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ROC: Are the Apples the Same or Different?

 

Sharon B. Shively

 
 

Should res judicata or collateral estoppel bar civil actions or  issues after a final ROC Decision and Order?

This article was prepared in conjunction with Sharon Shively's March 3, 2017, presentation at "Arizona Construction Law 2017: Annual Update of Recent Developments," sponsored by the State Bar of Arizona.

Do the principles of collateral estoppel and res judicata apply to bar issues or actions, heard in the administrative hearing process through the Arizona Registrar of Contractors (ROC), from being raised in civil court? To date, the answers are “yes and no” and “it depends.” Oftentimes, this question is manifested by the inquiry of “how many bites of the apple should be permitted?” But that answer depends on whether the apples are the same or different. Let’s review the legal principles first.

1. The Preclusive Doctrines

Res judicata bars a later suit based on the same cause of action and will preclude a claim when a former judgment on the merits was rendered by a court of competent jurisdiction and the matter now is at issue between the same parties or their privies was, or might have been determined in the former action.[1] Res judicata generally applies to valid and final adjudicative determinations by administrative tribunals. Id.

The doctrine of “collateral estoppel” bars a party from relitigating an issue identical to one he has previously litigated to a determination on the merits in another action. Id. Issue preclusion minimizes inconsistent determinations of factual issues among different forums and promotes judicial economy.

2. Case Discussions

The few Arizona cases on the issue typically start with a citation to J.W. Hancock Enterprises v. Arizona State Registrar of Contractors.[2] In Hancock, the homeowners filed a complaint with the Registrar regarding a dispute between them and the contractor as to whether the supplement to a contract required installation of Zonolite wall insulation. A hearing was held in which the contractor represented itself. The Registrar issued a Decision and Order finding that the parties had contracted for an insulation package including Zonolite wall insulation. Based on that finding, the Registrar found a violation of A.R.S. § 32-1154(A)(3), which requires licensed contractors to comply with the applicable plans and specifications. The contractor was required to install the Zonolite or have its license suspended. After retaining counsel, the contractor, claiming it had additional evidence to offer, petitioned for a rehearing that was denied. A statutory appeal followed which affirmed the Registrar’s decision. The contractor filed a declaratory judgment action which it lost on summary judgment based on the decision in the statutory appeal. The contractor argued that the Registrar of Contractors’ decision was an unconstitutional usurping of judicial power. The Arizona Court of Appeals concluded that:

“the construction and interpretation of disputed contract terms by the Registrar of Contractors pursuant to A.R.S. § 32-1154(A)(3) may constitutionally be exercised by the Registrar ancillary to its regulatory function.” Id.

Seemingly, the Court found that the factual issue of failing to install the Zonolite was a violation of the statute, which fact also supported a breach of contract claim. Having found the violation, the Court based its decision barring the relitigation of whether there was a breach of contract on the doctrine of collateral estoppel.[3] The Court did note that

“[t]he Registrar’s power is limited to suspending or revoking a contractor’s license, or attaching conditions to the license. Money damages may not be awarded.” Id. at 125.[4]

Interestingly, not one of the cases which involve a Registrar of Contractors hearing and cites to Hancock are reported cases, whether in federal or state court. In Pierce v. Laydon Leasing, Inc. dba Custom Pools, 2011 WL 1631931 (App. 2011), the Court of Appeals affirmed a Mohave County trial court ruling that a Registrar of Contractors decision was binding on the issue of whether the construction of a pool was so defective that the pool failed, causing damage to the house. The Court held that this issue was litigated before the Registrar on claimed violations of A.R.S. § 32-1154(A)(1), (3), (7), and (23), the Registrar found in favor of the pool contractor, and thus granted the contractor’s motion for summary judgment. The Court held that the issue was actually litigated before the agency, the parties had a full and fair opportunity to litigate the issue, resolution of the issue was essential to the decision, there was a valid final decision on the merits and there was a common identity of the parties. Id. The Pierces argued that they should not be precluded from civil litigation, as the remedy sought in court (money damages) was different than the remedy sought in the administrative hearing. The Court disagreed, stating that such an argument was relevant to a res judicata analysis, not a collateral estoppel analysis. Having found against the homeowners on the factual issue of the cause of the damage to the home (finding it was not the installation of the pool that was defective causing the problems), the Pierces could not re-litigate that issue in court. Presumably, had the Pierces been successful in the administrative hearing, they could have filed a lawsuit in civil court for damages, with the factual finding in their favor being subject to issue preclusion against the contractor.

