ALJDEC

99F-2131-ROC · Registrar of Contractors · 1999-07-29

IN THE OFFICE OF ADMINISTRATIVE HEARINGS

HEARINGS: June 23, 1999 at 9:00 a.m. and July 9, 1999, at 9:00 a.m. APPEARANCES: Complainant appeared through its attorney, Roger C. Decker, Esq.; Respondent appeared through its attorney, David L. O’Daniel, Esq. ADMINISTRATIVE LAW JUDGE: Diane Mihalsky _____________________________________________________________________ The parties presented evidence in these consolidated matters on the factual issue of whether Complainant damaged windows at a residence that Respondent had hired it to clean and argument on the legal issue of whether, if it did, Respondent violated A.R.S. § 32-1154(A) by withholding payment due under three contracts it subsequently made with Complainant, including a contract made under its commercial license, to recoup the entire amount of the alleged monetary loss. Based on the entire record, including the legal memoranda that the parties submitted after the second hearing, the undersigned makes the following Findings of Fact, Conclusions of Law, and Recommended Order. FINDINGS OF FACT The Registrar of Contractors issued general residential contractor’s License No. 060957, Class B, to Respondent, a corporation, on August 30, 1984. The Registrar issued general small commercial contractor’s License No. 075833, Class B-02, to Respondent on February 24, 1988. Complainant, a corporation, is a cleaning business that its owner, Joseph Dearaujo, started in Chicago in 1981. Complainant first started performing cleanup of construction sites for licensed contractors in 1989, when it started working for Continental Homes. The Van Der Rest Job Respondent contracted to build the Van Der Rest residence sometime in 1996. Its subcontractor installed the windows and numerous French doors in the residence at the completion of framing. Shipping stickers were affixed to the exterior of the windows; the manufacturer’s stickers were affixed to the interior of the windows. Photographs taken in March 1997 show that the windows were covered in plastic on the exterior to protect them from stucco application and masked on the interior and exterior to protect them from other trades’ work in construction of the residence. On or about August 12, 1997, the parties entered into their first contract, under which Complainant would clean the Van Der Rest residence in consideration for Respondent’s payment of $2,085.00. The parties’ written contract mostly consisted of a 2-page form “construction subcontract” that Respondent provided. The provisions in the form contract at issue are as follows: 5. Should Subcontractor [Complainant] fail employ sufficient competent personnel to complete the work in the given time, the Contractor [Respondent] may, after giving twenty-four (24) hours notice, by telephone, facsimile, letter or telegram mailed to the last know address of Subcontractor, employ help to complete the work and charge the same to Subcontractor’s account and/or charge Subcontractor any penalties due to its failure to complete work . . . . If the cost of completing said work exceeds the contract price, then the Subcontractor shall be held liable for such additional costs together with an amount equal in Paragraph 4. If the cost of completing said work exceeds the contract price, then the Subcontractor shall be held liable for such additional costs together with an amount equal to fifteen percent (15%) of Contractor’s total cost of completing such work as well as interest thereon at the rate of eighteen percent (18%) per annum, until paid. . . . . . . . 11. INDEMNIFICATION: Subcontractor shall indemnify, defend and save harmless Contractor and Owner from and against any and all claims, debts, demands, damages (including direct, liquidated, consequential, incidental or other damages), judgments, awards, losses, liabilities, interest, attorney’s fees, costs and expenses of whatsoever kind or nature at any time arising out of any failure of Subcontractor to perform any of the terms and conditions of his subcontract or which are in any manner directly or indirectly caused or occasioned by or contributed to, or claimed to be caused or occasioned by, or contributed to, by any act, omission, fault or negligence, whether active or passive, of Subcontractor or anyone acting under its direction or control, or on its behalf in connection with or incidental to the work, even though the same may have resulted from the joint, concurring or contributory act, omission, fault or negligence, whether active or passive, of Subcontractor or anyone acting under its direction or control, or on its behalf in passive [sic], of Contractor, Owner or any other person, unless the same is caused by the sole negligence or willful misconduct of Contractor, or Contractor’s agents, servants or independent contractors who are directly resonsible to Contractor. Without limiting the generality of the foregoing, the same shall include injury or death to any person or persons, including agents and employees of Owner, Contractor and Subcontractor, and damage to any property, regardless of location, including property of Owner, Contractor and Subcontractor, and shall extend to any similar obligations of Contractor undertaken by it under the General Contract with respect to the work hereunder. Subcontractor will, on request and its expense defend any action, suit or proceedings arising hereunder and shall reimburse and pay Contractor for any loss, cost, damage or expense (including legal fees) suffered by it hereunder. . . . .

