Changes in Arizona law regarding administrative appeals for contractors in ROC hearings
By Jamie Hanson, Lang & Klain
If either party to an Arizona administrative dispute is unhappy with the outcome of a case at the agency level, they can appeal the outcome to the Superior Court. That is not news.
What is news is that, thanks to recent legislation, the Superior Court proceeding is no longer a mere review of the administrative hearing. Now it can involve a brand-new trial in which the Court cannot even consider the administrative agency’s decision.
The statute – A.R.S. § 12-910 – that governs many administrative appeals was amended during the 2021 legislative session (via Arizona Senate Bill 1063) in ways that affect the entire complaint process.
AMENDMENTS TO A.R.S. § 12-910 REMOVE ALL DEFERENCE TO THE AGENCY’S RULING.
Under older versions of A.R.S. § 12-910, the decisions of administrative agencies received deference from the Court. That is to say, in any close question of fact or law, the Court was required to defer to the agency’s decision or interpretation.
The Court’s duty to defer to administrative agencies began to erode a few years ago. In 2018 the Legislature amended A.R.S. § 12-910 to remove the Court’s deference to government agencies on legal issues:
“In a proceeding brought by or against the regulated party, the court shall decide all questions of law, including the interpretation of a constitutional or statutory provision or a rule adopted by an agency, without deference to any previous determination that may have been made on the question by the agency.”
This shift was important, but not startling. Allowing a judge, rather than a government agency, to decide how the law ultimately applies made sense.
More recently, pursuant to SB 1063, which became the law in September 2021, the Court’s deference to the administrative agency disappeared entirely, requiring the Court to decide factual issues for itself:
“In a proceeding brought by or against the regulated party, the court shall decide all questions of fact without deference to any previous determination that may have been made on the question by the agency.”
This is a seismic shift. And there is more.
UNDER THE 2021 AMENDMENTS, ANY PARTY CAN DEMAND A TRIAL DE NOVO.
NOTE: The amendments to A.R.S. § 12-910 apply to nearly all State of Arizona regulatory agencies. However, as licensed contractors were the original audience for this article, our examples from this point forward will refer to the Arizona Registrar of Contractors and parties to disputes involving that agency. With that in mind, the reader should look to A.R.S. § 12-910(D) for the “trial de novo” provision applicable to the Registrar of Contractors.
Ordinarily, an administrative agency such as the Arizona Registrar of Contractors (ROC) receives recommended factual determination from an administrative law judge at the Office of Administrative Hearings (OAH). The administrative law judge presides over an administrative hearing, in which the parties (e.g., a homeowner and a contractor facing an ROC complaint) present testimony, documentary evidence, and arguments.
After the hearing, the administrative law judge issues a “recommended decision” and forwards it to the originating agency (in this case, the ROC). The ROC’s final administrative decision generally accepts the recommended decision (although it can also reject or modify the decision).
Under the previous version of A.R.S. § 12-910, the factual determinations coming out of that hearing were very hard to challenge. The amended A.R.S. § 12-910 seems to change that radically. It states that, in an appeal from a “final administrative decisions of agencies that regulate a profession or occupation pursuant to title 32” (and that includes the ROC), “the trial shall be de novo if trial de novo is demanded in the notice of appeal or motion of an appellee other than the agency.”
In this context, a “trial de novo” is a “new trial,” held in Superior Court, that disregards the findings of the administrative hearing. All testimony and other evidence is considered as if the administrative hearing had never been held.
This is a radical change; it seems to mean that, if either the homeowner or the contractor in an ROC dispute is unhappy with the ROC’s final administrative decision in their case, that party has the right to demand a new trial, which would be held in Superior Court.
THE EFFECTS ARE POTENTIALLY FAR-REACHING.
The real-world implications of this shift in the law are momentous.
First, the potential length and expense of an ROC dispute seem to have increased. Previously, if a homeowner and a contractor had a dispute, the ROC’s final administrative decision was, for practical purposes, normally the end of that dispute. A legal challenge usually to the Registrar’s decision did not make sense, given the laws requiring deference to the Registrar and its determinations. But now, A.R.S. § 12-910 tells us that the Registrar’s decision cannot legally be the final word (i.e., no deference), and either party can have a trial de novo if they demand it. So the ROC’s decision after n hearing is not necessarily the end of the dispute.
Second, contractors now seem incentivized to assert their own claims against homeowners. Real-world disputes between contractors and homeowners often involve claims on both sides. The homeowner may have a claim for work poorly performed or not performed at all; the contractor may have a claim for the owner’s non-payment.
In the world of the ROC, the contractor is not allowed to assert a claim for non-payment. There is no procedure for it, and, more fundamentally, the ROC has no jurisdiction over a homeowner. The ROC complaint process is exclusively about the regulated party (the contractor) and its compliance with construction-related regulations.
