ALJDEC - Licensing AMENDED
2023A-05352-NPC-ROC · Registrar of Contractors · 2024-08-08
IN THE OFFICE OF ADMINISTRATIVE HEARINGS
Sonoran Steelworks LLC,
COMPLAINANT
v.
BFL Projects INC
DBA: Respondent Builders
License No. ROC 322998,
RESPONDENT.
No. 2023A-05352-NPC-ROC
No. 2023A-06628-NPC-ROC
AMENDED ADMINISTRATIVE
LAW JUDGE DECISION
HEARING: February 22, 2024 and May 14, 2024 with the record held open until May 31, 2024 for the purpose of receiving post-hearing closing statements.
APPEARANCES: Nat Clarkson, Esq. represented Sonoran Steelworks LLC (Complainant). Chris Baniszewski, Esq. represented BFL Projects INC DBA: Builders
(Respondent).
ADMINISTRATIVE LAW JUDGE: Velva Moses-Thompson
EXHIBITS ADMITTED INTO EVIDENCE: Complainant’s Exhibits 1 through 79. Respondent’s Exhibits 1 through 22.
In light of the Arizona Registrar of Contractor’s rejection of the June 20, 2024 Administrative Law Judge Decision issued in this matter, and the Arizona Registrar of Contractor’s remand to, “determine the appropriate amount, if any, of recoupment the Respondent has established”, the Administrative Law Judges issues this Amended Administrative Law Judge Decision.
FINDINGS OF FACT
1. On or about June 29, 2023, the Arizona Registrar of Contractors (Registrar or ROC) issued a Notice of Hearing setting docket number 2023A-05352-NPC-ROC for hearing on August 8, 2023. The matter was later consolidated with docket number No. 2023A-06628-NPC-ROC. The consolidated matters were continued and a hearing convened on February 22, 2024.
2. On or about February 25, 2020, Complainant entered into a subcontract agreement with Respondent to provide labor and materials for the construction of an apartment building project in exchange for payment in accordance with the terms of the Subcontract. The apartment building was owned by Aspire.
3. The Subcontract included the following provisions:
Respondent may withhold approval of an invoice, but “give prompt notice to the subcontractor with reasons for disapproval pursuant to the Prompt Pay Act.
In the event that the Owner fails to make a payment within the time prescribed in the Prime Contract, the Contractor shall notify the Owner of the Owner’s default ... and advise the Subcontractor in writing of such default.”
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In the event of termination by the Contractor in accordance with this Section, the Contractor shall pay the Subcontractor for all Subcontract Work satisfactorily performed to the date of termination, less the sum of all monies already paid to the Subcontractor and, in the event of termination under Section 16.2(b) or 16.2(c), all costs the Contractor must pay to obtain satisfactory completion of the Subcontract Work by others.
4. The contract between Aspire and Respondent provides, in relevant part, as follows:
Should there be a good faith dispute of an item or items for payment, if those items cannot be resolved within the pay period being presented, those items shall be subtracted from the Application for Payment and the remainder of the Application for Payment shall be paid to Contractor by Owner in the time frames agreed to in this Agreement. Complainant began performing work under the contract as agreed.
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2.2.4 Law Compliance: Contractor will give all notices and comply with all Applicable Laws. If Contractor performs work knowing or having reasonable knowledge that the work is contrary to the Final Plans and Drawings or any Applicable Laws Contractor shall be responsible therefor and shall bear all costs attributable to correction. Work required by this Paragraph shall not be the basis for a claim for an increase in the Contract Sum or Contract Time.
Emphasis in original.
5. On April 17, 2022, Complainant submitted two Pay Applications to Respondent. One was for $168,913.81 and the other was for $126,521.93.
6. On May 25, 2022, Complainant submitted a Pay Application (Pay App) App to Respondent for $21,914.60. On June 10, 2022, sixteen days after receiving the Pay App, Respondent sent a rejection notice stating that the application was “rejected due to over progress & payment on various SOV line items. If you have any questions do not hesitate to get back to me.” Nine minutes later, Complainant responded, “That is a very generic statement. Please provide details.” Respondent never provided any further details justifying the rejection of the May Pay App. Respondent’s response to the May Pay App was not untimely and failed to provide the “reasonable detail” required by the Prompt Pay Act.
