2015 Real Property Appellate Case Law Year in Review
Catalina Foothills Unified School Dist. No. 16 v. La Paloma Property Owners Ass’n, Inc., — Ariz. —, 726 Ariz. Adv. Rep. 34 (App. 2015): In 1994, Catalina Foothills Unified School District No. 16 (the “District”) acquired property from La Paloma Property Owners Association, Inc. (“La Paloma”) in a stipulated eminent domain judgment (the “Property”). The Property is adjacent to Campo Abierto, a private road owned by La Paloma. At the time it acquired the Property, the District agreed that Campo Abierto would not be used to access the Property except by La Paloma residents approaching on foot.
However, in 2007, after the District built an early childhood education center on the property, it determined that it needed vehicular access to the property via Campo Abierto for student safety reasons. The District filed a complaint seeking fee simple condemnation of Campo Abierto, such condemnation to be subject to a perpetual easement for La Paloma residents. The trial court determined that access via Campo Abierto would enhance the safety of people accessing the property and granted the District immediate possession of the road and the District granted a perpetual easement back to La Paloma (ultimately reducing La Paloma’s severance damages).
Upon the District’s motion, the trial court precluded La Paloma’s appraisal estimating severance damages at more than $1,000,000, finding the appraisal was based on an incorrect legal premise (that the District could not grant an easement and a new road would have to be built). At trial, which was limited to the issue of just compensation, a jury awarded La Paloma damages for the fair market value of the condemned road in the amount of $290,000 and cost-to-cure severance damages of $56,416. La Paloma appealed.
The Court of Appeals partially affirmed the trial court, rejecting La Paloma’s argument that the District, as a political subdivision of the state, only had authority under A.R.S. §12-1112 to condemn private property for use as “buildings and grounds,” but not a road to access “buildings and grounds.” The Court held that eminent domain power may be express or by necessary implication, and that the District’s power to condemn property for use as buildings or grounds also implies the power to condemn property to create access to those buildings or grounds.
The Court further affirmed the award of just compensation, finding that the jury had accepted the higher proposed fair market value (offered by the District) and finding that the jury, by its verdict, had impliedly accepted the District’s argument that its conveyance of the easement to La Paloma effectively “cured” certain severance damages of La Paloma because its residents were still able to use the road. The Court of Appeals rejected La Paloma’s argument that it was entitled to additional just compensation instead of the perpetual easement and determined that La Paloma had the ability to offer other evidence of severance damages in its other expert’s report (after the first report was precluded) but failed to do so and thus was only entitled to the severance damages awarded to it by the jury.
MOTION FOR RECONSIDERATION PENDING
Foreclosure – Deficiency Judgments
BMO Harris Bank, N.A. v. Wildwood Creek Ranch, LLC, 236 Ariz. 363, 340 P.3d 1071 (2015): Wildwood Creek Ranch, LLC (“Wildwood”) obtained a $296,200 loan from BMO’s predecessor in interest, secured by a deed of trust on an unimproved, vacant lot. Wildwood’s sole members, Shaun and Kristina Rudgear, signed the mortgage note and personally guaranteed the loan. After Wildwood and the Rudgears defaulted on the note, BMO foreclosed on the property and sold it at a trustee’s sale. BMO later sued Wildwood and the Rudgears for a deficiency judgment.
The parties cross-moved for partial summary judgment. The Rudgears argued that BMO was precluded from recovering the deficiency because they intended to build a single one-family dwelling on the property. The Rudgears also submitted affidavits avowing that they intended to build a home on the property and occupy it as their primary residence. The trial court granted the Rudgears’ motion for partial summary judgment, and BMO appealed.
The Court of Appeals reversed and ordered that partial summary judgment be entered in favor of BMO, holding that A.R.S. §33-814(G), Arizona’s anti-deficiency statute, does not apply to vacant land. Under the statute, the land must be “utilized for either a single one-family or a single two-family dwelling,” and vacant land is not a dwelling.
