Important New Reporting Requirement for Some Construction Defect Settlements

In response to a tragic balcony collapse incident where the public later learned the contractor had paid millions to settlement defect cases in the preceding years, the California legislature passed, the state contractor’s license board is now implementing, a public disclosure requirement for certain construction defect claims. The disclosure requirement is triggered by a judgment (which is not a new requirement), an arbitration award, or a settlement of certain construction defect claims. These requirements are codified at California Business & Professions Code sections 7071.20-22.

What types of Projects: This requirement applies only if all of the following apply:

A) Residential
B) Multi-Family; and
C) Rental property

Limitations on Claims – The reporting requirement only applies if all of the following are true:

A) The claim is against a CSLB licensee (not a design professional) acting in the capacity of a contractor;
B) The claim is for a structural defect;
C) The total claim is valued at $1 million (not including investigation costs);
D) SB800 does not apply;
E) The action was filed after January 1, 2019; and
F) If a lawsuit, the case was designated complex by the courts (which may not apply if only contractor is sued).

Who has to report: Any licensee (general or sub-contractor) and any insurer for a licensee is required to report the settlement, in writing. If any particular licensee is found to owe $15,000 or less, they are not required to individually report.

When to report: Within 90 days of judgment or arbitration award or within 30 days of payment of a settlement.

Consequences of Reporting: The CSLB will automatically open an investigation into the licensee’s license utilizing their existing complaint process. The license board may take further action but it also has the option of determining that the civil case resolution was sufficient to protect the public and take no further action.

Consequences of Not Reporting: The licensee is in violation of their license requirements and is subject to licensure discipline.

Unanswered Questions:

If the gross settlement for a licensee exceeds $1 million but no individual insurer’s share exceeds $1 million, are the insurers still obligated to report? Section 7071.21 can be read to require that an insurer is obligated to report if they pay any portion of a reportable settlement. [Notably the licensee has to report the settlement either way.]

The CSLB is still developing its implementation protocols. Exactly how to report is not clear but at this time, it would appear that a minimum requirement would be written notice to the CSLB’s complaint intake processing office.

Illinois Supreme Court Limits Reach of Implied Warranty Claims Against Contractors

In a recent decision, the Illinois Supreme Court held that a purchaser of a newly constructed home could not assert a claim for breach of the implied warranty of habitability against a subcontractor where the subcontractor had no contractual relationship with the purchaser. Sienna Court Condo. Ass’n v. Champion Aluminum Corp., 2018 IL 122022, ¶ 1. The decision overruled Minton v. The Richards Group of Chicago, which held that a purchaser who “has no recourse to the builder-vendor and has sustained loss due to the faulty and latent defect in their new home caused by the subcontractor” could assert a claim of a breach of the warranty of habitability against the subcontractor. 116 Ill. App. 3d 852, 855 (1983).

In Sienna Court Condo. Ass’n, the plaintiff alleged that the condo building had several latent defects which made individual units and common areas unfit for habitation. 2008 IL 122022 at ¶ 3. The Court rejected the plaintiff’s argument that privity should not be a factor in determining whether a claim for a breach of the warranty of habitability can be asserted. Id. at ¶ 19. The Court also rejected the plaintiff’s argument that claims for a breach warranty of habitability should not be governed by contract law but should instead be governed by tort law analogous to application of strict liability. Id.

The Court reasoned that the economic loss rule, as articulated in Moorman Manufacturing Co. v. National Tank Co., 91 Ill. 2d 69, 91 (1982), refuted the plaintiff’s argument that the implied warranty of habitability should be covered by tort law. 2008 IL 122022 at ¶ 20. Under the economic loss rule, a plaintiff “cannot recover for solely economic loss under the tort theories of strict liability, negligence, and innocent misrepresentation.” National Tank Co., 91 Ill. 2d at 91. The Court explained that the rule prevented plaintiffs from turning a contractual claim into a tort claim. 2008 IL 122022 at ¶ 21. The Court further noted that contractual privity is required for a claim of economic loss, and an economic loss claim is not limited to strict liability claims. Id. Because the plaintiff’s claim was solely for an economic loss, it was a contractual claim in nature; therefore, the Court concluded that “the implied warranty of habitability cannot be characterized as a tort.” Id. at ¶ 22.

