1 Ca-Cv 21-0275 ( 2022 )

IN THE
ARIZONA COURT OF APPEALS
DIVISION ONE
JIE CAO, et al., Plaintiffs/Appellants,
v.
PFP DORSEY INVESTMENTS, LLC, et al., Defendants/Appellees.
No. 1 CA-CV 21-0275
FILED 7-7-2022
Appeal from the Superior Court in Maricopa County
No. CV2019-055353
The Honorable Daniel G. Martin, Judge
REVERSED AND REMANDED
COUNSEL
Osborn Maledon PA, Phoenix
By Eric M. Fraser (argued), John S. Bullock
Counsel for Plaintiffs/Appellants
Pacific Legal Foundation, Phoenix
By James M. Manley
Amicus Counsel for Pacific Legal Foundation in Support of Plaintiffs/Appellants
Woner Hoffmaster Peshek & Gintert, Scottsdale
By Shawna M. Woner, Stephanie Kwan Gintert
Counsel for Defendant/Appellee PFP Dorsey Investments, LLC
Carpenter Hazelwood Delgado & Bolen LLP, Tempe
By Edith I. Rudder, Nicholas C. S. Nogami (argued)
Counsel for Defendant/Appellee Dorsey Place Condominium Association
CAO, et al. v. PFP DORSEY, et al.
Opinion of the Court
OPINION
Presiding Judge Paul J. McMurdie delivered the Court’s opinion, in which
Chief Judge Kent E. Cattani and Vice Chief Judge David B. Gass joined.
M c M U R D I E, Judge:
¶1 Jie Cao and Haining Xia (“Xias”) appeal from the superior
court’s order upholding the forced sale of their Tempe condominium.1 The
court determined that the sale was permissible under A.R.S. § 33-1228,
which allows a supermajority of condominium unit owners to approve the
termination of a condominium complex, even over the objection of other
condominium unit owners.
¶2 In this opinion, we address A.R.S. § 33-1228 and hold that the
statute is constitutional when applied to condominium owners who bought
a condominium unit subject to terms that incorporate the statute. We also
hold, however, that if there have been substantive post-purchase changes
to the statute, the version of the statute in place at the time of purchase
controls.
¶3 Here, the superior court applied the August 2018 version of
A.R.S. § 33-1228 rather than the version in effect when the Xias bought their
condominium unit. As a result, because the previous version of the statute
potentially provided greater protections to minority shareowners, we
reverse and remand.
FACTS AND PROCEDURAL BACKGROUND
¶4 In 2007, a developer completed construction on the Dorsey
Place Condominiums (“Dorsey Place”), a condominium complex in Tempe.
The developer recorded a condominium declaration (“Declaration”),
establishing the property’s terms, covenants, conditions, and restrictions
(“CC&Rs”). Anyone who acquired an ownership interest in the
condominium complex was subject to the Declaration, which referred to
1 The notice of appeal also named Stone Xia as an appellant, but he
did not file an opening brief. Thus, he is dismissed as a party to this appeal.
See ARCAP 15(a)(1).
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Opinion of the Court
state regulations affecting condominium ownership. In January 2018, the
Xias bought a unit at Dorsey Place. Under the warranty deed2 and the
Declaration, the Xias took the unit subject to its CC&Rs.
¶5 In November 2018, PFP Dorsey acquired 90 of the 96 units at
Dorsey Place. Other individuals owned the remaining units. Under the
Declaration, each unit owner is a member of the Association, and each unit
equates to one vote within the Association. Thus, the Xias held one vote, as
did the other unit owners, while PFP Dorsey commanded 90 votes within
the Association.
¶6 In March 2019, the Association notified its members it would
be calling a meeting to discuss terminating the condominium. The notice
gave members five appraisal reports and a draft termination agreement
proposing to sell the entire condominium to PFP Dorsey for over $22
million. The appraisal reports listed the appraised values of five unit types,
and the Xias’ unit type was valued at $234,000.
¶7 The Association held the meeting on April 4, where it
presented its members with a modified termination agreement proposing
instead to sell “all portions of and interest in [Dorsey Place] not already
owned by PFP [Dorsey], to PFP [Dorsey], upon termination of the
Condominium.” The agreement described the purchase price as the
aggregate fair market value of the six units to be bought. An independent
appraisal would determine each unit’s fair market value, but the agreement
set forth a process for disapproving owners to obtain another appraisal.
