On Oct. 28, 2010 the Arizona Court of Appeals ruled that the administrative hearing process (“Administrative Process”) for the resolution of disputes between homeowners and homeowners’ associations in planned communities is unconstitutional. See Ariz. Rev. Stat. §§ 41-2198 to -2198.05. The Administrative Process was limited to claimed violations of planned community documents (such as CC&Rs, declarations, bylaws, articles of incorporation, and rules, if any, of a planned community) or statutes.

Under the Administrative Process, the homeowner or homeowners’ association may file a petition for hearing with the Arizona Department of Fire, Building and Life Safety (“DFBLS”). After reviewing the petition and response, the DFBLS director may refer the petition to the office of administrative hearings for a hearing before an administrative law judge (“ALJ”). The DFBLS has no further involvement in the matter after the referral. After a hearing, the ALJ will render a decision and may order a party to comply with the relevant planned community documents or statutes. The ALJ’s decision is final and not subject to any review or rehearing by the DFBLS. The sole relief available to a party aggrieved by the ALJ’s decision is review by the superior court.

The Administrative Processwas ruled unconstitutional by the Arizona Court of Appeals, Division One (the “Court”) in Gelb v. Department of Fire, Building & Life Safety, No. 1 CA CV 09-0744 (Ariz. App. Oct. 28, 2010) due to the violation of the separation of powers provision found in Article 3 of the Arizona State Constitution. Article 3 of the Arizona Constitution expressly provides that “[t]he powers of the government of the state of Arizona shall be divided into three separate departments, the legislative, the executive, and the judicial” and further states the three departments “shall be separate and distinct, and no one of such departments shall exercise the powers properly belonging to either of the others.” Arizona law does permit the Legislature to vest various administrative agencies with certain judicial powers so long as this authority is auxiliary to and dependent upon the proper exercise of legitimate regulatory power.

The Court emphasized that to be constitutional, the agency’s actions must be “reasonably necessary to effectuate the administrative agency’s primary, legitimate regulatory purposes.” Citing Cactus Wren Partners v. Ariz. Dep’t of Bldg. & Fire Safety, 177 Ariz. 559, 562, 869 P.2d 1212, 1215 (App. 1993) (citing J.W. Hancock Enters., Inc. v. Ariz. State Registrar of Contractors, 142 Ariz. 400, 405, 690 P.2d 119, 124 (App. 1984)). The stated purpose of the DFBLS is to “further the public interest of safety and welfare by maintaining and enforcing standards of quality and safety for manufactured homes, mobile homes and factory-built buildings and by reducing hazards to life and property through the maintenance and enforcement of the state fire code...” A.R.S. § 41-2141(A) (Supp. 2009).

The Court held that there is no nexus between the regulatory authority or purpose of the DFBLS and the authority to regulate planned communities. As a result, the Court found that when viewing the practical result of the Administrative Process, the DFBLS adjudicated a dispute between private parties relating to planned community documents, even though the DFBLS possesses no regulatory authority over planned community associations or documents. Because the Administrative Process does not relate in any way to DFBLS’ primary, legitimate or regulatory purposes, the grant of judicial powers by the Arizona State Legislature was not proper. If the Legislature chooses to amend the Administrative Process or pass new legislation granting the Arizona Department of Real Estate “ADRE”) similar duties and powers, we believe that it is likely that the Administrative Process would pass constitutional muster since the ADRE has regulatory authority over certain aspects of planned communities.

It is important to note that the DFBLS itself has taken action consistent with the Court’s decision in Gelb v. Department of Fire, Building & Life Safety. In response to the Gelb case, DFBLS noted that two other cases found the Administrative Process violated the Arizona Constitution’s separation of powers provision, one of which enjoined DFBLS from taking any further action under the Administrative Process. DFBLS did not appeal either case (nor did it provide input in the Gelb case) and, in January 2009, DFBLS completely discontinued processing any claims under the Administrative Process. These actions by DFBLS are consistent with the Court’s decision in the Gelb case that the Administrative Process under the DFBLS is unconstitutional.