ALJDEC

99F-1723-ROC · Registrar of Contractors · 1999-05-28

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARINGS: May 14, 1999 at 9:00 a.m. and May 20, 1999 at 9:00 a.m. APPEARANCES: Complainants appeared through their attorney, Patrick J. Davis, Esq.; Respondent appeared through her attorney, Terry Bays Smith, Esq. ADMINISTRATIVE LAW JUDGE: Diane Mihalsky _____________________________________________________________________

The parties presented evidence and testimony and, based upon the entire record, the undersigned makes the following Findings of Fact, Conclusions of Law and Recommended Order. FINDINGS OF FACT Background The Registrar of Contractors issued License No. 118559, Class B, to Respondent Kathy Lynn Martin, an individual doing business as Thix Stix, on November 6, 1996. Respondent did not at the time of the contracting activities at issue possess a C-39 license to install air conditioning and refrigeration or a C-37 license to install plumbing. Although the Registrar’s records shows that Respondent is a sole proprietorship, Respondent operates Thix Stix as a partnership with her husband, Richard Martin. Mrs. Martin takes care of the paperwork, including preparation of proposals, contracts, change orders, lien releases, applications for construction draws, and the like, and Mr. Martin performs and supervises actual construction at jobsites. The Registrar’s records show that, between February 20, 1998 and April 28, 1998, Respondent’s license was suspended because Capitol Indemnity Corporation canceled her bond and that, on May 15, 1999, her license again was suspended for lack of bond. During the time Respondent constructed Complainants’ residence, she possessed a bond in the amount of $5,000.00 issued by Redland Insurance Company. Respondent does not presently and did not at the time of the contract at issue have a policy of workers’ compensation insurance. In April 1998, the parties began negotiating a contract for Respondent to construct Complainants’ approximately 2,800-square-foot Santa Fe style residence based on plans that Complainants had obtained from designer Kenneth E. Preston. The plans showed stem walls, saw-cut control joints at various places in the slab, a flat roof, underground air returns for the HVAC system, and two air handlers, one located in a mechanical closet on the exterior of the residence near the master bathroom. On or about April 26, 1998, Respondent submitted a proposal to Complainants to construct the residence for a total cost of $310,054.00. On or about April 28, 1998, Complainants accepted Respondent’s proposal. The contract price was based on approximately two single-spaced pages of itemized costs that Respondent prepared, including the following: |Monolithic Concrete Slab: 4” slab |$17,850.00 | |o/ 8” ABC | | | | | |HVAC: 2-4 Ton Heat Pump units w/RA | 10,000.00 | |under cement, Programmable | | |Thermostats | | | | | |Rough Carpentry and Labor: Includes| 45,500.00 | |all 2x6 material for ext. walls, | | |Header material, ½” sheeting for | | |Roof and walls, Framing and Roofing | | |for patio cover, all vaga [sic] | | |beams and peeled poles, Labor to | | |frame walls and roof, Labor to stain| | |all doors and windows, all exterior | | |wood sealed, Trim carpentry | |

The contract included $10,000 for “miscellaneous overruns.” Although the contract required that “[a]ny change involving extra cost of labor or materials will be executed only after submission and acceptance of a written change order,” in the event the cost of an item exceeded the contract price, Respondent used additional money from the “overrun” item to pay for the excess amount without obtaining Complainants’ approval through a change order.[1] The contract finally provided that “[y]ou the homeowner (buyer) or tenant have the right to require the contractor to furnish you with a performance bond. . . .” Before beginning construction, Respondent’s husband Mr. Martin recommended that Complainants eliminate the underground air returns shown on the plan for the HVAC system because, according to Mr. Martin, the underground pipes might crack, which would allow water and insects to enter the system. At the time Mr. Martin recommended the modification, no HVAC contractor had been consulted about or accepted responsibility for changes to other parts of the HVAC system and the residence that elimination of the underground air returns would entail. Based on Mr. Martin’s recommendation, Complainants agreed to modify the plans for the HVAC system in the residence to eliminate the underground air returns. No change order commemorated this modification of the contract before the slab was poured. Respondent contacted Larry Rodriguez to obtain a bid to pour the slab. Although Mr. Rodriguez was employed by a masonry firm and has 24 years’ experience in concrete work, he has never possessed a contractor’s license. Mr. Rodriguez told Respondent that he lacked a license. Nonetheless, Respondent subcontracted the job of pouring the slab for Complainants’ residence to Mr. Rodriguez, whom Respondent treated as an independent contractor, not an employee. In June 1998, before Mr. Rodriguez poured the slab, Respondent and Mr. Martin rolled copper tubing for the rough-in plumbing that would be embedded in the slab. Although the copper tubing did not become affixed to the structure when Respondent rolled it out, no licensed plumber examined or approved Respondent’s placement of the tubing before the slab was poured over it. Once the slab was poured, the copper tubing that Respondent had rolled became affixed to the residence. Respondent drew and submitted a plan to Maricopa County to obtain a permit to pour a monolithic slab, which was specified in the contract but not on the plans, because a monolithic pour is less expensive than a stem-wall pour and Complainants were concerned about money. Mr. Rodriguez testified that, as he poured the slab, where the plans called for a saw-cut control joint, he used a tool designed by concrete workers and called a “groover” to make a groove approximately 1½” deep, which would act as a control joint. Mr. Rodriguez testified he then filled the groove with creme so that it was not visible. Neither Mr. Martin nor Respondent supervised Mr. Rodriguez’ pour but, instead, relied on his expertise to ensure compliance with the plans that Mr. Martin had drawn and applicable industry and workmanship standards. Respondent paid Mr. Rodriguez a total of $18,000.00, requested and received a draw from Complainants’ construction lender in the amount of $21,420.00,[2] and apparently pocketed the difference as profit on the concrete work.[3] Mr. Rodriguez signed lien waivers on May 29 and June 22, 1998. On or about June 23, 1998, Respondent signed the lien waiver that accompanied the draw request for the $7,000.00 allocated under the contract for “rough-in plumbing under concrete and top-out” and received the full amount of this payment from Complainants’ construction lender. In one of the first draws, in June or early July 1998, Respondent requested and received from Complainants’ construction lender a payment of $1,250, the full amount allocated in the contract, for liability and risk insurance. After the slab was poured, Mr. Martin’s brother from Illinois and several other family members helped him frame Complainants’ residence on Respondent’s behalf. These family members were not licensed; instead, Respondent considered them to be and treated them as independent contractors. When framing was nearly complete, in August 1998, Respondent contacted Curt Wellendorf of Wellendorf A/C & Heating, to whom the Registrar has issued C-39R License No. 105543, to design an HVAC system for Complainants’ residence to replace the system shown on the plans, which could no longer be built because the slab had been poured without underground air returns.