¶8 According to the Declaration, the condominium could “be
terminated only by the agreement of Unit Owners of Units to which at least
ninety percent (90%) of the votes in the Association are allocated.” PFP
Dorsey was the only member of the Association to sign the termination
agreement, but with nearly 94% of the votes, it ratified the termination and
sale on April 9. The Association recorded a warranty deed3 with the
Maricopa County Recorder’s Office, transferring the title of the Xias’ unit to
2 We take judicial notice of the Xias’ warranty deed, Maricopa County
Recording Number 20180103716.
3 We take judicial notice of PFP Dorsey’s warranty deed, Maricopa
County Recording Number 20190923560.
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Opinion of the Court
PFP Dorsey. Eventually, PFP Dorsey and the Association changed the locks
on the unit and disposed of the Xias’ remaining personal property.
¶9 The Xias sued PFP Dorsey and the Association, seeking a
declaratory judgment that the transaction violated the Arizona
Condominium Act, A.R.S. § 33-1201, et seq., which governs condominium
termination. They argued in the alternative that A.R.S. § 33-1228 is
unconstitutional as applied. They sought quiet title, ejectment, imposition
of a constructive trust, and further alleged civil trespass, conversion, breach
of fiduciary duty, unjust enrichment, and wrongful recording, all arising
out of an invalid or unconstitutional forced sale of their unit.
¶10 PFP Dorsey and the Association filed separate motions to
dismiss under Arizona Rule of Civil Procedure 12(b)(6). Each motion
argued that the Xias failed to state a claim upon which relief could be
granted because PFP Dorsey and the Association strictly complied with
A.R.S. § 33-1228. The superior court granted the motions over the Xias’
objection.
¶11 The Xias appealed, and we have jurisdiction under A.R.S.
§ 12-2101(A)(1).
DISCUSSION
¶12 When reviewing a dismissal under Rule 12(b)(6), we take the
facts alleged in the complaint as true and view them in the light most
favorable to the plaintiffs. Johnson v. McDonald, 197 Ariz. 155, 157, ¶ 2 (App.
1999).
¶13 On appeal, the Xias argue that (1) A.R.S. § 33-1228 is an
unconstitutional taking of private property, and (2) A.R.S. § 33-1228
prohibits PFP Dorsey and the Association from forcing a sale of less than
the entire condominium for only the appraised value. Both statutory
interpretation and constitutionality issues are questions of law, which we
review de novo. Koller v. Ariz. Dep’t of Transp., 195 Ariz. 343, 345, ¶ 8 (App.
1999) (statutory interpretation); Gallardo v. State, 236 Ariz. 84, 87, ¶ 8 (2014)
(constitutionality).
A. Arizona Revised Statutes Section 33-1228 Is Not Unconstitutional
as Applied Because the Xias Agreed to Grant the Association the Rights,
Powers, and Duties Prescribed by the 1986 Version of the Statute.
¶14 The Xias argue that A.R.S. § 33-1228 is a taking of private
property in violation of the Arizona Constitution. Our Constitution states
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Opinion of the Court
that “[p]rivate property shall not be taken for private use,” except for
certain exceptions inapplicable here. Ariz. Const. art. 2, § 17. Generally,
“[t]aking one person’s property for another person’s private use is plainly
prohibited.” Bailey v. Myers, 206 Ariz. 224, 227, ¶ 12 (App. 2003).
¶15 A statute that authorizes a private party to take another
party’s property constitutes a taking. See Loretto v. Teleprompter Manhattan
CATV Corp., 458 U.S. 419, 421 (1982) (taking had occurred when, without
permission of building owner, media company installed cables on
apartment building as authorized by statute). Without an exception to the
general rule, A.R.S. § 33-1228 is unconstitutional on its face.
¶16 The Xias argue that A.R.S. § 33-1228 “authorized an
impermissible traditional taking” and that without the statute, PFP Dorsey
and the Association would have “no authority” to terminate the
condominium and force the sale of the Xias’ unit. But PFP Dorsey and the
Association contend that the authority arises out of contract, so it is not an
unconstitutional taking.