The Court also rejected the plaintiff’s argument that warranty of habitability should be governed by tort law because it involves a duty imposed by the courts. Id. at ¶ 23. It reasoned that “an implied term in a contract is no less contractual in nature simply because it is implied by the courts . . . .” Id. The Court noted that the warranty of habitability can be waived under Illinois law, but individuals are not able to waive duties imposed upon them by the courts. Id. If the warranty of habitability was a tort claim, it would “raise[] significant practical problems, particularly for subcontractors” given that they “depend upon contract law and contracts with the general contractor to protect and define their risks and economic expectations.” Id. at ¶ 24. Because a subcontractor’s fees, costs, and liability are controlled by his contracts, turning an implied warranty of habitability claim into a tort would make those contracts pointless. Id.

The Court’s decision to overrule Minton rested on three primary reasons: (1) Minton failed to discuss why the economic loss rule did not apply; (2) Minton did not address what effect its holding would have on the contractual relationships of subcontractors and general contractors; and (3) there is “no authority for the idea that a tort duty comes into and out of existence depending on whether another entity is bankrupt.” Id. at ¶ 25. In light of the opinion, a home purchaser’s remedy where there is economic loss is now limited to those parties with whom it has a direct contractual relationship.

A Section 558.004 Pre-Suit Notice of Defect Tolls Florida’s Ten-Year Statute of Repose for Filing Construction Defect Claims

In prior coverage of Florida’s latest construction law developments, Gordon & Rees provided insight on Florida’s detailed update to its ten-year statute of repose for construction defect claims enacted on June 14, 2017. In the recently decided case of Gindel v. Centex Homes, No. 4D17-2149, 2018 WL 4362058, (Fla. 4th DCA, Sept. 12, 2018), a case of first impression, Florida’s Fourth District Court of Appeal held that serving a contractor with a Section 558 pre-suit notice of construction defect constitutes an “action” under Section 95.11(3)(c) and therefore tolls the statute of repose.

In Gindel, a putative class of individuals purchased townhomes (“Homeowners”) from the defendants, a homebuilder and its subcontractor (“Contractors”) alleging damages due to defective construction of the townhomes. Homeowners closed on and took physical possession of their respective properties on March 31, 2004, thereby triggering the statute of repose under Section 95.11(3)(c), Florida Statutes (the “statute of repose”). After discovering alleged construction defects, Homeowners served the Contractors with a pre-suit notice of defect on February 6, 2014, pursuant to Section 558, Florida Statutes. Contractors rejected the Homeowners’ request to cure the alleged defects. Consequently, Homeowners filed suit against Contractors on May 2, 2014 – 59 days after the statute of repose had expired.

Contractors moved for summary judgment, contending that the statute of repose barred Homeowners’ claims because the action was commenced not at the time the notice of defect was served, but when Homeowners actually filed their lawsuit. The trial court agreed with Contractors and ruled that service of the notice of defect did not commence the action under the statute of repose, filing a lawsuit did, and Homeowners lawsuit had been filed too late. The trial court entered summary judgment in Contractors’ favor. Homeowners appealed the trial court’s judgment.

The issue on appeal was “whether the pre-suit notice required by Chapter 558 qualifies as ‘an action,’ as the term is defined in the statute of repose, sections 95.011 and 95.11(3)(c).”

In answering this question, the court began its analysis with the plain language of Section 95.011 and Section 558 because each of them have their own definition of what constitutes an “action.” Section 95.011 defines an “action” as a “civil action or a proceeding”; Section 558.002(1) defines an “action” as a “civil action or arbitration proceeding.” Thus, as a textual matter, a homeowner’s service of a pre-suit notice of defect does not constitute an “action” within the express definition of either Section 95.011 or Section 558.002(1). Add to that, Section 558.004(1)(a) further makes clear that a pre-suit notice of defect is not an “action” under that Section 558 because it makes a distinction an “action” and a “written notice of claim,” and directs that the latter must be served on a contractor before the former can be filed in court. Importantly, however, as the Gindel Court noted, Section 95.011 and Section 558 are not textually intertwined such that the definition of an “action” under Section 558 must be read into Section 95.011(3)(c). Accordingly, the Court held that the term “action” in Section 95.011 and Section 558 are two separate and distinct terms that do not rely on one another.

The trial court, however, had construed the term “action” in Section 95.011 to mean only a civil action. By ruling that a pre-suit notice of defect is not an “action” under Section 95.011, the trial court effectively struck out the term “proceeding,” which is designed to encompass dispute resolution processes other than a civil action. The trial court’s construction of the statute conflicted with the canon of statutory interpretation that “a statutory provision should not be construed in such a way that it renders the statute meaningless.” Warner v. City of Boca Raton, 887 So. 2d 1023, 1033 n.9 (Fla. 2004).

