AZAPP Blog

Strait v. Strait (2/11/2010):  Arizona Court of Appeals Division One Holds that Although the Family Court Can Consider a One-Time Insurance Settlement as Income When Modifying Child Support, It Cannot Do So Without Determining Whether the Settlement Represented a Recoupment of Lost Capital or an Offset of Litigation Expenses Incurred.

Several years after dissolving their marriage, Joanne (“Mother”) and Clifford Strait (“Father”) gained joint legal custody of their children.  The Family Court ordered Father to pay Mother $381.69 in child support.  Two years later, the Family Court found Father’s income to be $20,000 per month and ordered child support of $1800.18 per month.  Father later sought to modify child support on grounds that the Family Court incorrectly included as income a $168,000 settlement he received as a result of litigation resulting from mold that had developed in his home.  The Family Court denied Father’s modification request, and this appeal followed.

The Arizona Appeals Court held that, under appropriate circumstances, one-time insurance payments can be considered income.  Although the child support guidelines define “gross income” as “income from any source,” the Family Court can deviate from the guidelines when their application would be inappropriate or unjust.  The Court of Appeals explained, however, that it would be unjust to include a one-time insurance settlement as income without first considering whether (1) all or some of the payment represents recoupment of capital or funds needed to remediate property damage, and (2) all or some of the payment offsets litigation expenses incurred.  Because the Family Court did not make those considerations, the Court of Appeals remanded the matter for further consideration.

Judge Portley authored the opinion; Judges Johnsen and Barker concurred.

Posted By: Michael S. Catlett

Indus. Comm’n of Ariz. v. Word (2/08/2010): Arizona Supreme Court Holds That the Eight-Year Limitations Period In A.R.S. § 23-907(E) For the Industrial Commission of Arizona to Recover Payments From Employers Runs From the Date of the Initial Award Giving Benefits to the Injured Worker, But That Each Payment Made to the Injured Employee by the Commission Qualifies as a Separate Judgment

In 1991, an employee of Tommy Word was injured during the course of employment. Word did not carry workers' compensation, and his employee sought workers' compensation. In 1992, an administrative law judge issued an award for the employee, and accordingly, the Industrial Commission of Arizona (the “Commission”) made payments to the employee. The uninsured employer is liable for such payments. Pursuant to A.R.S. § 23-907(E), the Commission issued “continuing awards” in 1993, 1994, and 1998 notifying Word of the payments made to the employee. In 2000, the Commission issued a final award, and recorded it with the Maricopa County Superior Court Clerk in 2001. Word did not contest any of the awards. The Commission attempted to collect the amounts owed by filing writs of garnishment in 2007. The Superior Court denied Word's motion challenging the garnishment. Word's argument was that the eight year limitations period in A.R.S. § 23-907(E) had expired, thus barring the Commission from collecting any liabilities incurred under the 1992 award. The Court of Appeals reversed the superior court, holding that under A.R.S. § 23-907(E), the Commission was required to file the 1992 award with the clerk of the superior court before pursuing remedies, and that the Commission's ability to recover from Word thus expired 8 years after the 1992 award.

The Arizona Supreme Court vacated the appeals court decision, and reversed the superior court. The Supreme Court stated that the appeals court had reached the correct result, but had incorrectly interpreted the statute. The appeals court correctly rejected the Commission's argument that, under A.R.S. § 23-907(E), it had obtained an eight-year lien by filing the 2000 award. The Supreme Court explained that the award referred to in A.R.S. § 23-907(E) is the initial decision awarding benefits, which in this case was issued in 1992. The Supreme Court rejected, however, the appeals court's holding that the Commission was required to file the 1992 award to perfect its rights to reimbursement from Word for payments made under the award. Each payment made to the injured employee by the Commission qualified as a separate judgment, which could be executed upon just like any other judgment, and the Commission's failure to file the initial award did not affect the status of each payment as an independent judgment. The Supreme Court stated that the appeals court reached the correct result in this case, however, because the last payment, which was made in 1998, expired five years later, in 2003. Because the Commission did not argue that the payment had been renewed, it could not form the basis of the 2007 garnishments. The Supreme Court declined to decide whether the Commission could renew such judgments, and whether 8-year liens established under A.R.S. § 23-907(E) may be renewed.

