Illinois Court Determines Insurer Must Defend Property Damage Caused by Faulty Workmanship
July 11, 2011 — Tred R. Eyerly, Insurance Law Hawaii
The Illinois Court of Appeals determined the insurer must defend allegations of property damage arising from faulty workmanship. Milwaukee Mut. Ins. Co. v. J.P. Larsen, Inc., 2011 Ill. App. Unpub. LEXIS 1443 (Ill. Ct. App. June, 20, 2011).
Larsen was a subcontractor for Weather-Tite in a condominium building. Weather-Tite installed windows on the project and hired Larsen to apply sealant to the windows. The windows subsequently leaked and caused water damage within the complex.
The homeowner’s association sued Weather-Tite for breach of express and implied warranties. Weather-Tite filed a third-party complaint against Larsen, seeking contribution and alleging that Larsen was in breach of contract by failing to add Weather-Tite as an additional insured under Larsen’s CGL policy.
Both Weather-Tite and Larsen tendered to Larsen’s insurer. Both tenders were denied because the insurer contended the complaints alleged only construction defects, and not “property damage” or an “occurrence” within the terms of the policy.
The insurer filed suit for a declaratory judgment. The trial court granted the insurer’s motion as to Weather-Tite, but granted Larsen’s cross-motion for summary judgment.
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Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com
Amerisure Case to be Heard by Texas Supreme Court
August 16, 2012 — CDJ Staff
The Fifth Circuit Court of Appeals has withdrawn its decision in Ewing Construction Company Inc. v. Amerisure Insurance Company, according to Insurance Developments. The Fifth Circuit had concluded that “a contractor’s obligation to perform its contact in a workmanlike manner constituted an ‘assumption of liability.’” Two questions have now been certified to the Texas Supreme Court. The dissent in the case argued the majority had misread Texas Supreme Court precedent. The court will now have the opportunity to clarify this matter.
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Georgia Supreme Court Rules Construction Defects Can Constitute an Occurrence in CGL Policies
April 5, 2011 — April 5, 2011 Beverley BevenFlorez - Construction Defect Journal
Recently, the Supreme Court of Georgia reversed the decision in American Empire Surplus Lines Insurance Company v Hathaway Development Company, Inc. stating that because Whisnant’s faulty workmanship caused damage to the surrounding properties, the construction defects constituted “occurrences” under the Commercial General Liability (CGL) policy. Unlike the South Carolina Supreme court ruling in the case of Crossman Communities v Harleysville Mutual, the Georgia Supreme Court stated that an accident can happen intentionally if the effect is not the intended result.
Interestingly, the only dissenting judge, J. Melton, disagreed with his colleagues on the basis that “although the term ‘accident’ is not specifically defined in the policy, it is axiomatic that an ‘accident’ cannot result from ‘intentional’ behavior.” It is clear that what constitutes an occurrence in CGL policies is still being hotly debated.
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Arizona Court of Appeals Decision in $8.475 Million Construction Defect Class Action Suit
May 9, 2011 — May 9, 2011 Beverley BevenFlorez - Construction Defect Journal
In the case of Leflet v. Fire (Ariz. App., 2011), which involved an $8.475 million settlement in a construction defect class action suit, the question put forth to the Appeals court was “whether an insured and an insurer can join in a Morris agreement that avoids the primary insurer’s obligation to pay policy limits and passes liability in excess of those limits on to other insurers.” The Appeals court provided several reasons for their decision to affirm the validity of the settlement agreement as to the Non-Participatory Insurers (NPIs) and to vacate and remand the attorney fee awards.
First, the Appeals court stated, “The settlement agreement is not a compliant Morris agreement and provides no basis for claims against the NPIs.” They conclude, “Appellants attempt to avoid the doctrinal underpinnings of Morris by arguing that ‘the cooperation clause did not prohibit Hancock from assigning its rights to anyone, including Appellants.’ This narrow reading of the cooperation clause ignores the fact that Hancock did not merely assign its rights — it assigned its rights after stipulating to an $8.475 million judgment that neither it nor its Direct Insurers could ever be liable to pay. Neither Morris nor any other case defines such conduct as actual ‘cooperation’—rather, Morris simply defines limited circumstances in which an insured is relieved of its duty to cooperate. Because Morris agreements are fraught with risk of abuse, a settlement that mimics Morris in form but does not find support in the legal and economic realities that gave rise to that decision is both unenforceable and offensive to the policy’s cooperation clause.”