In an unreported Arizona District Court case, Judge Neil Wake analyzed the preclusive effect of Registrar proceedings on Superior Court proceedings. First, the Court acknowledged that federal law requires the court to give the Registrar proceedings “the same full faith and credit ... as they have by Law or usage in the courts of [Arizona].”[5] The Court noted that, in Arizona, “[b]oth doctrines of res judicata and collateral estoppel may apply to decisions of administrative agencies acting in a quasi-judicial capacity.”[6] Importantly, however, the Court distinguished between the two doctrines:

Under the doctrine of res judicata, a judgment on the merits in a prior suit involving the same parties or their privies bars a second suit based on the same cause of action. This doctrine binds the same party standing in the same capacity in subsequent litigation on the same cause of action, not only upon facts actually litigated but also upon those points which might have been litigated. ...

Collateral estoppel is a doctrine of issue preclusion. It bars a party from relitigating an issue identical to one he has previously litigated to a determination on the merits in another action. The elements necessary to invoke collateral estoppel are:

  • the issue is actually litigated in the previous proceeding;

  • there is a full and fair opportunity to litigate the issue;

  • resolution of such issue is essential to the decision;

  • there is a valid and final decision on the merits; and

  • there is a common identity of parties.[7]

The Court focused on the major difference between res judicata and collateral estoppel in that case by noting that the former bars relitigation of every issue that may have been litigated, but the latter precludes relitigation only of issues actually litigated. Id.

The Court concluded that res judicata did not apply to bar a breach of contract claim before the Court, because the owner’s complaint to the Registrar about the workmanship was not a suit for breach of contract. Moreover, the Court noted that the owner (Cathay) could not sue for breach of contract in front of the Registrar because the Registrar has a statutory jurisdiction limited to certain powers it may exercise over contractors. While the Registrar has power to resolve bona fide contractual disputes involving licensed contractors to determine whether a contractor has violated the statutory provision that prohibits departure from plans or specifications without consent, it is a power ancillary to the Registrar’s regulatory mission and is viewed as extending to all contractual disputes necessary to adjudicating an alleged regulatory violation.[8]

Thus, narrowing the issue to one of collateral estoppel, the Court reviewed which factual issues were determined in the Registrar hearing and whether the Registrar had jurisdiction over those issues by referring to A.R.S. § 32-1154. Finding that two of the issues which were adjudicated in the Registrar hearing would also constitute breaches of contract, the Court held that the Owner was collaterally estopped from re-litigating those specific issues.

In Hayes v. Dexter Construction, Inc.,[9] the Registrar of Contractors issued a final order revoking a contractor’s license unless it fixed the homeowner’s wood floors before the effective date of the order. Other homeowner complaints in addition to the wood floors were also raised before the ROC. The homeowners filed a civil action seeking damages for breach of contract concurrently with the ROC complaint. The contractor argued that the trial court erred in awarding damages for claims that had been previously adjudicated by the ROC because only damages related to the wood floors should have been litigated. The trial court concluded that the homeowners were not precluded by res judicata from seeking money damages for the breach of contract and the Court of Appeals agreed.[10]

In CDC Pools, Inc. v. Eagleson,[11] the trial court dismissed a contractor’s declaratory judgment complaint after it was stayed pending the resolution of an appeal of a Registrar’s Decision and Order. In that case, the homeowners filed an administrative complaint with the Register alleging several violations of A.R.S. § 32-1154(A). The ROC investigator issued a corrective work order, but ultimately at the hearing the administrative law judge, finding that the parties had rescinded the contract, dismissed the ROC complaint. While the ROC complaint was pending, the contractor filed a civil action for a declaratory judgment that the contract had been terminated and the homeowners were not entitled to anything more under the contract, and sought attorneys’ fees and costs. When the contractor filed a motion for summary judgment, the homeowners requested a stay pending resolution of their appeal from the ROC ruling that had been entered in the interim. The court granted the stay, denied the motion for summary judgment without prejudice, and stated that the court action would be “superfluous” if the ROC’s ruling was affirmed on appeal. The appeal was ultimately dismissed as untimely, effectively affirming the ROC ruling and leaving it as the final ruling. The court then dismissed the civil action with prejudice and denied all relief. The appellate court agreed that the declaratory judgment action was properly dismissed, as such an action cannot be brought to review an administrative decision where there exists a procedure to appeal from the administrative ruling. Id. The court further stated that a declaratory judgment action may not be used to preempt or prejudge issues that are committed for initial decision to an administrative body. The court went even further, however, and also concluded that, based on the Hancock case, the administrative ruling barred the declaratory judgment action based on the collateral estoppel doctrine.

