County of La Paz v. Yakima Compost Company, Inc.

Court of Appeals of Arizona, Division 1, Department C
233 P.3d 1169 (2010)

ELI5:

Rule of Law:

A public entity waives the affirmative defense of a claimant's non-compliance with a statutory notice of claim requirement if it fails to raise the defense in its answer or a Rule 12(b) motion and subsequently engages in substantial litigation on the merits of the claim for an extended period.

Facts:

On September 17, 2002, the County of La Paz and Yakima Compost Company, Inc. entered into a 25-year agreement for Yakima to operate a sewer sludge drying facility on county land.
The Agreement obligated the County to "diligently pursue" a permanent site for the facility and gave the County the option to terminate after three years if it did not "succeed" in acquiring one.
Yakima was required to provide a $1 million performance bond within 60 days, but obtaining such a bond was contingent upon the County's approval of a closure plan.
Yakima submitted a closure plan on November 6, 2002, but the County delayed its approval for nearly a year, until October 20, 2003.
During this period, a County Supervisor expressed a desire to get out of the contract, stating Yakima's owner was a "shit broker" and that the County would "do anything they could to get out of the contract."
One of Yakima's major customers, the Orange County Sanitation District, suspended shipments of sludge after being informed by a County Supervisor of Yakima's non-compliance with the Agreement's terms.
The County eventually sought to terminate the agreement, citing Yakima's failure to timely furnish the performance bond, which was delayed by the County's own inaction on the closure plan.
The Agreement granted Yakima permission to conduct a specific operation on land also used by another company, BFI Waste Systems, rather than granting exclusive possession of the property.

Procedural Posture:

The County of La Paz initiated a lawsuit against Yakima Compost Company in an Arizona trial court on May 15, 2003, for breach of contract.
Yakima filed a counterclaim against the County for breach of contract on June 9, 2004.
The County filed a reply to the counterclaim, asserting multiple affirmative defenses, but did not include Yakima's alleged non-compliance with the statutory notice of claim requirement.
On November 17, 2006, after thirty months of litigation, the County filed a motion for partial summary judgment, arguing for the first time in a dispositive motion that Yakima's claim was barred by the notice of claim statute. The trial court denied the motion.
The case proceeded to a jury trial, where the trial court granted a judgment as a matter of law (JMOL) in favor of Lincoln General Insurance Company, the surety.
The jury returned a verdict, via special interrogatories, finding that the County breached the agreement and Yakima did not, awarding Yakima $9.2 million in damages.
The trial court entered a judgment consistent with the verdict but also ordered the contract terminated. It subsequently denied the County's post-trial motions for JMOL, a new trial, or remittitur.
The County appealed the judgment and the denial of its post-trial motions to the Arizona Court of Appeals; Yakima cross-appealed the portion of the judgment terminating the contract.

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Issue:

Does a public entity waive its affirmative defense of non-compliance with the statutory notice of claim requirement by failing to assert it in an answer or Rule 12(b) motion and by subsequently litigating the merits of a counterclaim for approximately thirty months before raising the defense in a dispositive motion?

Opinions:

Majority - Timmer, Chief Judge

Yes, a public entity waives the statutory notice of claim defense by failing to timely plead it and by its subsequent conduct in the litigation. The court held that non-compliance with the notice of claim statute, A.R.S. § 12-821.01(A), is an affirmative defense that is waived if not asserted in an answer or a Rule 12(b) motion. Here, the County failed to do either. Citing City of Phoenix v. Fields, the court further reasoned that even if a defense is properly preserved in a pleading, it can be waived by subsequent conduct. The County waived the defense as a matter of law by taking substantial action to litigate the merits of Yakima's counterclaim for thirty months before raising the issue in a motion for summary judgment. Such conduct, which included extensive discovery and hiring expert witnesses on damages, was inconsistent with an intent to rely on a procedural defense that could have been adjudicated early in the case, thus avoiding protracted and unnecessary litigation.

Analysis:

This decision solidifies the principle that affirmative defenses, particularly procedural ones like notice of claim requirements for governmental entities, are subject to waiver not only through pleading failures but also through conduct. It serves as a strong deterrent against 'sandbagging'—where a defendant litigates a case on the merits for an extended period before raising a potentially dispositive procedural issue. The ruling promotes judicial efficiency by requiring defendants to raise such defenses early, preventing parties from incurring substantial litigation costs on claims that could be dismissed on procedural grounds. For future cases, this precedent means government attorneys must be diligent in promptly asserting all affirmative defenses or risk waiving them through active participation in litigation.

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