The Appeals court further concluded that “even if the agreement had qualified under Morris, plaintiffs did not provide the required notice to the NPIs.” The court continued, “Because an insurer who defends under a reservation of rights is always aware of the possibility of a Morris agreement, the mere threat of Morris in the course of settlement negotiations does not constitute sufficient notice. Instead, the insurer must be made aware that it may waive its reservation of rights and provide an unqualified defense, or defend solely on coverage and reasonableness grounds against the judgment resulting from the Morris agreement. The NPIs were not given the protections of this choice before the agreement was entered, and therefore can face no liability for the resulting stipulated judgment.”
Next, the Appeals court declared that “the trial court abused its discretion in awarding attorney’s fees under A.R.S § 12-341.” The Appeals court reasoned, “In this case, the NPIs prevailed in their attack on the settlement. But the litigation did not test the merits of their coverage defenses or the reasonableness of the settlement amount. And Plaintiffs never sued the NPIs, either in their own right or as the assignees of Hancock. Rather, the NPIs intervened to test the conceptual validity of the settlement agreement (to which they were not parties) before such an action could commence. In these circumstances, though it might be appropriate to offset a fee award against some future recovery by the Plaintiff Leflet v. Fire (Ariz. App., 2011) class, the purposes of A.R.S. § 12-341.01 would not be served by an award of fees against them jointly and severally. We therefore conclude that the trial court abused its discretion in awarding fees against Plaintiffs ‘jointly and severally.’”
The Appeals court made the following conclusion: “we affirm the judgment of the trial court concerning the validity of the settlement agreement as to the NPIs. We vacate and remand the award of attorney’s fees. In our discretion, we decline to award the NPIs the attorney’s fees they have requested on appeal pursuant to A.R.S. § 12-341.01(A).”
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Fifth Circuit Reverses Insurers’ Summary Judgment Award Based on "Your Work" Exclusion
November 18, 2011 — Tred Eyerley, Insurance Law Hawaii
Application of the facts to the "your work" exclusion was the key to resolving coverage issued in Am. Home Assurance Co. v. Cat Tech L.L.C., 2011 U.S. App. LEXIS 21076 (5th Cir. Oct. 5, 2011).
Ergon Refining, Inc. hired Cat Tech L.L.C. to service a hydrotreating reactor. In January 2005, Cat Tech replaced certain parts in the reactor. After Cat Tech finished the job and left, Ergon noticed a high pressure drop in the reactor, forcing it to be shut down. Cat Tech returned in February 2005, removed, repaired and replaced the damaged parts, and loaded new parts. After completion, a second large pressure drop occurred during the reactor’s start-up process. The reactor was shut down until October 2005, when Ergon hired a different contractor to perform the repair work. Additional damage to the reactor was found.
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Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com
Ninety-Day Extension Denied to KB Home in Construction Defect Insurance Claim
July 10, 2012 — CDJ Staff
A magistrate judge has denied a request by KB Home Nevada to extend the time for service an additional ninety days. KB claims that St. Paul Fire & Marine Insurance Company has failed to defend them in a construction defect claim. However, the judge did grant KB an additional twenty days to effectuate service, noting that the request for additional time may be renewed.
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Another Colorado District Court Refuses to Apply HB 10-1394 Retroactively
October 28, 2011 — David M. McLain, Colorado Construction Litigation
In Martinez v. Mike Wells Construction Company, 09CV227, Teller County District Court Judge Edward S. Colt refused to apply C.R.S. § 13-20-808 retroactively to provide coverage for the underlying construction defect allegations. According to the recitation of facts in Judge Colt’s March 2011 order, Martinez contracted with Mike Wells Construction to serve as the general contractor for the construction of a home. At that time, Mike Wells Construction was insured through ProBuilders Specialty Insurance Company, RRG. Disputes arose between Martinez and Mike Wells Construction, resulting in Martinez ordering it off of the project in mid-November 2007 and terminating its right to work there by letter dated November 28, 2007.