Justice Hurwitz wrote the opinion for the unanimous Court.

Posted By: James K Rogers

LetBennett v. Baxter Group, Inc. (2/10/2010): Arizona Court of Appeals Division Two Holds that the Unauthorized Recording of a Valid Real Estate Purchase/Sale Agreement Does Not Constitute Grounds For Slander of Title Under A.R.S. § 33-420.

Buyer and Seller entered an agreement (the “Agreement”) for the sale of real property conditioned on Buyer obtaining required financing.  Buyer failed to obtain financing and Seller eventually accepted an offer to sell the property to another party.  Seller refused to return Buyer’s security deposit.  To attempt to force repayment of the security deposit, Buyer had the Agreement recorded before Seller’s new sale agreement had closed. 

Buyer sued Seller for breach of contract for failing to return the security deposit and for fraud.  Seller counterclaimed for fraud and for tortious interference with contract.  The trial court granted summary judgment to Buyer on the majority of Seller’s counterclaims, but denied summary judgment on Seller’s claims for interference with contract and slander of title.  After a bench trial, the court awarded Buyer the security deposit, but denied Buyer’s fraud claim.  The court ruled against Seller on its counterclaims for interference with contract and slander of title, and awarded Buyer its attorneys’ fees as well as costs and sanctions.   

Seller appealed.  The Court of Appeals affirmed dismissal of the slander of title claim, affirmed the finding of a breach of contract from the failure to return Buyer’s security deposit, and affirmed the award of sanctions.  The Court vacated and remanded for reconsideration the awards of attorneys’ fees and taxable costs.   

Seller based its slander of title claim on A.R.S. § 33-420(A), which imposes liability against a person who, claiming an interest in real property, causes a document asserting the claim to be recorded while “knowing or having reason to know that the document is forged, groundless, contains a material misstatement or false claim or is otherwise invalid.”  In addition, A.R.S. § 33-420(D) provides: “A document purporting to create an interest in, or a lien or encumbrance against, real property not authorized by statute, judgment or other specific legal authority is presumed to be groundless and invalid.” 

Seller argued that the A.R.S. § 33-420(D) presumption applied because no statute, judgment or other legal authority provided for the recording of the real estate sales agreement.  The Court of Appeals held, however, that A.R.S. § 33-420(A) focuses solely on whether the document is invalid or groundless, not on whether the recording of the document was authorized.  Because the Agreement itself was valid, the trial court did not err in dismissing the slander of title claim. 

Chief Judge Howard authored the opinion; Judges Espinosa and Vásquez concurred.

Posted By: Mark P. Hummels

Flagstaff Affordable Housing Ltd. P’ship v. Design Alliance, Inc. (2/2/2010): Arizona Supreme Court Holds that the Economic Loss Doctrine Prohibits a Plaintiff From Recovering in Tort for Purely Economic Loss under a Construction Contract, Unless the Contract Otherwise Provides.

In 1995, Flagstaff Affordable Housing Limited Partnership contracted with Design Alliance, Inc. for the design of eight apartment buildings and a community center.  In 2004, the U.S. Department of Housing and Urban Development filed a complaint against Flagstaff Affordable Housing, alleging that the apartments violated the federal Fair Housing Act’s accessibility guidelines.  After settling the matter with the Department of Housing, Flagstaff Affordable Housing sued Design Alliance alleging that it had breached its contract and acted negligently.  Design Alliance moved to dismiss the complaint, arguing that the contract claim was barred by A.R.S. § 12-552 and that the negligence claim was barred by the economic loss doctrine.  Flagstaff Affordable Housing voluntarily dismissed the contract claim, but argued that the economic loss doctrine did not apply to its professional negligence claim.  The superior court disagreed and granted Design Alliance’s motion to dismiss.  The Court of Appeals reversed, holding that the economic loss doctrine does not bar negligence claims against design professionals.  Design Alliance appealed. 

