Court Opinion

ID: 2669149
Source: CourtListenerOpinion
Date Created: 2014-04-08 16:00:37.843988+00
Date Added: 2024-06-11T09:17:57.870670
License: Public Domain

IN THE
              ARIZONA COURT OF APPEALS
                             DIVISION ONE

                 SHELLEY MAGNESS and COLORADO
               STATE BANK & TRUST COMPANY, N.A.,
                Co-Trustees of The Shelley Magness Trust
                   UDA 6/25/2000, Plaintiff/Appellee,

                                    v.

   ARIZONA REGISTRAR OF CONTRACTORS, Defendant/Appellant.

                          No. 1 CA-CV 13-0184
                            FILED 4-8-2014

          Appeal from the Superior Court in Maricopa County
                         No. CV2011-056468
            The Honorable John R. Doody, Commissioner

                    VACATED AND REMANDED

                               COUNSEL

Davidson, Lester & Kaffer, PLLC, Scottsdale
By Frederick E. Davidson, Brian G. Lester, Chad R. Kaffer
Counsel for Plaintiff/Appellee

Arizona Attorney General’s Office, Phoenix
By Michael Raine
Counsel for Defendant/Appellant
         MAGNESS v. ARIZ. REGISTRAR OF CONTRACTORS
                      Opinion of the Court

                               OPINION

Judge Michael J. Brown delivered the Opinion of the Court, in which
Acting Presiding Judge Margaret H. Downie and Chief Judge Diane M.
Johnsen joined.

B R O W N, Judge:

¶1           The Arizona Registrar of Contractors (“ROC”) appeals the
superior court’s order directing the ROC to issue payment from the
Residential Contractors’ Recovery Fund (“the Fund”) to Shelley Magness
and Colorado State Bank & Trust Company, as co-trustees of the Shelley
Magness Trust (“Magness”). For reasons that follow, we vacate the
superior court’s order and remand for further proceedings.

                            BACKGROUND

¶2           In September 2008, Magness and Lendo Management LLC
(“Lendo”) entered a contract for Lendo to construct a “bath addition” to a
house owned by Magness for the sum of $49,375. 1 The contract stated
“that additional work could be undertaken in accordance with Change
Orders.” Two months later, the parties entered a second contract that
provided for additional remodeling work to be performed for the sum of
$38,899 and included the same change order clause as the first contract.

¶3           Work on the project began in October 2008, and continued
through December 2009.        During construction, Magness approved
numerous change orders. By late December 2009, Magness had paid
Lendo $366,123.27. At that point, Lendo stopped working even though all
the contracted work was not yet completed. Magness unsuccessfully
attempted to contact Lendo to seek redress for the uncompleted work and
eventually paid other contractors to finish the project.

¶4            In April 2010, Magness filed a complaint against Lendo with
the ROC, which issued a citation naming Lendo. When Lendo failed to
file a response, an Administrative Law Judge (“ALJ”) entered a decision

1      It is undisputed that Lendo did not become a licensed contractor
until March 4, 2009.

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         MAGNESS v. ARIZ. REGISTRAR OF CONTRACTORS
                      Opinion of the Court

and order adopting the allegations of the complaint and revoking Lendo’s
license.

¶5           In November 2011, Magness filed a complaint against Lendo
in superior court alleging numerous claims, including breach of contract,
unjust enrichment, and conversion. Magness also named the ROC as a
defendant, alleging it was entitled to recover from the Fund based on
claimed damages of $17,461.45 ($8,619.40 for unperformed work, $1,030.00
for reimbursement of charges paid to Lendo for completion of the
unperformed work, and $7,812.05 for reimbursement of funds paid to
Lendo that should have been paid to subcontractors and suppliers).

¶6            In its answer, the ROC responded it was “without sufficient
knowledge to form a belief as to whether [Magness] is entitled to recovery
from the Fund[.]” The ROC also maintained that any award from the
Fund is statutorily limited to “the actual damages suffered by the claimant
as a direct result of the contractor’s violations” and “[o]nly those persons
injured as defined by [Arizona Revised Statute (“A.R.S.”) section] 32-1131
are eligible for recovery from the Fund.” The ROC requested that the
court deny Magness any recovery from the Fund unless Magness could
demonstrate eligibility under A.R.S. §§ 32-1131 and -1132(A) and
compliance with A.R.S. § 32-1136.

