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Flagstaff Affordable Housing v. Design Alliance (CA1 3/24/09)

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[THIS OPINION WAS REVERSED AND REMANDED BY THE ARIZONA SUPREME COURT ON 2/12/10. That opinion is here.]

In the last few days, both divisions of the Court of Appeals have issued opinions discussing the economic loss rule.

We will not comment on Valley Forge Insurance v. Sam’s Plumbing, L.L.C. (CA2 3/19/09) since an AzAppBlog writer was among the many lawyers involved, in one way or another, in the six or eight or more pieces of litigation that arose out of that accident (see our FAQ).

Design Alliance designed apartments that Flagstaff Affordable Housing built. The design violated federal handicap-accessibility  requirements. FAH was required to remedy the problem at considerable expense so it sued for, among other things, negligence.

Design Alliance moved to dismiss, arguing that the economic loss rule barred the claim. That rule, established in Arizona by the First Division in  Carstens v. City of Phoenix, 206 Ariz. 123, says that there can be no recovery for economic loss absent personal injury or property damage. The trial court granted the motion.

On appeal, the court reversed.

The relationship between architect and owner is one between professional and client. Professionals owe special duties to their clients. Therefore, the owner’s claim against the architect is based in tort, not contract.

If that reasoning seems a bit sketchy to you, it apparently did to the court, too, which may explain why the opinion states it in a few sentences then spends most of the remaining thirteen pages of the opinion trying to justify it. In ruling, apparently, that the economic loss rule does not apply to claims against professionals, all the court really says is that it knows a tort when it sees one and it sees one in that situation.

The plaintiff also sued in contract but that claim had lapsed under the statute of repose. The defendant argued that to allow a negligence claim would “eviscerate” the statute. The court’s response was, basically, “So what?”

The real problem is that the economic-loss rule has sat uneasily in Arizona law. Carstens dealt with a government entity, which courts almost never look at the same way they look at you and me. Since then, though, other types of defendants have tried to use it to escape what would previously have been accepted as negligence claims.

Valley Forge contains a more extensive analysis – and criticism – of Carstens, an analysis the Flagstaff Affordable Housing court did not need or care to make. But both cases rule in favor of claimants, reversing trial court decisions, and together they should considerably dampen defendants’ enthusiasm for the economic loss rule.

Backus v. State of Arizona (3/19/09)

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For several years now, Arizona government entities have been actively trying to use the notice-of-claim statute to defeat claims. Having pushed this issue to the court, they now get the result they deserve – but that doesn’t mean that the court should have given it to them.

This action consolidates two wrongful-death claims against the Department of Corrections. The State had claimed that the notice-of-claim letters for both were insufficient. The Supreme Court accepted the matter to “address the standard that applies to determine whether a claim adequately states the ‘facts supporting’ the amount claimed.”

The statute in question (which, perhaps tellingly, the opinion quotes only in a footnote) says:

The claim shall contain facts sufficient to permit the public entity or public employee to understand the basis upon which liability is claimed. The claim shall also contain a specific amount for which the claim can be settled and the facts supporting that amount.

The State argued that this requires facts that, viewed objectively, allow the government to evaluate the claim and the amount demanded. The Court of Appeals, though, ruled in favor of both plaintiffs, concluding that any supporting facts, “regardless of how meager,” satisfy the statute.

The Supreme Court began its analysis by insisting that its goal was to fulfill the intent of the Legislature. But, it said, the statutory language is not “clear and unequivocal,” requiring the courts to construe it. As it happens, the Supreme Court had already done that, in Deer Valley Unified School District v. Hauser, 214 Ariz. 293, 152 P.3d 490 (2007). It said then that a claimant must “[provide] the government entity with a factual foundation to permit the entity to evaluate the amount claimed.” The holding of that case, though, had arguably been on a slightly different issue. Moreover, the court said, Deer Valley didn’t address what to do when a claimant and a public entity disagree about whether the facts are sufficient.

Normally, of course, when parties disagree on whether a statute has been obeyed a court resolves the disagreement. Naively, we thought that that’s what courts were for. But the Chief Justice, writing for a unanimous court, decided that that wouldn’t do in this situation.

Why not? Well, for one thing, the opinion worried that a claimant only has 180 days after an incident to present the demand letter and “by the time a trial judge could decide whether a particular claim satisfied the supporting-facts requirement, the time to file a claim letter will have expired.”

Can you figure that out? By the time the court rules on whether the demand served by a claimant was sufficient, the time for serving the demand will have expired. Does the court mean to imply that a claimant could serve a second demand if the first were found insufficient? Where does the statute say that? And if it did, why couldn’t the claimant serve the new/amended demand within the 180 days, whether the trial court had ruled yet or not, making the whole issue moot?