The Arizona Supreme Court vacated the Court of Appeal’s opinion.  The Court first held that the economic loss doctrine applies to construction defect cases involving a contract.  The economic loss doctrine refers to “a common law rule limiting a contracting party to contractual remedies for the recovery of economic losses unaccompanied by physical injury to persons or other party.”  In Arizona, application of the doctrine varies depending on context-specific policy considerations.  In cases involving construction defects, such as this, the Court concluded that “the policies of the law generally will best be served by leaving the parties to their commercial remedies when a contracting party has incurred only economic loss, in the form of repair costs, diminished value, or lost profits.”  Because, however, the concerns upon which the economic loss doctrine is based are not implicated if the plaintiff cannot pursue contractual remedies, the Court noted that the doctrine should not apply when the plaintiff lacks privity.  The focus in those cases should remain whether the applicable substantive law allows liability in the particular case. 

The Court then addressed the Court of Appeals’ holding that the economic loss doctrine does not apply to claims for professional negligence, regardless of the type of case, because claims for professional negligence are based upon a common-law duty of care that exists independent of any contract.  The Supreme Court rejected this “formalistic” approach, concluding that “the fact that an architect, as a professional, has legally imposed duties of care does not displace the general policy concerns that parties to construction-related contracts should structure their relationships by prospectively allocating the risks of loss and identifying remedies.”  The Court also rejected Flagstaff Affordable Housing’s contentions that applying the economic loss doctrine to professional negligence claims against architects would be contrary to public policy. 

In this case, the superior court did not apply the version of the economic loss doctrine set forth in the Court’s opinion.  Therefore, the Court reversed the judgment for Design Alliance and remanded the case to the superior court for further proceedings. 

Justice Bales authored the Court’s unanimous opinion.

Posted By: Brandon A. Hale

Arizona Tile, LLC v. Berger (2/2/2010): Arizona Court of Appeals Division One Holds that A.R.S § 33-1005 Creates a Trust Obligation and that Directors of a Corporation May be Held Personally Liable if they Cause a Corporation to Breach that Trust Obligation.

Howard Berger and John McCarthy were the sole directors of Designer Surfaces, Inc., which fabricated and installed countertops.  Designer Surfaces purchased many of the materials it used from Arizona Tile on an open account.  After Designer Surface became insolvent, it failed to pay Arizona Tile for materials Arizona Tile had supplied.  Arizona Tile sued Designer Surfaces for breach of a credit agreement and unjust enrichment, and also sued Berger and McCarthy personally for breaching trust obligations they allegedly owed Arizona Tile under A.R.S. § 33-1005.  Mr. Berger moved to dismiss the complaint against him for lack of personal jurisdiction on grounds that he was a resident of California and did not have minimum contact with Arizona, which the trial court denied.  Arizona Tile then moved for summary judgment against Berger and McCarthy for diverting the funds Designer Surfaces allegedly held in trust.  Arizona Tile also sought its attorneys’ fees on the grounds that case against Berger and McCarthy arose out of contract.  The superior court granted summary judgment in favor of Arizona Tile, concluding that A.R.S. § 33-1005 applied to the facts of the case and that Arizona Tile was entitled to attorneys’ fees because the case arose out of contract.  Berger and McCarthy appealed.

The Arizona Court of Appeals affirmed in part and reversed in part.  It first held that the superior court had personal jurisdiction over Berger.  Arizona courts have personal general jurisdiction over any nonresident who has substantial or continuous and systematic contacts with Arizona.  In this case, the Court found that the exercise of general jurisdiction by the superior court was “reasonable and just” because Berger was regularly physically present in Arizona, had offices and property in Arizona, and systematically transacted business in Arizona. 