Next, the Court looked to the Supreme Court’s decision in Raymond James Financial Services, Inc. v. Phillips, 126 So. 3d 186 (Fla. 2013), for guidance. In Raymond James, the Supreme Court had to decide whether an arbitration proceeding constituted an “action” under Section 95.011. The Court resorted to Black’s Law Dictionary for the definition of the word “proceeding,” which means “[a]ny procedural means for seeking redress from a tribunal or agency.” The Court further reasoned that because an arbitration involves a legal process for seeking redress from an “adjudicatory body,” arbitration meets the definition of a “proceeding” under Section 95.011. But in the context of a Section 558 pre-suit notice defect, a homeowner is not commencing an action before a tribunal, but rather, is complying with a require prerequisite to do so. Accordingly, Raymond James can be distinguished from Gindel on those grounds. The proposition that Raymond James stands best for is that the Supreme Court has recognized that a “proceeding” under Section 95.011 may be a process besides a civil action. The holdings in Raymond James and now Gindel leave open the possibility that parties who agree to engage in pre-suit mediation in a non-construction cases before the statute of limitations expires could use pre-suit mediation as a means of tolling the time period to file suit.

Last, the Court looked at the practical purposes behind the Section 558 pre-suit notice of defect requirement. A pre-suit notice of defect is designed to enable the parties to work towards curing any alleged defective construction without first filing a civil action. The only reason the Homeowners in Gindel server a pre-suit notice of defect instead of immediately filing suit is because Section 558.003 expressly prohibits from filing a civil action “without first” “serv[ing] written notice of claim on the” (Section 558.004(1)(a)) defendant. Thus, it would undermine the purpose of Section 558.003 to provide claimants incentive to circumvent the pre-suit claim procedures put in place thereby. But even with that legislative intent in the backdrop, in granting Contractors summary judgment, the trial nonetheless court ruled that Homeowners should have ignored Section 558.003 by commencing their lawsuit and seeking a stay until compliance with Section 558.003 had been effect. The Gindel Court, however, rejected the notion that the Homeowner’s should have had to resort to violating rather than “rightly complying” with Section 558 pre-suit notice of defect requirement.

Thus—and although Gindel likely laid to rest any question as to whether a Section 558 notice of defect tolls the statute of repose—the Homeowners there could have ensured the viability of their claims by filing their lawsuit and contemporaneously serving the notice of defect on the defendant, then moving to stay the action until pursuant to Section 558.003 until the applicable timeframe set forth in Section 558.004(1)(a) expires. Notably, the Court did not disavow this procedure, but held that construction defect claimants are not required to resort to this procedure to comply with the statute of repose if they timely served their notice of defect, and that claimants should not be penalized for adhering to the statutory procedure.

The court ultimately held that the trial court’s summary judgment order was erroneous because Homeowners’ timely service of a pre-suit notice of defect under Section 558 constituted an “action” under Section 95.011, and reversed and remanded the case to the trial court to reinstate the complaint.

Conclusion

Claimants wishing to bring construction defect claims now have clarity from the Gindel decision that service of a Section 558 pre-suit notice of defect, even right up against the expiration of the statute of repose, tolls the time to file suit.

Insurers May Not Be Required to Defend Contractors In a Florida §558 Proceeding

In recent holding1, the Florida Supreme Court held that an insurer may not have a duty to defend a contractor in a Florida §558 proceeding.

Chapter 558 of the Florida Statutes sets forth procedural requirements which must be met before a claimant may file a construction defect action. These requirements include serving a contractor, subcontractor or supplier with written notice of the claim. The contractor, in turn, must serve a written response to the notice of claim in which the contractor provides either an offer to repair the alleged construction defect at no cost to the claimant, resolution of the claim through a monetary payment, a statement disputing the claim, or a statement that any monetary payment will be determined by the recipient’s insurer.2 The claimant may file suit if the contractor disputes the claim and refuses to remedy the alleged defect or provide monetary compensation.

In the case of Altman Contractors, Inc. v. Crum & Forster Specialty Insurance3, Altman Contractors was the general contractor for a condominium project in Broward County, Florida. Altman Contractors was insured by Crum & Forster Specialty Insurance (“C&F”) through seven consecutive one-year commercial general liability policies that were essentially identical. The policies required C&F to defend Altman Contractors against any “suit” seeking damages because of bodily injury or property damage. The policies defined “suit” as follows:

“Suit” means a civil proceeding in which damages because of “bodily injury,” “property damage” or “personal and advertising injury” to which this insurance applies are alleged. “Suit” includes:

  1. An arbitration proceeding in which such damages are claimed and to which the insured must submit or does submit with our consent; or
  2. Any other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.

