Smith v. Pinnamaneni

• Decision Date: 28 April 2011
• Docket Number: 1 CA-CV 10-0329
• Court: U.S. District Court — District of South Carolina
• Parties: WILLIAM SMITH; and W INC., an Arizona corporation, Plaintiffs/Appellees, v. KRISHNA PINNAMANENI; and PIONEER FAMILY INVESTMENTS, LLC, Defendants/Appellants

WILLIAM SMITH; and W INC., anArizona corporation, Plaintiffs/Appellees,

v. KRISHNA PINNAMANENI; and PIONEERFAMILY INVESTMENTS, LLC, Defendants/Appellants

1 CA-CV 10-0329

COURT OF APPEALS STATE OF ARIZONA DIVISION ONE DEPARTMENT D

Filed: April 28, 2011

OPINION

Appeal from the Superior Court in Maricopa County

Cause No. CV 2010-090435

The Honorable Larry Grant, Judge

AFFIRMED IN PART, REVERSED IN PART, AND REMANDED

Mesa

Sawkiw Law PLC

By William D. Sawkiw

Attorneys for Plaintiffs/Appellees

Phoenix

Burch & Cracchiolo, P.A.

By Michael S. Dulberg

and Melissa Iyer

Attorneys for Defendants/Appellants

NORRIS, Judge

¶1 This appeal arises out of an arbitration award in favor of a contractor, plaintiff/appellee W Inc. We hold the superior court properly confirmed the award against defendant/appellant Pioneer Family Investments, LLC, becausePioneer waived its defense that W Inc. was an unlicensed contractor by failing to raise it in the arbitration. Because the superior court, however, did not determine whether defendant/appellant Krishna Pinnamaneni, a nonparty to the construction contract between W Inc. and Pioneer, was bound to arbitrate, we reverse confirmation of the award against him and remand for further proceedings consistent with this opinion.

FACTS AND PROCEDURAL BACKGROUND

¶2 In October 2007, Pioneer, through its managing member Pinnamaneni (unless separately referenced, collectively, "Defendants"), entered into a contract with W Inc. for construction of a home. W Inc.'s president, William Smith, signed the contract on behalf of W Inc. The contract contained an arbitration clause that stated "[a]ny Claim arising out of or related to the Contract... shall... be subject to arbitration." The clause also stated "[t]he award rendered by the arbitrator... shall be final, and judgment may be entered upon it in accordance with applicable law in any court having jurisdiction thereof." The clause further specified the arbitration would be conducted by the American Arbitration Association ("AAA") according to the AAA's currently effectiveConstruction Industry Arbitration Rules ("CIAR").¹ After a dispute arose regarding W Inc.'s work, W Inc. demanded arbitration against Respondent "Krishna Pinnamaneni-Pioneer Family Investments, LLC" in April 2009 as to the scope of work, full and timely payments, and other claims. Later that month, Pinnamaneni filed a complaint with the Arizona Registrar of Contractors ("ROC") against W.W. Smith Construction, Inc., a different construction company headed by Smith. The complaint, however, related to the work on the home.

¶3 Defendants repeatedly told the AAA case manager they did not intend to participate in the arbitration until the ROC had adjudicated the complaint. In September 2009, W Inc. amended its original arbitration demand to seek relief against "Krishna Pinnamaneni" for wrongful termination, demanding work outside the contract, and failing to pay for all work. The arbitrator advised Defendants the filing of the ROC complaint did not stay the arbitration, informed them the arbitration was going forward, and encouraged them to participate.

¶4 Approximately one week before the scheduled arbitration, Pinnamaneni discovered W Inc. did not have a contractor's license in 2007 when the contract was signed andfor nearly the entire first year of construction. On December 15, 2009, W Inc. appeared at the arbitration hearing, but Defendants did not. Consistent with CIAR 30, which prohibited a default award and required a party to offer evidence even if the opposing party was absent from the hearing, W Inc. presented evidence to the arbitrator in support of its claims. Subsequently, the arbitrator issued an award to W Inc. against Defendants for $28,740 in damages and $9190 in fees and expenses.

¶5 W Inc. applied to the superior court for confirmation of the award. Defendants² opposed confirmation, arguing W Inc. had "fraudulently entered into a contract without [a contractor's] license, which is a requirement pursuant to Arizona law to perform the type of work which is the subject of the contract at issue in this case."³ In response, W Inc. arguedDefendants had waived their licensing argument by failing to raise it in the arbitration.

¶6 After oral argument on the application, the superior court confirmed the arbitration award and directed W Inc. to submit a proposed form of judgment confirming the award. W Inc. submitted a proposed judgment and Defendants, now represented by counsel, objected, reasserting W Inc. did not have a

The fraud is, Your Honor, that he always told us W Inc. is a license-Arizona Contractor license. That is requirement for the mortgage company that I only hire the licensed contractors. Come to find out after one year he tell us that he needed to change the contract because of some insurance issue. Even then he doesn't tell us the truth.

