AZ Court of Appeals Broadly Interprets Persons Entitled to Compensation From Arizona Residential Contractors’ Recovery Fund

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It’s not just for homeowners anymore – Arizona Court of Appeals decides a resident of property owned by his trust may still receive compensation from the Arizona Residential Contractors’ Recovery Fund.

A recent Arizona Court of Appeals’ decision gives a broad interpretation on the eligibility of an injured person who may assert a claim for compensation from the Arizona Registrar of Contractor's Residential Contractors' Recovery Fund (Fund). The decision reversed prior rulings that the injured person, who resided in property owned in his trust which he controlled, could not bring a claim under the Fund.

In Pinnamaneni v. Arizona Registrar of Contractors, Case No. 1 CA-CV 14-0006, the Court of Appeals held that Krishna Pinnameneni, (Resident), who designed a home for himself to be built on property owned by the Krishna M. and Bhavani K. Pinnamaneni Revocable Living Trust (Owner-Trust), was allowed to recover from the Fund as a “person injured”[1] by a residential contractor’s violation of the rules governing registered contractors.

The Resident had acted through his LLC, the Pioneer Family Investments (Company), to negotiate a contract with the contractor, The Untouchables (Contractor).

When problems with the construction arose, the Resident filed a complaint with the Arizona Registrar of Contractors (ROC) against the Contractor. Though the Resident listed himself as the “homeowner” and “Person Filing the Complaint,” he listed the Company as the “Company name (If filing on behalf of a company).”

The ROC ruled that the Resident was not eligible to recover under the fund because (1) he was not the “person injured” under A.R.S. § 32-1131(3); (2) the Company (and not the Resident or the Owner-Trust, which owned the property) filed the underlying complaint; and (3) the Company had the contract with the Contractor, not the Resident. The Superior Court agreed on appeal, but the Court of Appeals disagreed and reversed.

To qualify as a “person injured” under the Fund statute[2], a claimant must (1) be an owner of residential real property; (2) actually occupy or intend to occupy the property as a residence and (3) be damaged by the failure of a residential contractor to adequately build or improve a residential structure.

The ROC found that the Contractor had performed deficient work and revoked its license. The Resident (on his own behalf and as trustee) and Company then filed a claim to recover payment from the Fund[3], which the ROC denied.

Unlike the lower court, the Court of Appeals said that the Resident was a “person injured” even though the property at issue was owned by the Owner-Trust, yet occupied by the Resident.

The Court noted that the Resident had complete control over the property in the Owner-Trust, because it was revocable and he created it and acted as both the trustee and a beneficiary. As such, the Court concluded that “under these circumstances—where the property is owned by a revocable trust and the occupant is the trustor, trustee, and beneficiary of that revocable trust—the trustee acting on behalf of the trust satisfies the owner and occupant requirements of [the Fund statute].”

Addressing the lower court’s denial of the Resident’s claim because he did not have a direct contractual relationship with the Contractor, the Court of Appeals noted that the current version of the statute (as compared to the original version) does not require a direct contractual relationship between a property owner whose property is damaged and the contractor alleged to have caused the damage.

And finally, disagreeing with the lower court’s decision, the Court of Appeals found that participation in the underlying complaint to the ROC was not required to recover from the Fund. The Court found that the law[4] provides that recovery funds are available “to remedy the violation,” and is not contingent on who files a complaint.

Notes:

[1] See A.R.S. § 32-1131.

[2] Under A.R.S. § 32-1154(G), “if a contractor’s license has been revoked or has been suspended as a result of an order to remedy a violation of this chapter, the registrar may order payment from the residential contractors’ recovery fund to remedy the violation.” A person injured by the violation may be awarded up to $30,000 for actual damages suffered as a direct result of the contractor’s violation. A.R.S. § 32-1132(A).

[3] A.R.S. § 32-1131(3).

[4] A.R.S. § 32-1154(B).

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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