On or about August 13, 1998, Mr. Wellendorf submitted a proposal to Respondent and Complainants to install an HVAC system consisting of two 4- ton air handlers and two heat pump units, the same number as contemplated under the original plans, at a cost of $10,568. Because the underground air returns had been eliminated, the only way Mr. Wellendorf’s system would work would be to install an air handler in a closet in the master bedroom suite[4] rather than in the mechanical closet on the residence’s exterior, adjacent to the master bathroom, which was shown on the plans. This was the first time that Complainants were told that eliminating the underground air returns would require changes in the location of the mechanical components of the HVAC system. On September 9, 1998, Mr. Martin fell off the roof of the residence, suffered a severe compound fracture of his leg, and was air evacuated to a hospital. Mr. Martin spent the next two weeks in the hospital and, at the time of the hearings, had undergone seven surgeries to treat the fracture and used a cane to walk with difficulty. While Mr. Martin was in the hospital, Respondent brought him information and he remained in charge of construction of Complainants’ residence. In mid-September 1998, Respondent requested and received from Complainants’ construction lender $325 for “permits.” Mr. Martin subsequently used his own meter to tap into the private water system, without obtaining prior approval or paying for any hookup. By mid-September 1998, Mr. Martin’s relatives who were helping with framing only worked at the jobsite on weekends. The only subcontractor working at the jobsite after mid-September was Mr. Wellendorf. Although Complainants were beginning to be concerned about the elimination of underground air returns and did not want an air handler in the master bedroom suite because of the noise it would make, because Mr. Wellendorf told them it was the only way to make the modified system work, on September 27, 1998, Complainant Toni Kramer reluctantly signed a change order accepting Mr. Wellendorf’s proposal. The change order provided for a $245 credit to the contract price because the Mr. Wellendorf’s proposal eliminated a closet bi-pass door.[5] Shortly thereafter, Respondent obtained a construction draw and paid Mr. Wellendorf $3,170 to begin installing the HVAC system. He subsequently installed some duct work into the garage. Neither Mr. Wellendorf nor Respondent submitted plans to or obtained approval from the county for construction of the modified HVAC mechanical and duct system. In late September or early October, Complainants became concerned that, if Respondent did not finish construction of the residence, they would lose the windows, for which Respondent had obtained a $17,495.26 draw to purchase at about the time the slab was poured and which for several months had been in temporary storage, for which cost Respondent also had obtained draws from Complainants’ construction lender. Complainants therefore cut the lock off the temporary storage shed, replaced the lock with a lock to which they had a key, and furnished a copy of the key to Respondent. On or about October 12, 1998, Respondent sent via facsimile to Complainants a nine-page document asking them to sign four change orders and approve a construction draw of $2,219 for “fireplaces that were installed on October 2, 1998 by Wisdom Window and Door.” The change orders concerned replacing the 12’ interior viga poles with 9-10’ poles, to be “fit . . . up [as] tight against the drywall as possible,” to extend the framing around the built-in refrigerator all the way to the ceiling and for the air conditioning duct to run out above the ceiling, to build all doorways that required an exposed beam with 8” by 8” “RS douglas fir material to match the entry beam,” and for the entry patio to be redone without overhangs, which change would be “done against the discretion of the builder and the builder will carry no warranty against water damage that would be created to beam and corbel being exposed with no overhang.” Complainants did not sign any of the change orders or the draw request. Instead, on October 14, 1998, they sent via facsimile to Respondent the following letter: We will not sign the change order for eliminating the overhang on the front patio. The plans clearly do not provide for an overhang and Richard admitted to taking it upon himself to put them up without our approval. The overhangs need to be removed from both the entry patio and the back patio so they are consistent with the plans without change. Furthermore, you cannot pick and choose what you will warrant. You have contracted to build this house and therefore you must warrant the entire house. I assume these problems will be corrected this weekend as you have promised that a crew would finish framing this weekend.