The Arizona Supreme Court granted review, citing the applicability of A.R.S. §33-814(G) as a recurring issue of statewide importance. Reviewing de novo the trial court’s grant of summary judgment on behalf of the Rudgears, the Supreme Court vacated the appellate court’s opinion, reversed the trial court’s judgment and remanded for an entry of summary judgment in favor of BMO.
Consistent with the Court of Appeals’ opinion, the Supreme Court determined that A.R.S. §33-814(G) applies only to property “utilized” as a “dwelling,” and that a structure may only be a dwelling if it is suitable in which to reside and a person actually resides there (or intends to). Thus, without a completed structure suitable for dwelling purposes, anti-deficiency protection will not apply. The Supreme Court expressly overruled M & I Marshall & Ilsley Bank v. Mueller insofar as Mueller held that anti-deficiency protection could ever apply to a partially completed home. The Court clarified (in a footnote) that, although the Arizona legislature recently amended A.R.S. §33-814(G), that amendment only applies to deeds of trust originating on or after January 1, 2015, and thus has no bearing on the court’s opinion in this case.
First Fin. Bank, N.A. v. Claassen, — Ariz. —, 357 P.3d 1216 (App. 2015): In April 2008, Theodore Claassen (“Claassen”) obtained a loan from the Irwin Union Bank F.S.B. (First Financial Bank, N.A.’s successor in interest, the “Bank”), in an amount not to exceed $5,500,000, for the purpose of building a single family dwelling. Approximately $1,700,000 was used to satisfy the original purchase money loan and the balance was to be used for construction draws. The total amount loaned by the Bank to Claassen was over $3,000,000, which was evidenced by a note and secured by a deed of trust. Claassen never completed construction on the property and failed to make payments after October 2009.
The Bank notified Claassen of a default in April 2010 and filed a complaint to judicially foreclose the property in December 2010, at which time the debt was at least $3,056,144.59 plus accruing interest, costs, fees, and attorneys’ fees. The trial court set a trial for July 2013, but Claassen did not participate in preparing the joint pretrial statement. In the pretrial statement, the Bank asserted a deficiency judgment was owed by Claassen in the amount of $1,119,676.67, including interest-only payments paid out of a reserve account during the construction period, homeowner’s association mandatory construction deposit, accrued interest, and late fees on the loan. Claassen did not participate in the bench trial and the trial court determined that, based on the total amount owed, there was a non-purchase money, non-construction money deficiency in the amount of $1,119,676.76 (which may be reduced, after the foreclosure sale, by any amount in excess of the fair market value of the property obtained).
Claassen filed a motion for a new trial on the theory that the deficiency was not recoverable under Arizona’s anti-deficiency statutes and the trial court erred when it determined that they were non-purchase money amounts. The trial court denied his motion and Claassen timely appealed.
Despite the Bank’s assertion that costs typically associated with a loan, including interest and late fees, are non-purchase money, the Court of Appeals found the amounts in question analogous to refinancing a loan in which several types of charges are rolled into the new loan (which have been judicially determined to be purchase money sums). The Court reversed the trial court’s ruling and determined that interest, late fees, and the mandatory construction deposit are purchase money obligations and thus subjected to anti-deficiency protections. Additionally, although Claassen first raised the purchase money argument in his motion for a new trial (because he did not attend the trial), the court held that he did not waive those arguments because waiver of anti-deficiency protection is specifically precluded by A.R.S. 33-729 (and A.R.S. 33-814).
Great Western Bank v. LJC Development, LLC, — Ariz. —, 362 P.3d 1037 (App. 2015): Great Western Bank’s predecessor (the “Lender”) and Cedar Ridge Investments, LLC (the “Borrower”) agreed to a loan in 2007 for acquisition and development of a 50-unit residential subdivision (the “A&D Loan”). Lender and Borrower then enter into an agreement from which the residences could be constructed. Some funds apparently were borrowed arising out of the second agreement to fund the construction of a number of units (although those facts are not clear from the decision), after which Lender terminated the second agreement in the summer of 2008. The Borrower defaulted and the Property went to foreclosure. The Lender filed an action to recover a $2.6 million deficiency; the actions against the guarantors are at issue in this matter.
