Riverside official loses early round in building dispute
Thursday, April 15, 2004
By DOUG HABERMAN / The Press-Enterprise
Riverside City Councilman Frank Schiavone and his former custom-homebuilding business partner are personally liable for fraud and negligence in the construction of a Riverside home and a second structure in the back yard, an arbitrator has tentatively ruled.
The March 26 interim award to Francisco Melgarejo, for whom Schiavone and ex-partner Steve Fisher built the home in 1993-94, is for almost $222,000 plus a yet-to-be-determined amount for attorneys' fees and costs, expert-witness fees and investigative costs. Melgarejo, 39, has been the head coach of men's soccer at Riverside Community College for the past seven years and was a professional soccer player in Mexico.
Schiavone and Fisher denied any wrongdoing and said they are hopeful that the arbitrator will issue a different final ruling.
Francisco Melgarejo has won an interim award against Riverside Councilman Frank Schiavone and his ex-business partner. | | | |
"I'm just completely beside myself here," Schiavone said Monday. "We did a good job, and there was nothing misrepresented" to Melgarejo, he said.
Schiavone and Fisher have filed a motion asking the arbitrator to reconsider his interim decision, their attorney, Kirk Barber of Temecula, said. The arbitrator, retired Los Angeles County Superior Court Judge Sam Cianchetti, has agreed to review the motion, Barber said.
Melgarejo alleged that a number of defects in the two buildings emerged after construction, including improper plumbing that caused sewage to back up into sinks, toilets, bathtubs and the yard; water seepage through window frames, sliding doors and the roof; the growth of mold; and cracking in the buildings' drywall and stucco. Another allegation was for fraud - for building aguesthouse behind the main house without obtaining the proper city permits for it and for its sewage system.
Melgarejo's attorneys, Serge Tomassian and Michael Inouye of the Irvine firm Throckmorton, Beckstrom & Tomassian, argued that Schiavone and Fisher cut corners to beef up their profits.
Cianchetti toured the house in April 2002 for a first-hand look at the construction. "The interior and exterior cracks were excessive, virtually every window reflected cracking and water intrusion, the tile installation was shoddy, the large beam in the bedroom had extensive cracking, the pool decking was not equipped with proper drainage" and the roof leaks, he wrote. He attributed the defects to "improper construction."
"Arbitrator finds defendants' conduct regarding the rear dwelling particularly egregious," Cianchetti wrote. "Not only did defendant fail to exercise reasonable care regarding the manner in which the dwelling was constructed, arbitrator finds defendants were deceitful in their dealings with plaintiff regarding the rear dwelling."
Schiavone and Fisher deny they did poor work. For example, they didn't install the tiles by the pool that covered a drain they had installed, Schiavone said.
"The shoddy work that exists out there today is a result of the homeowner, or somebody acting at his request, who did the work after we were gone," Schiavone said. He also blamed many of the problems at the house on lack of maintenance.
On the fraud allegation, Schiavone said the second structure built on the property is a storeroom and office, not a guesthouse, and a bathroom was not part of the project so the septic system that serves the second building had to have been installed after his former partnership had finished its work on the Melgarejo property.
The second structure lacks closets. "Wouldn't you want a closet in your guesthouse?" Schiavone said.
City code-compliance officials have cited Melgarejo for several violations since 2002, including for a patio structure, storage shed and a front fence that was too high. Melgarejo said he's made everything right with the city.
City code-compliance officials said Wednesday that Melgarejo still needs a permit to use the small structure as aguesthouse and must hook its bathroom up to the city sewer system or remove the plumbing.
Schiavone said the code violations demonstrate a pattern of behavior on Melgarejo's part. Melgarejo's attorneys said Schiavone is trying to distract attention from the arbitrator's findings.
Interim award
A ruling in binding arbitration cannot be appealed, Melgarejo's attorneys said. Inouye, one of the attorneys, said housing-construction-defect lawsuits are not uncommon, but findings of fraud are rare.
The arbitrator's interim award is for about $130,000 in compensatory damages for negligence, roughly $42,000 in compensatory damages for fraud and $50,000 in punitive damages.