The policies did not provide further definitions for “civil proceeding” or “alternative dispute resolution proceeding” as used within the definition of “suit.”

After being served with a §558 notice, Altman Contractors notified C&F of the claims and demanded that C&F defend and indemnify it. C&F denied that the notice invoked its duty to defend because it did not constitute a “suit” as defined by the policy. Altman Contractors ultimately resolved the construction defect claims without a lawsuit being filed and without C&F’s involvement. Altman Contractors then filed suit for declaratory relief in which it sought a declaration that C&F owed a duty to defend and indemnify it under the policies.

The Florida Supreme Court held that Florida’s Chapter 558 notice and repair process “cannot be considered a civil proceeding under the policy terms because the recipient’s participation in the chapter 558 settlement process is not mandatory or adjudicative.”4 Rather, a recipient of a Chapter 558 notice may “choose to not respond and, thereby, force the claimant to file a lawsuit to recover for the identified construction defect.”5 The court nevertheless recognized that the policies’ definition of “suit” included “[a]ny other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.”6 The court then held that, while the Chapter 558 process was not a civil proceeding, it was an alternative dispute resolution proceeding under which the insurer’s consent was required to invoke its duty to defend.

Based on this ruling, an insurer is not necessarily required to defend a Florida contractor that received a Chapter 558 notice. The Florida Supreme Court does not interpret Chapter 558 as constituting a “civil proceeding” as defined in many CGL policies. Even if the policy in question contains language pertaining to “alternative dispute resolution proceedings,” the insurer’s duty to defend can only be invoked with its consent. This could have broad ramifications in Florida construction defect actions, as a contractor’s ability to investigate and contest the allegations could be adversely impacted without the assistance of counsel.

______________________________________________

1 Altman Constrs., Inc. v. Crum & Forster Specialty Ins. Co., 232 So.3d 273 (Fla. 2017).
2 See Fla. Stat. § 558.004(5).
3 232 So.3d 273 (Fla. 2017).
4 Id. at 278.
5 Id.
6 Id.

Insurance Policies Broadly Defining “Suits” May Prompt an Insurer’s Duty to Defend and Indemnify During the Chapter 558 Pre-Suit Notice Process

In Altman Contractors, Inc. v. Crum & Forster Specialty Insurance Company, No. SC16-1420, 2017 WL 6379535 (Fla. Dec. 14, 2017), the Florida Supreme Court addressed whether the notice and repair process set forth in chapter 558, Florida Statutes, constitutes a “suit” within the meaning of a commercial liability policy issued by Crum & Forster Specialty Insurance Company (“C&F”) to Altman Contractors, Inc. (“Altman”). The Court found that because the chapter 558 pre-suit process is an “alternative dispute resolution proceeding” as included in the definition of “suit” in the policy by C&F to Altman, C&F had a duty to defend Altman during the chapter 558 process, prior to the filing of a formal lawsuit.

Chapter 558, titled “Construction Defects,” sets forth procedural requirements before a claimant may file a construction defect action. It requires a claimant to serve a written notice of claim on the applicable contractor, subcontractor, supplier, and/or design professional prior to filing a construction defect lawsuit. The legislature intended for Chapter 558 to be an alternative dispute resolution mechanism in certain construction defect matters allowing an opportunity to resolve the claim without further legal process.

Altman was a general contractor for the construction of a high-rise residential condominium in Broward County, Florida. C&F insured Altman for the project through seven consecutive one-year commercial general liability insurance policies (collectively, “policy”). The policy required C&F to defend Altman against any “suit.” The policy, in part, defined “suit” as a civil proceeding. The Court found that the pre-suit 558 process was not a civil proceeding because the recipient’s participation in the 558 process was not mandatory or adjudicative. However, in defining the term “suit,” the policy also included “[a]ny other alternative dispute resolution proceeding in which such damages are claimed and to which the insured submits with our consent.” The Court found that the plain meaning of the term, “alternative dispute resolution” means a procedure for settling a dispute by means other than litigation. Hence, it determined that the chapter 558 process is an alternative dispute resolution proceeding within the plain meaning of the policy term, falling within the definition of “suit,” and triggering C&F’s duty to defend Altman during the 558 process.