The court said that if the 180 days had expired, “the trial judge would have no option but to dismiss the civil action if the judge found the factual statement insufficient.” But how can that be a reason not to do it? Dismissing cases for insufficient factual statements is what this whole issue is about. This paragraph (no. 20) gives the game away: the court considers the notice-of-claims statute a “significant and unpredictable obstacle” to claims and doesn’t want them dismissed on that basis.

The other reason given by the opinion not to allow the trial court to judge the sufficiency of the notice is that it would cost too much. Frankly, we’re tired of hearing time and expense used as an excuse whenever it fits a litigant’s or court’s position and ignored when it doesn’t.

The court decided that “The approach that best furthers legislative intent is to allow a claimant to decide what facts support the amount claimed and to disclose those facts as part of the notice of claim.” “(C)ourts should not scrutinize the claimant’s description of facts to determine the ‘sufficiency’ of the factual disclosure.” In other words, claimants can say as much or as little as they like so long as they make at least a slight show of abiding by the statute. This is, of course, not what Deer Valley said but it is consistent with the Court of Appeals’ “however meager” approach – except that the trial court can’t even rule on meagerness.

Given this “standard” – which is of course no standard at all — what, the court more-or-less asked, is to prevent claimants from hiding facts?

First, claimants must want to settle their cases and they therefore have “no valid reason to withhold facts.” Before we read that sentence we would have bet that at least one of the Justices had at least a little experience defending state agencies. Apparently, we would have been wrong.

Second, “the professional obligations of claimants’ lawyers will deter them from submitting incomplete or inaccurate information in claim letters. Any deliberate attempt to misrepresent facts supporting a claimed amount could violate a lawyer’s obligation of truthfulness under the Arizona Rules of Professional Conduct.” But the issue isn’t about misrepresentation. And since when is “incompleteness” in making a claim an ethical violation? 

It is nice to know, though, that the court trusts us all of a sudden. “We  . . .  expect . . .  lawyers to act honorably.” So why do we need to prove by paperwork – time-consuming and therefore expensive paperwork – that we’re meeting our ethical obligations to counsel clients about ADR?  Why are there CLE audits?

Well, what the court actually said was “We . . . expect claimant’s lawyers to act honorably” [emphasis added]. Perhaps the lawyers the courts are to trust are only those representing plaintiffs.

The notice of claim still has to include an amount for which the case can be settled; that’s Deer Valley. Otherwise, the lesson of Backus is that in enacting the statute the Legislature intended that the people it regulates be the sole judges of whether they had satisfied its regulation. In the guise of construing the statute, the opinion largely nullifies it.

Government agencies had been overreaching on this issue, using hypertechnical interpretations of the statute to try to dismiss claims regardless of their merit. They deserved to get their hands slapped. But the answer was to set reasonable guidelines, not to throw out the Legislature’s baby with the bathwater just because the Supreme Court didn’t like the looks of the poor thing.

Poulson v. Ofack (CA1 3/17/09)

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When is a good result a bad result?

This was a motor-vehicle accident case. Plaintiff’s medical bills were $17,000; the arbitrator awarded her $39,000; Defendant appealed. Four days before trial, Plaintiff disclosed additional medical bills of $5,000; over objection, the trial court let them in. The jury awarded $30,000 – on $22,000 in medical bills, not bad work by the defense.

Because the verdict was not twenty-five percent more favorable than the award, though, Plaintiff moved for statutory sanctions (including almost $24,000 in attorneys fees). The trial court denied them. The possibility of sanctions had come up during the argument about the newly-disclosed bills and the court indicated, then and in denying Plaintiff’s motion, that it would not be fair to sanction the Defendant when it had allowed Plaintiff to increase the amount of the claim.

The Court of Appeals reversed. Under the statute (12-133), sanctions are mandatory unless they would cause “substantial economic hardship.” There was none of that here since Defendant’s insurance carrier was paying.

The language of the statute is clear. The problem with the opinion is its implication (paragraph 13) that the legislature intended this result. We think it highly unlikely that legislators foresaw courts allowing plaintiffs to add new things to a claim yet holding defendants to the standard of the old claim. It would be more correct to say that the statutory language allows this and that the legislature, which could change the statute if it wished, has not done so.

Its easy to suggest in retrospect,  especially since we don’t know the facts of the case, that the arbitration award wasn’t really bad enough to warrant appeal, particularly with a claimant who was still treating, and that the defendant should have moved for new trial and appealed the evidentiary ruling in response to the claim for sanctions. But trial judges should know that a statute that says “shall” is going to be held to mean “shall” unless it gives a clear exception. The idea of balancing the unfairness is of course a favorite of trial courts but it shouldn’t take retrospect to know that they can’t do so using discretion they don’t have.  If the plaintiff’s attorney nearly tripled his fee by sandbagging the defense, CA1 isn’t the court to blame.