As for the statutory issue, the Court of Appeals then held that A.R.S. § 33-1005, by its plain language, created a trust obligation upon Designer Surfaces.  A.R.S § 33-1005 provides that “monies paid by or for an owner-occupant . . . to a contractor, as defined in § 32-1101, as payment for labor, professional services, materials, machinery, fixtures or tools for which a lien is not provided . . . shall be deemed for all purposes to be paid in trust and shall be held by the contractor for the benefit of the persons or persons furnishing such labor, professional services, materials, machinery, fixtures or tools.”  In this case, the Court of Appeals found that Designer Surfaces was subject to the provisions of A.R.S § 33-1005 because Designer Surfaces qualified as a “contractor” under A.R.S. § 32-1101.  Therefore, applying the plain language of the statute, the Court of Appeals concluded that A.R.S. § 33-1005 created a trust obligation upon Designer Surfaces in favor of Arizona Tile for the money Designer Surfaces received from the materials Arizona Tile had supplied. 

Next, the Court of Appeal held that Berger and McCarthy could be held personally liable for causing Designer Surfaces to breach its trust obligations.  Although corporate officers and directors are not personally liable for a corporation’s misconduct merely by virtue of their positions, they may be held liable if they direct the corporation to commit a breach of trust.  In this case, because Arizona Tile had provided evidence that Berger and McCarthy decided what accounts to pay and failed to pay Arizona Tile at a time that Designer Surfaces should have been holding funds in trust for Arizona Tile’s benefit, the Court of Appeals concluded that Berger and McCarthy could be liable for the loss resulting from that breach of trust.

Finally, the Court of Appeals held that Arizona Tile was not entitled to recover its attorneys’ fees under A.R.S. § 12-341.01.  The Arizona Supreme Court has acknowledged that, under § 12-341.01(A), attorneys’ fees may be awarded in a cause of action in tort if the cause of action could not exist but for the breach of a contract.  In this case, the Court of Appeals concluded that Arizona Tile was not entitled to attorneys’ fees because the cause of action against Berger and McCarthy for breaching the trust obligations was not “entwined” with the breach of contract between Designer Surfaces and Arizona Tile.

Judge Weisberg authored the opinion; Judges Norris and Downie concurred.

Posted By: Brandon A. Hale

Gamboa v. Metzler (2/2/2010):  Arizona Court of Appeals Division One Holds That Time Limitations Imposed by a Trial Court on a Party’s Examination of a Witness Are Not Unreasonable if the Time Constraints Encountered Are “Solely Attributable” to the Party.   

Plaintiff Jaime Gamboa sued Defendant Dorothy Metzler in connection with a car accident.  Plaintiff called eight witnesses at trial.  Five of his witnesses testified on the second day of trial, but part of that day was not used because of witness scheduling problems.  The parties and trial court agreed that Plaintiff’s remaining three witnesses and Defendant’s lone witness would testify the third day on a specific schedule.  Plaintiff’s counsel, however, failed to alert one of his remaining witnesses to the schedule for the third day, and the witness arrived late, forcing Plaintiff to rest late.  Nonetheless, the parties agreed that Defendant’s lone witness would still complete his testimony by the end of the third day.  Plaintiff’s counsel cross-examined that witness for forty-three minutes before being stopped by the trial court at the end of the day.  Plaintiff’s counsel objected to “limiting [his] cross-examination,” but did not ask to resume cross-examination the following day or attempt to determine whether the witness was even available then.  The next day, the trial court stated that the scheduling problems were “solely attributable” to Plaintiff, and did not allow further examination.  Plaintiff timely appealed.