Depending on how broadly an insurance policy is worded, insurance companies may be required to defend and indemnify their insureds through the chapter 558 process, before any formal lawsuit has been filed. Although this is beneficial to contractors, subcontractors, suppliers, and design professionals, the insurance companies will be burdened with having to pay legal fees in defending these parties during this process. As Altman expands what is considered a “suit” to include the 558 process in some instances, insurance companies would be wise to analyze how they define “suit” in their policies going forward to avoid triggering a duty to defend and indemnify its insureds even before formal litigation has been initiated.

California Supreme Court Confirms the Right to Repair Act as the Exclusive Remedy for Seeking Relief for Defects in New Residential Construction

The California Supreme Court recently issued its decision on a critical issue in the residential construction industry – the claims for construction defects that a California homeowner can bring against a builder or seller of new residential properties in California.

Holding

In McMillin Albany v. The Superior Court of Kern County, the Court held that California’s Right to Repair Act (California Civil Code, sections 895, et seq.) (the “Act”) is the exclusive remedy for homeowners claiming defective construction of new residences in California.

Why this Case is Important

After years of dispute at the trial court and court of appeal levels on whether homeowners were limited to statutory claims or if they could opt to alternatively plead common law claims or seek common law claims alone for construction defects, the Supreme Court took up the McMillin case to decide whether a homeowner’s common law action alleging construction defects is subject to the Act’s pre-litigation notice and cure procedures.

The Court looked at the causes of action available under the Act, the attendant damages scheme, and the legislative purpose behind the Act’s pre-litigation procedures, and found that the Act bars common law causes of action, and mandates pre-litigation obligations. This is a profound decision that will impact the area of construction defect litigation, narrowing the type of claims and exposure for homebuilders and contractors in California.

Background

California’s Right to Repair Act (“Act”) is a 15-year-old statutory scheme which contains an elaborate statutory framework delineating procedural and substantive rights of parties in disputes involving new residential construction in the state. Written in response to the California Supreme Court’s decision in Aas v. Superior Court (2000) 24 Cal. 4th 627, which held that tort theories could not support a claim for purely economic damages for construction defects, the Act provides California homeowners a statutory right to recover such damages. Additionally, as noted below, the Act sets forth a lengthy set of building construction standards, contains obligations that builders must fulfill, including warranties to be provided, contains elaborate pre-litigation procedures and deadlines, and procedures for lawsuits under the Act.

McMillin Homeowners’ Bring Claims of Both Common Law and SB 800 Violations

In McMillin, a group of homeowners sued the builder of their homes asserting both common law causes of action, and statutory causes of action under the Act. The builder claimed that the Act allows defendants to informally inspect and to test alleged defects before litigation and thus sought stipulation to stay the action to complete such inspections. The homeowners declined to stipulate. Further, Plaintiffs later dismissed their statutory causes of action, electing to proceed only on common law grounds. The developer, McMillan, then moved the trial court to stay the action until Plaintiffs complied with the pre-litigation procedures under the Act. Following the law of sister appellate districts, the trial court denied the stay.

Procedural History

On appeal, the Fifth District Court of Appeals declined to follow conflicting interpretations of the Act upheld by the Fourth District in Liberty Mutual Ins. Co. v. Brookfield Crystal Cove LLC (2013) 219 Cal.App.4th 98, and by the Second District in Burch v. Superior Court (2014) 223 Cal.App.4th 1411, and granted the stay.

As discussed below, the Court reviewed the Act and ultimately found that the Act is the “virtually exclusive remedy not just for economic loss but also for property damage arising from construction defects.” Accordingly, the defendant property developer was entitled to a stay of the litigation until plaintiffs complied with the Act’s pre-litigation notice, inspection and repair procedures.

California Supreme Court’s Examination and Finding that the Right to Repair Act is THE Remedy for Tort Claims

The Court reviewed the history of the Act and the underlying legislative history, as well as the specific damages scheme under the Act to develop its finding. The Court examined Civil Code Section 944, which provides that an aggrieved homeowner can claim damages for a builder’s failure to meet the building standards established in Sections 896 and 897. The Court found the lengthy list of building standards contained in Section 896, coupled with the catchall of Section 897, as evidence of the Legislature’s intent to supplant common law causes of action for construction defects in residential construction.

Further, the Court found that Section 943(a), which contains the phrase “no other cause of action for a claim covered by this title or for damages recoverable under Section 944 is allowed,” also supports its finding that Section 944 “defines the universe of damages that are recoverable under the Act” and Section 943 makes the Act, the “exclusive means” to recover such damages.