7. On June 20, 2022, Complainant submitted a Pay App to Respondent for $17,495.20. Respondent never notified Complainant of any objections to the June Pay App.
8. On July 20, 2022, Complainant revised the June Pay App, increasing the amount due to $98,368.08. Again, Respondent never responded with any objection to the June Pay App.
9. On July 20, 2022, Complainant submitted a Pay App to Respondent for $152,605.58. Respondent never notified Complainant of any objections to the July Pay App. Mr. Ortega stated that Complainant caused the project to be delayed due to insufficient manpower. Mr. Ortega testified that Respondent inquired with Respondent on more than one occasion whether Respondent would have sufficient manpower to perform the under the contract. On July 22, 2022, Mr. Ortega requested that Sonoran confirm an erection crew for August 8th, identifying who Sonoran would be using, how many men and anticipated duration.
10. On August 10, 2022, with Respondent owing Complainant hundreds of thousands of dollars, and without any notice whatsoever that its Pay Apps were objectionable, Complainant served Respondent and Aspire with a notice of intent to suspend work pursuant to Arizona Revised Statutes (A.R.S.) § 32-1185(B).
11. Respondent had a duty to pay Complainant in full by August 15, 2022 in order to keep Complainant from legally being entitled to stop work on the project.
12. On August 20, 2022, Complainant submitted a Pay App to Respondent for $49,489.12. Respondent never notified Complainant of any objections to the August Pay App. Even though Respondent had notified Complainant that Respondent might be hiring a third party to provide supplemental manpower to perform Complainant’s scope of work, Respondent did not ever give Complainant an indication of any chargebacks for which Complainant might be responsible.
13. In the early part of August of 2022, Respondent notified Complainant that it might be hiring a supplemental contractor (primarily Iron Force Contractors, Inc. (“Iron Force”)). However, Respondent never disclosed to Complainant the costs incurred by Iron Force. Iron Force’s timesheets did not include details regarding the type of work that it was completing.
14. On September 20, 2022, Complainant submitted a Pay App to Respondent for $36,817.05. For the first time in many months, Respondent finally gave some feedback on the September Pay App. Respondent stated that four of the five items billed were “missing from Respondent’s Pay App” to Aspire. Yet, all of these items were for work which had already been approved by Respondent and for which Complainant had approved change orders. In any event, rather than pay Complainant for the one line item for which there was no dispute at all, Respondent never paid Complainant for any part of its Pay App.
15. As of February of 2023, Aspire terminated its contract with Respondent. Consequently, Respondent terminated its contract with Complainant.
16. On May 8, 2023, Complainant filed complaint number 2023A-05352 against Respondent with the Registrar. Complainant submitted with the complaint a valid Notice of Intent to Suspend Work For Non Payment that provided, in relevant part, as follows:
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This letter constitutes notice pursuant to A.R.S. 32 § 1185(B) that unless Sonoran Steelworks LLC receives payment in full of past-due pay applications ....... Before August 15, 2022......Sonoran Steelworks LLC will be entitled to additional payment of any costs it incurs from mobilization resulting from shut-down and start-up of operations.
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17. On June 12, 2023, Complainant filed a second written complaint (complaint number 2023A-06628) with the ROC.
18. Through complaint number 2023A-05352 and complaint number 2023A-06628, Complainant alleged that Respondent violated A.R.S. § 32 -1154(A)(10).
19. Complainant alleged that the amount of principal submitted to Respondent that were never properly rejected was $392,986.53. The amount that was not approved and certified through the Prompt Pay Act is the accrued interest which was equal to $69,973.96. See id.
20. Based upon the complaints, the ROC subsequently issued Citations against Respondent’s license alleging that Respondent has violated A.R.S. § 32 -1154(A)(10).