The award is "interim" because Cianchetti must still calculate the additional costs for the final award. A Riverside County Superior Court judge must then confirm the final award.
Fisher said by phone Monday that he and Schiavone had gone into the four-day arbitration hearing in December feeling sorry for Francisco Melgarejo over the October 2002 death of his wife, Maria.
"We didn't try as hard as we could have," he said, and they are now trying to make up for that before the arbitrator makes his final award.
"Some of the information is, quite frankly, our fault that we didn't provide" to the arbitrator, Schiavone said. He and Fisher are asking the arbitrator to review this information, including a letter the Melgarejos wrote to Schiavone thanking him for his professionalism in handling the building of their home. They are hopeful that the arbitrator will change his decision in light of this information, Schiavone said.
Frank Zotto, vice president for case management at the American Arbitration Association in New York, said it's uncommon for arbitrators to reverse their interim awards. If a party to a case is seeking a reconsideration of an interim award, "what did they know after the decision that they didn't know the day before?" he said.
"There was language in the arbitrator's award that led us to believe there was a misunderstanding on his part as to what some of the evidence we submitted meant," Barber said. He believes Cianchetti will consider a more detailed explanation of the evidence, he said.
For his part, Melgarejo said he was tempted to drop the case after his wife died from an aneurysm at the age of 52, but he decided to keep pursuing it.
"I guess the main thing for her and for me was that God was going to make justice," he said. "I feel redeemed that God really did his part."
Building the home
The elements of the case go back to 1993, when Schiavone sold land to the Melgarejos on Bradley Street east of Washington Street. Schiavone and Fisher's partnership, Riverside Builders, Inc., then built a house and auxiliary structure on the acre-plus property, completing the project in May 1994.
As problems surfaced, particularly with the plumbing, Maria Melgarejo tried unsuccessfully to resolve them with Schiavone, according to documents that the Melgarejos' attorneys filed with the arbitrator. Francisco Melgarejo said he and Maria even moved into an apartment for a while when the sewage stench became overpowering.
"The smell was incredible," he said.
The Melgarejos' homeowners insurance company and the Melgarejos themselves brought in experts, who determined that the house's sewer pipes don't slope downward enough, among other problems, according to documents that the Melgarejos' attorneys filed with the arbitrator.
Schiavone said the plumbing problems arose because of the poor functioning of the state-mandated low-flow toilets his firm had to install at the time. He said the news media covered the problems with these toilets extensively at the time.
He said the problems also occurred because the Melgarejos put certain kinds of foods down the garbage disposal - such as artichokes - that are notorious for causing backups. He said he only received calls about plumbing problems a few months after the Melgarejos moved in and then again in 1997 and 1999.
The Melgarejos filed a lawsuit in June 2000.
Thank-you letter
During an interview Monday, Schiavone provided a copy of a letter from the Melgarejos dated June 25, 1994, and typewritten on the stationery of Maria Melgarejo's court-interpreting business.
"You guys really get a high mark for customer service," the letter says. "From the beginning we felt we could trust you. And you know that in the world of contractors, trust can be hard to come by."
If a contractor did a poor job building your house, "would you give them a letter like this?" Schiavone asked. The letter "fell through the cracks" and was not introduced as evidence in the arbitration hearing, he said.
Inouye said the problems with the house and second structure came to light only after the Melgarejos had written the letter.
Cianchetti, the arbitrator, wrote in his March 26 decision that he found Schiavone and Fisher negligent in the manner in which the Melgarejos' house was constructed.
Schiavone showed photographs of the house, pointing out a buildup of dirt in the sliding window tracks, for example.
"It's one of the worst-maintained houses I've ever seen," he said.
Building permits
The arbitrator also found Schiavone and Fisher liable for fraud for deceiving the Melgarejos about the city permit for the second structure. The permit is for a storage building, but Francisco Melgarejo said it was always meant to be aguesthouse.
This 630-square-foot building was referred to as an "auxillary (sic) dwelling" in the Melgarejos' contract with Riverside Builders, Inc. and in other documents. But Schiavone said that was a linguistic error. "It should have said auxiliary building," he said.