¶7            Lendo did not answer as required by Arizona Rule of Civil
Procedure (Rule) 12(a)(1)(A) and Magness filed an application for entry of
default and motion for entry of judgment by default without a hearing.
The superior court entered a default judgment against Lendo. As relevant
to the Fund claim, the court awarded Magness damages against Lendo in
the amount of $17,461.45. In response, the ROC filed a notice stating it did
not object to the entry of default judgment against Lendo, but that it did
“not waive any objections it has to a payout from the [F]und” and
“reserve[d] the right to object to an order directing payment from the
Fund for any other applicable reasons,” citing A.R.S. §§ 32-1131 -1140.

¶8             Magness then filed an application for an order directing
payment from the Fund. The ROC objected, asserting Magness’s
application did not satisfy statutory requirements because Magness failed
to (1) establish “eligibility for payment” as a “person injured” because the
house was owned by a trust; (2) demonstrate that Lendo held a
contractor’s license at the relevant time period; or (3) limit the claim to
“actual damages.” The ROC requested that, at a “minimum,” the court
“order a hearing requiring [Magness] to prove these matters.” The
superior court entered an unsigned minute entry granting Magness

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         MAGNESS v. ARIZ. REGISTRAR OF CONTRACTORS
                      Opinion of the Court

recovery from the Fund in the amount of $14,067.39 ($17,461.45 less
$3,394.06 that Magness had recovered from Lendo’s contractor’s bond).
The ROC moved for reconsideration, requesting an evidentiary hearing to
resolve factual issues relevant to Magness’s eligibility to recover from the
Fund. The superior court summarily denied the ROC’s motion and
entered a signed order directing payment from the Fund. The ROC timely
appealed.

                              DISCUSSION

¶9           The ROC argues the superior court erred by entering an
order of payment because Magness failed to demonstrate eligibility, under
the relevant statutes, to recover the awarded damages from the Fund.
Additionally, the ROC contends it was entitled to a hearing before such an
order of payment could be entered.

¶10           As a preliminary matter, we reject Magness’s argument that
because it obtained a default judgment against Lendo awarding damages
in the amount of $17,461.45 on its Fund claim, the ROC’s challenges to
Magness’s eligibility to recover from the Fund are precluded. As
expressly stated in Rule 55(a), default may be entered only against a party
who has failed to plead or otherwise defend. Here, the ROC filed an
answer challenging Magness’s eligibility to recover from the Fund before
an application for default was filed. Therefore, no entry of default against
the ROC could have occurred and the default judgment against Lendo did
not eliminate the ROC’s right to object to the subsequent application for
payment from the Fund. 2

¶11        Under the governing statutes (A.R.S. §§ 32-1132, -1136),
however, a party need not secure a judgment against the ROC as a

2      To the extent Magness argues that the ALJ’s decision in the license
revocation proceeding bars the ROC’s challenges on appeal, we likewise
reject that claim. The ALJ’s order adopted Magness’s allegations that
Lendo violated the parties’ contracts by failing to perform all of the work
specified. But the ALJ’s order did not establish that Magness was entitled
to recover from the Fund; instead, the order expressly noted that Magness
would not be eligible to recover from the Fund if it denied the contractor
the opportunity to complete the work. Furthermore, Magness did not
seek payment from the Fund based on the ALJ’s order as provided for in
A.R.S. § 32-1154 (setting forth the administrative remedy for collecting
from the Fund).

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          MAGNESS v. ARIZ. REGISTRAR OF CONTRACTORS
                       Opinion of the Court

prerequisite to recovering from the Fund. Section 32-1132(A) sets forth
the overall eligibility requirements:

      The residential contractors’ recovery fund is established, to
      be administered by the registrar, from which any person
      injured by an act, representation, transaction or conduct of a
      residential contractor licensed pursuant to this chapter that
      is in violation of this chapter . . . may be awarded . . . an
      amount of not more than thirty thousand dollars for
      damages sustained by the act, representation, transaction or
      conduct. An award from the fund is limited to the actual
      damages suffered by the claimant as a direct result of the
      contractor’s violation but shall not exceed an amount
      necessary to complete or repair a residential structure. . . .
      An award from the fund shall not be available to persons
      injured by an act, representation, transaction or conduct of a
      residential contractor who was not licensed pursuant to this
      chapter or whose license was in an inactive status, expired,
      cancelled, revoked, suspended or not issued at the time of
      the contract.

After obtaining a judgment against a residential contractor, the “injured
person” may apply to the superior court for an order directing payment
from the Fund. A.R.S. § 32-1136(B). If the injured person has given
twenty days’ notice to the ROC, “the court may direct payment out of the
fund either on receipt of a consent to payment signed on behalf of the
registrar or, in the absence of any written consent, after the notice
period[.]” Id. If the ROC files a timely written objection with the court,
however, “the court shall not direct payment from the fund without
affording the registrar a reasonable opportunity to present and support its
objections.” Id. (emphasis added). Thus, § 32-1136(B) establishes the
ROC’s procedural rights—notice and an opportunity to be heard in a
meaningful manner.