¶17 A condominium may only be created by recording a
declaration. A.R.S. § 33-1211. The Declaration here provided that
[b]y acceptance of a deed or by acquiring any ownership
interest in any portion of the Condominium, each Person . . .
binds himself . . . to all of the provisions, restrictions,
covenants, conditions, rules and regulations now or hereafter
imposed by the Condominium Documents and any
amendments thereof.
So when the Xias bought their unit in January 2018, they agreed to be bound
by the Declaration, which grants the Association the “rights, powers and
duties as are prescribed by the Condominium Act.” PFP Dorsey and the
Association argue that the April 2019 termination and sale was authorized
under the Declaration because they strictly followed the provisions of
A.R.S. § 33-1228. But PFP Dorsey (and the superior court) applied the
current version of the statute, even though it reflects an August 2018
amendment that potentially lessened protections for individual
condominium unit owners subject to a forced sale. See H.B. 2262, 53d Leg.,
2d Reg. Sess. (2018).
¶18 The Xias argue that, under Kalway v. Calabria Ranch HOA, LLC,
252 Ariz. 532 (2022), the 2018 amendments to the statute cannot be
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Opinion of the Court
incorporated into the Declaration.4 They assert that the 1986 version in
effect at the time of their purchase is the one that applies here. PFP Dorsey
and the Association respond that the Declaration incorporated the 2018
amendments because the Declaration defines the “Condominium Act” as
“A.R.S. §33-1201, et seq., as amended from time to time.”
¶19 “Although contracts are generally enforced as written, in
special types of contracts, we do not enforce ‘unknown terms which are
beyond the range of reasonable expectation.’” Kalway, 252 Ariz. at 544, ¶ 14
(citation omitted) (quoting Darner Motor Sales, Inc. v. Universal Underwriters
Ins. Co., 140 Ariz. 383, 391 (1984)). CC&Rs, like the Declaration, are subject
to this rule. Id. at 544, ¶ 14. As a result, we will not “allow[] substantial,
unforeseen, and unlimited amendments” to the Declaration, as that “would
alter the nature of the covenants to which the homeowners originally
agreed.” Id. at 544, ¶ 15. We “will not subject a minority of landowners to
unlimited and unexpected restrictions on the use of their land merely
because the covenant agreement permitted a majority to make changes to
existing covenants.” Id. (quoting Boyles v. Hausmann, 517 N.W.2d 610, 617
(Neb. 1994)).
¶20 For these reasons, although the Declaration incorporates
amendments to the Condominium Act, an amendment will be included
only if it falls within the Xias’ “reasonable expectations based on the
declaration in effect at the time of the purchase.” See Kalway, 252 Ariz. at
544, ¶ 15. We look objectively at the Declaration to determine whether it
gave sufficient notice of a future amendment. Id. at 544–45, ¶ 16. The
Declaration need not provide notice of the precise details of the
amendment, but “it must give notice that a . . . covenant exists and that the
covenant can be amended to refine it, correct an error, fill in a gap, or change
it in a particular way.” Id. at 545, ¶ 17. Future amendments, however,
“cannot be ‘entirely new and different in character,’” otherwise they would
4 Although the Xias did not raise this argument before the superior
court or in their opening brief, they have not waived the argument. Waiver
“is procedural, not substantive, . . . and may be suspended at an appellate
court’s discretion.” Dombey v. Phx. Newspapers, Inc., 150 Ariz. 476, 482 (1986).
We will consider the Xias’ argument because it is founded on Kalway, which
was issued after all parties had filed their initial briefs, and all parties were
later “afford[ed] a full opportunity to brief and argue the issue.” See Jimenez
v. Sears, Roebuck & Co., 183 Ariz. 399, 406, n.9 (1995).
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exceed the reasonable expectations of the owners. Id. (quoting Lakeland Prop.
Owners Ass’n v. Larson, 459 N.E.2d 1164, 1167 (Ill. 1984)).
