Smith v. Pinnamaneni

• Decision Date: 28 April 2011
• Docket Number: No. 1 CA–CV 10–0329.,1 CA–CV 10–0329.
• Parties: William SMITH; and W Inc., an Arizona corporation, Plaintiffs/Appellees,v.Krishna PINNAMANENI; and Pioneer Family Investments, LLC, Defendants/Appellants.
• Court: Arizona Court of Appeals

227 Ariz. 170

254 P.3d 409

607 Ariz. Adv. Rep. 35

William SMITH; and W Inc., an Arizona corporation, Plaintiffs/Appellees,

v.Krishna PINNAMANENI; and Pioneer Family Investments, LLC, Defendants/Appellants.

No. 1 CA–CV 10–0329.

Court of Appeals of Arizona, Division 1, Department D.

April 28, 2011.

Sawkiw Law PLC By William D. Sawkiw, Mesa, Attorney for Plaintiffs/Appellees.Burch & Cracchiolo, P.A. By Michael S. Dulberg, and Melissa Iyer, Phoenix, Attorneys for Defendants/Appellants.

OPINION

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, because Pioneer 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 effective Construction 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 and for 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. Defendants ² 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. argued Defendants 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 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 ¶ 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 W Inc. 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, ¶ 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, ¶ 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., 183 Ariz. 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, ¶ 27, 201 P.3d 529, 535 (2009); see Spaw–Glass Constr. Servs., Inc. v. Vista De Santa Fe, Inc., 114 N.M. 557, 844 P.2d 807, 809 (1992) (licensing defense should have been raised in arbitration and failure to do so constituted waiver); Davidson v. Hensen, 135 Wash.2d 112, 954 P.2d 1327, 1336–37 (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 as voidable, 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, ¶ 23, 81 P.3d 1040, 1046 (App.2003) (under substantial compliance doctrine, “even unlicensed contractors are not automatically barred from bringing an action for amounts due”); Davidson, 954 P.2d at 1336 (failing to comply with licensing registration statute does not make contract void ab initio; “very applicability of the substantial compliance doctrine to such circumstances argues that a contract subject to the statute is not void”). Because, under the Arizona authorities discussed above, contracts with unlicensed contractors are not per se unenforceable and unlicensed contractors can seek compensation under A.R.S. § 32–1153 if they show substantial compliance with licensing requirements, the burden is on the opposing party to affirmatively raise the defense of lack of licensure and that party's failure to do so constitutes a waiver. See Herstam v. Deloitte & Touche, LLP, 186 Ariz. 110, 115–16, 919 P.2d 1381, 1386–87 (App.1996) (statutes enacted to protect individuals may nonetheless be waived by those individuals); McClellan Mortg. Co. v. Storey, 146 Ariz. 185, 188, 704 P.2d 826, 829 (App.1985) (“It is well settled that most rights may be waived.”).

¶ 10 Here, Defendants knew of W Inc.'s unlicensed status before the arbitration hearing. Yet, instead of raising W Inc.'s status as a defense to W Inc.'s claim in the arbitration, Defendants chose...