You have also asked us to live with the airhandler in the master bedroom area. Upon further consideration, we are not willing to allow the air-conditioning system to be installed contrary to the plans. The plans call for an air return unit in the mechanical closet. That is where it needs to be. Richard said it would be better to eliminate the underground air returns but did not consider, until it was too late, that there was not enough room for an above ceiling air return system from the mechanical closet. Richard has admitted that this was a mistake. As such, you must figure out how to make the system work according to plans at no additional cost or inconvenience to us. In fact, we are entitled to a credit or refund because we have learned that it is far more expensive to install an underground return air system. We believe Richard recommended against underground return air so that you could make more money. Furthermore, the efficiency of the system cannot be compromised by any modifications now required of the system. A CFM report and duct design we feel is [sic] mandatory. It must be as efficient as if it had been built per plans.

Please let us know by fax how you intend to proceed by the end of the week. This problem needs to be addressed and plans drawn that are approved by Wallendorf [sic] in writing before this project will be allowed to go beyond the framing stage.

32. By October 16, 1998, Respondent and Mr. Martin consulted an attorney, who responded to Complainants’ letter in relevant part as follows: It appears from your letter, you have some significant lingering and unresolved issues related to the construction of your home. [Respondent] would like to respond to the issues presented in your letter . . . , as well as any other issues you have as to quality of workmanship, supervision, oversight or materials regarding this project. I observed two very committed individuals who are quite desirous to make this project work for you and for you to be pleased. I therefore suggested that perhaps we could all come to the table to set out the issues you may have and allow [Respondent] an opportunity to respond.

One thought, assuming you are agreeable, is to come together with your representative or attorney at some date in the near future and we will develop a work out schedule and resolve pending issues. My clients’ primary concern is to complete the construction of your home at the highest level of quality. Therefore, please advise as to how this may be accomplished so that we may be assured that the subcontractors and my clients are paid for their work. Pursuant to the agreed to terms of the contract, draws were to be directed by the lender to my clients in advance of the work to be performed by the contractor and the subcontractors.

Please let me know if the contract terms have been modified, changed or amended so that I may transmit that information to my clients. As of this date, they have not received any notice to the contrary, thus I am assuming my clients may still request that the bank issue draws made payable to the subcontractors. Further that those draws be sent directly to my clients.

33. On October 19, 1998, Respondent requested a draw in the amount of $11,326.69, including $1,700.00 for solar tubes, $1,800.00 for fireplaces, $195.00 for temporary facilities, $170.00 for clean-up, $3,000.00 for supervision, $595.47 for windows, $2,750.00 for carpentry trim labor, and $1,116.22 for “contingencies” for overruns on the cost of the fireplaces and trusses. As to the requested amount of carpentry trim labor, the draw request included the notation: This item will be needed for the installation of the window and door package which will be done on Sat. Oct. 24. We are aware that money is not to be funded prior to work being done but we cannot use our resources for this project and are asking for this in advance. . . . Please let me know when this project will be inspected for this draw so I can met [sic] with the inspector.

This draw request was neither approved nor paid. 34. Complainants then consulted their own attorney, who on October 21, 1998 responded to Respondent’s attorney in relevant part as follows: I have been hired to represent [Complainants] in their dispute with [Respondent]. [Complainants] are amenable to further discussions but [Respondent] is in breach of contract and has exhibited no ability or desire to cure its breach. As such, [Respondent] is directed to immediately cease all construction and expenditures on [Complainants’] home.

Contrary to plans and specifications, [Respondent] failed to install an underground return duct for the HVAC system. Mr. Martin told [Complainants] that the underground return duct was problematic and should be installed above the ceiling instead. But after the foundation was poured and substantial framing was completed, Martin admitted he had made a mistake because he did not anticipate the extent of the modifications to the home and HVAC system necessitated by moving the duct above ground. In fact, the county will not now approve the HVAC system because of the deviation from the previously approved plans. There is not room in the trusses of this Santa Fe style house to accommodate the above ground return duct without substantially modifying drop ceiling heights, vent locations and the location of [an] air handler. In addition, [Respondent’s] subcontractor, Wellendorf A/C & Heating confirms that the return duct should have been installed underground and that the HVAC system called for in the plans can no longer be installed. For example, according to [Respondent] and Wellendorf, one of the air handlers now has to moved from the utility room at the back of the house into sitting room that is part of the master bedroom as a result of the mistake. In addition, the modifications required to even install the HVAC system substantially compromises [sic] the efficiency of the system. In short, the house is not even completely framed and [Respondent] has already caused a substantial diminishment in the home’s value. . . .

[Respondent’s] inability or refusal to follow plans is also evident from the unilateral installation of overhangs above the front entry and back porches even though there are no overhangs called for in the plans and overhangs certainly do not belong on Santa Fe style houses like [Complainants’]. Although [Respondent] offered to remove the overhang above the front entry at no cost, it refused to warrant that work. In any event, the framers installed more material on the overhangs last weekend in preparation for the roofer. Thus, it is apparently that [Respondent] now has no intention of correcting its mistake.

Other instances of plan disregard are [Respondent’s] failure . . . to install control joints in the interior concrete slabs as required by the plans. Notably, the concrete was poured by an unlicensed subcontractor, Larry Rodrigues.

