Southwestern Paint & Varnish Co. v. Arizona Dept. of Environmental Quality

• Decision Date: 16 March 1999
• Docket Number: No. CV-98-0118-PR,CV-98-0118-PR
• Citation: 976 P.2d 872,194 Ariz. 22
• Parties: 292 Ariz. Adv. Rep. 3 SOUTHWESTERN PAINT & VARNISH CO., Plaintiff/Appellant, v. ARIZONA DEPARTMENT OF ENVIRONMENTAL QUALITY, Defendant/Appellee.
• Court: Arizona Supreme Court

Page 872

976 P.2d 872

292 Ariz. Adv. Rep. 3

SOUTHWESTERN PAINT & VARNISH CO., Plaintiff/Appellant, v. ARIZONA DEPARTMENT OF ENVIRONMENTAL QUALITY, Defendant/Appellee.

No. CV-98-0118-PR.

Supreme Court of Arizona En Banc.

March 16, 1999.

Lenore Tsakanikas, Tucson, Attorney for Southwestern Paint & Varnish Company.

Attorney General Janet A. Napolitano, Phoenix By Marc T. Steadman, Assistant Attorney General, Attorneys for Arizona Department of Environmental Quality.

O P I N I O N

MARTONE, Justice.

¶1 We are asked to decide whether a party aggrieved by final agency action must seek rehearing before that agency as a prerequisite to judicial review. We hold that, unless a statute specifically directs otherwise, one need not seek rehearing before an agency in order to seek judicial review.

I.

¶2 In September 1995, Southwestern Paint and Varnish Company (Southwestern) sought reimbursement for environmental clean-up costs from the state. In March 1996, the Arizona Department of Environmental Quality (Department) denied the claim. Southwestern appealed under a Department rule and, after an evidentiary hearing, an administrative law judge recommended that the Department affirm the original denial. The director of the Department issued a final decision that adopted the administrative law judge's findings of fact and conclusions of law.

¶3 Under the Department's rules, Arizona Administrative Code R18-1-218, Southwestern could have sought rehearing before the Department. Instead, in October 1996, it filed an action in the Superior Court of Arizona in Pima County seeking judicial review of the Department's final decision. The superior court dismissed the complaint because Southwestern failed to file a motion for rehearing from the Department's final decision.

¶4 The court of appeals reversed and held that the relevant statutes and rule do not require a party to seek rehearing before the agency in order to seek further judicial review. Southwestern Paint & Varnish Co. v. Arizona Dep't of Envtl. Quality, 191 Ariz. 40, 951 P.2d 1232 (App.1997). Because of conflicting decisions in the court of appeals, we granted review. Ariz. R. Civ.App. P. 23(c)(3).

II.

A. The Conflict

¶5 In Herzberg v. David, 27 Ariz.App. 418, 555 P.2d 677 (1976), judges of Division Two sitting in a Division One case held that a party aggrieved by an administrative decision must use a rehearing procedure as a condition precedent to judicial review. Drawing upon A.R.S. § 12-901(2)(1992) ¹ and A.R.S. § 12-902(B)(1992), ² the court concluded that an application for rehearing was an "application for administrative review" within the meaning of § 12-902(B), and therefore judicial review was foreclosed for the failure to file a motion for rehearing. Id. at 419, 555 P.2d at 678.

¶6 In Arizona Law Enforcement Merit System Council v. Dann, 133 Ariz. 429, 652 P.2d 168 (App.1982), Division One of the Court of Appeals agreed with Herzberg, which it characterized as a Division Two case. Id. at 432, 652 P.2d at 171. As recently as Rosen v. Board of Medical Examiners, 185 Ariz. 139, 143, 912 P.2d 1368, 1372 (App.1995), Division One followed Dann to hold that a motion for rehearing was within the scope of A.R.S. § 12-902(B) such that the failure to file a motion for rehearing precludes judicial review. We granted review in Rosen, but ultimately dismissed the case because it had become moot. Rosen v. Board of Med. Exam'rs, 186 Ariz. 517, 924 P.2d 1036 (1996).

¶7 While Herzberg was governed by the court's understanding of the Administrative Review Act, A.R.S. §§ 12-901 to -914 (1992), see Foremost Life Insurance Co. v. Trimble, 119 Ariz. 222, 224, 580 P.2d 360, 362 (App.1978), a 1976 amendment to the Administrative Procedure Act, A.R.S. § 41-1062(B)(1992), as amended by Laws 1976, ch. 104, § 4, produced similar outcomes. ³ See Oliver v. Arizona Dep't of Racing, 147 Ariz. 83, 86, 708 P.2d 764, 767 (App.1985); Oliver v. State Land Dep't, 143 Ariz. 126, 128, 692 P.2d 305, 307 (App.1984).