¶21 When the Xias took ownership of their unit in January 2018,
the 1986 version was in effect, and A.R.S. § 33-1228(G)(1) provided that
the respective interests of unit owners are the fair market
values of their units, limited common elements and common
element interests immediately before the termination, as
determined by an independent appraiser selected by the
association. The determination of the independent appraiser
shall be distributed to the unit owners and becomes final
unless disapproved within thirty days after distribution by
unit owners of units to which fifty percent of the votes in the
association are allocated. The proportion of any unit owner’s
interest to that of all unit owners is determined by dividing
the fair market value of that unit owner’s unit and common
element interest by the total fair market values of all the units
and common elements.
After the 2018 amendments and at the time of the proposed termination of
the condominium, A.R.S. § 33-1228(G)(1) provided that
the respective interests of unit owners are the fair market
values of their units, limited common elements and common
element interests immediately before the termination and an
additional five percent of that total amount for relocation
costs for owner-occupied units. An independent appraiser
selected by the association shall determine the total fair
market values. The determination of the independent
appraiser shall be distributed to the unit owners and becomes
final unless disapproved within sixty days after distribution
to the unit owner. Any unit owner may obtain a second
independent appraisal at the unit owner’s expense and, if the
unit owner’s independent appraisal amount differs from the
association's independent appraisal amount by five percent
or less, the higher appraisal is final. If the total amount of
compensation owed as determined by the second appraiser is
more than five percent higher than the amount determined by
the association’s appraiser, the unit owner shall submit to
arbitration at the association’s expense and the arbitration
amount is the final sale amount. An additional five percent of
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the final sale amount shall be added for relocation costs for
owner-occupied units.
Thus, the 1986 version used the fair market value of an owner’s unit to
calculate the proportion of that owner’s interest relative to the entire
condominium. But the 2018 version appears to set the fair market value of
the unit alone as “the final sale amount” to which the owner is entitled,
rather than calculating the owner’s proportionate share of the sale price of
the condominium as a whole.
¶22 The Declaration did not provide sufficient notice of such a
substantive amendment. It defined the Condominium Act as the
condominium statutes “as amended from time to time.” This provision only
provides notice that the Condominium Act could be amended by the
legislature, which cannot provide “fair notice of any enacted amendment.”
See Kalway, 252 Ariz. at 545, ¶ 19 (provision gave insufficient notice when it
only stated that the “Declaration may be amended at any time by an
instrument executed and acknowledged by the Majority Vote of the
Owners”). And the statutory amendments did not merely refine the
statutes, correct errors, or fill in gaps, but substantively altered owners’
property rights beyond the “owners’ expectations of the scope of the
covenants.” See Kalway, 252 Ariz. at 545, ¶ 17. Allowing this provision to
amend the Declaration would “allow[] substantial, unforeseen, and
unlimited amendments [that] would alter the nature” of the agreement. See
Kalway, 252 Ariz. at 544, ¶ 15. We conclude, therefore, that the Declaration
did not incorporate the 2018 amendments to A.R.S. § 33-1228, and the Xias
purchase agreement only granted the Association the rights, powers, and
duties prescribed by the 1986 version of the statute.
¶23 But PFP Dorsey and the Association claim that the Xias could
not contract around the 2018 amendments to subsection (G)(1). They cite
A.R.S. § 33-1228(K), which states that “[b]eginning on the effective date of
this amendment to this section, [August 3, 2018,] any provisions in the
declaration that conflict with subsection G, paragraph 1 of this section are
void as a matter of public policy.” They maintain that the 2018 version must
apply here because the legislature “intended the 2018 version to apply to
all condominiums, regardless of the language in their declarations.” As
discussed, a forced termination and sale under the statute is
unconstitutional but for an owner’s contractual agreement under the
declaration. And we cannot read A.R.S. § 33-1228(K) to affect agreements
already in place because “no . . . law impairing the obligation of a contract[]
shall ever be enacted.” Ariz. Const. art. 2, § 25; see also Hayes v. Cont’l Ins.
Co., 178 Ariz. 264, 273 (1994) (“[I]f possible this court construes statutes to
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avoid rendering them unconstitutional.”). But see Phelps Dodge Corp. v.
