Don't Become a Victim
Home Renovation Projects
CONTRACTOR FRAUD SERIES (Part 1)
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By Michael Panish
Construction Expert Witness
As a Construction Expert Witness, I have been involved in numerous homeowner
vs. contractor lawsuits that turned out to be directly created by contractor
fraud. In this article, I have combined a few different actual cases,
highlighting the various tactics used by dishonest contractors to bait
and then hook the homeowner. In all of these cases, the homeowner prevailed.
Definition of FRAUD
A wrongful or criminal deception deliberately practiced in order to secure
unfair or unlawful gain.
Trickery or a swindle.
My Initial Contact with the Disgruntled Homeowner
It was late in the afternoon, and a call came into my office. It was from
a gentleman that was in great distress regarding a renovation that was
taking place at his home. It seemed that every time an alleged problem
arose during the renovation of his home, the contractor had been issuing
change orders. The biggest problem was that until this point in time,
the homeowner (trusting that the contractor was honest) had been paying
for all of the alleged changes. He had a total contract to renovate his
home of approximately $500,000.00. The project had started about three
weeks before, and he had already paid the contractor over $270,000.00.
Very little work had been done other than partial demolition of the old
structure. Up until this point, the homeowner had gone along with all
of the requests of the contractor for the additional charges. The homeowner
did not want to create any problems with the contractor, and felt that
by making the requested payments he would maintain a peaceful and happy
project. The homeowner did not want to "rock the boat", or create
any unnecessary tension with the contractor. This day was the breaking
point for the homeowner. He believed that he was being taken advantage
of, and he was not going to pay for any more change orders, so he wanted
my opinion as to whether he was right or wrong.
My First Impressions
I offered to pay a visit to the work site, and the property owner agreed
to meet me there. Upon my arrival, the homeowner gave me a quick tour
of the jobsite. Debris, building materials, and tools were strewn all
around the property. No workmen were present, and there was not a construction
fence in place. There was an in ground pool in the back yard. There was
no fence or gate surrounding the pool, and the original home had been
almost totally demolished. There was easy access to the back yard through
the demolished home, the exposed pool was potentially dangerous, and it
was obvious that there were many children in the neighborhood.
I immediately advised the homeowner that it was imperative that he get
a construction fence around this project to protect the people in the
area, as well as his property. I asked the homeowner to describe the renovation
plans, and he showed me the blueprints that had been given to him by the
construction company. It was apparent that the contractor was indeed taking
advantage of this owner, and I spoke with the homeowner regarding his
options for getting this project under control.
Why the homeowner was worried
His contractor was already threatening that all further work would stop
and that he would place a mechanics lien on the property for non- payment
of the most current change order that the homeowner was refusing to pay.
I informed the homeowner that a change order was only valid if at least
three conditions were met: 1. Change order must be signed by both parties
prior to commencement of additional work (must by in writing, a verbal
agreement is not normally enforceable). 2. The work has been completed
satisfactorily 3. It is proven that the substance of the change order
added to or changed the original terms and conditions of the prior contractual
He asked me if I knew an attorney, as he was concerned that he would be
sued by the contractor if he terminated the project contract. He was also
very worried about the existing condition of his home, and the possibility
that his lender would call the note due because the house was basically
no longer there.
The Homeowner Begins to Fight Back
I was certain that the homeowner needed to retain the services of a competent
attorney, and offered several referrals that would be effective in enabling
the homeowner to get control of this serious situation.
A week later, the homeowner retained me as his consultant on this project,
and asked me to inform his attorney of choice about the problems with
this contract and contractor. The attorney went into action against the
contractor, issuing a stop notice, and filed a lawsuit regarding the abusive
actions by the contractor.
Discovery Began – That's When Things Got Interesting
It seemed that the contractor primarily advertised through mailed coupons,
local newspapers, and flyers. In the contractor's ads, they provided
photographs of projects they claimed they had performed. The contractor
advertised that he had been in business for over 35 years (even though
their contractor's license number was very new). They also said the
business was family owned and that no subcontractors were employed. Personalized
service and attention to details were the key reasons to use this contracting firm.
The literature provided during discovery showed pictures of homes that
were generic. I found that the pictures used on the contractor's ads
were actually taken from a stock photo websites that had photographs of
various homes available to download. However, one specific location was
shown in detail, and it turned out to be many shots of the same home,
photographed from different angles and elevations (side views). It was
discovered that the detailed photographed home was actually owned by family
members of the contractor. For example, roofing was mentioned as one of
the many available services performed by the contractor. In one included
set of photographs, the contractors' family owned home was used to
show a close up of roofing materials.