¶8 Against this historic backdrop, Division Two of the Court of Appeals in the instant case decided that the failure to seek rehearing was not a bar to judicial review. Southwestern Paint & Varnish Co. v. Arizona Dep't of Envtl. Quality, 191 Ariz. 40 951 P.2d 1232 (App.1997). Relying upon our opinion in Campbell v. Chatwin, 102 Ariz. 251, 257, 428 P.2d 108, 114 (1967), the court noted that the doctrine of exhaustion of administrative remedies does not apply where the remedy is permissive. Southwestern Paint, 191 Ariz. at 42, 951 P.2d at 1233. It then rejected Herzberg 's reading of A.R.S. § 12-901(2) and § 12-902(B). Id. at 43, 951 P.2d at 1234. The court held that the delayed finality of § 12-901(2) applies only when "an application for a rehearing or review is made," and thus the remedy is permissive. The court did not address Herzberg 's characterization of a rehearing as an "application for administrative review" within the meaning of § 12-902(B), but instead characterized that section as simply a timing provision. Id. The court then turned to A.A.C. R18-1-218(A) ⁴ and concluded that the agency rule was unambiguous in stating that rehearing is permissive. Id.

B. Resolution

¶9 Although the court of appeals has grappled with this issue since its decision in Herzberg in 1976, this is an issue of first impression for us.

¶10 The linchpin of the Herzberg decision is its equation of a rehearing with an "application for administrative review" within the meaning of A.R.S. § 12-902(B). Herzberg, 27 Ariz.App. at 419, 555 P.2d at 678. But a request for rehearing is not an application for administrative review. The application for administrative review precedes the administrative decision from which any rehearing might be sought. We read § 12-902(B) as encompassing the traditional doctrine of exhaustion of administrative remedies and the words "petition for rehearing" or "request for rehearing" are notably absent from the administrative mechanisms listed there. Thus, § 12-902(B) does not answer the question raised in Herzberg.

¶11 Nor does § 12-901(2). We agree with the court below that the delayed finality of that provision by its own terms applies only when "an application for a rehearing or review is made."

¶12 Neither § 12-901(2) nor § 12-902(B) answers the question whether a motion for rehearing is a prerequisite to judicial review. To the extent that Herzberg, Dann, and Rosen suggest otherwise they are expressly disapproved.

¶13 But what of A.R.S. § 41-1062(B)? Under it, agencies are required to provide an opportunity for rehearing before a decision becomes final. It also instructs agencies to draft rehearing rules as closely as practicable to Rule 59, Ariz. R. Civ. P. But by its own terms, A.R.S. § 41-1062(B) does not require a party to seek rehearing as a precondition to judicial review. It simply requires an agency to adopt a rule that provides an opportunity for rehearing. And the rule should look like Rule 59, Ariz. R. Civ. P. Yet we know that a party is not required to file a motion for new trial under Rule 59 in order to perfect an appeal from a final judgment in the superior court. A.R.S. § 12-2102(A)(1994). ⁵ To the extent that Oliver v. State Land Dep't, and Oliver v. Arizona Dep't of Racing, relied upon the predecessor to § 41-1062, (A.R.S. § 41-1010), they are expressly disapproved.

¶14 The statutes then, as they existed at all times relevant to this case, do not answer the question before us. We are left then with the argument that a motion for rehearing is part of the administrative process that must be exhausted under the general doctrine of exhaustion of administrative remedies in order to seek judicial review. But we have held that the exhaustion of administrative remedies doctrine does not apply in many circumstances, including those where the remedy is permissive. Univar Corp. v. City of Phoenix, 122 Ariz. 220, 224, 594 P.2d 86, 90 (1979); Campbell v. Chatwin, 102 Ariz. 251, 257, 428 P.2d 108, 114 (1967). We agree with the court below that the agency rule here is drafted in permissive terms ¶15 But there is a more critical reason why the exhaustion doctrine does not include a motion for rehearing. The administrative remedy that must be exhausted is the main event. When a party is aggrieved by agency action, it seeks administrative review, hearing, and final decision. This gives the agency an opportunity to review its action and apply its expertise. But once the agency makes its final decision the reasons for exhaustion disappear. The agency has already performed its statutory function. It has found facts and made conclusions of law. It has applied its expertise. See generally McKart v. United States, 395 U.S. 185, 193-95, 89 S.Ct. 1657, 1662-63, 23 L.Ed.2d 194 (1969).

¶16 After a full-blown hearing process and a final decision, there is little likelihood that anything will change on rehearing. Why then make it mandatory in the tens of thousands of cases in which it is useless? This would only add to the delay and expense of resolving the dispute. In those few cases in which rehearing makes sense, a permissive remedy is available. Indeed, in our view, there is harm in suggesting that a motion for rehearing is required. It suggests that the administrative decision from which rehearing is sought is not really final at all. This would give the agency a second or third opportunity to get it right when all its resources should be allocated to getting it right the first time.

¶17 Our review of the cases and treatises suggests no reason why final agency decisions should not be as final as the final judgments of a court. As noted, motions for new trial in the superior court are not a prerequisite to an appeal to the court of appeals, and a motion for reconsideration in the court of appeals is not a prerequisite to a petition for review in this court. Indeed, our experience with motions for rehearings or reconsideration in our courts has led to amendments...