Arizona Elec. Power Co-op., Inc., 207 Ariz. 95, 119, ¶ 101 (App. 2004), as
amended on denial of reconsideration (Mar. 15, 2004) (“Although the language
in the contract clauses of the federal and state constitutions is seemingly
absolute, the State can impair contract obligations in the exercise of its
inherent police power to safeguard vital public interests.”).
¶24 The Xias took ownership of their unit in January 2018 subject
to the Declaration, which incorporated the Condominium Act. And
substantive amendments to the Condominium Act cannot later be
incorporated into the agreement without renewed consent. Thus, the 1986
version of A.R.S. § 33-1228 applies.
B. The Authority Granted to the Association Must Be Analyzed
Under the 1986 Version of A.R.S. § 33-1228.
¶25 The Xias also argue that A.R.S. § 33-1228 does not authorize
the Association to sell the contested unit to PFP Dorsey because, under their
interpretation, the statute requires that (1) any sale of condominium
property must include the entire condominium, and (2) the Association
must sell the property on the most favorable terms and distribute the sale’s
proceeds in proportion to their interests as determined by appraisals.
¶26 The primary goal of statutory interpretation is to “find and
give effect to legislative intent.” Secure Ventures, LLC v. Gerlach, 249 Ariz. 97,
99, ¶ 5 (App. 2020). We start with the statute’s plain language and give its
words their ordinary meaning. Id. In doing so, we read the statute’s words
in context. See J.D. v. Hegyi, 236 Ariz. 39, 40–41, ¶ 6 (2014). “If the statute is
subject to only one reasonable interpretation, we apply it without further
analysis.” Glazer v. State, 237 Ariz. 160, 163, ¶ 12 (2015). But if the statute is
ambiguous, we may consider many different factors, including “the context
of the statute, the language used, the subject matter, its historical
background, its effects and consequences, and its spirit and purpose.”
Wyatt v. Wehmueller, 167 Ariz. 281, 284 (1991).
¶27 In 1985, the Arizona Legislature adopted a version of the
Uniform Condominium Act. See 1985 Ariz. Sess. Laws, ch. 192, § 3. When a
statute is based on a uniform act, we may infer that the legislature
“intended to adopt the construction placed on the act by its drafters.”
UNUM Life Ins. Co. of Am. v. Craig, 200 Ariz. 327, 332, ¶ 25 (2001) (quoting
State v. Sanchez, 174 Ariz. 44, 47 (App. 1993)). We note, however, that our
legislature declined to adopt certain provisions of the uniform act, which
likewise guides our interpretation.
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1. Arizona Revised Statutes Section 33-1228(C) Allows a
Termination Agreement to Include a Provision for the Sale of Any
Portion of the Condominium.
¶28 The Xias argue that A.R.S. § 33-1228(C) prohibits the sale of
less than the entire condominium. Although the Xias originally made this
argument under the 2018 version of the statute, the legislature did not
substantively amend the subsections referenced in this argument. As a
result, we will address the argument here.
¶29 Section 33-1228(C) reads:
A termination agreement may provide that all the common
elements and units of the condominium shall be sold
following termination. If, pursuant to the agreement, any real
estate in the condominium is to be sold following termination,
the termination agreement shall set forth the minimum terms
of the sale.
The plain language of the first sentence allows a termination agreement to
provide for the sale of all the common elements and units. In the context of
A.R.S. § 33-1228, this sentence gives an association, via a termination
agreement, the power to contract for the sale of the entire property,
including the property of unit owners who object to the termination and
sale. See A.R.S. § 33-1228(A), (B) (contemplating a termination agreement
approved by less than all unit owners); A.R.S. § 33-1228(D) (contract for sale
binds owners of the property to be sold upon approval under subsections
A and B); see also Antonin Scalia & Bryan A. Garner, Reading Law: The
Interpretation of Legal Texts 167–69 (2012) (“Context is a primary determinant
of meaning,” and all of a statute “provides the context for each of its
parts.”).
¶30 The Xias argue that A.R.S. § 33-1228(C) requires that “[i]f . . .
any real estate is to be sold, it must all be sold.” But the subsection’s first
sentence does not require anything; the language is permissive. See A.R.S.