Fraudulent Acts are Discovered
As presented in the advertising, and apparently intended to deceive, the
contractor seemed to have worked on dozens of local homes. When addresses
were verified during discovery, it turned out that the majority of the
homes did not even exist. As mentioned above, a good portion of the contractor's
represented completed projects photographs came from an internet site
that specializes in stock photography or one home owned by family members
of the contractor. This was the first layer of deception and dishonesty
created solely by the contractor.
As information surfaced through discovery and depositions, it turned out
that this particular contractor had been disciplined many times by the
contractors state license board, had changed business names, and was currently
involved in a couple of other legal matters. Although various other homeowners
later disclosed that they had checked with licensing boards to verify
the contractor, the fact that numerous names and business licenses were
used made it almost impossible to check the past performance or references.
The Homeowners did not Verify the Contractor's Claims
In these three combined cases, it was my opinion that the homeowners were
lax in not properly investigating or attempting to verify trade references,
speak to previous clients, or personally inspect the inside of homes that
were represented as being part of the contractors previous projects list.
How the Deception Developed
The sales team from the contractor personally drove the homeowner around
the neighborhood pointing out locations claiming that the construction
work was done by his company. The salesman repeatedly asserted that the
residents of these project houses were unavailable to allow viewing of
these projects, or had moved since the time of the renovations. The contractor
also developed an impressive website which added false credibility. It
was found, through further discovery that in the past the contractor had
walked off of jobs for alleged non-payment, attempted to place liens on
the properties, and had been left unchallenged for the most part. There
was apparently a pattern to the contractor's business practices.
How does the Unscrupulous Contractor get away with Fraud?
In previous cases, the amount of money owed and in dispute was generally
too small to pursue legally. Most of the disgruntled homeowners were advised
by their attorneys to not file any action against this contractor. The
claimed amounts were too small for an expensive court trial, and yet too
big to take into a small claims action.
Why is this Case Different?
This time, the case was for an amount of money that was too great for the
homeowner to walk away from, and the personality of the homeowner dictated
that he get revenge for the unprofessional and poor treatment that the
contractor had given him.
Depositions Prove Deceit
During depositions of four key members of the contractors' construction
team, every possible misleading statement and non truth was used. Each
person contradicted or attempted to blame someone other than himself for
the "misunderstanding" with the client. Promises that were made
to the homeowner and his family were brushed away as inconsequential and
invalid. And, the contractor refused to make any attempt to rectify or
settle the case prior to trial, further continuing to expound that the
homeowner was the dishonest party in this matter. In part, the contractor
attempted to shift the blame onto his sales staff, stating that he was
unaware of any promises made by the sales people, and so he believed he
was not responsible for the alleged misunderstandings. In all three cases,
the contractors were originally non English speaking. They attempted to
claim that their business practices were acceptable and normal in the
country that they came from, and that all three homeowners were responsible
for not fully understanding their business policies.
Among many other ridiculous claims, the contractor stated that the plans
were misleading and incomplete. The problem with that statement was that
the contractor had drawn, submitted, and obtained plan approval on behalf
of the homeowner. The contractor's draftsmen had attached clauses
to the plans stating that it was the responsibility of the contractor
to verify existing site conditions prior to submitting a bid, starting
work, or doing any demolition to the property. Along with the plan issues,
the financial arrangements per the contract were illegal and in direct
violation of the contractor code of conduct. The contract terms and conditions
were so vague and ambiguous that it was nearly impossible to identify
milestone payment requirements for any work performed on this project.
In the state where these events took place, a pre demolition inspection
is mandated by law to determine the presence of any hazardous materials
such as asbestos that would need abating prior to removal. The contractor
did not comply with these laws.
In each case, the contractors had claimed to have over 35 years of experience
in renovating homes in the area. If that was actually the case, each contractor
should have been well aware of the building requirements in that geographic
area. Furthermore, it was discovered that all three contractors had not
even lived in the United States for 30 years prior to these cases.
Per the construction plans, the house was to be completely demolished and
a new (ground up) two story structure was to be created. After demolition,
the contractor stated that he needed to restructure some elements of the
house (that didn't exist anymore), and he issued his first of many
inappropriate change orders.