Mike Wells, the owner of the corporation, subsequently died. Martinez sued Mike Wells Construction in July 2009 for breach of contract and various claims relating to alleged defecting workmanship. Martinez provided notice of the suit to the special administrator of the probate estate. No answer having been filed, the court entered a default judgment against Mike Wells Construction and Martinez sought to garnish Mike Wells Construction’s ProBuilders insurance policy.
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Reprinted courtesy of Higgins, Hopkins, McLain & Roswell, LLC. Mr. McClain can be contacted at mclain@hhmrlaw.com
US Courts in Nevada Busy with Yellow Brass
August 2, 2012 — CDJ Staff
Judge Robert C. Jones, the chief judge of the United States District Court of Nevada, and Judge Peggy A. Leen, a magistrate judge with the same court, have issued orders in cases involving allegations of high-zinc yellow brass plumbing components. Judge Jones issued orders on Waterfall Homeowners Association v. Viega, Inc. and Greystone Nevada, LLC v. Anthem Highlands Community Association on July 9, 2012. Judge Leen issued orders on Southern Terrace Homeowners Association v. Viega, Inc. on July 10, and The Seasons Homeowners Association, Inc. v. Richmond American Homes of Nevada, Inc. on July 19.
Chief Judge Jones held an omnibus hearing on Waterfall v. Viega on June 12. During that hearing “Chief Judge Jones had already agreed that the claims against the product manufacturers should be be severed from the majority of the other claims and that discovery should proceed on different tracks.” Judge Leen ordered that the Southern Terrace claims be referred to Chief Judge Jones to determine if it should be consolidated with other yellow brass cases.
Chief Judge Jones’s decision in Greystone Nevada rests on issues of whether the affected homeowners had signed arbitration agreements. The judge found that the “Defendant’s claims that the seven homeowners they have identified are subsequent purchasers who need not arbitrate with Greystone is definitively refuted by the evidence.”
Judge Leen cites the Greystone decision in her ruling on Seasons Homeowners Association v. Richmond American Homes of Nevada. Richmond seeks to compel individual arbitration, stating that “the arbitration clause used singular rather than plural terms, and therefore, class arbitration was foreclosed.” Judge Leen determined that “under Nevada law, a homeowners association has statutory authority to represent homeowners associations in these types of actions. She did, however, accept Richmond’s argument that they could compel arbitration.
The Waterfall order involves an attempt by two homeowners associations to seek a class action against seventeen defendants, the first twelve of whom are described as “the Viega Defendants” and “the Uponor Defendants.” Chief Judge Jones notes that “many of these Defendants have been sued in identical class actions by the same law firms, but with different named defendants.” The homeowner association seek to “represent their own 998 members directly but also wish to represent up to 10,000 homeowner associations representing up to 250,000 similarly situated homeowner members throughout the Las Vega area via this class action.”
The judge has denied the Viega Defendants’ attempt to deny class certification, noting that the plaintiffs “argue that they intend to argue for class certification under Rule 23(b)(3). He also denied the motions by the two groups of the Viega Defendants. The U.S. Viega Defendants sought to be dismissed from the case for a variety of reasons. The judge noted of the claim that the plaintiffs had no injury of fact and are not alleging actual damage is contradicted by the allegations of actual damage made by the plaintiffs. ”They have alleged that the parts are defective and have already begun to corrode in at least a few sample circumstances, even if they have not yet failed.” To the argument that there re not particular claims made against defendants, the judge notes, “it is clear from the Complaint which Defendants are alleged to have manufactured and sold which brands of allegedly defective products, and which Defendants are alleged to have installed them.”
The German Viega firms also sought to be dismissed from the suit, noting that “they have no property, employees, accounts, advertisements, etc. in Nevada and have not sold any products in Nevada.” However, the judge notes that “at least Waterfall, and perhaps Red Bluff, was still under construction when Viega, Inc. became the sole shareholder of Vanguard Industries, Inc.”
