs associated with shop fabrication due to the lack of approved shop drawings. On March 31, 2016, Complainant submitted its second pay application directly to Owner. The application was certified on April 05, 2016.[35] On April 21, 2016, Owner released a payment of $81,601.20 to Respondent. On April 21, 2016, Complainant provided lien releases to Respondent, however, the amounts owed to Complainant’s subcontractors and suppliers exceeded the amount approved for payment in the second application.[36] Respondent agreed to advance the funds at issue to Complainant, $32,624.55, in exchange for a 3% fee of $1,068.74.[37] On May 05, 2016, Respondent issued payment for the application upon receipt of Complainant’s lien release.[38] 22. On April 19, 2016, Complainant submitted its third payment application to Respondent for $71,112.60 after 10% retention for work performed through April 30, 2016.[39] On May 04, 2016, Respondent informed Complainant that Owner approved $64,745.00 before retention.[40] On May 04, 2016, Complainant submitted its third pay application directly to Owner.[41] The application was certified that same day.[42] On May 19, 2016, Owner released a payment of $58,270.50[43], of which $36,693.29 had been advanced to Complainant for its March payment.[44] On May 24, 2016, Complainant provided lien releases to Respondent, however, the amounts owed to Complainant’s subcontractors and suppliers exceeded the amount approved for payment in the third application.[45] Respondent agreed to advance the funds at issue to Complainant, $5,391.21, in exchange for a 3% fee of $161.74.[46] On June 03, 2016, Respondent issued payment for the application upon receipt of Complainant’s lien release.[47] 23. On May 23, 2016, Complainant submitted its fourth payment application to Respondent for $90,152.15 after 10% retention for work performed through May 31, 2016.[48] On June 08, 2016, Respondent informed Complainant that Owner declined to issue further payments to Complainant for lack of performance.[49] On June 10, 2016, Complainant submitted its final shop drawings to Respondent.[50] On June 17, 2016, Owner released a payment of $362,010.74.[51] On June 30, 2016, Complainant provided lien releases to Respondent, however, the amounts owed to Complainant’s subcontractors and suppliers exceeded the amount approved for payment in the fourth application.[52] On June 30, 2016, Respondent issued payment for the application. Respondent did not receive Complainant’s lien release until July 05, 2016.[53] 24. On June 23, 2016, Complainant submitted its fifth payment application to Respondent for $81,527.35 after 10% retention for work performed through June 30, 2016.[54] On June 29, 2016, Respondent informed Complainant that Owner approved $33,839.00 before retention.[55] On June 30, 2016, Respondent submitted its pay application to Owner, who certified it on July 07, 2016.[56] On July 26, 2016, Owner released a payment of $142,355.26.[57] On August 05, 2016, Respondent issued payment for the application upon receipt of Complainant’s lien release.[58] 25. On July 01, 2016, the parties met to reset the project’s schedule. 26. On July 21, 2016, Complainant submitted its sixth payment application to Respondent for $320,326.20 after 10% retention for work performed through July 31, 2016.[59] On July 28, 2016, Respondent informed Complainant that Owner approved $185,835.60 after retention.[60] Owner released payment on August 10, 2016. On September 02, 2016, Respondent issued a $234,111.24 payment for the application upon receipt of Complainant’s lien release.[61] 27. On August 08, 2016, Complainant submitted its seventh payment application to Respondent for $14,193.00 after 10% retention for work performed through August 05, 2016, along with all applicable lien releases.[62] On August 11, 2016, Respondent issued a $15,770.00 payment to Complainant, and assessed Complainant a $473.10 advancement fee.[63] 28. On August 19, 2016, Complainant submitted its eighth payment application to Respondent for $216,019.80 after 10% retention for work performed through August 31, 2016.[64] On August 25, 2016, Respondent informed Complainant that it reduced Complainant’s pay request to $132,445.00 due to multiple issues.[65] On August 31, 2016, Respondent advised Complainant that Owner approved a payment of $109,528.00 before retention.