23. In the event Subcontractor is paid entirely and it appears that his work needs adjustment or further work to be entirely satisfactory, Subcontractor herein agrees to return at once upon twenty-four hour notice and repair, correct or alter the same to Contractor’s satisfaction, including all costs incidental thereof, without cost to Contractor. Upon failure to do so, Contractor may engage other help and Subcontractor shall be liable therefor. Subcontractor shall and does hereby, warrant and guarantee the work and materials covered by this Agreement, and agrees to make good at his own expense, an [sic] defect in materials or workmanship which may occur or develop within a period of two years from the date of completion and acceptance of the work by Owner. Should Subcontractor refuse or neglect to proceed at once with the correction of rejected or defective materials and/or workmanship after receiving notice to do so, it is agreed Contractor shall have the right and power to have the defects remedies or changes made at the expense of the Subcontractor and Subcontractor agrees to pay Contractor in remedying such defects and/or making such changes, together with an amount equal to fifteen percent (15%) of Contractor’s total cost of completing such work, and a sum for reasonable attorney’s fees, (whether or not attorney’s fees are awarded by a court of law), as well as interest thereon at the rate of eighteen percent (18%) per annum, until paid.

[Emphasis added.] Complainant first performed cleanup of the Van Der Rest residence jobsite in late August 1997. On September 3, 1997, Respondent’s vice president, Ken Frank, conducted a walk-through inspection of the Van Der Rest residence with its owners and prepared an 8-page punch list. The items on the punch list referencing windows were to “clean all windows” on the exterior of the residence, to “clean windows & tracks” in the living room and dining room, and to “replace window pane on 2nd panel in right door” in the entry. According to Mr. Frank, the window in the entry required replacement because it had a long scratch that was visible from 15’ away in normal daylight. Members of the construction industry follow the so-called “15’ rule” to determine whether a scratched window requires replacement, which means that, if a scratch is visible from 15’ away in normal daylight, the window should be replaced. The only other scratch that violated the 15’ rule that Mr. Frank noted in the walk-through inspection, which was not mentioned on the punch list, was a scratch in the kitchen that had been caused by the drywaller in on a kitchen window. Although Mr. Frank testified other scratches were visible in the walk-through inspection, they did not violate the 15’ rule. On September 4 or 5, 1997, Complainant’s cleaning crew returned to the Van Der Rest residence to clean the windows. Ramona Campos, a member of Complainant’s crew, testified in Spanish at the hearing, with another of Complainant’s witnesses acting as an interpreter, that she noticed other scratches on windows, pointed them out to Mr. Dearaujo, and was instructed by Respondent’s project superintendent Blair Denniston to continue cleaning. Ms. Campos and Mr. Dearaujo both testified that razor blades were not used to clean windows at the Van Der Rest residence, that many other trades were working in the residence when they cleaned it, and that the windows were not covered in plastic or otherwise protected either time they cleaned the residence. If the sun has dried out the stickers, razor blades frequently must be used to remove them. Razor blades are used only as a last resort, however. Blair Denniston testified at the hearing that Respondent’s crews and subcontractors took a great deal of care to protect the windows. According to Mr. Denniston, the only scratch to which Complainant called his attention on the second cleaning was the one on the window in the kitchen.