¶12           In this case, it is undisputed that Magness timely notified the
ROC that it was applying for court-ordered payment from the Fund. In
response, the ROC filed a timely written objection to Magness’s
application for payment, arguing Magness had failed to demonstrate its
eligibility. Citing § 32-1131, which defines “person injured,” in relevant
part, as “any owner of residential real property . . . which is actually
occupied or intended to be occupied by the owner as a residence,” the
ROC argued that Magness, as a trustee, did not qualify as both the
requisite owner and occupier of the property. Moreover, because it is

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          MAGNESS v. ARIZ. REGISTRAR OF CONTRACTORS
                       Opinion of the Court

undisputed that Lendo was not a licensed contractor at the time Magness
and Lendo entered the first and second contracts, the ROC argued Lendo
was not a licensed contractor “at the time the parties enter[ed] into the
contract” under § 32-1132(A). In addition, accepting the allegations of
Magness’s complaint as true, the ROC asserted that Magness’s requested
damages ($14,067.39) exceeded those permitted by statute because
Magness paid other contractors only $8,619.40 to complete the contracted
work. Finally, the ROC argued that § 32-1136(B) required the superior
court to hold a hearing to address the ROC’s written objections before
ordering payment from the Fund.

¶13           Magness countered that Shelley Magness, as the sole
beneficiary of the Trust, qualified as a “person injured” under the statute.
Magness did not dispute that Lendo was unlicensed at the time the first
and second contracts were formed, but maintained that each of the
numerous subsequent change orders was a contract for purposes of § 32-
1132 and noted that many of them were entered after Lendo obtained a
contractor’s license. Magness also claimed that the ROC could not
challenge the amount to be recovered from the Fund because the award of
damages was established by the superior court’s default judgment.
Finally, Magness argued that a hearing was not statutorily required and
the ROC’s request for a hearing should be denied.

¶14           The superior court implicitly denied the ROC’s request for a
hearing and “grant[ed] recovery to Magness in the amount of $14,067.39”
without expressly addressing any of the ROC’s objections. Thus, as a
threshold matter, we consider whether the superior court “afford[ed] the
registrar a reasonable opportunity to present and support its objections.”
A.R.S. § 32-1136(B).

¶15           “The interpretation of a statute is a question of law that we
review de novo.” Bonito Partners, L.L.C. v. City of Flagstaff, 229 Ariz. 75, 83,
¶ 30, 270 P.3d 902, 910 (App. 2012). “We interpret statutes to give effect to
the legislature’s intent, looking first to the statutory language itself.” Baker
v. Univ. Physicians Healthcare, 231 Ariz. 379, 383, ¶ 8, 296 P.3d 42, 46 (2013).
We strive to give effect to each word or phrase of the statute. Guzman v.
Guzman, 175 Ariz. 183, 187, 854 P.2d 1169, 1173 (App. 1993). When
construing a statute, “we examine its individual provisions in the context
of the entire statute to achieve a consistent interpretation.” State v.
Gaynor-Fonte, 211 Ariz. 516, 518, ¶ 13, 123 P.3d 1153, 1155 (App. 2005)
(citation omitted). “Indeed, if statutes relate to the same subject and are
thus in pari materia, they should be construed together . . . as though they
constituted one law.” Bonito, 229 Ariz. at 83, ¶ 30, 270 P.3d at 910.

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         MAGNESS v. ARIZ. REGISTRAR OF CONTRACTORS
                      Opinion of the Court

¶16           Section 32-1136, which sets forth the process for obtaining
payment from the Fund, expressly states that recovery is “subject to the
limitations stated in this article.” Considered in context with the other
statutes governing Fund eligibility, § 32-1136 necessarily includes the
threshold eligibility requirements set forth in § 32-1132(A), which, if not
met, bar recovery from the Fund. In addition, § 32-1136 (D) provides:

      The court shall proceed on an application in a summary
      manner and, on the hearing, the injured person is required to
      show that he:

      (1) Has given notice as required [twenty day notice to the
          registrar].

      (2) Has obtained a judgment which has become final . . .
          stating the amount and the amount owing at the date of
          the application.

      (3) Has proceeded against any existing bond covering the
          residential contractor and has not collected upon such
          bond an amount of thirty thousand or more [except when
          the award is made pursuant to an administrative
          proceeding].