As such, the Act is the exclusive means of recovering damages for violations contains in Sections 896, and 897, and those sections are to be interpreted broadly to include almost all construction defect claims, a reading warranted by their text.

Pre-Litigation Procedures Must Be Followed For Any Claims of Construction Defects in Residential Construction

Armed with the interpretation above, the Court went further and analyzed the Act’s pre-litigation procedures and found that Civil Code Section 910 provides builders of residential construction a right to remedy the defects before litigation. The Court held that this goal of the Act necessitates a holding that common law claims are also subject to pre-litigation procedures because a determination to the contrary would frustrate the purpose of the law, the purpose of Section 910. Stated another way – the Court held that allowing homeowners to bring common law claims without first abiding by Act’s prelitigation procedures would thwart the Act’s purpose in providing builders a pre-litigation right to repair.

The Supreme Court’s full opinion issued on February 2, 2018, is available at: McMillin Albany LLC v. Superior Court, S229762 (2018) __             Cal.4th __.

2017 Colorado Construction Defect Recap: Colorado Legislature and Judiciary Make Favorable Advances for Development Community

Last March, the Colorado General Assembly introduced House Bill 17-1279 concerning the requirement that a unit owners’ association obtain approval through a vote of unit owners before filing a construction defect action. The bill, passed in May, requires a home owners’ association to first notify all unit owners and the developer or builder of a potential construction defect action, call a meeting where both the HOA and developer or builder have an opportunity to present arguments and potentially remedy the defect, and obtain a majority vote of approval from the unit owners to pursue a lawsuit before bringing a construction defect action against a developer or builder. The bill amends C.R.S. § 38-33.3-303.5, which previously only required substantial compliance with the above-mentioned actions. Moreover, the previous version of C.R.S. § 38-33.3-303.5 did not require the HOA to perform these actions prior to a suit being filed. HB 17-1279 also removed the provision of C.R.S. § 38-33.3-303.5 that made it only applicable to buildings of five or more units.

This legislation, along with the Colorado Supreme Court’s decision in Vallagio at Inverness Residential Condo. Ass’n v. Metro. Homes, Inc., are significant developments in Colorado construction defect litigation. In Vallagio, a clause in the homeowner association’s declaration required arbitration of construction defect claims. This clause could not be amended without consent of the developer/declarant. The homeowner association voted to amend the declaration to delete the arbitration provision and filed a civil lawsuit against the developer. The trial court found the vote was valid, but the Court of Appeals reversed. The Supreme Court affirmed the Court of Appeals decision, holding that the consent-to-amend provision is consistent with the Colorado Common Interest Ownership Act (CCIOA), and that the Colorado Consumer Protection Act (CCPA) does not preclude an agreement to arbitrate CCPA claims against a declarant.

These two advances lend greater certainty to the development community and will hopefully make developers more willing to build in Colorado, which is currently facing a shortage of affordable housing. The General Assembly put forth several bills in the last few years to encourage such growth, but HB 17-1279 was the only bill passed in 2017 that addresses the construction of affordable multifamily housing. The population boom in Colorado is slightly cooling off with more Coloradans moving out. Individuals moving away cite unaffordable housing and high cost of living as reasons for leaving the Centennial State.

When is the Statute of Limitations Period Triggered for a Construction Defect Claim in New Jersey?

After conflicting conclusions by the lower courts, the New Jersey Supreme Court recently decided whether a condo association’s lawsuits for construction defects were timely filed against a general contractor and three of its subcontractors. The trial court and appellate division came to opposite conclusions by using different commencement dates for the 6-year statute of limitations at N.J.S.A. 2A:14-1.

Construction of the building was complete in May 2002 and the owner rented units for two years. In June 2004, the owner sold the building to a developer who converted the building from a rental to condo ownership. As part of the conversion, the developer retained an engineer to inspect the common areas. In October 2004, the inspector found that the structure of the building, townhomes and parking deck appeared to be in good condition with “some spalling of concrete” and “some sporadic cracking of the concrete” in the parking deck. The report was in the condo public offering statement and master deed. Once 75% of the units were sold in July 2006, the developer transferred control of the building to the condo association. The association then retained an engineer to perform an inspection in June 2007. Numerous construction defects were found including in exterior walls, roofing, concrete flooring, plumbing, landscaping and the parking garage.

