ALJDEC

96F-2117-ROC-REM · Registrar of Contractors · 1998-04-29

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARING: March 26 and April 27, 1998 APPEARANCES: Walter and Lilie Morris, Complainants, represented themselves on March 26, 1998 and were represented by Jay Graif, Attorney at Law, on April 27, 1998 Kari Rovala dba KDL Industries, Respondent represented himself ADMINISTRATIVE LAW JUDGE: Allen W. Reed _____________________________________________________________________

PRELIMINARY FACTS On March 7, 1997, a Recommended Order was submitted in this case to the Registrar of Contractors (Registrar). The Recommended Order found violations of A.R.S. §32-1154(A)(3)/A.A.C. R4-9-108 workmanship standards, (A)(7) wrongful conduct resulting in substantial injury, and (A)(23) failure to take corrective action. A 14- day suspension followed by 180-day probation were to follow any suspension which would be imposed if certain corrective work was not done. On March 21, 1997, the Registrar adopted the Recommended Order. On April 30, 1997, the Administrative Law Judge recommended denial of the Complainants’ motion for rehearing. The Administrative Law Judge considered a motion for rehearing by the Respondent contingent on the granting of the Complainants’ motion. Since Complainants’ motion had been denied, the Respondent’s motion was also denied. The Respondent disagreed with the Administrative Law Judge’s analysis of, and ruling on, the motion. On May 8, 1997, the Registrar adopted the recommendation denying the motions for rehearing. On April 25, 1997, the Respondent filed an appeal with the Superior Court for Maricopa County (CV 97-07560), and an Amended Complaint on June 12, 1997. The Respondent’s license suspension and probation were stayed by Order of the court. On June 18, 1997, the Registrar entered an Order of Closing, finding that the Respondent had substantially complied with the Order to do corrective work which had issued as a result of the original hearing and Recommended Order. On October 2, 1997, the Order of Judge Linda A. Akers was filed. The Order remanded the case to have the Administrative Law Judge elaborate on his order and rehear the issues on the Respondent’s request for the rehearing. On October 20, 1997, the Registrar remanded the case to the Office of Administrative Hearings and Administrative Law Judge for elaboration, and rehearing, if necessary. A prehearing conference was scheduled for and held on November 18, 1997. The Respondent did not appear because notice of the conference had been sent to an address which was no longer current. A Preliminary Order was issued based on the prehearing conference. The Preliminary Order required the Respondent to submit a request for a conference on rehearing and state what issues were to be heard at the rehearing. The Respondent requested a conference which was held with the parties on January 26, 1998, and resulted in the matter being set for rehearing on March 26, 1998. The issues which were to be reheard concerned the violations of A.R.S. §32- 1154(A)(7), wrongful conduct, with respect to the Complainants’ personal property which had not been satisfactorily accounted for, and the Respondent’s failure to account for the monetary amounts which were, or should have been, credited to the Complainants. FINDINGS OF FACT By way of recapitulation, the Complainants’ home was substantially destroyed by arson on November 30, 1994. On December 1, 1994, the Complainants entered a Contract and Authorization to Perform Work with the Respondent which provided in pertinent part that the Respondent would: Secure the property; Restore salvageable personal items including cleaning of smoke and water damage from clothes and restoration of other contents, warehousing and delivery upon reconstruction of the home; Assist owners with inventory; Prepare scope of work outline and costs; Reconstruct property. An arson investigation was conducted and the contents were removed from the home. Items which were not salvageable were discarded. Items which sustained partial fire, smoke and water damage but could be salvaged were “packed out”. Clothes were bagged and other items were boxed. The items were inventoried by Stan Stoeber (Stoeber), and left at the house. They were later moved to a storage facility in February, 1995, and returned to the Complainants in April 1996. Four large items which had a potential for salvage were a washer-dryer, refrigerator, armoire and dresser. One of the smaller items which was important to the Complainants and which was apparently not damaged was a set of baseball cards (inventoried on page 110 of the Inventory Work Sheet). An electric edger was noted after the fire but not returned. Some dinner china was broken when returned to the Complainants. Subsequently, all of the contents were declared a total loss for insurance purposes. The Respondent made no attempt to restore any damaged clothes because the cost of such restoration when added to replacement costs would have exceeded policy limits. The majority of clothes were returned to the Complainants. There is some evidence of a theft of some of the Complainants’ property while it was stored at the house prior to reconstruction. One of the items which wound up missing was the Complainants’ set of 1957 baseball cards which had been inventoried and possibly stored in the Complainants’ shed for which the Respondent had the key. The original Proposal and Contract dated February 19, 1995, had a cost term of $70,776.93 for reconstruction of the home. This figure included 10% overhead, 10% profit plus