The Van Der Rests moved into the residence on September 7 or 9, 1997. Mrs. Gina Van Der Rest testified telephonically at the hearing that she first noticed scratches on the windows in addition to those noted in the walk-through inspection after she moved in. These scratches violated the 15’ rule and were not acceptable to her and she required Respondent to replace 14 French doors and 3 or 4 windows. The windows at issue are not true multi-light windows but, instead, are comprised of a two panes of glass enclosing argon gas, with metal dividers inside and wooden strips or tape outside to simulate multiple panes. Because separating the two panes would allow the argon gas to escape and compromise the energy efficiency of the windows, a severe scratch on one of the simulated panes of a window requires replacement of the whole window. In addition, the windows are constructed of tempered glass, which is stronger than regular glass but also softer, which means it scratches more easily. Over the next several months, the parties discussed the damage to the windows. Various personnel who worked for Respondent testified that Complainant’s owner Mr. Dearaujo admitted that he had caused the damage to the windows; Mr. Dearaujo denied ever making any such admission. Either Mr. Dearaujo or someone on Respondent’s behalf eventually made a claim to Complainant’s insurance company, which, according to Mr. Dearaujo, denied the claim because Complainant’s policy excluded damage to windows. Kelly Ely, a salesperson for Western Insulated Glass, testified that the scratches in the windows at the Van Der Rest residence were deep enough that a person’s fingernail would fall into the scratch, which means the scratches were too deep to buff out. Rob Thomaselli, the owner of Mirror Works, which manufactures custom windows, also testified that the scratches were too deep to buff out. According to Mr. Thomaselli, in his opinion the scratches had been caused by razor blades, based on the depth of the scratches and the swiping motion that was apparent in their shape. The Other Jobs On September 4, 1997, Complainant agreed to perform cleaning work at the Ast residence in consideration for Respondent’s payment of $800.00. Shortly thereafter, Complainant fully performed this contract. On October 22, 1997, Respondent agreed to perform cleaning work at the Abram residence in consideration for Respondent’s payment of $2,000.00. On or about November 5, 1997, Complainant fully performed this contract. On September 21, 1998, Complainant agreed to perform cleaning work at the Jewelry by S.A. Gauthier jobsite, a commercial project, in consideration for Respondent’s payment of $2,460.00. Respondent subsequently approved a change order increasing the cost of this contract $380.00 and, on or about September 28, 1998, Complainant fully performed this contract. Respondent did not pay Complainant anything for the Van Der Rest, Ast, Abram, or Jewelry by Gauthier jobs, although the parties entered a few additional contracts subsequent to these jobs, which contracts Complainant performed and was paid for and which were not at issue at the hearing. The Parties’ Claims and Accountings On or about October 30, 1998, Respondent ordered windows to replace the windows that had been damaged at the Van Der Rest residence. On January 2, 1999, Complainant made complaints to the Registrar against Respondent’s residential license for its failure to pay for the Van Der Rest, Ast, and Abram jobs and against Respondent’s commercial license for the failure to pay for the Jewelry by Gauthier job, which complaints were designated, respectively, Nos. M99-0879 and 99-2131. These two complaints have been consolidated for purposes of both the hearing and the recommended decision. On or about February 28, 1999, Respondent received from Western Insulated Glass an invoice for the damaged windows, which totaled $6,555.00. The kitchen window, which had been damaged by the drywall installer, cost $79.06, making the damages that Respondent attributed to Complainant $6,476.37. On or about March 1, 1999, the Registrar issued a Citation and Complaint in Case No. 99-2131, which charged Respondent with violations of A.R.S. § 32-1154(A)(7), (11), and (18). On or about April 14, 1999, the Registrar issued a Citation and Complaint in Case No. M99-0873, which charged Respondent with violations of A.R.S. § 32-1154(A)(7) and (11). Respondent’s answer to both Citations and Complaints stated that Complainant owed Respondent $3,827.43, including the $6,555.43 allegedly owed for the damaged windows at the Van Der Rest residence (apparently including the damage caused by the drywall installer), $325.00 for repainting, and $1,032.00 for “15% Overhead and Profit,” but