Finally, both of Chief Judge Jones’s rulings cite a related case in the U.S. District Court for the District of Minnesota involving a class action settlement for those with F1807 systems. He notes in both these cases that “Plaintiffs disclaimed any claims based upon F1807 components.”
Read the courts' decisions…
Waterfall Homeowners Association v. Viega, Inc.
Greystone Nevada, LLC v. Anthem Highlands Community Association
Southern Terrace Homeowners Association v. Viega, Inc.
The Seasons Homeowners Association, Inc. v. Richmond American Homes of Nevada, Inc.
Mandatory Arbitration Provision Upheld in Construction Defect Case
May 18, 2011 — May 18, 2011 Beverley BevenFlorez - Construction Defect Journal
The Superior Court of New Jersey reversed the decision in Frumer v. National Home Insurance Company (NHIC) and the Home Buyers Warranty Corporation (HBW), stating that the mandatory arbitration provision within the Frumer’s home warranty policy was binding.
The Frumers alleged that the construction defects were discovered immediately after moving into their million dollar home. After failing to achieve any results from dealing with the builder, they turned to their home warranty. There was some dispute over claims, and a settlement offer was rejected by the Frumers. The Frumers elected to commence litigation rather than utilize the binding arbitration.
The NHIC and the HBW filed a motion to compel arbitration, however, the motion judge denied the motion: “…the Warranty leaves open the option for [plaintiffs] to commence litigation, which [plaintiffs have] done in this case. The clause also states that ‘the filing of a claim against this limited Warranty shall constitute the election of remedy and shall bar the Homeowner from all other remedies.’ However, the provision does not state that the filing of a claim elects arbitration as the exclusive remedy, and any ambiguity in the language must be inferred against the drafter.”
The NHIC and the HBW appealed the decision. The Superior Court reversed the decision: “Where, such as here, the homeowner files a claim against the warranty for workmanship/systems defects, the warranty clearly and unequivocally establishes binding arbitration as the exclusive remedy. There is, however, no election of remedies for a dispute involving a major structural defect claim. The warranty clearly and unequivocally establishes binding arbitration as the exclusive remedy.”
Charles Curley of Halberstadt Curley in Conshohocken, Pa., the local counsel for National Home and Home Buyers, told the New Jersey Law Journal that “the ruling reaffirms New Jersey’s commitment to enforcing arbitration agreements and requiring people to go to mandatory arbitration when the contracts call for it.”
“At this point, their hope is that the warranty company will do what it's supposed to do — repair covered defects,” Eric McCullough, the Frumer’s lawyer said to the New Jersey Law Journal.
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Vegas Hi-Rise Not Earthquake Safe
July 12, 2011 — CDJ Staff
If an earthquake hit Las Vegas, the Harmon Tower would not withstand it. A report from Weidlinger Associates told MGM Resorts that “in a code-level earthquake, using either the permitted or current code specified loads, it is likely that critical structural members in the tower will fail and become incapable of supporting gravity loads, leading to a partial or complete collapse of the tower.” The inspection came at the request of county officials, according to the article in Forbes.
According to Ronald Lynn, directory of the building division in the county’s development services division, “these deficiencies, in their current state, make the building uninhabitable.” The county is concerned about risks to adjacent buildings.
MGM Resorts is currently in litigation, separate from the stability issues, with Perini Corp., the builders of Harmon Tower.
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No Coverage For Construction Defects When Complaint Alleges Contractual Damages
September 1, 2011 — Tred Eyerley, Insurance Law Hawaii
The underlying plaintiff’s allegations contended the contractor was in breach of contract for construction defects caused in building her home. Accordingly, the court found no coverage.See Nat’l Builders and Contractors Ins. Co. v. Slocum, 2011 U.S. Dist. LEXIS 81694 (S.D. Miss. July 26, 2011).
Slocum Construction LLC sold a home it built to Laura Peterson. Subsequently, Peterson filed suit, alleging a breach of the contract and seeking rescission and cancellation of the contract. Peterson further alleged at least thirty-three specific defects in the construction of the house.