However, under the newly amended A.R.S. § 12-910, a contractor in an administrative hearing is now incentivized to assert, in Superior Court, a claim against the homeowner for non-payment. If the administrative hearing against the contractor can easily lead to a new trial in front of a Superior Court judge, then why not assert the claim for non-payment against the homeowner (i.e., a lawsuit) and then consolidate the cases when the time is right?
This is legally possible, and it is prudent for contractors to consider. It may make homeowners think twice about filing a frivolous or questionable ROC complaint (which they can currently file for free at the ROC’s office).
Third, attorney fee awards appear to be increasingly possible in conjunction with ROC cases. The possibility of ultimately consolidating (a) an appeal from an ROC decision with (b) a contractor’s claim for non-payment against a homeowner raises another real-world issue, which is often the most critical issue in disputes: attorney fees.
In the ROC complaint process, neither party can receive an award of attorney fees, and traditionally no one gets their fees awarded in an appeal from an ROC decision either. The influential case on that issue is Keystone Floor & More. In that case, the Court explained that A.R.S. § 12-341.01, the statute that normally allows attorney fees to be awarded to the prevailing party in a contract dispute, does not apply in appealing an ROC decision. The Court’s explanation relies on describing the action before it as focused exclusively on the contractor’s statutory obligations and the ROC’s regulatory decisions.
But now, if the contractor can consolidate a suit for non-payment with an appeal from any ROC decision, the case seems to be more truly one that is “arising out of contract” (the critical phrase in the statute governing attorney fees) in a way that triggers the availability of a fee award under A.R.S. § 12-341.01. Such a possibility makes the prospect of a drawn-out ROC dispute with a homeowner a little less bleak for contractors.
Fourth, more contractors will likely need to hire lawyers to handle ROC complaints. If a homeowner wants to push an ROC hearing into a trial de novo before the Superior Court, most contractors will necessarily have to hire an attorney. The reason: Most contractors are either a corporation or an LLC; a corporation or LLC is allowed to represent itself in the Office of Administrative Hearings for an ROC complaint, but it is not allowed to appear without an attorney in Superior Court, where any appeal or trial de novo would be held.
The homeowner, who is allowed to self-represent in either setting, can therefore force a contractor to hire legal counsel if the dispute continues into Superior Court. The attraction of the trial de novo to a homeowner disappointed with an unfavorable ROC decision makes that possibility more likely than ever.
Finally, the new law throws uncertainty around Recovery Fund decisions. If a homeowner obtains discipline against a licensed residential contractor, the homeowner may seek a payout from the ROC’s Recovery Fund for “actual damages” attributable to the contractor.
For workmanship issues, the measure of actual damages is usually established by bids or invoices from other licensed contractors. For various reasons, the amounts involved are usually higher than those that the original, disciplined contractor would have charged or incurred. It’s cheaper to do it yourself; it’s more expensive if someone else takes over your work.
But who ultimately decides the amount that gets paid to the homeowner? (By the way, it is an amount that the original contractor is responsible for re-paying with 10% interest in order to stay licensed.) It is the ROC that decides how much money gets paid out. The ROC’s decision is subject to its own appeal; either the contractor (who wants the payout to be lower) or the homeowner (who wants it to be higher) can challenge the ROC’s calculation.
Under the new A.R.S. § 12-910, it is conceivable that the ROC and its Recovery Fund personnel are pulled deeply into cases that go to Superior Court, so that the ROC can explain precisely why a homeowner is or is not entitled to certain amounts for “actual damages.” If this is accurate, then the whole administrative complaint process seems less reliable for homeowners who believe they have been injured by a licensed residential contractor.
IN THIS NEW LEGAL LANDSCAPE, ANYONE INVOLVED IN AN ROC COMPLAINT SHOULD CONSULT WITH A KNOWLEDGEABLE ATTORNEY.
As this article is written (December 2021), the latest revisions to A.R.S. § 12-910 are brand new. No one has yet subjected the revisions and their implications to litigation, which is where courts and practitioners work out the details that need to be decided.
Nor has the ROC yet published any substantive policy statement about what it will or will not do in light of the statutory revisions. And that is not a criticism of the ROC. It is too early to tell how things will work under the revised § 12-910 and how the ROC’s complaint process actually will be affected.
But one thing is clear: Anyone dealing with an ROC complaint or thinking about filing one should be aware of this new statutory framework. There are great possibilities created by the changes, but also some potential pitfalls. Thus, it is more important than ever to consult with experienced, informed attorneys about how to handle the ROC complaint process prudently and strategically.
Lang & Klain partner Jamie Hanson is a Certified Administrative Law Specialist (Arizona Board of Legal Specialization) and a former Chief Counsel at the Arizona Registrar of Contractors. Contact Jamie at 480-534-4877 or by email.