The guarantors argued that the Lender’s termination constituted a breach of a loan agreement (i.e., they asserted the second agreement was a construction loan agreement), and the Lender asserted that it was entitled, pursuant to the agreement, to issue a blanket statement that it would not lend any additional funds.
The trial court concluded that the second agreement was a loan agreement and found that the Lender breached its duty of good faith and fair dealing in issuing a unilateral termination. The trial court found that the Lender knew that the Borrower’s business plan was to use proceeds from the sale of units to repay both the A&D Loan and the second agreement – the construction loan. Included within its ruling was a finding that “the Borrower had proven with reasonable certainty it would have profited between $2,808,000 and $3,500,000 had [the Lender] not terminated” the second agreement. The trial court further found the Borrower ready, willing and able (other than having the loan proceeds) to begin construction. Accordingly, the trial court found the Lender in breach and entered judgment in favor of the guarantors, dismissing the action and awarding the guarantors fees and Rule 68 sanctions.
The principal question before the Court of Appeals was interpretation of the second agreement. It disagreed with the Lender’s argument that the agreement constituted only a set of terms by which to make future loans, noting that the title of the agreement characterized it as a “Loan Agreement” and stated in its opening paragraph that it was an agreement between the Lender and Borrower “to Make and Take Loan.” The agreement also provided that “Lender agrees to make the Loans to Borrower, each such Loan to be used by Borrower for the acquisition of a Lot and for subsequent construction of Improvements thereon, and Borrower agrees to accept such Loans from Lender.” The Court found that the second agreement constituted, at a minimum, a commitment” to at least consider Borrower’s requests on a case-by-case basis.” It affirmed the trial court’s decision that the Lender was in breach of the loan agreements.
The Lender also argued the doctrine announced in D’Oench, Duhme & Co. v. FDIC, 315 US 447, 459-62 (1942), that, as a successor to a failed bank, it was protected against claims arising out of oral or otherwise “secret” deals. The court rejected the defense, noting that the Lender’s agreement was in writing and that the duty of good faith was always known, as it arose from the known contract.
Aside from the issue of how to interpret the loan agreement, the case affirms that a guarantor has at least a defense (or it may be that Borrowers may have an affirmative cause of action) against a Lender for damages arising out of the Lender’s breach.
Lien Rights (Money Judgment Information Sheet)
Lewis v. Debord, — Ariz. —, 356 P.3d 314 (2015): In June 2003, Cecilia and Randall Lewis obtained a default judgment against Karen MacKean and Fred Foust, recorded the judgment in January 2006, and renewed the judgment in June 2008. However, neither the judgment nor the renewal was accompanied by a separate information statement, as required by §33-967(A). Subsequently, in March 2008, MacKean purchased real property and transferred it to Sonomex, LLC (of whom Foust was the statutory agent). In July 2012, Sonomex sold the property to Ray and Anne Debord.
In August 2012, the Lewises sought judicial foreclosure of the lien, naming MacKean, Sonomex, and the Debords as defendants. The trial court granted summary judgment in favor of the Debords, concluding that the Lewises’ failure to comply with A.R.S. §33-967(A) rendered their judgment lien against the property invalid and unenforceable. The Court of Appeals, reviewing the grant of summary judgment de novo, affirmed.