The condo association commenced lawsuits in March 2009, more than 6 years after the building was completed. The suits alleged negligence, breach of express and implied warranties of good workmanship, breach of habitability and merchantability. After discovery, the GC and subcontractors filed motions for summary judgment, arguing that the lawsuits were not commenced within the 6-year statute of limitation.

The trial court agreed, finding that the time began to run in May 2002 when the building was substantially completed, determining that the condo association had time to discover the problems within that time. The court concluded that the October 2004 report put the owners on notice of potential problems.

The appellate division reversed, finding that the statute of limitation clock did not begin to run until the condo association obtained its inspection report in June 2007, which was when they had actual notice of the defects. The appellate division rejected arguments that this would make contractors “forever liable,” violating the 10-year statue of repose for claims against construction contractors.  See N.J.S.A. 2A:14-1.1(a).

The Supreme Court disagreed with both of these approaches and concluded that a construction defect cause of action accrues at the time the building’s original or subsequent owner first knew or, through reasonable diligence, should have known of the basis for a claim. The time commences even if there are subsequent owners because a subsequent owner “stands in no better position than a prior owner in calculating the limitation period.” The Supreme Court recognized that the discovery rule applied, i.e., a cause of action will be held not to accrue until the injured party discovers, or by an exercise of reasonable diligence and intelligence should have discovered that he may have a basis for an actionable claim. However, it found that the discovery rule does not re-triggered the statute of limitations each time there is a sale; it is triggered when anyone in the chain of title first knew or should have known of the actionable claim against an identifiably party.

In this particular case, the Supreme Court found that it did not have the factual record to determine when the claim accrued. It remanded the case to the trial court to determine when all of the entities in the chain of ownership first knew, or should have known through the exercise of reasonable diligence, that it had a cause of action against each defendant.

The Supreme Court also addressed the statute of repose, which requires the filing of a lawsuit against persons who provided services in the construction of an improvement, within 10 years of the date of substantial completion of the work. In this case, the condo association’s suits were commenced within this 10 year period.

The lessons of this decision are that property buyers must be diligent in discovering not only construction defects, but if and when prior owners knew or should have known about the defects. Seller who know and do not disclose potential problems will face claims of fraudulent concealment by a subsequent owner. Hopefully, sellers will not unwittingly trigger the statute of limitations clock by turning a blind eye to construction defects that could have been discovered.

Is California’s Right to Repair Statute the Only Basis for a Claim for Residential Construction Defects? The California Supreme Court Will Weigh in Shortly.

In McMillin Albany, LLC v. Superior Court, real parties, including Carl Van Tassell and 36 other homeowners, filed a first amended complaint alleging eight causes of action against the builder, McMillin Albany, LLC, including strict products liability, negligence, and breach of express and implied warranties. Plaintiffs alleged the homes were defectively constructed and that the alleged construction defects resulted in damage to their homes. The third cause of action of the first amended complaint alleged violation of the building standards set forth in Civil Code Section 896, part of the Right to Repair Act.

Plaintiffs did not give McMillin notice of the alleged defects before filing suit. The parties, in turn, attempted to negotiate a stay of the judicial proceedings to complete the pre-litigation process under SB 800, but plaintiffs subsequently withdrew from these negotiations, dismissed plaintiffs’ third cause of action, and argued that plaintiffs were no longer required to comply with the statutory pre-litigation process under SB 800, as they had dismissed their cause of action alleging violation of the Right to Repair Act. McMillin then filed a motion for a stay of the proceedings, which plaintiffs’ vigorously opposed.

The trial court denied the motion for stay of the proceedings, concluding real parties were entitled to plead common law causes of action in lieu of a cause of action for violation of the building standards set out in Section 896 and they were not required to submit to the pre-litigation process of the Act when the operative complaint did not allege any cause of action for violation of the Right to Repair Act. The court sited Liberty Mutual as the basis for their decision. McMillin, in response to this ruling, filed a petition for a writ of mandate, seeking a writ directing the trial court to vacate its order denying McMillin’s motion for a stay and to enter a new order granting a stay pending completion of the pre-litigation process under SB 800.

In considering McMillin’s writ petition, the 5th District Court of Appeal in Fresno found that the only issue before the court was whether McMillin’s motion for a stay pending completion of the pre-litigation procedures of Chapter 4 of the Act was properly denied. In order to make that determination, the Court of Appeal considered the scope of the Act and whether the Albany McMillin homeowners were required to comply with the SB 800 pre-litigation process before filing suit against McMillin, regardless of whether the plaintiff homeowners were asserting any claims or causes of action reliant upon SB 800.