§ 33-1228(C) (“A termination agreement may provide that all the common
elements and units of the condominium shall be sold.”) (emphasis added);
see also Scalia & Garner, supra, at 112 (“May” is a permissive word and
“permissive words grant discretion.”). In the second sentence, the
legislature contemplated an agreement under which “any real estate in the
condominium is to be sold.” A.R.S. § 33-1228(C) (emphasis added). And the
only requirement imposed is that “the termination agreement shall set forth
the minimum terms of the sale.” Id.; see also Scalia & Garner, supra, at 112
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(Used correctly, “shall” is mandatory, and “[m]andatory words impose a
duty.”).
¶31 The statute thus permits but does not require a sale to include
the entire condominium. And nothing in the statute prohibits the sale of
less than the whole condominium. As a result, we read the statute to allow
a termination agreement to provide for the sale of less than all the units and
common elements.
2. The Superior Court Dismissed the Xias’ Complaint Based
on an Inapplicable Version of A.R.S. § 33-1228.
¶32 The Xias also argue that the Association owed them a
fiduciary duty to act in their best interests and sell the property on the best
terms possible. They argue that A.R.S. § 33-1228(D) creates a fiduciary
relationship by vesting title to their property in the Association as trustee.
¶33 Under A.R.S. § 33-1228(D), “[i]f any real estate in the
condominium is to be sold following termination, title to that real estate on
termination vests in the association as trustee for the holders of all interest
in the units.” The statute vests title to the real estate in the association so
that “the association has all powers necessary and appropriate to effect the
sale.” A.R.S. § 33-1228(D); see also A.R.S. § 33-1259 (Third parties may
assume an association is acting properly within its capacity as trustee.). As
trustee, an association must carry out a sale in good faith, with loyalty, and
in the interests of the unit owners. See Lane Title & Tr. Co. v. Brannan, 103
Ariz. 272, 278 (1968) (“[T]he trustee owes the beneficiary a duty of
undivided loyalty.”); A.R.S. § 14-10801 (“[T]he trustee shall administer the
trust in good faith, in accordance with its terms and purposes and in the
interests of the beneficiaries.”); A.R.S. § 14-10802 (trustee owes a duty of
loyalty); A.R.S. § 14-10803 (trustee owes a duty of impartiality); see also
A.R.S. § 14-10815(B) (describing such duties as “fiduciary duties.”).
¶34 The Association concedes that it became a trustee to facilitate
the sale, but it argues that A.R.S. § 33-1228 only requires the trustee to
“carry out the sale that the members of the Association agreed to when they
agreed to terminate the condominium.” We disagree. By assuming the role
of trustee, the Association owed a fiduciary duty to all unit owners. The
Association argues that if it owed the unit owners a fiduciary duty, it did
not breach the duty because it strictly complied with the requirements of
A.R.S. § 33-1228 by including the sale price and protective measures
required by A.R.S. § 33-1228(G). The Association thus argues that it
properly terminated and sold the condominium.
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¶35 The Association relies, however, on the requirements
imposed by the 2018 version of the statute. Likewise, the superior court
dismissed the Xias’ complaint “for the reasons advanced by [PFP Dorsey
and the Association],” which included arguments relying on the 2018
version. But as discussed, the Xias only agreed to the 1986 version of the
statute. As a result, we vacate and remand to the superior court to apply
the 1986 version of A.R.S. § 33-1228 to determine whether the Association
breached its fiduciary obligations. Thus, we need not address whether the
sale at issue would have fulfilled the Association’s fiduciary duty under the
2018 version.
ATTORNEY’S FEES
¶36 The Xias seek attorney’s fees on appeal. Contractual
attorney’s fees provisions are enforced according to their terms. Chase Bank
of Ariz. v. Acosta, 179 Ariz. 563, 575 (App. 1994). The Declaration provides
that if any unit owner employs attorneys to enforce compliance with the
Declaration, the prevailing party has a right to recover its reasonable
attorney’s fees. Because the Xias are the prevailing party, we award them
their reasonable attorney’s fees and costs after complying with Arizona
Rule of Civil Appellate Procedure 21.
CONCLUSION
¶37 We reverse and remand the superior court’s dismissal of the
Xias’ complaint.
AMY M. WOOD • Clerk of the Court
FILED: AA
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