[66] On September 16, 2016, Owner released a payment of $109,312.00 to Respondent.[67] On September 02, 2016, Complainant provided lien releases to Respondent, but did not provide lien releases for its subcontractors and suppliers until November 15, 2016.[68] On October 12, 2016, Complainant advised Respondent that it would pick up the eighth payment along with its September payment because it did not want to incur further advancement fees from Respondent.[69] 29. On September 19, 2016, Complainant submitted its ninth payment application to Respondent for $157,076.44 after 10% retention for work performed through September 31, 2016.[70] Owner approved a payment of $124,209.90 after retention.[71] Owner released payment on October 11, 2016.[72] On August 03, 2017, Complainant provided Respondent with a lien release.[73] Payments were directly issued to Complainant’s subcontractors and material suppliers.[74] 30. September 25, 2016, was Complainant’s last day performing work on the project. 31. On November 16, 2016, Complainant issued Respondent a Notice of Intent to Suspend Work for Non-Payment letter.[75] Specifically, pursuant to Ariz. Rev. Stat. § 32-1123.04(B), Complainant advised Respondent that unless it received $191,137.90 by November 23, 2016, that it would suspend performance of its subcontract with Respondent on November 24, 2016. 32. On August 03, 2017, Complainant signed an unconditional waiver and release on a $12,400.00 progress payment through September 25, 2016.[76] 33. A total of twenty-two change orders were executed for the project.[77] Between December 29, 2016, and February 20, 2018, sixteen deductive change orders were issued to Complainant totaling $105,862.69 in costs incurred to Respondent as a result of supplemental and expedited trades Respondent hired once Complainant left the project.[78] Post deductions, the contract between the parties totaled $691,287.31. 34. In sum, Complainant was paid $720,903.40 by Respondent on their contract.[79] DISCUSSION & CONCLUSIONS OF LAW 1. This matter lies within the Registrar’s jurisdiction and has been properly brought before the Office of Administrative Hearings for adjudication.[80] 2. Unless otherwise provided by law, a party asserting a claim, right, or entitlement bears the burden of proof; a party asserting an affirmative defense has the burden of establishing the affirmative defense. The standard of proof on all issues in this matter is that of a preponderance of the evidence.[81] 3. “A preponderance of the evidence is such proof as convinces the trier of fact that the contention is more probably true than not.”[82] 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.”[83] 4. The purpose of the Registrar’s licensing statutes is to protect the public from unscrupulous, unqualified, and financially irresponsible contractors.[84] 5. Statutes should be interpreted to provide a fair and sensible result.[85] Statutes shall be liberally construed to affect their objects and to promote justice.[86] 6. Ariz. Rev. Stat. § 32-1129 et al., provides numerous benefits and protections for subcontractors including their right to timely payment, 1.5% interest per month on unpaid invoices, and the right to stop work for nonpayment (after notice). 7. Subsection (A) of Ariz. Rev. Stat. § 32-1129.02 provides, in pertinent part, that “[p]erformance by a subcontractor in accordance with the provisions of a construction contract entitles the subcontractor to payment from the party with whom the subcontractor contracts.” 8. Subsection (B) of Ariz. Rev. Stat. § 32-1129.02 provides, in pertinent part, that “[i]f a subcontractor has performed in accordance with the provisions of a construction contract, the contractor shall pay to its subcontractors within seven days of receipt by the contractor of each progress payment, retention release or final payment, the full amount received for such subcontractor’s work and materials supplied based on work completed or materials supplied under the subcontract.” 9. Subsection (E) of Ariz. Rev. Stat. § 32-1129.02 provides, in pertinent part, that “[i]f a contractor chooses to withhold the application or certification for all or a portion of a subcontractor’s billing, the contractor must prepare and issue a written statement within fourteen days to the applicable subcontractors stating the reasons for withholding the application or certification from the owner.” 