[Respondent] has also breached the contract by misrepresenting the status of work to obtain premature and unearned draws. [Respondent] signed the construction lender’s builder draw information sheet acknowledging [Respondent] “accepts and agrees to the requirements . . .” of the lender including the requirement that “Prior to any construction draws being paid, lender requires that the property be inspected by duly authorized agent of the lender to verify that such construction has been acceptably completed.” A copy of that sheet is enclosed for your reference. Contrary to that agreement, [Respondent] obtained the entire draw for framing and the windows and half the draw for roofing even though the framing is not complete, the windows have not been installed and the roofing has not even begun. [Respondent] obtained these draws by misrepresenting that work was complete. The premature draws, result in the accrual of substantial unnecessary interest. For example, [Respondent] took a draw of over $17,000 for the windows in June even though the home is still not ready for the windows. Thus the windows sit in storage while the interest on the window draw mounts. Incredibly [Respondent] also took the remainder of the draw last month even though window installation has not even started. There are also other instances of improper draws but listing them all at this point in [sic] unnecessary.

In addition to those breaches, [Respondent] has not adequately manned the jobs for over a month. Very little is getting done and crews only work weekends.

If [Respondent] wants the breaches to be excused, it must cure all breaches or provide sufficient plans to rectify breaches, at no cost to [Complainants], and give adequate assurances of its ability to complete by posting a $310,000 performance bond, on or before Friday, October 23, 1998, at 5:00 p.m. As I am sure you are aware, the construction contracts [sic] specifically provides that [Complainants] have the right to require a performance bond under the terms of the construction contract.

Because it is doubtful that [Respondent] can cure it’s [sic] breach or live up to the obligations imposed by the contract, [Complainants] propose an alternative. [Complainants] will not sue if [Respondent] pays back the $50,000 it improperly received for work not performed, defective work and materials not yet purchased; warrants the construction thus far performed; releases all liens; and waives any claims for injuries suffered by Richard Martin when he fell during construction. Otherwise, [Complainants] will file suit and a complaint with the Registrar of Contractors. . . .