The contractor was also guilty of hiring illegal workers that were dropped
off at the jobsite. They were left unsupervised, did not know what they
were supposed to do, and could not communicate with other workers at the
site. Everything about the beginning stages of this project were completely
out of control, and absolutely unprofessional.
Mitigation Efforts by the Homeowner
After thorough documentation, photographic evidence, and precise analysis
of existing site conditions, a comprehensive report was made by Mike Panish.
This "time capsule" of information captured the site and existing
conditions to provide future documentation and proof by an independent
party that could be used to show exactly what had occurred up to the time
that the original contractor and homeowner had ended their relationship.
This documentation is critical in future proceedings and is the only accepted
way to prove deficiencies, preserve, and capture and maintain an official
record of the site.
After the original contractor was barred from working on this project by
the homeowner's attorney, a new contractor was found. The new contractor
was brought in to restart the project, and eventually corrected and finished
the building of the new structure. The cost to the homeowner was approximately
one and a half times the total bid made by the original contractor.
Original Contractor's Attempted Defense
During depositions, the original contractor used the actual completed
cost of construction to claim that the homeowner positioned him (the contractor)
into building the house for well below what it actually should have cost.
In reality, the higher cost was directly attributable to the original
inferior work that needed to be corrected.
The contractor attempted to claim that the homeowner was sophisticated
in the field of construction and actually positioned the contractor into
performing the new construction work for far less than originally proposed.
The contractor claimed that the homeowner always had the upper hand on
this job and had been taking advantage of him.
Claim after claim was made by the dishonest contractor attempting to shift
the blame onto the homeowner. As an example of the contractor's misconduct
and underhanded dealings, the contractor was buying materials for the
homeowner's job, having them delivered to the site, then removing
them and using them on other jobs, or just returning them. This was his
way of getting the homeowner of this project to pay for materials at other
It seemed that the contractor was running a "Ponzi" scheme type
of business, as it appeared that he had absolutely no records that could
explain or support where any of the funds he had received from the homeowner
had gone. He was attempting to use this money to cover past jobs or future
work at other locations that he could profit from. It was also determined
that the contractor would submit material bills from a supplier, claiming
that the components were used on the homeowners property, and later return
the materials to the supplier claiming he did not need them.
The Homeowner Prevails
After a two year period, the case went to trial. The homeowner was seeking
compensation in the amount equal to the actual costs associated with correcting
all of the deficient work that was performed by the contractor, plus all
of the overages paid as a result of change orders that had no merit. After
two weeks in trial, the jury awarded the homeowner approximately 10 times
the amount that the homeowner was seeking. Fraud is often difficult to
prove, but in this case it was proven without a doubt. The contractor,
salesmen, and owners of this construction company were found to be personally
responsible for their actions. Because the attorney filed the action correctly
(as fraud), the company could not file corporate bankruptcy to avoid this
judgment and all parties were held personally responsible. They all attempted
an appeal, but lost.
Don't let this Happen to You
This information was compiled from Mike Panish's actual cases. Similar
events and situations occurred to the three homeowners that this article
was derived from. In the past, the housing market was strong, and many
bad contractors were allowed to get away with defective workmanship. In
the current market, there are many building contractors that are having
significant problems finding work. There are even more dishonest and unscrupulous
building contractors preying on the homeowner that is desperately seeking
to have someone renovate their property. It is more important now to thoroughly
verify all references, view comparable examples of work, and check that
a contractor of choice is financially solvent prior to entering into any
contractual agreement where money is tendered in advance for future services.
Michael Panish is an expert in the field of construction. He has been retained
by both plaintiff and defense counsel on many homeowner vs. contractor
disputes. As a consultant, construction expert, and experienced general
contractor he has been involved in mediations, arbitrations and trials
pertaining to contractor fraud and contract misrepresentation. He has
participated in numerous court proceedings throughout the United States.
He is licensed in the State of California as a general contractor, electrical
contractor, cabinet and millwork contractor, door and hardware security
contractor, and paint & finish contractor. Mr. Panish has offices
in California and the New England area and is available for nationwide
consultation, forensic analysis, inspection, report, and testimony. Mr.
Panish can be reached at (818) 429-1963 or visit his website at www.ConstructionWitness,com
for more information
CONTRACTOR FRAUD SERIES (Part 2) - Beware of Unscrupulous Contractors