Talk toughens in Melchiori, subcontractor dispute
Melchiori Construction Co., the Santa Barbara-based general contractor known for taking on high-profile projects, faces more than 20 non-payment claims from subcontractors and suppliers on a $6.5 million construction project at UC Santa Barbara.
The payment disputes mark the third Melchiori public project in which subcontractors alleged they were not paid. Thirty-eight claims were made on a $4.5 million Emergency Operations Center that Melchiori built for Santa Barbara County, a sign that in a tough economy the contact sport of contracting has turned into a serious game.
In a remodel of the Santa Barbara County Public Defender’s offices, subcontractors filed 10 payment disputes. Nine of them have been resolved, but one has turned into a lawsuit filed by a Ventura-based heating and air conditioning company demanding $454,000 for unpaid work.
Mark Melchiori, president and CEO of Melchiori Construction Co., said his company only withholds payment when its subcontractors don’t meet the terms of their contracts or if their workmanship doesn’t meet industry benchmarks.
He said some subcontractors have had trouble with the extensive paperwork required in public works projects, as well as with his firm’s stringent quality controls. Melchiori’s past projects have included the Pacific Capital Bancorp headquarters and the Granada Theatre in Santa Barbara and QAD headquarters in Summerland.
“We treat every subcontractor like we want to be treated,” Melchiori told the Business Times.
Two major subcontractors allege they met all the requirements outlined in their agreements with Melchiori and were still not paid. Ventura-based Scott and Sons Electric claims it was not paid $454,000 for work on the Emergency Operations Center, and Ventura-based Churchill Heating & Air Conditioning claims it was not paid $197,000 for work on the public defender’s office. Attorneys for both say they were forced to file lawsuits because of approaching statutes of limitations on their claims.
“We begged and pleaded with them to pay the bill. We met with them in person asking what the hold-up was. They asked us for additional documentation, which we provided. They asked for further documentation, and we provided it,” said Erik Feingold, an attorney for Churchill’s. “It got to the point where my client was running out of time.”
“[Scott and Sons] met with [Melchiori] and satisfied all their requests, and it still didn’t get them paid,” said George Vogt, and attorney for the electrical subcontractor. “We believe that Melchiori has been paid for our work already and is holding the funds in violation of the California contractors codes.”
At the emergency operations center, the county is withholding $573,223 from Melchiori because 15 claims disputes remain open. Staff have begun using the center although it has not been deemed officially complete.
At UCSB, Melchiori submitted the winning bid for Ocean Science Education Building, a 15,000-square-foot mixture of office space and interactive seawater exhibits for schoolchildren being built on campus. Construction began in April 2010 but is behind schedule.
Subcontractors and suppliers to the project have filed claims called stop notices. In a public works project, the government pays only the general contractor. It is the general contractor’s responsibility to pay its subcontractors.
A subcontractor can file a stop notice with the government to allege that it has not been paid by the general contractor. The government is then required to withhold 125 percent of the disputed amount as an incentive for the general contractor to resolve the dispute with its subcontractor.
Public projects require extensive documentation. Subcontractors must submit certified payrolls to document that workers are being paid prevailing wages, as well as detailed lists of suppliers and bills from suppliers. Melchiori said that level of documentation is necessary because it is his company that bears all the legal responsibility for payments.
If a supplier or a subcontractor’s employees allege they haven’t been paid, it is Melchiori, rather than the government entity, that will be sued.
“This company means everything to me and my family and the employees,” Melchiori said. “We’re trying to do the very best we can in a very difficult economy and manage the risk. I feel like somewhat of a punching bag. I bear every single solitary financial risk. I feel like I have to manage that risk.”
Earlier this year, Melchiori’s company won an $8.9 million judgment against Chapala One LLC and developer Don Hughes for breach of contract and fraud on the ill-timed condominium project in downtown Santa Barbara. In September, Melchiori filed to force Chapala One into involuntary bankruptcy the day before its lenders were due to foreclose on the property, potentially depleting the only asset that could pay for Melchiori’s judgment.
Bankruptcy documents claim that Chapala One has a market value of $30 million but is laden with $80 million in debts. If the claims in the case so far were allowed to stand, it is unclear how much Melchiori would be paid.
Mark Melchiori said the unpaid judgment “has absolutely no effect on the ongoing business operations of Melchiori Construction Co. Period.”