(Emphasis added.) On October 21, 1998, the same date as Complainants’ attorney’s letter, Respondent and Mr. Martin packed up their tools, equipment and material, took Respondent’s sign down, and left the jobsite. Respondent did not post a performance bond. No further negotiations occurred between the parties or their attorneys. Respondent never returned to the jobsite. On October 30, 1998, Complainants received notice that the Arizona Health Care Cost Containment System (AHCCCS) had filed a claim against their homeowner’s insurance to recover the cost of treatment for the injuries Mr. Martin suffered when he fell off Complainants’ residence’s roof on September 9, 1998. As of October 22, 1998, when Respondent left the jobsite, she had received the full amounts allocated in the contract for “carpentry, rough labor” ($17,850.00), “rough lumber” ($15,000.00), trusses ($7,500.00), and “roofing” ($3,800.00). Mr. Martin agreed that, when Respondent left the job, framing was incomplete and that no roof had been constructed. By that time, Respondent had received a total of $203,894.53 in disbursements from Complainants’ construction lender. On October 26, 1998, Complainants posted a document entitled “IMPORTANT NOTICE” at the jobsite addressed to “all suppliers, subcontractors, and service providers, notifying them “to cease all product ordering, material, or service delivery” until Complainants authorized such activities because Respondent allegedly “[was] in severe breach of contract [and] packed up and fled the job sight [sic] completely.” On or about October 26, 1998, Complainants hired Hoctor Refrigeration & Heating, Inc. to design and install an HVAC system in the residence for $10,650. The system included three air handlers to allow Complainants to provide for a separate zone in the master bedroom suite. The air handler for that zone is located in the mechanical closet, as the original plans provided, and the third air handler is located where a porch was. The zoning of the Hoctor system is different than in the original plans, however, because originally the house was to have only two air handlers, which would not have allowed the master bedroom suite to be zoned separately from the rest of the house. On November 6, 1998, Respondent purchased an insurance policy from Maryland Casualty Company, insured Respondent from November 6, 1998 to November 6, 1999, for a premium of $1,389.00. Respondent attached a copy of the declarations page of this policy to her response to the Registrar’s Citation and Complaint to support her allegation that, even though she lacked worker’s compensation, which she felt was not required, she had obtained liability insurance for the job. Complainant Joe Kramer has acted as an owner-builder in completing the residence because Complainants could not locate a licensed general contractor who would warrant the work that Respondent started. In completing the residence, Mr. Kramer spent $1,373.66 at Home Depot for additional framing materials,[6] $222.04 for materials to construct the third mechanical closet, $3,750.00 to Diefenderfer Plumbing to complete top- out plumbing, $2,862.15 for spruce logs to use in framing, $225.00 for a septic permit, and $295.00 for a water hookup. At some point in late 1998 or early 1999, large cracks appeared in the slab. Complainants since have retained a tile contractor to lay tile over the slab. The tile contractor charged Complainants $500 more to lay a membrane over the slab to control future damage to the tile that likely otherwise would have been caused by the defective surface but would not warranty his work because of excessive cracking in the slab. Complaints to the Registrar of Contractors On November 30, 1998, Complainants made a complaint against Respondent to the Registrar, alleging that Respondent had violated various subsections of A.R.S. § 32-1154(A) by (a) disregarding the contract and plans by failing to install the underground air returns; (b) disregarding the plans and aiding and abetting an unlicensed contractor by hiring Larry Rodriguez to pour the slab and omitting saw cut or other control joints; (c) failing to carry workers’ compensation or other insurance; (d) contracting beyond the scope of her license by installing plumbing; and (e) abandoning the job by refusing to post a performance bond or to correct or complete construction for which she had received payment. On December 22, 1998, the Registrar’s inspector Mel Purchase performed a jobsite inspection. As a result of Inspector Purchase’s inspection, on December 30, 1998, the Registrar directed Respondent to take appropriate action to correct Complainants’ complaints about the HVAC system, the “major cracking” in the slab, the lack of workers’ compensation, the plumbing work done beyond the scope of her license, and her abandonment of the job. Inspector Purchase noted in the directive that, in his opinion, “neither party wants to finish the house with the other party.” On January 14, 1999, Complainants amended their complaint to allege a claim that Respondent had failed to pay suppliers for materials for which they had received draws from Complainants’ construction lender. Complainants presented no evidence to support this claim at the hearing. On January 18, 1999, Complainants requested a hearing. On February 3, 1999, the Registrar issued a Citation and Complaint, charging Respondent with violation of A.R.S. § 32-1154(A)(1), (4), (7), (23), and (3). Other Expert Opinions Regarding the HVAC System Jeff McKinnon, the Hoctor employee who supervised installation of the three air handlers and the rest of the HVAC system at Complainants’ residence, testified that underground air returns are generally more expensive to install than above-ground air returns, usually costing about $3,500 more for an average 2-unit residence. The advantage of underground air returns is that the average temperature in the summer in an underground air duct is about 75° or 80°, as compared to between 100° and 150° in an attic. Even if attic ducts are insulated, more heat is transferred to overhead air ducts and, therefore, underground air returns offer greater efficiency. Mr. McKinnon also testified that houses presently are constructed using PVC pipes for underground air returns. Although the concrete pipes that were used in the 1960’s and 1970’s were known to crack, which allowed water and insects to enter the HVAC system, for the past twenty years cracks have not been a significant problem. Although Mr. McKinnon did not approve of the system Mr. Wellendorf had started to install, his design of the HVAC system was based on Complainants’ preferences, not the original plan or Mr. Wellendorf’s modification of the plan. In Mr. McKinnon’s opinion, significant design changes, such as installation of overhead air returns not shown on the plans, should be made before framing, although the actual plans cannot be finalized until framing is complete. Mr. Wellendorf agreed that cracks in underground air returns are not a significant problem in modern systems. Although Complainants were upset about the elimination of the underground air returns when he became involved in the project, since the slab was poured already, a system having underground air returns would have been prohibitively expensive and was not an option he could have recommended to Complainants. Kenneth E. Preston, a licensed general contractor and the designer of Complainants’ residence, agreed that there exists a belief in the industry that underground air returns are more efficient but testified that he does not share this belief. Mr. Preston agreed, however, that cracks in underground air returns are no longer a problem under modern industry practices. Regarding the Control Joints (or Lack