      (4) Is not aware of any personal or real property or other
          assets of the debtor which can be applied in satisfaction
          of the judgment.

(Emphasis added.) By its plain language, subsection D contemplates a
hearing when the ROC has objected to an application for payment.
Nonetheless, Magness argues that because none of the requirements
outlined in subsection D is contested in this case, no hearing was
necessary. We do not construe the scope of the hearing referenced in
§ 32-1136(D) so narrowly. The statute establishes a list of minimum
requirements the injured person must prove. When, as here, the ROC
challenges an applicant’s lack of compliance with requirements set forth
elsewhere in the governing statutes, the applicant must also demonstrate
that those statutory prerequisites have been satisfied.

¶17          This construction of § 32-1136(D) gives effect to each of the
relevant provisions of the statutory scheme governing eligibility for
payment from the Fund. See Guzman, 175 Ariz. at 187, 854 P.2d at 1173 (“It
is a cardinal rule of construction that statutory provisions must be
considered in the context of the entire statute and consideration must be

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          MAGNESS v. ARIZ. REGISTRAR OF CONTRACTORS
                       Opinion of the Court

given to all of the statute’s provisions to determine the legislative intent
manifested by the entire act.”). Notwithstanding the four conditions listed
in subsection D, subsection E provides that the “court shall make an order
directed to the registrar requiring payment from the fund of whatever sum
it finds to be payable on the claim, in accordance with this section, if the court
is satisfied on the hearing of the truth of all matters required to be shown
by the injured person by subsection D of this section.” (Emphasis added.)
The phrase “whatever sum it finds to be payable on the claim” denotes the
court’s discretion to evaluate and determine the amount due under the
statutes. In addition to establishing “actual damages,” a person seeking
payment from the Fund must satisfy other eligibility requirements that are
not included in subsection D, such as (1) proving “person injured” status
under § 32-1131(3) and (2) establishing that the contractor was properly
licensed at the time of the contract under § 32-1132(A).

¶18           In sum, an applicant seeking recovery from the Fund
through a civil remedy must obtain a judgment against the contractor and
meet all of the remaining statutory eligibility requirements. Thus, we are
not persuaded by Magness’s argument that the scope of the hearing
referenced in § 32-1136(D) is strictly limited to the four requirements of
that section because doing so would nullify the eligibility requirements of
§ 32-1132 and undermine a key purpose of the Fund, namely, to
compensate homeowners who have been harmed by licensed contractors.
See Koss Corp. v. Am. Exp. Co., 233 Ariz. 74, 79, ¶ 12, 309 P.3d 898, 903
(App. 2013) (noting that statutes should not be construed in a manner that
would lead to an absurd result, conflict with legislative intent or “be
contrary to the rest of the statutory scheme”). Similarly, Magness’s
reading of the statute would deprive the ROC of its statutory right to
present and support its objections and would improperly relieve an
“injured person” of the burden of demonstrating eligibility for payment
from the Fund. We therefore conclude the superior court erred in
summarily granting Magness’s application for payment. 3

3      Based on our resolution of the hearing issue, we express no opinion
regarding the merits of the ROC’s challenges to Magness’s eligibility to
recover from the Fund and remand those matters for consideration by the
superior court in the first instance. On remand, the superior court is in the
best position to determine the scope of the hearing needed to determine
whether Magness has met its burden of establishing eligibility for
payment from the Fund, recognizing the need to consider Magness’s
application in a “summary manner.” See A.R.S. § 32-1136 (D).

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          MAGNESS v. ARIZ. REGISTRAR OF CONTRACTORS
                       Opinion of the Court

¶19            Magness has requested an award of attorneys’ fees pursuant
to A.R.S. § 12-348, which provides that “a court shall award fees and other
expenses to any party . . . which prevails by an adjudication on the merits”
in a “court proceeding to review a state agency decision[.]” Magness has
not prevailed on appeal and, in any event, “the provisions of A.R.S. § 12-
348 do not apply to attorneys’ fees awarded from the Fund.” Shelby v.
Ariz. Registrar of Contractors, 172 Ariz. 95, 100, 834 P.2d 818, 823 (1992); see
also A.R.S. § 32-1132(A) (stating that “monies in the residential contractors’
recovery fund shall not be directly awarded for attorney fees or costs
except in contested cases appealed to the superior court” via an
administrative remedy.). Therefore, we deny the request.

                               CONCLUSION

¶20           Because the ROC was not afforded its statutory right to
present and support its objections, we vacate the superior court’s order
directing payment from the Fund and remand for further proceedings
consistent with this opinion.

                                   :MJT

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