21. Hearings were conducted in the above-entitled matters on February 22, 2024 and May 14, 2024.
22. At hearing, Complainant presented the testimony of Complainant’s owner and general manager, John Swodeck. Respondent presented the testimony of Respondent’s manager, Alex Ortega, Respondent’s Vice President of the Phoenix Commercial Division.
23. At hearing, Mr. Swodeck explained that the two Pay Apps that were submitted to Respondent in April of 2022 were for the balance of all the work that had been completed by Complainant prior to issuing its stop work notice as well as the retention for the work that Complainant had completed. Respondent never notified Complainant of any objections to the April Pay Apps. Mr. Swodeck explained that Respondent improperly held payment for the Pay Apps submitted each month during the time period of April 2022 through September 2022.
24. Mr. Ortega admitted that the scaffolding was used for a variety of subcontractors to perform their work (specifically the EFIS, paint, and window contractors). However, in March 2022, the scaffolding was still up because those subcontractors were not done. It was after the scaffolding came down that Sonoran was able to proceed with work. Mr. Ortega explained that it would not pass along items invoiced by Complainant (and other subcontractors) because Aspire would reject all of one of a Pay App submitted by Respondent if any part of the Pay App was objectionable. Mr. Ortega stated that Complainant cause the project to be delayed due to insufficient manpower. Mr. Ortega testified to the effect that Respondent did not owe money to Complainant because Respondent had to pay other subcontractors to complete Complainant’s scope of work under the contract. In support of its position that it did not owe any money to Complainant, Respondent submitted into the record Exhibits 3 and 4 that show payments totaling $165,000 more than the amount that Respondent would have paid Complainant under the contract. However, it was not clear whether Respondent paid Iron Force for work that was within the Complainant’s scope of work under the contract.
25. Complainant contended its post-hearing written closing argument that any claims to an offset of the invoices or Pay Apps issued to Respondent should not be considered in an ROC hearing. Complainant contended, “In Revive Construction & Cleaning, LLC, a subcontractor filed a complaint against a contractor for failing to adhere to the Act. Shea Connelly Dev. LLC v. Arizona Registrar of Contractors, No. 1 CA-CV 19-0718, 2020 WL 6503616, at ¶ 3 (Ariz. Ct. App. Nov. 3, 2020) (a memorandum decision cited for persuasive value only pursuant to Rule 111(c), Ariz. R. Sup. Ct.). The administrative law judge (the “ALJ”) found that the contractor had not paid certain invoices, that it violated the Act, and that the contractor could not provide any legal authority for the notion that the ROC should consider offsets when assessing the contractor’s violation of the Act. See id. at ¶ 7. The ROC suspended the contractor’s license as a result. See id. On appeal the superior court affirmed the ROC’s decision. See id. At the Court of Appeals, the contractor claimed that the ALJ had abused her discretion “by not considering evidence of an offsetting counterclaim or the equitable defense of recoupment in imposing sanctions.” Id. at ¶ 13. The Court of Appeals’ analysis is very helpful in determining whether the ROC should consider offsets:
An offset is an action or counterclaim a defendant might have brought in a separate action against the plaintiff and recovered a judgment. W. J. Kroeger Co. v. Travelers Indem. Co., 112 Ariz. 285, 287 (1975). “[A] recoupment is a reduction by the defendant of part of the plaintiff's claim because of a right in the defendant arising out of the same transaction.” Morris v. Achen Constr. Co., Inc., 155 Ariz. 507, 510 (App. 1986), rev'd and vacated on other grounds, 155 Ariz. at 512. Neither offset nor recoupment apply in Prompt Pay Act proceedings before the ROC. The purpose of the Prompt Pay Act is to establish a statutory framework for ensuring timely payments from owners and contractors to subcontractors and suppliers, Stonecreek Bldg. Co., Inc. v. Shure, 216 Ariz. 36, 39 ¶ 16 (App. 2007), and proceedings before the ALJ are meant to adjudicate whether payments have been timely made or withheld for valid statutory objections. The proceedings are not venues for comprehensive litigation over contract rights and obligations. See id., 216 Ariz. at 40 ¶ 18 (regardless of obligations under the Prompt Pay Act, civil remedies for breach of contract or tort claims are unaffected). Allowing a contractor to bring a counterclaim or some right outside the Prompt Pay Act against a subcontractor or supplier to reduce the amount owed under certified invoices would inflate a simple prompt payment proceeding before an ALJ to full civil litigation better suited to the superior court. Id. at ¶¶ 13-14.