permits and taxes. A supplement (Supplement 1) to the above contract was signed by the Complainants on February 20, 1995. This was in the amount of $14,268.87 for certain additions to the home. Another supplement (Supplement 2) was signed solely by Lilie Morris on behalf of the Complainants on June 8, 1995. This supplement was in the amount of $6,498.00 plus any amounts paid by insurance. The $6,498.00 was to be paid to the Respondent from insurance proceeds to the Complainants for personal property losses. The total price term of the original contract and supplements is $91,544.00. The itemized cost for the reconstruction under the contract and supplements comes to $110,927.27 if using the April 19, 1995, supplement for fire damage repair amount of $25,881.47 (Exhibit 12), or $105,069.46 if using the June 1, 1995, supplement for fire damage repair amount of $20,023.66 (Exhibit Remand C). The above referenced supplement for fire damage repair (Exhibit Remand C), was not specifically presented to the Complainants by the Respondent. According to the Respondent, it was part of Supplement 2 to the contract which only showed the $6,498.00 figure. If this testimony is accepted, this leaves $13,524.66 ($20,023.66 minus $6,498.00) as the part of Supplement 2 which was to paid by insurance. It is clear that this difference accounts for the disparity of the price term under the contract-supplements and the itemized cost of reconstruction. This amount was not specifically disclosed to the Complainants prior to having Mrs. Morris sign Supplement 2 . Two checks from the insurance company for repair of the home amount to $87,846.38 ($59,423.65 and $28,442.73). The additional payment of $14,268.00 by the Complainants for Supplement 1, and the Supplement 2 amount of $6,498.00, which was to be paid from personal property reimbursement, would bring the total paid for construction costs to $108,612.38. The evidence did not establish any separate payment on the amount set forth in Supplement 2. The parties did not dispute the evidence that the Complainants paid the $14,268.00 for Supplement 1. An exact final amount paid for construction is not ascertained, although the evidence shows payment of approximately $102,114.38 plus an additional $2,019.00 which was acknowledged by the Respondent and $1,450.00 evidenced by a check from the Complainants to the Respondent for a total of $105,583.38, paid toward construction. The endorsement of the Complainants’ signatures was forged on a check which had been issued by the Complainants’ insurance company. The check was made out to the Complainants, the Respondent and the savings and loan which held the mortgage (Lender), as joint payees in the amount of $59,423.65. The proceeds of the check were deposited with the savings and loan. A cashier’s check in the amount of $12,998.00 from the Lender, and made out to the Complainant, Walter E. Morris (Morris), was sent to the Respondent who testified he gave it to the Complainants. Morris testified he did not recall receiving the check. CONCLUSIONS OF LAW The issue on rehearing is whether the Respondent is in violation of A.R.S. §32-1154(A)(7) wrongful or fraudulent conduct, for failing to account for all of the Complainants’ personal property and for exceeding the amount listed for construction costs in the contract and supplements as well as failing to account for those for costs. The Complainants testified credibly that they informed the Respondent that they wanted certain damaged items returned even if damaged, and did not authorize the Respondent to dispose of them. Among the items which were not returned, were an armoire, refrigerator and a dresser. The Contract and Authorization to Perform Work, obligated the Respondent to secure the property, restore salvageable personal items and assist the owners with inventory. The evidence showed that the above items were in the possession or under the control of the Respondent and that although damaged, they were not necessarily a complete loss so as to be worthless. The Respondent’s argument that the contents of the home were declared a total loss does not relieve the Respondent of his obligations to the Complainants under the contract. In addition, the evidence showed that the baseball cards and the edger were apparently not damaged by the fire but somehow disappeared sometime after the Respondent took custody and became responsible for their safekeeping. The possible theft does not relieve the Respondent of the responsibility to “secure the property”. The Respondent had the key to the shed and the house where property was being kept. Some of the property was removed to a storage facility by the Respondent and kept there for over a year. The Respondent’s testimony that the Complainants told him they did not want the items at issue returned, is not accepted as credible. It is concluded that the failure to return certain items of personal property without justification or satisfactory explanation constitutes wrongful conduct within the meaning of the statute. There was no evidence that the Respondent converted these items for personal gain. The value of the items was not satisfactorily shown and no reasonable restitution can be determined. The Respondent’s explanation for not cleaning the clothes is accepted as reasonable and does not constitute evidence adverse to the Respondent. The clothes which were allegedly missing are not considered adverse evidence for the purpose of the conclusion on this issue. The breakage of any china is not shown to have been careless or otherwise of a nature to constitute wrongful