The Arizona Appeals Court affirmed, holding that the trial court did not violate Plaintiff’s due process rights when it limited his cross-examination of Defendant’s witness.  The Court explained that Arizona Rule of Evidence 611(a) requires trial courts to “exercise reasonable control over the mode and order of interrogating witnesses and presenting evidence,” and Rule 611(h) permits them to impose “reasonable time limits on [] trial proceedings or portions thereof.”  Under these rules, trial courts have broad discretion to manage trials, but time limitations must be reasonable.  The Court explained that in this case, the trial court did not act unreasonably because: (1) the court allotted sufficient time for cross-examination; (2) Plaintiff repeatedly agreed that the witness would testify by the end of the third day; (3) the time constraints Plaintiff encountered were “solely attributable” to him; (4) Plaintiff had ample time to cross-examine the witness; and (5) Plaintiff did not request additional time when the court stopped his examination. 

The Court also held that Plaintiff failed to show that the limitation on his cross-examination caused him any harm because he did not make an offer of proof below.

Judge Portley authored the opinion; Presiding Judge Johnsen and Judge Barker concurred.

Posted By: Sharad H Desai

Federico v. Maric (1/28/2010): Arizona Court of Appeals Division One Rules That an Aiding and Abetting Bad Faith Claim Made Against a Doctor Performing an Independent Medical Exam for an Insurer Must Include Evidence That the Physician Knew of the Insurer’s Tort and Substantially Assisted or Encouraged the Insurer.

Federico injured his back in a work-related accident.  He made a claim for worker’s compensation benefits and, after receiving some treatment from M.B.I. Industrial Medicine (“MBI”), his employer’s workers’ compensation insurer denied Federico’s claim.  A year later, Federico told MBI that he had re-aggravated his injury.  A month after that, Federico sustained another work-related injury.  After the new injury, the insurer requested that MBI retain Dr. Maric to perform an independent medical examination (“IME”) of Federico.  Maric concluded in the IME that Federico did not need further medical treatment, and noted that there was no objective evidence of physical pain or injury.  He also noted that Federico may be a malingerer.  As a result, the insurer denied Federico’s worker’s compensation claim.

Federico sued for bad faith and asserted that MBI and Maric aided and abetted the insurer’s bad faith.  The trial court granted Maric’s motion for summary judgment on the aiding and abetting claim and Federico appealed.

The Court of Appeals affirmed in a unanimous opinion.  The Court first reviewed Arizona’s aiding and abetting tort, explaining that Federico had to prove, among other things, (1) that Maric had knowledge of the primary tort – the insurer’s bad faith denial of Federico’s claim – and, (2), that Maric “substantially assist[ed] or encourag[ed]” the insurer.  The Court held that Federico had not raised a contested issue of material fact on either point. 

As to Maric’s knowledge, Federico argued that the trial court could have inferred that Maric knew about the insurer’s bad intent based on various alleged facts, including allegations that Maric improperly examined Federico and that Maric knew his report would negatively impact Federico’s claim.  The Court reasoned that such allegations referred only to Maric’s actions and were irrelevant to Maric’s knowledge of the insurer’s actions.  As to substantial assistance, the Court noted that Federico had not provided any evidence that Maric assisted the insurer’s actions.  Although the insurer may have requested the IME for improper purposes, nothing suggested that the insurer needed the IME to act in bad faith.

Finally, the Court rejected Federico’s argument that the trial court applied the wrong summary judgment standard.  Although the judge may have viewed some evidence from Maric’s perspective, that was necessary to assess Maric’s knowledge or implied knowledge of the insurer’s tortious actions.

Judge Irvine authored the opinion; Judges Gemmill and Thompson concurred.

Posted By: Joseph N. Roth

State v. Taylor (2/2/2010):  Division One of the Arizona Court of Appeals Holds That an Administrative Penalty Does Not Accrue Prejudgment Interest in the Absence of an Explicit Statutory Mandate.

In 1994, the Arizona Structural Pest Control Commission (now the Office of Pest Management) imposed a civil penalty against the Taylors for performing pest control without a license.  The Taylors never paid the penalty.  In 2004, the Commission filed civil suit to convert the penalty order to a judgment and asked the Superior Court also to impose prejudgment interest.  The Court entered the order, but refused to order interest, and the Commission appealed.