The matter at hand is no different. Just because Respondent may have a colorable claim in civil court against Complainant, does not mean that the ROC should not find that Respondent violated the Act and that its license should be suspended.”
26. Respondent contended that Shea Connelly Dev. LLC v. Arizona Registrar of Contractors does not apply to the current matters because in that case, the contractor conceded that it did not provide written objections to the contractor’s invoices and that the invoices were due to the contractor. Respondent contended that Complainant submitted incorrect Pay Apps that could not be submitted to Aspire because Aspire would automatically reject the Pay Apps. Respondent argued that the Pay Apps submitted during the months of April 2022 through September 202 never became due because Respondent was not paid by Aspire. Furthermore, Respondent contended that its backcharges exceeded the amount due under the contract.
27. Upon consideration of the evidence presented at hearing, the Administrative Law Judge finds that Complainant submitted a valid stop work notice under A.R.S. 32-1185(B) and was no longer responsible for remaining work. Furthermore, there was insufficient evidence to establish that Complainant provided insufficient manpower for the timely completion of the project.
28. If Complainant would have lacked valid justification for issuing the stop work notice, the evidence presented at hearing still fails to establish that the amounts Respondent paid to its subcontractors exceed the balance owed under the contract.
CONCLUSIONS OF 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. A.A.C. R2-19-119.
“At a hearing on an agency action to suspend, revoke, terminate or modify on its own initiative material conditions of a license or permit, the agency has the burden of persuasion.” A.R.S. § 41-1092.07(G)(2).
A preponderance of the evidence is:
The 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 1373 (10th ed. 2014).
Statutes should be interpreted to provide a fair and sensible result. 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.").
“Statutes shall be liberally construed to effect their objects and to promote justice.” A.R.S. § 1-211(B).
The purpose of the ROC’s licensing statutes is to protect the public from unscrupulous, unqualified, and financially irresponsible contractors. See Aesthetic Property Maintenance v. Capital Indem. Corp., 183 Ariz. 74, 900 P. 2d 1210 (1995).
A.R.S. § 32-1154(A) provides that:
The holder of a license or any person listed on a license pursuant to this chapter shall not commit any of the following acts or omissions: .... 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.
8. 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 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.”
9. Payment for “[s]ervices rendered in connection with the licensee’s operations as a contractor” does not include interest, finance charges, lien charges, or other charges that are based solely on contract terms.
10. A.R.S. § 32-1182(D) provides, in relevant part, as follows:
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A billing or estimate for a progress payment shall be deemed certified and approved fourteen days after the owner receives the billing or estimate, unless before that time the owner or the owner's agent prepares and issues a written statement stating in reasonable detail the owner's reasons for not certifying or approving all or a portion of the billing or estimate.” A.R.S. § 32-1182(D).
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11. A.R.S. § 32-1182(E) provides:
An owner may withhold from a progress payment only an amount that is sufficient to pay the direct costs and expenses the owner reasonably expects to incur to protect the owner from loss for which the contractor is responsible and that results from any reasons set forth in writing pursuant to subsection D of this section.
12. A.R.S. § 32-1183(E) provides, in relevant part, as follows:
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E. If the contractor or subcontractor chooses to withhold the application or certification for all or a portion of a subcontractor's or material supplier's billing or estimates as permitted by subsection C of this section, the contractor or subcontractor must prepare and issue a written statement within fourteen days to the applicable subcontractors or material suppliers stating in reasonable detail the contractor's or subcontractor's reasons for withholding the application or certification from the owner or contractor.
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A.R.S. § 32-1186 provides:
A. The following are against this state's public policy and are void and unenforceable:
1. A provision, covenant, clause or understanding in, collateral to or affecting a construction contract that makes the contract subject to the laws of another state or that requires any litigation arising from the contract to be conducted in another state.