thereof) in the Slab Inspector Purchase testified he saw no saw cuts or control (or construction) joints of any kind in the slab at Complainants’ residence. He did observe significant cracking that, in his opinion, would cause problems as construction of the residence continued. In Inspector Purchase’s opinion, unlicensed contractor Larry Rodriguez’ work did not comply with minimum workmanship standards. Mr. Preston testified that saw-cut control joints are used in conjunction with a stem wall pour, not on monolithic pour like the one at Complainants’ residence. For a monolithic pour, Mr. Preston recommends use of a channel joint, which is a piece of 18-gauge metal embedded about ½” beneath the surface of the concrete which is not visible from the surface. A channel joint cannot be installed with a tool after a pour. A groover, which Mr. Rodriguez allegedly used to make a control joint, is a toll used for finishing patios, driveways, and other exposed concrete, but not used on interior slabs. Mitigation The Citation and Complaint issued by the Registrar advised Respondent that, if she were found in violation of any contracting law, her prior disciplinary record of final Registrar of Contractors’ orders might be considered in mitigation or aggravation. Accordingly, notice is taken of official records of the Registrar of Contractors, which reveal that, if the Registrar accepts this recommended decision, it will be the only final agency order against Respondent on the Registrar’s current record. Although Respondent’s prior record is deemed to be excellent and should be viewed as a matter in mitigation for any disciplinary penalties to be imposed as a direct result of this case, the violations are serious and, unfortunately, for the most part irremediable at this time. CONCLUSIONS OF LAW In this administrative proceeding, Complainants bear the burden of proof and must establish statutory violations by a preponderance of the evidence. See A.A.C. R2-19-119; see also Culpepper v. State, 187 Ariz. 431, 438, 930 P.2d 508, 515 (App. 1996). “A preponderance of the evidence is such proof as convinces the trier of fact that the contention is more probably true than not.” Morris K. Udall, Arizona Law of Evidence § 5 (1960). A preponderance of the evidence is “evidence which is of greater weight or more convincing than evidence which is offered in opposition to it; that is, evidence which as a whole shows that the fact sought to be proved is more probable than not.” Black’s Law Dictionary at page 1064 (6th ed. 1990). The suspended status of Respondent’s license must be considered in imposing disciplinary sanctions, since little or no motivation otherwise would exist for any contractor to undertake any remedial measures to avoid additional penalties being assessed against a license that is already suspended. The suspended status of Respondent’s license does not preclude Complainants from pursuing their administrative remedies nor preclude the Registrar of Contractors from conducting these disciplinary proceedings, which are authorized by A.R.S. § 32-1154(C). Respondent’s failure to comply with any condition that the Registrar includes in his order entered in this proceeding should result in revocation of Respondent’ s suspended license, which, in turn and in due course, will lead to the initiation of appropriate disciplinary action pursuant to A.R.S. § 32-1154(A)(21) against any separate license that the Registrar may have issued on which either Kathy Lynn Martin or Richard Martin is listed as a “person” as defined in A.R.S. § 32-1101(A)(5). A.A.C. R4-9-103(B) authorizes a general residential contractor to perform “[c]onstruction of all or any part of a residential structure or appurtenance, except for . . . plumbing [and] air conditioning systems . . . .” Respondent signed the lien waiver and received the full contract amount for “rough-in plumbing under concrete and top-out.” No evidence indicates that any licensed plumber was involved in this project before Complainants hired Diefenderfer Plumbing in November 1998 to complete the work Respondent had started, despite not having a plumbing license, for which she has been paid in full. The record therefore establishes that Respondent performed work beyond the scope of her general contractor’s license when she rolled out copper tubing at the jobsite before the slab was poured, in violation of A.R.S. § 32-1154(A)(17).[7] The legislature has defined “contracting” to include activities preparatory to actual construction, including undertakings. See A.R.S. § 32-1101(A)(3) and (7). The record shows that Mr. Martin on Respondent’s behalf undertook to modify the HVAC system to eliminate underground air returns, without the involvement of any air conditioning contractor, based on allegations of dangers that all competent experts agreed at the hearing no longer existed under modern industry practices. In making this recommendation, Respondent also contracted beyond the scope of her license, in violation of A.R.S. § 32-1154(A)(17). The effect of any verbal agreement to modify the original contract that Complainants may have given for this change is obviated because such agreement was based on misinformation that Respondent was not qualified to provide. Cf. Hubbs v. Costello, 22 Ariz. App. 498, 501, 528 P.2d 1257 (1974) (A claim for rescission can be established by “a showing of a representation made by the defendant contracting party, the representation’s falsity, its materiality, and the fact that it was an inducing cause for plaintiffs’ entering into the contract.”). The record therefore establishes that, in eliminating the underground air returns without obtaining Complainants’ informed consent and without advising them that additional modifications to the HVAC system and residence would later be required, Respondent violated A.R.S. § 32-1154(A)(2).[8] The record establishes that Respondent violated A.R.S. § 32-1154(A)(10)[9] in hiring unlicensed contractor Larry Rodiguez to pour the slab. Because he lacks a license, Mr. Rodriguez is not competent to testify regarding how a slab should be poured. The competent expert testimony unanimously established that a tool called a “groover” cannot be used to install control joints in an interior slab and that, therefore, the slab was poured without any effective control joints. Because Respondent is responsible for the work of the employees and subcontractors she hires, regardless of whether they have their own licenses, the evidence establishes that with respect to the excessive cracks in Complainants’ slab, Respondent violated A.R.S. § 32-1154(A)(3)[10] and (7).[11] The legislature has included among the grounds for suspension, revocation, or other disciplinary action against a contractor’s license “[f]ailure to comply with the statutes or rules governing social security, workers’ compensation or unemployment insurance.” A.R.S. § 32-1154(A)(4). The Arizona legislature requires an employer to provide workers’ compensation insurance to its employees, which are defined as follows: H. When an employer procures work to be done for him by a contractor over whose work he retains supervision or control, and such work is part or process in the trade or business of the employer, then such contractors and the persons employed by him, and his subcontractor and persons employed by the subcontractor, are, within the meaning of this section, employees of the original employer. For the purposes of this subsection, “part or process in the trade or business of the employer” means a particular work activity that in the context of an ongoing and integral business process is a regular, ordinary or routine in the operation of the business or is routinely done through the business’ own employees.