The Court of Appeals affirmed.  A.R.S. § 44-1201(A), which the Commission cited as authority for awarding interest, applies only to “any loan, indebtedness, judgment or other obligation,” which language the Court concluded did not encompass an administrative penalty.  Nor had the legislature provided for prejudgment interest in the specific statute that authorized the penalty against the Taylors, as it had in a number of other administrative penalty statutes.

PRACTICE NOTE:  The Taylors claimed that the Court of Appeals did not have jurisdiction over this case because the Commission failed to file a notice of appeal within 30 days of judgment as required by ARCAP 9.  The Court rejected this argument.  The judgment was entered against the Taylors on April 21, 2008.  The Commission also had a claim against a third party, which was resolved by default judgment on August 21, 2008.  The April judgment against the Taylors was not a final, appealable judgment because it did not dispose of all claims against all defendants.  Because the Commission filed its notice of appeal within 30 days of the August judgment, the Court had jurisdiction.

 Judge Johnsen authored the opinion; Judges Orozco and Thompson concurred.

Posted By Kathleen Brody O'Meara

Aztar Corporation v. U.S. Fire Insurance Co. et al. (1/28/2010):  Division One Holds That Hotel and Casino Cannot Recover Under Business Interruption Insurance Policy When an Expansion Building Collapses During Construction.

After an expansion to the Atlantic City Tropicana Casino collapsed during construction, the New Jersey government temporarily shut down various impacted structures, including the main entry street to the Tropicana, a pedestrian bridge, the bus terminal, an existing parking structure, and the west hotel tower.  The Tropicana otherwise remained fully operational, but experienced a decrease in patronage of the hotel and casino.  The hotel owner and operator, Aztar, filed claims for loss with its various insurance carriers, including the “Excess Carriers.”  All of the carriers denied business interruption coverage and contingent business interruption coverage.  One of the carriers accepted the civil authority and ingress/egress coverage claims, and the others denied these claims as well. Aztar sued the carriers, and Aztar and the Excess Carriers filed cross-motions for partial summary judgment. The trial court ruled in favor of the Excess Carriers, determining that “interruption of business, whether total or partial” did not include a loss from decreased patronage at the Tropicana because the Tropicana remained fully operational and was not damaged by the collapse.  The trial court also ruled that contingent business interruption coverage was not available because the expansion was not a “contributing property” and the loss from the decreased patronage was not a business interruption.  The trial court permitted the Excess Carriers to file an application for attorneys’ fees, even though the applications were not timely filed, and granted those applications. Aztar appealed, arguing that the trial court erred in denying its cross-motions for summary judgment and in granting summary judgment to the Excess Insurers, and in granting attorneys’ fees to the Excess Carriers.  

The Arizona Appeals Court affirmed, but did so on alternative grounds.  The Court held that the trial court erred in determining as a matter of law that Aztar’s claims could not fall within the business interruption coverage provision of the policies because the hotel and casino still had the same operational capacity because the term “interruption of business, whether total or partial” could include a decreased patronage in some circumstances. The Court found that the trial court did not err in granting summary judgment to the Excess Carriers on the issue of contingent business interruption coverage because the expansion was not yet a contributing property to the Tropicana. The Court found that the trial court erred in finding a factual issue regarding whether the expansion was a covered property on the date of collapse, but agreed with the trial court’s implicit ruling that the damaged property must be a covered property to trigger the coverage provisions.  Reasoning that the language of the policy was clear that the expansion would become a covered property on April 1, 2004 (after the collapse occurred), the trial court reversed the trial court’s ruling on the issue. On the attorneys’ fees issue, the Appeals Court ruled that under ARCP 54(g), the trial court had the discretion to extend the time for filing claims for attorneys’ fees, thus it was not improper to allow the Excess Carrier’s untimely applications.       

Judge Barker authored the opinion, Judges Portley and Swann concurred.

Posted By: Kristin L. Windtberg