The Court of Appeals noted that the purpose of §33-961(A) (requiring filing of judgment liens) is to give notice of the judgment lien to subsequent purchasers and others who may deal with the judgment debtor’s real property. Since the legislature amended the judgment-lien statutes in 1996, A.R.S. §33-967 has required an information statement to accompany any money judgment, decree or renewal, the purpose of which is to identify true judgment debtors and protect those who have been erroneously identified as judgment debtors. Relying on the plain language of §§33-964(A) and 33-967(D) (requiring an information statement to accompany any money judgment, decree, or renewal in order to identity true judgment debtors and protect those who have been erroneously identified as judgment debtors), the Court of Appeals found that the Lewises’ failure to attach an information statement did not invalidate the lien, but nonetheless concluded that because the Debords acquired their interest in the real property before the Lewises fully complied with A.R.S. §33-967(A), the Debords’ interest in the property took priority over the Lewises’ judgment lien.
The Arizona Supreme Court granted the Lewises’ petition for review, and agreed with the Court of Appeals that the Lewises’ failure to file an information statement affected their priority in the real property, but did not invalidate their lien. However, vacating the Court of Appeals, the Court held that the “priority” in A.R.S. §33-967(D) only affects the rights between competing creditors, not subsequent purchasers. Applying Arizona’s well-settled rule that a subsequent purchaser with notice takes property subject to an existing judgment lien, the Arizona Supreme Court held that, because the Debords had constructive notice of the Lewises’ recorded judgment, the Debords took the property subject to the lien and the Lewises’ failure to file an information statement did not prevent them from executing against the property.
Contractor’s Duty to Homeowners
Sullivan v. Pulte Home Corp., 237 Ariz. 547, 354 P.3d 424 (App. 2015): In 2000, Pulte Home Corporation (“Pulte”) construction and sold a home to an initial purchaser, who then sold the home to the John and Susan Sullivan (the “Sullivans”) in 2003. The Sullivans never had a contract with Pulte.
In 2009, the Sullivans noticed irregularities in a retaining wall. An engineer they hired determined that the wall had been constructed in a dangerously defective manner. The Sullivans notified Pulte of the engineer’s findings, but Pulte claimed it was no longer responsible for any construction defects.
The Sullivans filed a complaint against Pulte alleging numerous causes of action, including breach of the implied warranty of workmanship and habitability; they sought to recover the cost of repairs. The trial court dismissed all claims against Pulte, holding that the Sullivans’ claim for breach of implied warranty was time barred by Arizona’s statute of repose, A.R.S. §12-552(A), and that all the Sullivans’ tort claims were barred by the economic loss doctrine (which bars a plaintiff from recovering economic tort damages for a product or property that is the subject of a contract between the parties).
The Court of Appeals affirmed the trial court’s dismissal of all counts of the complaint except the negligence claims. On petition for review, the Arizona Supreme Court vacated the Court of Appeals’ opinion as it pertained to the economic loss rule, but agreed that the economic loss rule did not bar the Sullivans’ negligence claims since they were not in privity of contract with Pulte and remanded the case to the trial court to address the negligence claims.
Pulte moved to dismiss the Sullivans’ negligence claims on the theory that it owed no duty of care to a subsequent purchaser, the trial court granted Pulte’s motion, and the Sullivans’ appealed. On appeal, the Sullivans argued that Pulte owed them a duty of care, as residential homeowners, based on the City of Phoenix’s Building Code and the Arizona Registrar of Contractors regulations, which mandate design and construction standards for safe residential construction.
The Court of Appeals determined that, while a tort duty may be premised on public policy if it is designed to protect a class of persons (in which the plaintiff is included) against the type of harm that actually occurred, the Phoenix Building Code specifically disclaimed any intent to benefit or protect a particular class of people and the residential contractor regulations are meant to protect the public in general, not a specific class of people. Although Arizona courts have determined that certain public safety statutes may support public policy-based tort duties, such findings typically occurred in cases involving injuries or death. Here, no public policy-based duty was supported by the Phoenix Building Code or residential contractor regulations based on purely economic loss.