10. Subsection (F) of Ariz. Rev. Stat. § 32-1129.02 provides, in pertinent part, that “[i]f the owner issues a written statement stating that the owner declines to certify or approve all or a portion of the contractor’s billing and if the amounts to be paid from that billing by the contractor to any subcontractors are affected by the owner’s decision not to certify or approve, the contractor shall send a copy of that written statement within seven days after the receipt to any affected subcontractors or material suppliers.” 11. Ariz. Rev. Stat. § 32-1154(A)(10) provides, in pertinent part, that among the grounds for suspension or revocation of a contractor’s license is a “[f]ailure by [the] 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, if the licensee lacks the capacity to pay, when the licensee has received sufficient monies as payment for the particular construction work project or operation for which the services or materials were rendered or purchased.” 12. Ariz. Rev. Stat. § 32-1154(A)(12) holds, in pertinent part, that among the grounds for suspension or revocation of a contractor’s license is a “[f]ailure in any material respect to comply with this chapter.” 13. Ariz. Rev. Stat. § 32-1156.01 holds that “[a]fter a hearing pursuant to this article, an administrative law judge may recommend that a licensee provide restitution to any person who is injured or whose property is damaged by an action of the licensee.” 14. In the case at bar, the tribunal is tasked with determining how much money Complainant is owed by Respondent, if at all, and whether said debt(s) constitute a violation of Ariz. Rev. Stat. §§ 32-1129.02, 32-1154(A)(10), and 32-1154(A)(12) for which Respondent’s license may be disciplined by the Registrar. 15. Upon review of the record, a preponderance of the evidence establishes that Complainant was paid in full on its contracts with Respondent. Additionally, the record establishes that Complainant was paid timely and provided advanced written notice in each instance it payment applications were reduced for cause.

16. Although none of Complainant’s witnesses were directly involved in the accounting for the project, Complainant argued that it was owed at least $58,559.28 and as much as $74,155.80 by Respondent. Specifically, Complainant argued that Respondent failed to issue full payments on five Payment Applications totaling a payment shortage of $58,559.28. Complainant further argued that Respondent refused and/or otherwise failed to seek payment from Owner, in part or in total, on eight Payment Applications totaling a payment shortage of $74,155.80. Complainant also argued that by September 2016 Respondent owed Complainant $191.137.90. 17. Complainant, however, could not account for the lack of reconciliation in its records with regards to the advancements it received from Respondent. Complainant agreed to receive three advance payments from Respondent, all of which included a 3% fee. Complainant’s records do not reflect repayment to Respondent or acknowledged reduction of payment from Respondent based on outstanding amounts owed. Notably, Complainant also chose to forgo accepting payment in August 2016 for that month’s payment, to avoid incurring an additional 3% advancement fee, and instead chose to be paid for that month in September 2016. 18. Complainant also argued that Respondent violated the Arizona Prompt Pay Act, specifically Ariz. Rev. Stat. § 32-1129.02(E), because emails Respondent sent regarding workmanship concerns and reductions to Complainant’s pay applications did not comply with the statutes “reasonable detail” requirement as defined by Ariz. Rev. Stat § 12-1363(E). The tribunal is not swayed by this argument. 19. Because Complainant has not established by a preponderance of the evidence that Respondent violated Ariz. Rev. Stat. §§ 32- 1129.02(A), 32-1154(A)(10), or 32-1154(A)(12), Complainant has failed to established cause for the Registrar to suspend or revoke Respondent’s contractor’s license. 20. Considering the facts and circumstances of this matter, Complainant’s complaint must be denied. RECOMMENDED ORDER IT IS RECOMMENDED that that on the effective date of the Final Order in this matter that Complaint Nos. 2017-4148 and 2018-3863 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 40 days from the date of that certification. Done this day, July 25, 2019.