not including any amounts Respondent owed Complainant for the Ast or Jewelry by Gauthier jobs. This damage calculation was amended at the second hearing in this matter to exclude the cost of the window the drywall installer damaged and to include an additional charge to Complainant for $662.19 to “replace french door and window unit,” credits to Complainant for the amounts of the Ast and Jewelry by Gauthier contracts, and $1,070.78 for “15% of Contractor’s Cost – see par. 23 of Construction Subcontract.” Under Respondent’s amended calculation, Complainant still owed it $454.34. No evidence was presented at the hearing to substantiate the additional charge of $662.19 or the basis of Respondent’s claimed costs or overhead and profits. On June 22, 1999, Complainant’s owner Mr. Dearaujo submitted to a polygraph examination administered by Manuel F. Valenzuela. Based on his examination, Mr. Valenzuela testified at the hearing that he believed Mr. Dearaujo was telling the truth when he testified that he told Respondent’s project superintendent for construction of the Van Der Rest residence that the windows were damaged prior to Complainant performing cleanup at the job site and when he testified that he did not damage any windows while he was cleaning that residence. Mr. Valenzuela also translated the Complainant’s employee Ms. Campos hearing testimony, as noted above in Finding of Fact No. 9. The Citations and Complaints issued by the Registrar advised Respondent that, if it were found in violation of any contracting law, its prior disciplinary record of final Registrar of Contractors’ orders might be considered in mitigation or aggravation. Accordingly, administrative 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. The Registrar’s records also reveal that Respondent’s commercial License No. 075833, Class B-02, was suspended for lack of bond between November 27, 1997 and March 1, 1999, during which time it apparently performed the Jewelry by Gauthier contract. CONCLUSIONS OF LAW In this administrative proceeding, a complainant normally bears 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). Respondent concedes that it entered into contracts with Complainant for cleanup on the Van Der Rest, Ast, Abram, and Jewelry by Gauthier jobs for the amounts alleged, however, and that those amounts remain unpaid. A claim of set-off or recoupment against monies that otherwise would be owed is an affirmative defense for which the party asserting the right to a set-off bears the burden to prove by the same evidentiary standard as the claim. See, e.g., Consolidated Roofing & Supply v. Grimm, 140 Ariz. 452, 457, 682 P.2d 457, 462 (Ct. App. 1984). “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). In Arizona, “[r]esults of polygraph examinations will not be admissible as evidence in this state absent stipulation.” In the Matter of Swartz, 141 Ariz. 266, 276, 686 P.2d 1236, 1246 (1984) (citing State v. Valdez, 91 Ariz. 274, 371 P.2d 894 (1962)). No stipulation was entered here and, in fact, Respondent objected to admission of the results of polygraph examination and to Mr. Valenzuela’s testimony. Moreover, the polygraph examination was administered nearly 22 months after Complainant cleaned the Van Der Rest residence and, as pointed out on cross-examination, asked Mr. Dearaujo whether he personally, as opposed to his crew, had damaged “the windows,” as opposed to “any windows,” which was somewhat ambiguous. The results of the polygraph examination therefore is given little or no consideration in this recommended decision. See id. Although it is a close question, a preponderance of the evidence establishes that Complainant more likely than not damaged the windows, with the exception of the one in the kitchen, at the Van Der Rest residence, that the reasonable cost of replacing these windows was $6,476.37, and that, therefore, Respondent was justified in withholding the $2,085.00 that it otherwise would have owed Complainant for this job. The evidence also establishes that Respondent induced Complainant to enter into the contracts for the Ast, Abram, and Jewelry by Gauthier jobs by making a promise of payments that Respondent actually knew likely would never be made. Respondent’s own evidence shows that it did not bother to ascertain that the windows definitely would need to be replaced until after all three jobs had been performed and that it did not inform Complainant of the actual cost of the replacement windows until it answered the Citations and Complaints that the Registrar issued after Complainant made complaints to the Registrar for nonpayment. The Registrar “is charged with the overall responsibility of protecting the welfare of the public dealing with persons