PETITION FOR REVIEW DENIED
Contractor Licensing Regulations
Chavira v. Armor Designs of Delaware, Inc., — Ariz. —, 356 P.3d 334 (App. 2015): Armor Designs of Delaware, Inc. and Armor Designs, LLC (collectively, “Armor”), hired Marco Antonio Chavira (“Chavira”), a licensed and bonded electrical contractor, to disassemble equipment at its Phoenix manufacturing plant. Armor subsequently hired Chavira to reassemble the same equipment at its new manufacturing plant. After Chavira performed all the work, Armor refused to pay him for any of the reassembly/installation work.
Chavira filed suit against Armor, which sought summary judgment on the theory that Chavira was barred by A.R.S. §32-1153 from suing because he had performed significant work without a license (although Armor alleged that only 18 or 77 invoiced tasks fell outside of Chavira’s license). The trial court granted summary judgment in favor of Armor and Chavira appealed. The Court of Appeals vacated the trial court’s ruling, holding that the plain language of A.R.S. §32-1153 only precluded Chavira from recovering for unlicensed work – it does not prevent him for recovering for the portion of the work for which he was properly licensed. The Court remanded the case to the trial court to determine for which portion of the work Chavira could recover.
Owner-Occupant/Residential Contractors’ Recovery Fund
Pinnamaneni v. Ariz. Registrar of Contrs., 237 Ariz. 147, 347 P.3d 593 (App. 2015): In 2003, Krishna Pinnamaneni (“Pinnamaneni”) began designing a home for himself and his family to be built on property owned by the Krishna M. and Bhavani K. Pinnamaneni Revocable Living Trust (the “Trust”), of which Pinnamaneni is the trustee. During the home’s construction, Pinnamaneni acted through his limited liability company, Pioneer Family Investments (“Pioneer”), to negotiate all contractual and financial matters, including a contract with The Untouchables, Inc. (the “Contractor”), on behalf of himself and the Trust.
Because of problems caused by the Contractor during construction, Pinnamaneni, through Pioneer, filed an ROC complaint. In the section titled “Person Filing the Complaint”, Pinnamaneni checked the box next to “homeowner” and listed his name. Following a hearing on the ROC complaint, an administrative law judge found that the Contractor had performed deficient work. The ALJ’s recommended decision, which listed Pioneer as the complainant, was subsequently adopted by the ROC.
After the Contractor filed for bankruptcy, Pioneer and Pinnamaneni (on his own behalf and as trustee of the Trust) filed a joint claim to recover payment from the Residential Contractors’ Recovery Fund (the “Fund”), which allows “any person injured” by conduct of a licensed contractor in violation of the rules governing contractors to recover damages incurred as a result of the deficient construction. The ROC denied the claim on the basis that they were not a ‘person injured’ as required by A.R.S. §32-1131(3). Following an eligibility hearing, the ROC determined that Pinnamaneni did not meet the statutory qualification for obtaining a recovery from the Fund (because the Trust owned the property), rendering him ineligible to recover from the Fund. Pinnamaneni, individually and as trustee of the Trust, appealed the denial of his claim to the trial court, which affirmed the ROC’s order. He timely appealed the trial court’s ruling.
The Court reversed the trial court’s judgment affirming the ROC order and remanded. To qualify as a “person injured” under A.R.S. §32-1131(3), the claimant must “(1) be an owner of residential real property; (2) 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 Court of Appeals determined that, although the property was owned by the Trust and not Pinnamaneni individually, because the Trust is revocable and Pinnamaneni is the settler/trustee/beneficiary, he had complete control over the property. Thus, the court determined that the owner and occupant requirements of A.R.S. §32-1131(3) were met and Pinnamaneni was entitled to compensation from the Fund as a “person injured.”
Fidelity Nat’l Title Ins. Co. v. Centerpoint Mechanic Lien Claims, 238 Ariz. 135, 357 P.3d 160 (App. 2015): This incredibly complex fact pattern arises from funding issues related to the construction of a high-rise residential condominium development in Tempe called “Centerpoint.” Funding for the Centerpoint project became erratic during construction and subcontractors and suppliers began to record mechanics’ liens and notices of lis pendens against Centerpoint. Dozens of these mechanic’s lien foreclosure claims asserted priority over a $165M lender’s security interest.