. . . .

D. A business that uses the services of an independent contractor may prove the existence of an independent contractor relationship by executing a written agreement that complies with this subsection. The written agreement shall evidence that the business does not have the authority to supervise or control the actual work of the independent contractor or the independent contractor’s employees. . . .

A.R.S. § 23-902 (emphases added); see also A.R.S. § 23-901(5) (defining “employee” to mean “[e]very person in the service of any employer subject to the provisions of this chapter, . . . but not including person whose employment is both . . . [c]asual [and n]ot in the usual course of the trade business or occupation of the employer.”). Consistently with these statutes, the Business Management Guide for Arizona Contractors defines an “employee” for whom a contractor must provide workers’ compensation insurance as someone who “must do the work without being able to hire his or her own employees” and “receives payment for his or her services based on the hour, week, or month.” Id. at 7-61. Under the statutory criteria and the guidelines promulgated by the Registrar, Mr. Martin’s relatives who framed the residence were employees for whom Respondent was required to obtain workers’ compensation insurance. Her failure to do so is a violation of A.R.S. § 32-1154(A)(4). The purpose of the Workers’ Compensation Act “is to compensate an employee for lost earning capacity and to prevent the injured employee and dependents from becoming public charges during the period of disability.” Mail Boxes v. Industrial Comm’n of Arizona, 181 Ariz. 119, 121, 888 P.2d 777, 779 (1995). In contrast, the Registrar “is charged with the overall responsibility of protecting the welfare of the public dealing with persons engaged in the building contracting vocations and afford the public protection against incompetent, inexperienced, unlawful and fraudulent acts of building contractors.” Burrows v. Taylor, 129 Ariz. 212, 214, 630 P.2d 35, 37 (App. 1981). In Arizona, “[a]ll property acquired by either husband or wife during the marriage is the community property of the husband and the wife . . . .” A.R.S. § 25-211. Mr. Martin thus was a partner and co- owner of his wife Respondent’s business, despite the information shown on the Registrar’s records. Under Arizona law, therefore, she was not required to obtain workers’ compensation insurance coverage for him. See Wright v. Demeter, 8 Ariz. App. 65, 68, 442 P.2d 888 (1968) (citing Rockefeller v. Industrial Comm’n, 58 Utah 124, 197 P. 1038 (1921)). The record also establishes, however, that the parties’ contract required Respondent to obtain “liability and risk insurance,” that she requested and obtained a payment from Complainant’s construction lender in June or July 1998 for insurance, but that she did not actually obtain an insurance policy until November 6, 1998, after the contract had been terminated and too late to protect Complainants from possible exposure to liability for the injuries that Mr. Martin suffered in the September 9, 1998 accident. In failing to use the money obtained from the construction lender for insurance to protect Complainants from the risk of personal liability for jobsite accidents that occurred during construction of their residence, Respondent not only breached the contract but also violated A.R.S. § 32- 1154(A)(7). The record establishes that Complainants’ demands that Respondent post a performance bond and return unearned draws were both permitted under the contract and reasonable conditions for allowing Respondent to continue construction of the residence. The undersigned notes that Respondent’s $5,000.00 bond only allowed her to construct an annual gross volume of $150,000.00 or less and that Respondent had received total disbursements of $203,894.53 for Complainants’ residence alone between June and September 1998. Although by October 21, 1998, Respondent may have been reluctant to return to the jobsite because she doubted her and her husband’s ability to complete the contract satisfactorily, the evidence supports Inspector Purchase’s opinion that “neither party wants to finish the house with the other party.” The record therefore does not establish that Respondent abandoned the contract or refused to perform the contract in violation of A.R.S. § 32-1154(A)(1). Because the contract had been terminated and Complainants had chosen to retain other contractors whose abilities they felt more confident about, the record also does not establish that Respondent violated A.R.S. § 32- 1154(A)(23)[12] in failing to comply with the Registrar’s December 30, 1998 directive. The legislature has not empowered either the Office of Administrative Hearings or the Registrar to adjudicate or award money damages, which must be recovered, if at all, through civil court action. The legislature has empowered the Registrar to impose reasonable conditions that may serve to reduce or eliminate any otherwise appropriate disciplinary penalties for proven violations of contracting laws, however, if the performance of corrective or remedial measures on a jobsite is impossible. See Sunpower of Arizona v. Arizona State Registrar of Contractors, 166 Ariz. 437, 440-41, 803 P.2d 430, 433-34 (App. 1990). An award of restitution in an administrative action avoids requiring a Complainant who has sustained the burden of proving contracting law violations to await the outcome of protracted civil litigation to recover even a portion of a demonstrated loss. An award of restitution also allows a licensed contractor to control, at least to some extent, the severity of a disciplinary penalty. Any amounts paid in satisfaction of a condition in the nature of restitution affecting licensing should be credited against any civil judgment ultimately obtained in favor of either party. The record establishes that Respondent was paid in full for many contract items that were not completed and, in some cases, not even begun at the time the parties terminated their contract. The record also established that the contract was terminated for good cause and, therefore, even if Respondent did not obtain the draws through misrepresentation, as Complainants contend, Respondent’s failure to return these monies was unjustified and constitutes violation of A.R.S. § 32-1154(A)(7). As a result of Respondent’s various statutory violations, Complainants are entitled to the following restitution: (a) $3,420.00 for the profit Respondent made on unlicensed contractor Larry Rodriguez (Finding of Fact (“FOF”) 13, 17); (b) $1,250.00 for the insurance policy Respondent failed to purchase before leaving the jobsite (FOF 19, 36, 40); (c) $1,373.66 for additional framing materials (FOF 37, 41); (d) $2,862.15 for spruce logs to be used in framing (FOF 37, 41); (e) $3,750.00 to finish the top-out plumbing (FOF 18, 41); (f) $225.00 for a septic permit (FOF 24, 41); (g) $295.00 for a water hookup (FOF 24, 41); (h) $500.00 to lay tile on the improperly poured and cracked slab (FOF 16, 42); and (i) $3,800.00 for the roof that was paid for and not built (FOF 37). This list is based the evidence presented on matters at issue at the hearing and should not preclude either party from seeking additional amounts in a civil proceeding or, if the Registrar revokes Respondent’s license, to preclude Complainants from offering evidence to substantiate additional damages in an administrative claim to the Residential Contractors’ Recovery Fund under A.R.S. § 32-1131 et seq. The record does not establish that Complainants are entitled to restitution for any monies given to Mr. Wellendorf or spent on the third mechanical closet, although these monies may be claimed as civil damages in an action brought in a judicial forum having appropriate jurisdiction. Mr. Wellendorf was not a party to this proceeding and the record does not establish that his work did not comply with minimum workmanship standards. Moreover, it appears that the HVAC system that Hoctor Refrigeration & Heating, Inc. installed was zoned differently and may have offered some advantages over the system that the original plans described, which Mr. Wellendorf’s system was meant to implement as much as possible. RECOMMENDED ORDER In view of the foregoing, it is recommended that the Registrar revoke Respondent’s Class B license, No. 118559, on the effective date of his decision in this matter, thirty five days after the date of mailing. It is further recommended that if, on or before the effective date of the Registrar’s order, Respondent furnishes proof that she has paid Complainants $17,475.81 as restitution for her proven contracting law violations, that the Registrar allow her to keep her license. If the Registrar allows Respondent to keep her license, it is further recommended that, in addition to the restitution described above, Respondent be required to post an additional surety bond, cash deposit or alternative deposit for a period of 12 months, including future renewal periods, in the amount of $5,000.00, in addition to the surety bond, cash deposit or recovery fund participation required by A.R.S. § 32-1152 and A.A.C. R4-9-112(A). Cash or alternative additional deposits, if utilized, should be returned only after the expiration of an additional two-year period following the 12-month period only if no claims are then pending. If the Registrar allows Respondent to keep her license, it is further recommended that, in addition to the restitution and increased bond amount recommended above, Respondent’s Class B license shall be placed on disciplinary probation for a period of 180 days. Done this day, June 9, 1999.