engaged in the building vocations and afford the public protection against incompetent, inexperienced, unlawful and fraudulent acts of building contractors.” Burrows v. Taylor, 129 Ariz. 212, 213, 630 P.2d 35, (Ct. App. 1981) (citation omitted). The purpose of the statutes creating the Registrar’s office would not be served by allowing Respondent an offset of the cost of replacing windows at the Van Der Rest residence against the amounts of the other three contracts under these circumstances. Nor does the parties’ contract provide notice to Complainant of the potential offset. Paragraph 5 of the contract only makes Complainant liable for a failure to employ sufficient personnel to perform the contract, which did not occur. As Complainant’s post-hearing memorandum notes, Paragraph 11 of the contract might make Complainant liable for damage to the windows and might allow an offset, but Paragraph 23 requires not only that Complainant be paid but that it receive notice of Respondent’s claim and an opportunity to remedy the alleged deficiency on which the claim is based. Respondent provided no such payment, notice, or opportunity here and, in fact, Respondent did not inform Complainant of the liquidated amount of its claim until after Complainant had fully performed the subsequent three contracts and had made a complaint to the Registrar. Respondent also is not allowed an offset or recoupment under the authorities cited in the parties’ post-hearing memoranda. All offsets allowed in those authorities involved counterclaims or defenses to a claim of nonpayment that arose in the same transaction. See Occidental Chemical Co. v. Connor, 124 Ariz. 341, 345, 604 P.2d 605, 609 (1979); Morris v. Achen Const. Co., Inc., 155 Ariz. 507, 510, 747 P.2d 1206, 1209 (Ct. App. 1986); Business Financial Services v. Butler & Booth Development Co., 147 Ariz. 510, 512, 711 P.2d 649, 651 (Ct. App. 1985); Warren, Little & Lund, Inc. v. Max J. Kuney Co., 115 Wash 2d 211, 796 P.2d 1263, 1264 (1990). As Respondent’s post-hearing memorandum notes, a “right of setoff . . . is not absolute.” See Nutter v. Occidental Petroleum Land and Development Corp., 117 Ariz. 458, 460, 573 P.2d 532, 534 (Ct. App. 1977). Although Respondent could have asserted a complaint or counterclaim against Complainant in court, Respondent did not and could not assert a counterclaim against Complainant in this forum because Complainant is not a licensed contractor. Instead, Complainant is a member of the general public whom the statutes creating the office of the Registrar were enacted to protect. Respondent therefore seeks a recoupment, which in Arizona 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, 155 Ariz. at 510, 747 P.2d at 1209 (emphasis added). The amounts owed under the Ast, Abram, and Jewelry by Gauthier contracts arose in transactions different from the Van Der Rest contract and, therefore, damage to the Van Der Rest residence is not proper recoupment to claims for nonpayment of the amounts owed for jobs were no damage is alleged. The evidence therefore establishes that Respondent violated A.R.S. § 32- 1154(A)(7)[1] and (11)[2] in failing to pay Complainant for the Ast, Abram, and Jewelry by Gauthier contracts and that Respondent violated A.R.S. § 32- 1154(A)(18)[3] in performing the Jewelry by Gauthier contract, including contracting with Complainant for cleanup, while its commercial license was suspended for lack of bond. RECOMMENDED ORDER Based on the foregoing, it is recommended that the Registrar suspend Respondent’s residential Class B License No. 060957 and commercial Class B- License No. 075833 on the effective date of the Registrar’s order 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 provides proof in writing to the Registrar that it has paid Complainant a total of $5,670.00 for the Abram, Ast, and Jewelry by Gauthier contracts, no license suspension shall take place and the Registrar shall close Case Nos. 99-2131 and M99-0873. Done this day, August 13, 1999.

______________________________________ Diane Mihalsky Administrative Law Judge

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

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

By ___________________________

----------------------- [1] 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.”

[2] This statutory subsection 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 . . . .”

[3] This statutory subsection includes among the grounds for suspension, revocation, or other disciplinary action against a contractor’s license “[c]ontracting or offering to contract or submitting a bid while the license is under suspension or while the license is on inactive status.”

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