The Lender tendered defense of the mechanic’s lien claims to its insurer, Fidelity. Fidelity accepted the defense, but with a reservation of rights. A subsequent attempted sale of the property failed in part due to Fidelity’s decision not to provide a title policy to the buyer that would insure priority over the mechanic’s liens. As such, the Lender advised Fidelity that it was seeking a potential Morris settlement directly with the mechanic’s lien claimants.
In Arizona, when an insurer agrees to defend its insured against a third-party liability claim under a reservation of rights, the insured can enter into a “Morris” agreement. This agreement allows the insured to independently settle with the third party claimant without violating the insured’s contractual duty of cooperation. The insured can then assign the insured’s rights against the insurer to the claimant, subject to the insurer’s retained right to contest coverage.
Here, the settlement agreement was between the insureds (Lender’s assignees under the deeds of trust recorded against the Centerpoint property) and an entity they controlled (which had previously purchased the third-party mechanic’s liens at a large discount). The settlement agreement was for an amount significantly greater than the amount actually paid to purchase the mechanics’ lien claims. For these reasons, the Court of Appeals held that the settlement agreement between the insured parties and the related entity that purchased the mechanics’ lien claims was not a compliant Morris agreement. Thus, the Court of Appeals reversed the trial court’s ruling that Fidelity’s liability – if it loses the yet to be litigated coverage dispute – is the negotiated settlement amount.
First Am. Title Ins. Co. v. Johnson Bank, 237 Ariz. 490, 353 P.3d 370 (App. 2015): In December 2005 and June 2006, First American Title Insurance Company (“First American”) issued two lender’s title insurance policies to Johnson Bank (the “Bank”), insuring the properties for $1,000,000 and $1,050,000 respectively, the exact amount loaned by the Bank to the owners of the properties. First American also issued owners’ title insurance policies to the owners of the properties.
In 2008, the owners of the properties sued First American under their owners’ policies, alleging damages as a result of First American’s failure to discover CC&Rs that prohibited commercial development on the properties. The owners subsequently defaulted on their loans to the Bank, who then foreclosed and obtained title to the properties. The Bank then sued First American under its lender’s policies for failing to discover the CC&Rs.
While the parties stipulated to arbitrate the Bank’s claim for damages, they could not agree on what the starting date should be for calculating the diminution in value of the properties – the Bank argued it should be the date the policies were issued and First American argued it should be the date of foreclosure. Each party sought declaratory relief from the trial court, they cross-moved for summary judgment, and the trial court determined that the appropriate starting date to calculate diminution in value was the date of foreclosure. The Bank appealed.
In vacating the trial court’s grant of summary judgment in favor of First American, the Court of Appeals ultimately adopted the reasoning of the Arizona District Court in Equity Income Partners LP v. Chicago Title Ins. Co., a 2012 unpublished opinion. Equity Partners held that because a title policy is breached at the time of the loan (if the title insurer fails to discover a title defect), then the title insurer should bear the risk of a decline in value of the property between the time of the policy and the time the defect is discovered. Here, where the undiscovered defect caused the owners to default on their loans with the Bank, the proper starting date for measuring a property’s diminution in value is the date of the loan. Because First American failed to discover and disclose the CC&Rs that frustrated the intended use of the properties, First American breached the lender’s policies at the time the loan was made.
PETITION FOR REVIEW GRANTED
Oral Argument Scheduled for February 17, 2016
Hub Props. Trust v. Maricopa County, —Ariz. —, 358 P.3d 592 (App. 2015): Hub Properties Trust (“Hub”) purchased real property in Maricopa County (the “Property”) from the City of Phoenix (the “City”) on March 4, 2011. When the City owned the Property, it was exempt from property taxes pursuant to Article 9, Section 2(1) of the Arizona Constitution and A.R.S. §42-11102(A). After Hub purchased the Property, the County Assessor’s Office determined the Property was no longer exempt municipal commercial property. As a result, the Property was included in the Assessor’s roll as taxable property and was included in the County’s tax roll for tax year 2011. The Maricopa County Board of Supervisors then fixed, levied and assessed property taxes for the Property for the County’s assessment and tax roll for the 2011 tax year.