In Nick Hardy Construction v. Nyberg,[12] Nyberg hired Hardy to construct a home. During construction, she saw cracks and heaving in the concrete slab. She filed a complaint with the Registrar of Contractors listing ten items, some of which related to the concrete slab. At the administrative hearing, Nyberg testified that the non-concrete items were no longer issues. The administrative law judge found that the concrete slab did not comply with industry and workmanship standards and that the contractor thus violated A.R.S. section 32-1154(A)(3). Hardy did not appeal, made the repairs, and filed a notice of compliance with the Registrar of Contractors. The administrative law judge found that Hardy had complied with the terms and conditions of the ROC Order and recommended the matter be closed, and the ROC agreed. The homeowner appealed to the Superior Court, which affirmed the ROC decision.

During the ROC proceedings, Hardy sued Nyberg for breach of contract and unjust enrichment for amounts due under the contract. Nyberg filed a counterclaim for breach of contract, negligence related to the concrete slab, and false reporting of a lien. On competing motions for summary judgment, Hardy argued that collateral estoppel and res judicata barred the counterclaims because the concrete slab workmanship had been litigated previously in the ROC proceedings. The trial court agreed with Hardy that res judicata and collateral estoppel applied and precluded the homeowner’s counterclaims. The court reasoned that Nyberg had testified that all other issues had been resolved and that only the concrete slab issues remained, and that she failed to disclose or assert a claim for money damages or seek restitution during the ROC proceeding.

On appeal, Nyberg argued that she should not be precluded from bringing a breach of contract claim for associated damages. Hardy conceded that res judicata and collateral estoppel should not have applied to bar Nyberg’s breach of contract counterclaim. The appellate court agreed and concluded that, while the ALJ’s findings have preclusive effect, citing Hancock, the ROC cannot award compensatory damages, relying on Bentivegna v. Powers Steel & Wire Prods., Inc.,[13] quoting “to fully protect a plaintiff’s rights, he must be allowed to seek money damages in the courts in addition to any remedies available through the ROC complaint procedure.” Moreover, the appellate court concluded that, even though Nyberg testified at the ROC hearing that the other items on her complaint list were no longer a problem, because she wasn’t a party to the ROC hearing (just a complaining witness), she was not precluded from presenting evidence on those issues as part of her claim for damages. In support of that statement, the court cited to Twin Peaks Const. Inc. of Nevada v. Weatherguard Metal Construction.[14]

In 34 Degrees North, LLC v. Mountain View Construction, LLC, 2016 WL 7209664, a commercial owner filed an ROC complaint against the original general contractor, who was ordered to take corrective action. Because the owner had selected a new general contractor, the original general contractor did not have the opportunity to correct anything. Nonetheless, the administrative law judge found that two of nine charges had merit, and the ROC placed the general contractor on 120 days of discipline.

Subsequently, the owner filed a civil suit against the original contractor and the follow-on general contractor. The original general contractor filed a Motion for Summary Judgment, claiming that collateral estoppel under the Hancock case barred the claim. The trial court agreed.

On appeal, the owner claimed that collateral estoppel should not apply because the owner wasn’t a “party” to the ROC proceeding. Unfortunately, the appellate court punted on this issue and assumed, without deciding, that even if the owner wasn’t a party, and even if collateral estoppel was not a bar, the motion for summary judgment was still properly granted because the owner had no standard of care expert.

3. Two Elements for Collateral Estoppel May Be Missing in Administrative Hearings

The Same “Parties” Are Not Involved. The Twin Peaks court noted that A.R.S. § 32-1154 “prohibits specified conduct by the holder of a contractor’s license, which is granted by the Registrar.” Id. at 380. The statute authorizes the Registrar to investigate, impose civil penalties, including suspension and revocation of a license if a violation is found. Under A.R.S. § 32-1154(B), the Registrar is required to investigate a complaint, hold a hearing, and issue a final determination about the licensee’s status, subject to judicial review. Accordingly, the Court concluded that the complainant is not a party to the action, even though a complaint was filed to start the process. If that is the case, of course, as the Nygard court agreed, then collateral estoppel and res judicata would never apply.

And so, we are left in ambiguity. If the complaining owner or contractor in an ROC proceeding is not a party to the proceeding, then neither collateral estoppel nor res judicata can apply. Only one of the cases discussed above follows that reasoning, however. Additionally, none of the cases address whether the ROC proceedings are really “fully and fairly” litigated – another requirement to find preclusive effect.