Fisher testified that he inadvertently typed "dwelling," said Barber, the attorney for Schiavone and Fisher.
The word "dwelling" appears "on way too many documents for it to be a mistake," said Inouye, one of the Melgarejos' attorneys.
During the arbitration proceeding, Melgarejo produced blueprints for a guesthouse and a storage building, Schiavone said. He had never seen the blueprint for the guesthouse, he said.
Schiavone said he referred the Melgarejos to the draftsman who drew up the blueprints, and the Melgarejos paid the draftsman for the plans. It was the plan for the storage building that he filed with City Hall, Schiavone said.
But Tomassian, the other attorney for the Melgarejos, said the couple got the blueprints from Schiavone at the time they signed the construction contract and they never dealt with a draftsman. The Melgarejos were stunned when they learned that the city permit was for a storeroom, he said.
Since the permit Schiavone obtained from the city was only for a storage building, the city considers the guesthouse an illegal structure whose status Francisco Melgarejo must pay to correct, the Melgarejos' attorneys argued in court documents.
Marion Ruiz handled the Melgarejos' construction loan in 1993 as a loan officer for De Anza National Bank. She said she spoke with Maria Melgarejo about the second building.
"She indicated it was strictly a storage unit because of the work she did," Ruiz said Monday. She said she didn't remember an appraisal done for De Anza - which was later bought out by another bank - that clearly refers to a guesthouse. The Melgarejos submitted the appraisal to the arbitrator as evidence.
Francisco Melgarejo and his attorneys said his late wife had done simultaneous translating in court and would not have needed a storage room because she didn't have a lot of documents to store.
Schiavone said Riverside Builders, Inc. built a storeroom, and then the Melgarejos converted it into a guesthouse.
Arbitrator unconvinced
Cianchetti didn't buy the storeroom argument put forth by Schiavone and Fisher. "Arbitrator finds the contention that the contract language referred to a storeroom lacks credibility. The plain meaning of the term 'dwelling' is 'a place of residence, a habitation, a house.'"
Schiavone and Fisher never notified the Melgarejos that they had failed to obtain a permit for the guesthouse, Cianchetti wrote. If the building were to be a storeroom, they could have just used that term in the contract, he said.
An electrician who worked on the project, Saul Cortez, testified that he was told not to let city building inspectors know the second building was aguesthouse, Cianchetti wrote in his decision.
"He was told that if any building inspector appeared on the property he should make no mention of any plumbing which had been partially installed in the bathroom in the rear house. Further, Mr. Cortez was advised that he was not to mention the fact the rear house was livable," the arbitrator wrote.
Cianchetti didn't say who gave Cortez these orders, and Schiavone denied that he or Fisher had ever given anyone such instructions.
The main house is connected to the city sewer system, but the second structure has a 50-gallon septic tank, which Cianchetti said strong circumstantial evidence shows that Schiavone and Fisher had installed. They deny installing it. The tank serves a bathroom in the second building. Schiavone said his firm didn't put a bathroom in this structure.
The city doesn't permit having one building on a parcel of land on the sewer system and another on a septic system. Francisco Melgarejo will now have to pay to hook the second structure up to the city sewer system. Bringing the small structure up to code could cost Melgarejo more than $30,000, Tomassian said.
"Arbitrator finds the evidence in this case satisfies all of the elements of fraud based on a false promise," Cianchetti wrote.
The Melgarejos' attorneys filed as evidence a report filed by an inspector for De Anza National Bank with a notation dated Dec. 23, 1993, that indicates a bathroom for the "small structure" was partially plumbed. Schiavone said his former company installed "hose bibs" on the outside of the structure, and it's possible that's what the inspector meant.
The $220,000 award is against Schiavone and Fisher as individuals because the company they owned as equal partners at the time the house was built is now defunct.
"An award against the corporation alone would be meaningless," Cianchetti wrote.
Staff writer Bonnie Stewart contributed to this report.
Reach Doug Haberman at (909) 368-9644 or
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