Hub subsequently filed a lawsuit against the County claiming the taxes assessed on the Property were illegally collected because the Property “was not subject to ad valorem taxation” and appealed the Property’s valuation. The parties cross-moved for summary judgment on the former claim and the tax court granted the State’s motion, finding the Property was no longer tax exempt after the City sold it to Hub. The parties subsequently settled Hub’s valuation claim and the tax court entered a stipulated judgment on that issue. Hub appealed the tax court’s grant of summary judgment in favor of the State.
Under A.R.S. §42-11002, all property in Arizona is subject to taxation unless expressly exempt. Such an exemption applies to federal, state, county, and municipal property. A.R.S. §42-11102(A). On appeal, Hub argued that taxable status is fixed on the valuation date (January 1st) and that once property is exempt, it is exempt for the entire tax year even if there is a change of use or ownership. Because the Property was valued on January 1st, while it was still owned by the City, Hub argued that the Property retained its exempt status and no taxes are owed.
The Court of Appeals disagreed. The Court held that if Hub’s argument was correct, then had the State purchased the Property from a private party in March 2011, the State could be required to pay property taxes until the next valuation period. This would clearly contravene the plain meaning of both Article 9, Section 2 of the Arizona Constitution and A.R.S. §42-11102.A. (“Federal, state, county and municipal property is exempt from taxation.”) The Court agreed with the tax court’s holding that the period of exemption begins on the date the property enters government ownership and ends on the date it leaves government ownership. Therefore, although the Property was tax-exempt while the City owned it in 2011, the exemption was lifted when Hub purchased the Property in March 2011.
DBT Yuma, L.L.C. v. Yuma County Airport Authority, — Ariz. —, 361 P.3d 379 (2015): The Yuma County Airport Authority (“YCAA”) is a nonprofit corporation, formed for the purpose of operating and maintaining airports in southern Arizona. Pursuant to a lease agreement (the “Lease”), Yuma County leases land to YCAA on which the Yuma International Airport (the “Airport”) is located and operated. In 2008 and 2009, Lux Air had sublease agreements with the YCAA, after which Lux Air was evicted from the Airport. Plaintiffs (collectively doing business as Lux Air) brought an action against YCAA and Yuma County, alleging that YCAA was a political subdivision and alter ego of Yuma County.
The Court of Appeals affirmed the trial court’s grant of summary judgment in favor of Yuma County, holding that A.R.S. §28-8424 imposes no vicarious liability on Yuma County for YCAA’s actions. Rather, the Court of Appeals found that the legislature specifically shielded counties leasing property to airports under A.R.S. §28-8424 from liability by allowing a lease with a separate corporate entity. The provisions of the Lease reiterate that YCAA was responsible for and must indemnify Yuma County from and against any claims or liabilities arising under the Lease.
The Arizona Supreme Court also affirmed the trial court’s grant of summary judgment, rejecting DBT Yuma’s assertion that an airport authority is an agent of the authorizing governmental entity because the airport authority “performs an essential governmental function as an agency or instrumentality of the city, town, county or state.” A.R.S. §28-8424(A)(3).
Instead, viewing the phrase “agency or instrumentality” in the statutory context, the Court determined the terms were not meant to establish a principal-agency relationship, but were merely descriptive of the airport authority’s public role in performing an essential governmental function. In support of its holding, the Court cited other state and federal statutes authorizing the creation of a nonprofit corporation made an “agency or instrumentality” of the government but without making the government liable based on an agency relationship (e.g., 12 U.S.C. §1452 creating the Federal Home Loan Mortgage Corporation; A.R.S. §30-102(B) creating the Arizona Power Authority).