There Is No Full and Fair Opportunity to Litigate. For those lawyers that routinely practice before the Registrar of Contractors, few would take the position that those proceedings are at all similar to the full and fair opportunities to litigate that are present in civil court. The significant differences in procedure and opportunity between the two forums can easily lead to the same issue being determined differently, depending on the forum selected. For example, there is no opportunity for the same level of discovery, disclosure and evidentiary rules and protections in ROC proceedings that there is in civil court. Indeed, there are no rules for disclosure and exchange of documentation, the evidentiary rules do not apply, and hearsay is virtually always admitted in administrative hearings.

Accordingly, administrative decisions will often be made based on evidence that is insufficient and unreliable and would not be admissible in civil court. Construction entities can represent themselves in administrative proceedings, but not in trial court. Of course, not surprisingly, almost no unrepresented party would understand that the result of an administrative proceeding might have a preclusive impact on their right to litigate in a court of law.

Given the trial court opportunities of pre-trial discovery, evidentiary objections, skilled cross examination, a lawyer’s skilled trial presentation, and the availability of a jury, it is likely that a court decision will be different from or inconsistent with a decision made by an administrative law judge.

4. Final Decisions and Orders from the ROC Should Not Preclude a Party from Pursuing a Trial Court Action

The significant differences noted above support a legal analysis that neither a contractor nor an owner should be precluded from pursuing a civil action in trial court, notwithstanding a Final Decision and Order issued by the Registrar of Contractors.

First, there is the basic question of whether the complainant is actually a “party” to the dispute or just a witness.

Second, while there may be a possibility that findings of fact in any particular case may be inconsistent between the two forums, the goals, procedures and safeguards of the two forums are different enough that the Court should not be bound by the administrative proceeding.

It should be noted here, however, that, as of this writing, Arizona Senate Bill 1072 (2017) is pending in the Arizona Legislature. That bill amends A.R.S. § 12-910 relating to the judicial scope of review of final administrative decisions. Because the bill is still being amended and modified, it is not known whether the final version, if passed and adopted, will alter the analysis above. Moreover, the Arizona Registrar of Contractors could consider adding new rules that require a more robust disclosure and discovery process and develop new safeguards. If adopted, such new rules may also impact the above analysis.


[1] Better Homes Construction, Inc. v. Goldwater, 203 Ariz. 295, 53 P.3d 1139 (App. 2002), citing Gilbert v. Bd. Of Med. Exam’rs, 155 Ariz. 169, 745 P.2d 617 (App. 1987), superseded on other grounds by statute as stated in Goodman v. Samaritan Health System, 195 Ariz. 502, 990 P.2d 1061 (App. 1999).

[2] 142 Ariz. 400, 690 P.2d 119 (App. 1984)

[3] Interestingly, there was no issue raised about the Registrar of Contractors using its own employees as hearing officers in this case. The Office of Administrative Hearings was legislatively created in 1995 and took effect on January 1, 1996. See e.g., R.L. Augustine Const. Co., Inc. v. Peoria Unified School Dist. No. 11, 188 Ariz. 368, 936 P.2d 554 (1997).

[4] Following up on that theme, in 1990, Sunpower of Arizona appealed a decision of the Registrar, after hearing, that Sunpower was required to remove solar equipment it had installed and return the full amount paid to a homeowner. Sunpower of Arizona v. Arizona State Registrar of Contractors, 166 Ariz. 437, 803 P.2d 430 (App. 1990). Sunpower argued that being required to refund the money paid was “money damages,” essentially a rescission of the contract and not within the scope of the Registrar’s regulatory powers. The Court of Appeals disagreed holding that such awards are restitutionary and are within the powers of the administrative agency.

[5] Design Trend Intern. Interiors, Ltd. v. Cathay Enterprises, Inc., 2011 WL 1135887 (D. Ariz. 2011), on rehearing 2012 WL 727528 (D. Ariz. 2012) (judgment revised on rehearing)

[6] Id., citing Hawkins v. State, 183 Ariz. 100, 900 P.2d 1236 (App. 1995).

[7] Id. (quoting Gilbert v. Bd. Of Med. Exam’rs, 155 Ariz. 169, 745 P.2d 617 (App. 1987).

[8] Id. citing Sunpower of Arizona v. Arizona Registrar of Contractors, 166 Ariz. 437, 803 P.2d 430 (App. 1990)

[9] 2012 WL 27597 (App. 2012)

[10] Id. citing Bentivegna v. Powers Steel & Wire Prods., Inc. 206 Ariz. 581, 81 P.3d 1040 (App. 2003)

[11] 2014 WL 2801802 (App. 2014)

[12] 2016 WL 159344 (App. 2016)

[13] 206 Ariz. 581, 81 P.3d 1040 (App. 2003)

[14] 214 Ariz. 476, 154 P.3d 378 (App. 2007)