2. A provision, covenant, clause or understanding in, collateral to or affecting a construction contract stating that a party to the contract cannot suspend performance under the contract or terminate the contract if another party to the contract fails to make prompt payments under the contract pursuant to section 32-1181, 32-1182 or 32-1183.
B. Any mediation, arbitration or other dispute resolution proceeding arising from a construction contract for work performed in this state shall be conducted in this state.
Emphasis Added.
13. A.R.S. § 32-1186(A) provides, in relevant part, as follows:
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The billing or estimate for a progress payment shall be submitted on a thirty day billing cycle unless the construction contract and each page of the plans, including bid plans and construction plans, shall specifically identify a different billing cycle in a clear and conspicuous manner as prescribed in subsection B of this section. If any work is performed during a billing cycle, a contractor shall timely submit a billing or estimate to the owner. The preponderance of the evidence shows that Respondent violated A.R.S. § 32-1154(A)(10) as alleged.
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14. Upon review of the evidence at hearing, the Administrative Law Judge (ALJ) concludes that Respondent failed to timely notify Complainant of the reasons that it was withholding payment for the Pay Apps submitted during the months of April through September of 2022, in reasonable detail, as required under A.R.S. § 32-1183(E). Accordingly, the ALJ concludes that the Pay Apps submitted during the months of April through September of 2022 are deemed certified.
15. The preponderance of the evidence shows that Respondent failed to pay the Pay Apps submitted during the months of April through September of 2022 when payment became due. The ROC does not consider offsets when assessing whether a contractor has violated A.R.S. § 32-1154 (A)(10). Even if offsets can be considered in this matter, the preponderance of the evidence shows that Complainant properly exercised its statutory right to stop work and it not responsible to pay for any work that Respondent paid other subcontractors to complete work that was within Complainant’s scope of work.
16. Respondent did not bear its burden to establish the affirmative defense that any monies that it otherwise might have owed Complainant are more than offset by the monies that Respondent paid to others to complete Complainant’s scope of work under the contract. Additionally, Respondent has not established that it lacks the capacity to pay Complainant.
17. Accordingly, the ALJ concludes that Respondent has violated A.R.S. § 32-1154(A)(10) as charged.
18. Based upon Respondent’s violation of the provisions of A.R.S. § 32-1154(A)(10), grounds exist to impose discipline against Respondent’s license.
19. Because A.R.S. § 32-1154(A)(10) only includes a licensee’s failure to pay for materials or services rendered in connection with the licensee’s operations as a contractor, not late fees, interest, or other consequential or contractual damages, the ALJ does not recommend that Respondent be required to pay late fees as a condition of keeping its contractor’s license in good standing.
RECOMMENDed order
Based on the foregoing, it is recommended that the ROC suspend license number 322998 held by BFL Projects INC DBA: Respondent Builders, until it has provided to the ROC, and the ROC has accepted, documents that establish that it has paid Complainant $392,986.53 in certified funds.
It is further recommended that when and if the ROC receives and accepts Respondent’s evidence that it has paid Complainant in certified funds, the ROC may close the complaints in Case No. 2023-05352 and Case No. 2023A-06628.
Pursuant to A.R.S. § 41-1092.08(I), the licensee may accept the Administrative Law Judge Decision by advising the Office of Administrative Hearings in writing not more than ten (10) days after receiving the decision. If the licensee accepts the Administrative Law Judge Decision, the decision shall be certified as the final decision by the Office of Administrative Hearings.
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 forty (40) days from the date of that certification.
Done this day, August 8, 2024.
/s/ Velva Moses-Thompson
Administrative Law Judge
Transmitted by either mail, e-mail, or facsimile to:
Tom Cole, Director
Registrar of Contractors
Nat Clarkson, Esq.
ANDERSON CLARKSON BROWN PLLC
[email redacted]
Chris R. Baniszewski, Esq.
Warner Angle Hallam Jackson & Formanek PLC
[email redacted]
[email redacted]
By: OAH Staff