Construction Law

This article appeared in the October 2009 issue of "The Construction Advisor" published by Lang Baker & Klain, PLC. Free Subscription to the Construction Advisor View the Construction Advisor index

When a licensed contractor fails to pay a residential property owner as ordered by the Arizona Registrar of Contractors (ROC), the ROC makes the payment on the contractor’s behalf from the Registrar’s Residential Recovery Fund. The ROC may then sue the contractor to force the contractor to reimburse the Fund.

How promptly the ROC must take legal action, and whether there is a time limit on the ROC’s right to seek reimbursement, was the issue that the Arizona Court of Appeals addressed in its August 2009 ruling in State of Arizona v. Johnston.

Background

In 2004, Edward and Joy Kufahl filed an ROC complaint against Frederico and Mary Johnston, doing business as Ace Aluminum and Products (“Ace”). The ROC issued an administrative order requiring Ace to remedy the violations. Ace failed to do so.

In April 2005, the ROC issued a final judgment against Ace and awarded the Kufahls $16,900 in damages. That amount was paid from the Residential Recovery Fund and charged against Ace. On June 16, 2005, the Kufahls assigned to the ROC their judgment against Ace. The next day the ROC sent a demand letter to Ace’s surety, seeking reimbursement from Ace’s license bond. The surety paid $1,000.

On October 22, 2007, two years and four months after the date of the demand letter, the Attorney General sued Ace in Superior Court to enforce the ROC’s subrogation rights, pursuant to A.R.S. § 32-1138. (“Subrogation” refers to the substitution of one party in the place of another with reference to a lawful claim, demand or right.)

Ace asked the trial court to dismiss the State’s lawsuit, arguing that the time had expired for the ROC to enforce its subrogated judgment against Ace. In making that argument, Ace cited the provision of § 32-1138 that states, “The registrar and the attorney general shall promptly enforce all subrogation claims.” (Emphasis added.)

Ace also based its argument on a 2007 Arizona Court of Appeals decision (West Valley View, Inc. v. Maricopa County Sheriff’s Office) in which the Court found that “promptly” means “at once or without delay.” (That case dealt with the failure of a government agency to “promptly” furnish copies of records to a requesting party.)

The ROC countered that the “promptly enforce” requirement in § 32-1138 was not intended to serve as a statute of limitations and that Ace’s interpretation was contrary to Arizona statutes, case law and public policy. (A “statute of limitations” sets maximum time periods during which certain actions can be brought.)

The trial court sided with Ace, noting that “’promptly’ as used in A.R.S. § 32-1138 cannot mean 2½ years,” and granted Ace’s motion to dismiss.

The ROC appealed.

Decision

For the three-judge panel at the Arizona Court of Appeals, the sole issue was whether the statutory phrase “shall promptly enforce all subrogation claims” prohibits the ROC from seeking subrogation against a non-compliant contractor nearly two-and-a-half years after an award was paid from the Residential Recovery Fund.

Ace argued that “shall promptly enforce” constitutes “express language limiting the time period” during which the ROC can enforce its subrogation rights. Ace also argued that the Court should interpret the word “promptly” in its ordinary meaning.

The ROC reiterated its trial-level argument that the legislature did not intend for § 32-1138 to serve as a statute of limitations.

The Court of Appeals agreed with the ROC, noting that the statute does not state a specific time limit for enforcing the ROC’s subrogation rights and, therefore, is not a statute of limitations. In its ruling, the Court found that “neither the language, purpose, nor context of A.R.S. § 32-1138 reflects legislative intent to create a statute of limitations regulating the enforcement of the Registrar’s subrogation right against a non-compliant contractor.”

Further, the Court’s opinion stated that “nothing in the history or context of A.R.S. § 32-1138 suggests that the statute was intended to be a shield to protect non-compliant contractors.” The opinion goes on to state, “[W]e cannot conclude that the legislature [intended to excuse] a non-compliant contractor from accountability, which includes … compensating an injured party for damages caused by his non-compliance with Arizona law. To hold otherwise would effectively require all licensed residential contractors in compliance with the law to bear the burden of paying for a non-compliant contractor’s misdeed.” (Emphasis added.)

As for Ace’s reliance on the West Valley View decision, the Court found the circumstances to be so different from the ROC’s subrogation issue that the meaning of “promptly” in that case was not applicable to this one.

Conclusion. In reversing the trial court’s order dismissing the ROC’s claim, the Court of Appeals sent a clear message that there is no particular expiration date on the ROC’s subrogation rights.

At whatever point the ROC chooses to pursue those rights – whether “promptly” in the ordinary sense of the word or whenever the ROC decides to act – contractors cannot escape liability for failure to reimburse the Registrar’s Residential Recovery Fund.