Ultimately, the 5th District Court of Appeal concluded that the Legislature intended that all claims arising out of defects in residential construction, involving new residences sold on or after January 1, 2003 (Civ. Code § 938), be subject to the standards and the requirements of the Right to Repair Act and that homeowners bringing such claims were required to give notice to the builder and engage in the pre-litigation procedures in accordance with the provisions of Chapter 4 of the Act prior to filing suit in superior court. The court concluded that the plaintiff homeowners did not comply with the requirements of Chapter 4 allowing McMillin the absolute right to attempt repairs. Further, the Court of Appeal held that McMillin was entitled to a stay of the action until the statutory pre-litigation process has been completed.

On December 1, 2015, the California Supreme Court, noting an irreconcilable conflict between Liberty Mutual and McMillin Albany, ordered the 5th District’s McMillin Albany decision de-published pending review by the Supreme Court.

The Supreme Court has now set the case for oral argument on November 7, 2017, and we will see if the court makes the determination that SB 800 is an “exclusive remedy” after all.

Nevada Non-Mutual Claim Preclusion Case Effect on Permissive Cross-Claims

In construction defect litigation, including matters where the contractors are covered by owner controlled insurance policies (“OCIP”) or design professionals are not sued by plaintiff, a question often arises as to whether or not the co-defendants should file cross-claims for indemnity or contribution regarding plaintiff’s defect and damage claims? Notwithstanding the permissive status of such potential cross-claims, the prudent course in Nevada construction defect cases — without a good reason to justify a second lawsuit — is to file cross-claims or third-party complaints regardless of OCIP potential coverage to avoid claim or non-mutual claim preclusion.

Procedurally, parties with permissive cross-claims in the past could wait before proceeding against co-defendants under statute and case law. In Nevada, the applicable rule on cross-claims against co-parties is NRCP 13(g). A pleading may state as a cross-claim any claim by one party against a co-party arising out of the transaction or occurrence that is the subject matter either of the original action or of a counterclaim therein or relating to any property that is the subject of the original action. Such cross-claim may include a claim that the party against whom it is asserted is or may be liable to the cross-claimant for all or part of a claim asserted in the action against the cross-claimant.

A frequently cited case interpreting the permissive cross-claim rule is Executive Mgmt. v. Ticor Title Ins. Co., 114 Nev. 823, 963 P.2d 465 (1998). Noting that NRCP 13 (g) language is “clearly permissive” regarding the option to pursue, the Nevada Supreme Court held that where a party to an action has a permissive cross-claim, that party has the option to pursue that claim in an independent action, and if such a claim is neither asserted nor litigated, the parties cannot be barred from asserting it in a later action by principles of res judicata, waiver or estoppel. 963 P.2d at 474. Moreover, the Supreme Court stated it would “not allow the doctrine of claim preclusion to convert the permissive character of NRCP 13(g) into a compulsory mandate.” Id. at 475.

However, the Nevada Supreme Court’s relatively recent decision in Weddell v. Sharp 131 Nev. Adv. Op. No. 28, 350 P.3d 80 (May 28, 2015), has limited that procedural option for co-defendants. Even as to parties without contractual privity, the Nevada Supreme Court held that non-mutual claim preclusion applies in Nevada. The purpose of claim preclusion and non-mutual claim preclusion is to obtain finality of litigation by preventing a party from filing another suit based upon the same set of facts present in the initial suit. This includes promoting judicial economy in situations where the rules of civil procedure governing noncompulsory joinder, permissive counterclaims, and permissive crossclaims “fall short.” 350 P.3d at 84.

In the Weddell case, the Supreme Court decision modified the privity requirement established in Five Star Capital Corp. V. Ruby, 124 Nev.1048 (2008), with application of “the doctrine of nonmutual claim preclusion.” In short, the Nevada Supreme Court Weddell decision makes it clear that the main inquiry focuses on whether appellant has shown a good reason to justify this second lawsuit. Weddell 350 P.3d at 85.

Now, notwithstanding the optional direction for permissive cross-claims or counter claims under NRCP (13), the Nevada Supreme Court found that defendants in a second lawsuit may validly use a claim preclusion defense based upon where (1) there has been a valid final judgment in a previous action; (2) the subsequent action is based on the same claims or any part of them that were or could have been brought in the first action: and (3) privity exists between the new defendant and the previous defendant or the defendant can demonstrate that he or she should have been included as a defendant in the earlier suit and the plaintiff cannot provide a “good reason” for failing to include the new defendant in the previous action. Id.at 85-86.