______________________________________ Diane Mihalsky Administrative Law Judge

Original transmitted by mail this ____ day of June, 1999, to:

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

By ___________________________

----------------------- [1] If overruns occurred after the amount allocated to “Miscellaneous Overruns” was exhausted, presumably change orders would be required to increase the cost of any item, which increase concomitantly would increase the total contract price.

[2] As noted above, the amount set forth on the contract for the monolithic slab with underground air returns was $17,850. The difference between the contract amount and the amount actually charged came from the “Misc. Overruns” budget, or “Contingency,” as the construction lender’s accountings described payment of unallocated monies. Although Respondent offered evidence that underground air returns increase the cost of the slab and a monolithic pour decreases the cost, she did not offer any explanation of why the pour for the monolithic slab, for which the contract provided, cost $3,570 more than the contract amount, even after the underground air returns were eliminated.

[3] General contractors are of course permitted to profit from their subcontractors’ work. This finding of fact is made because Mr. Rodriguez testified that, although Respondent informed him of the job and paid him, he thought his contract was with Complainants and to allow calculation of the proper measure of restitution.

[4] The master bedroom was separated from an area designated the “sitting room” by a half wall. Although the sitting room could be converted into a fourth bedroom or nursery, the original plans call for it to be part of the master bedroom.

[5] This purported “credit” appears to have been mostly illusory because Mr. Wellendorf’s $10,568 bid exceeded the $10,000 amount that the contract allocated to the HVAC system. Presumably, the difference would have come from the amount allocated to “Misc. Overruns.”

[6] Complainants submitted seven receipts from Home Depot and alleged various credits for materials returned. Complainant Joe Kramer credibly testified he had incurred these costs in completing the framing himself with the help of friends and family members.

[7] This statutory subsection includes among the grounds for suspension, revocation, or other disciplinary action against a contractor’s license “[k]nowingly contracting beyond the scope of the license or licenses of the licensee.” Although the Registrar’s Citation and Complaint did not charge a violation of this statutory subsection, Complainants’ original November 30, 1998 complaint specifically alleged a violation and Respondent came to the hearing prepared to defend the complaint.

[8] This statutory subsection includes among the grounds for suspension, revocation, or other disciplinary action against a contractor’s license “[d]eparture from or disregard of plans or specifications . . . in any material respect which is prejudicial to another without consent of the owner . . . .”

[9] This statutory subsection includes among the grounds for suspension, revocation, or other disciplinary action against a contractor’s license “[a]iding and abetting an unlicensed person to evade the provisions of this chapter . . . .” Although the Registrar’s Citation and Complaint also did not charge a violation of this statutory subsection, Complainants’ original November 30, 1998 complaint specifically alleged a violation and Respondent came to the hearing prepared to defend the complaint.

[10] This statutory subsection includes among the grounds for suspension, revocation, or other disciplinary action against a contractor’s license “[v]iolation of any rule adopted by the registrar.” The rule violated here was A.A.C. R4-9-108, which requires that “[a]ll work shall be performed in a professional and workmanlike manner” and that “[a]ll work shall be performed in accordance with any applicable building codes and professional industry standards.”

[11] This statutory subsection includes among the grounds for suspension, revocation, or other disciplinary action against a contractor’s license “[t]he doing of a wrongful or fraudulent act by the licensee as a contractor resulting in another person being substantially injured.”

[12] This statutory subsection includes among the grounds for suspension, revocation, or other disciplinary action against a contractor’s license “[f]ailure to take appropriate corrective action to comply with this chapter or with rules adopted pursuant to this chapter without valid justification within a reasonable period of time after receiving written directive from the registrar.”

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Office of Administrative Hearings 1400 West Washington, Suite 101 Phoenix, Arizona 85007 (602) 542-9826