And then when he doesn't do certain things, we told him to finish it in thirty days, and instead using as a response that he goes and preemptively files this arbitration in order to make and to change the date rather than having to address the issues. On December 7th, when we found out that he was operating on an unlicensed contract because he never told us, and that's when we found that this is completely fraud all around and he's hiding the ball, and that was the deception and fraud, Your Honor. And the record provides the proof of that, and I have provided all those documents to you.

Accordingly, Defendants never requested the superior court to determine the validity of the arbitration clause separately from the contract. See Stevens/Leinweber/Sullens, Inc. v. Holm Dev. & Mgmt., Inc., 165 Ariz. 25, 2 9, 7 95 P.2d 1308, 1312 (App. 1990). On appeal, Defendants have not made such a request nor have they argued that they made such a request in superior court.contractor's license when it entered into the contract and thus could not recover under Arizona Revised Statutes ("A.R.S.") section 32-1153 (2007). Section 32-1153 prohibits a contractor from "commenc[ing] or maintain[ing] any action in any court of the state for collection of compensation" for contracting work if the contractor was not licensed when the contract was signed and when the cause of action arose. See infra 1 8. After additional briefing and a second oral argument, the superior court again confirmed the arbitration award and entered judgment against Defendants. ⁴ Defendants timely appealed. We have jurisdiction pursuant to A.R.S. § 12-2101(B) (2003).

DISCUSSION

I. Licensing

¶7 Defendants argue the superior court should not have confirmed the arbitration award in favor of W Inc. because WInc. failed to prove it was properly licensed in compliance with A.R.S. § 32-1153.⁵ We disagree. As we explain, a contractor's lack of licensure is an affirmative defense subject to waiver, and Defendants waived this defense by failing to raise it in the arbitration. Although we normally review a superior court's confirmation of an arbitration award for an abuse of discretion, FIA Card Servs., N.A. v. Levy, 219 Ariz. 523, 524, 1 5, 200 P.3d 1020, 1021 (App. 2008), the issue raised here requires us to consider and interpret legal principles and statutes, so our review is de novo. Steer v. Eggleston, 202 Ariz. 523, 527, 1 16, 47 P.3d 1161, 1165 (App. 2002).

¶8 Under A.R.S. § 32-1153,

No contractor... shall... commence or maintain any action in any court of the state for collection of compensation for the performance of any act for which a license is required... without alleging and proving that the [contractor] was a duly licensed contractor when the contract sued upon was entered into and when the alleged cause of action arose.

Arizona courts have treated the lack of licensure as an

affirmative defense that must be raised by an opposing party. See Aesthetic Prop. Maint., Inc. v. Capitol Indem. Corp., 183Ariz. 74, 75, 900 P.2d 1210, 1211 (1995) (Arizona Supreme Court referred to defendant's objection to contractor's lack of license as "rais[ing] the defense of nonlicensure"); Reidy v. Blackwell, 140 Ariz. 333, 335, 681 P.2d 916, 918 (App. 1983) (calling licensing defense "the affirmative defense of the licensing statute"); cf. Leone v. Precision Plumbing & Heating of S. Ariz., Inc., 121 Ariz. 514, 516, 591 P.2d 1002, 1004 (App. 1979) ("Illegality [of contract] is an affirmative defense that must be pleaded."). And, in Arizona, as a general matter, failure to plead an affirmative defense results in waiver of the defense. City of Phx. v. Fields, 219 Ariz. 568, 574, 1 27, 201 P.3d 529, 535 (2009); see Spaw-Glass Constr. Servs., Inc. v. Vista De Santa Fer Inc., 844 P.2d 807, 809 (N.M. 1992) (licensing defense should have been raised in arbitration and failure to do so constituted waiver); Davidson v. Hensen, 954 P.2d 1327, 1336-37 (Wash. 1998) (contractor's noncompliance with license registration requirement is affirmative defense that must be timely pleaded or is waived).

¶9 Older cases in Arizona treated contracts with unlicensed contractors as illegal and void ab initio, meaning unenforceable. See, e.g., Hunt v. Douglas Lumber Co., 41 Ariz. 276, 287-88, 17 P.2d 815, 819 (1933). More recent case law, however, treats contracts with unlicensed contractors asvoidable, not void, meaning they are enforceable if certain conditions are met. For example, in Aesthetic Property Maintenance, the Arizona Supreme Court held an unlicensed contractor could seek compensation under A.R.S. § 32-1153 by substantially complying with the licensing requirements. 183 Ariz. at 78, 900 P.2d at 1214. In so holding, the court recognized substantial compliance satisfied the purpose of the statute, which was not to punish licensees who had failed to strictly comply with the statutory requirements, but "to protect the public from unscrupulous, unqualified, and financially irresponsible contractors." Id. at 77-78, 900 P.2d at 1213-14; see Bentivegna v. Powers Steel & Wire Prods., Inc., 206 Ariz. 581, 587, 1 23, 81 P.3d...