conduct. The forgery of the Complainants’ signatures is not shown to have been done or caused by the Respondent and no injury was shown from the forgery since the proceeds of the check were properly placed with the Lender. The cashier’s check in the amount of $12,998.00 to Morris which he does not recall, does not constitute evidence of any wrongful act by the Respondent. It is incumbent on the Complainants to prove by competent evidence that he did not receive the check and that the check was somehow converted by the Respondent for personal gain. The mere failure to recollect what happened to the check, and presenting that as evidence against the Respondent casts doubt on some of the Complainants’ allegations regarding the financial aspects of this case. The Complainants have some responsibility in their own self interest, to be aware of the financial arrangements surrounding the disbursement of the insurance proceeds. It is somewhat bewildering that the Complainants would actually not know what happened to a $13,000.00 cashier’s check almost three years after it was issued and a year and a half after this matter initially came on for hearing. The findings of fact in paragraphs 10 and 11, show that the itemized cost for reconstruction exceeded the stated costs under the contract-supplements by between $13,500.00 to $14,000.00. The $500.00 difference between the total of itemized costs (Findings of Fact, paragraph 11), and the amounts paid for construction (Findings of Fact, paragraph 12), were not explained. Notwithstanding the fact that the original itemized cost of the supplement for fire damage repair was prepared by the Respondent in April, 1995, and a copy is part of Exhibit 12, the credible evidence shows the Respondent did not specifically disclose this additional cost to the Complainants prior to obtaining the signature of Mrs. Morris on Supplement 2. It would seem that total itemized costs could have been readily stated on Supplement 2 rather than using such nebulous language as “amounts to be paid by insurance” which apparently refers to the approximately $13, 500.00 difference between total itemized cost and the $6,489.00 figure. An insurance check in the amount of $28,422.73 was issued on June 14, 1995 (six days after the signing of Supplement 2), and it is presumed this was the source of payment. The Complainants did not show that the work done under the supplement for fire damage repair (Exhibit Remand C) was unnecessary, not desired or otherwise foisted on them by the Respondent for purely personal gain. Nonetheless, the failure to properly inform the Complainants and account for the “amounts to be paid by insurance” prior to having Mrs. Morris sign Supplement 2, has attributes of a potential for fraud. It is concluded that that this course of conduct constitutes wrongful conduct under the statute. The substantial injury is that the Complainants paid for work, without having been informed of the specific cost and without having agreed to the cost. The issue is not whether the work was satisfactorily done or the cost reasonable (although the Respondent’s 10% profit and 10% overhead is highly questionable under these facts). Although fraud is not proven, the potential for fraud is evident. The injury is sustained by depriving the Complainants of the information necessary to make an informed choice regarding cost of work and application of their insurance proceeds. The Complainants’ argument that they are entitled to the difference between original contract and supplements which amount to $91,544.00 and the higher itemized reconstruction costs of $105,069.46 ($105,583.38 if the payment amount is used), is not accepted. This is because there is no showing that the reconstruction costs were inappropriate or that the Complainants were not benefited or did not want the items or work covered by the additional cost. Absent such a showing it is apparent that the Complainants received the benefit of the supplement and the equitable doctrine of quantum meruit would apply. However, under the facts of the case, it should not apply to the overhead ($1,568.00) and profit ($1,724.80) charged by the Respondent as part of Exhibit Remand C. RECOMMENDED ORDER In view of the foregoing it is recommended, commencing on the effective date of the Order entered in this matter, that the Class B license of the Respondent shall be suspended until the Registrar receives written proof that the Respondent has paid or tendered payment in the amount of Three Thousand Two Hundred and Ninety Three ($3,293.00) Dollars as restitution to the Complainants; It is further recommended that if the Respondent pays or tenders payment to the Complainants as required by the Order entered in this matter, then the aforementioned license suspension shall not take place; It is further recommended that upon the completion of the license suspension, if any, or upon the effective date of the Order entered in this matter, whichever is later, . . . . . . . . . . . . . . . that the Respondent’s Class B license be placed on probation for a period of One Hundred and Twenty (120) days. Done this day, May 13, 1998.

_______________________________ ALLEN W. REED Administrative Law Judge

Original transmitted by mail this ____ day of May, 1998, to:

Mr. Michael P. Goldwater, Director Registrar of Contractors ATTN: Joyce Armijo 800 West Washington, 6th Floor Phoenix, AZ 85007

By _______________________________

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Office of Administrative Hearings 1700 West Washington, Suite 602 Phoenix, Arizona 85007 (602) 542-9826