/s/ Jenna Clark Administrative Law Judge

Transmitted electronically to:

Jeffrey Fleetham, Director Registrar of Contractors ----------------------- [1] The hearing record in this matter was held open until July 05, 2019, to allow the parties to provide written closing arguments to the Office of Administrative Hearings. [2] See https://roc.az.gov/contractor-search?Id=a0Yt000000ACNCJEA5. The license is renewed through April 30, 2020. [3] Aloha 15 LLC is also listed as a Related Entity/Subsidiary on the license. [4] Id. [5] Id. [6] Id. [7] See Registrar’s electronic hearing file at Intake Complaint Submittal1.pdf. [8] Id. [9] See Registrar’s electronic hearing file at Notice of Administratively Complete Complaint1.rtf. [10] See Registrar’s electronic hearing file at Rch421 Citation No Pay1.rtf. [11] Id. [12] See Registrar’s electronic hearing file at Lg Citation1.pdf. [13] See Registrar’s electronic hearing file at pages 58-59. [14] See Registrar’s electronic hearing file at pages 60-147. [15] See Registrar’s electronic hearing file at pages 31-35. [16] Id. [17] See Registrar’s electronic hearing file at pages 5-9. [18] See Registrar’s electronic hearing file at page 46. [19] See Respondent Exhibit E. [20] See Respondent Exhibits A-C. Respondent was not made aware of Complainant’s lack of certification until after the contracts were signed. [21] See Respondent Exhibit D. [22] Id. [23] Id. [24] See Respondent Exhibit S. [25] See Complainant Exhibit 5. [26] See Respondent Exhibit G. Respondent’s related fraud allegation against Complainant stems from email correspondence between the parties from September 2016 through November 2016 which establishes that advancements Respondent issued to Complainant were for subcontractor payments on an unrelated project. See Respondent Exhibit F. [27] See Respondent Exhibit S. [28] Id. [29] Id. [30] Id. [31] Id. [32] See Respondent Exhibit G. [33] Id. [34] See Respondent Exhibit H. [35] Id. [36] Id. [37] Id. [38] Id. [39] See Respondent Exhibit I. [40] Id. [41] Id. [42] Id. [43] Id. [44] See Respondent Exhibit R. [45] See Respondent Exhibit I. [46] See Respondent Exhibit R. [47] See Respondent Exhibit I. [48] See Respondent Exhibit J. [49] Id. [50] See Respondent Exhibit S. [51] See Respondent Exhibit J. [52] Id. [53] Id. [54] See Respondent Exhibit K. [55] Id. [56] Id. [57] Id. [58] Id. [59] See Respondent Exhibit L. [60] Id. [61] Id. Funds paid were less a $2,842.49 advancement fee deducted by Respondent. [62] See Respondent Exhibit M. [63] Id. [64] See Respondent Exhibit N. [65] Id. [66] Id. [67] Id. [68] Id. Notably, Complainant was issued lien release reminders by Respondent on October 07, 2016, and October 12, 2016. [69] See Respondent Exhibit N. [70] See Respondent Exhibit O. [71] Id. [72] Id. [73] Id. [74] See Respondent Exhibits O and T. [75] See Complainant Exhibit 4 and 9-13. [76] See Respondent Exhibit Q; see also Complainant Exhibit 8. [77] See Respondent Exhibit P. [78] Id. [79] Id. [80] See Ariz. Rev. Stat. §§ 32-1101 et seq., 32-1154(A), and 41-1092 et seq. [81] See Ariz. Admin. Code R2-19-119. [82] Morris K. Udall, Arizona Law of Evidence § 5 (1960). [83] Black’s Law Dictionary at page 1220 (8th ed. 1999). [84] See Aesthetic Property Maintenance v. Capital Indem. Corp., 183 Ariz. 74, 900 P. 2d 1210 (1995). [85] See Gutierrez v. Industrial Commission of Arizona, 226 Ariz. 395, 249 P.3d 1095 (2011)(citation omitted); State v. McFall, 103 Ariz. 234, 238, 439 P.2d 805, 809 (1968) (“Courts will not place an absurd and unreasonable construction on statutes.”). [86] See Ariz. Rev. Stat. § 1-211(B).

-----------------------

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