Slocum tendered to its insurer, National Builders and Contractors Insurance Company (NBCI). NBCI filed suit for a declaratory judgment.
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Reprinted courtesy of Tred R. Eyerly, Insurance Law Hawaii. Mr. Eyerly can be contacted at te@hawaiilawyer.com
Alaska Supreme Court Dismisses Claims of Uncooperative Pro Se Litigant in Defect Case
August 11, 2011 — CDJ Staff
The Alaska Supreme Court found that in the case of Khalsa v. Chose, Ms. Khalsa? failure to cooperate with the courts has obligated them to dismiss her claims against Mr. Chose. Ms. Khalsa bought a home kit from Mandala Custom Homes of Nelson, British Columbia, Canada. Mr. Chose, one of the owners of Mandala was paid by Ms. Khalsa to supervise assembly in Fairbanks. After construction, the roof developed leaks. Ms. Khalsa stated that when climbing a ladder to inspect a skylight leak, she fell and injured herself.
During the subsequent suit, Khalsa proved uncooperative. She skipped a pretrial conference. She attended a hearing that set discovery deadlines but then did not comply with discovery, including her failure to provide medical records documenting her injuries. She eventually said that she would only be able to travel from Arizona to Alaska if the defendants paid for her and her caretaker?s expenses.
When finally deposed, Khalsa terminated the deposition after five minutes, alleging the deposition was “intentionally designed to cause [her] to endure further emotional distress, due to the psychological trauma . . . that was caused or contributed to by the defendants.”
Eventually, the lower court sanctioned her twice. In July, 2008, the court concluded that her failure to provide medical records required dismissal of her injury lawsuit. In October of that year, the court dismissed all remaining claims due to her “pattern of excuses and long delays in providing information for discovery culminating in her refusal to participate in her deposition by the defendants.” Further, Khalsa has argued that the trial court displayed “prejudice and bias toward the pro se plaintiff.”
The Alaska Supreme Court rejected all of Ms. Khalsa?s claims, dismissing her case. They did, however, note that she has thirty days to file an appeal.
Read the court’s decision…
Preventing Costly Litigation Through Your Construction Contract
August 17, 2011 — Douglas Reiser, Builders Counsel
It’s Tuesday, which means it ’s the middle of your work week. Tuesday is a great time to take an hour to look over your contracts, while the crews are pushing through their scheduled work. Today’s food for thought: How do you use your contract to reduce your litigation burden?
Your contract should do many things. It should discuss the scope of work, scheduling of work, quality of work, coverage for liabilities and conditions and timeliness for payment. But often overlooked is how your contract can lend to dispute resolution.
Commonly, you will see a simple provision that covers governing law, venue for disputes and the awarding of attorneys’ fees. But you can do better. Remember, a contract is enforced to the maximum extent possible in Washington state.
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Reprinted courtesy of Douglas Reiser of Reiser Legal LLC. Mr. Reiser can be contacted at info@reiserlegal.com
Late Filing Contractor Barred from Involving Subcontractors in Construction Defect Claim
March 1, 2012 — CDJ Staff
The Colorado Court of Appeals looked at that state’s Construction Defect Action Reform Act in determining if a general contractor could add subcontractors as third-party defendants to a construction defect lawsuit. Shaw Construction, LLC was the general contraction of the Roslyn Court condominium complex, and was sued by the homeowners’ association in a construction defect case. United Builder Services was the drywall subcontractor on the project. MB Roofing had installed roofs, gutters, and downspouts. The certificate of occupancy for the last building was issued on March 10, 2004. The project architect certified completion of all known remaining architectural items in June, 2004.
The HOA filed a claim against the developers of the property on January, 21, 2009. A week later, the HOA amended its complaint to add Shaw, the general contractor. Shaw did not file its answer and third-party complaint until March 29, 2010, sending its notice of claim under the CDARA on March 30.
The subcontractors claimed that the six-year statute of limitations had ended twenty days prior. Shaw claimed that the statute of limitations ran until six years after the architect’s certification, or that the HOA’s suit had tolled all claims.
The trial court granted summary judgment to the subcontractors, determining that “substantial completion occurs ‘when an improvement to real property achieves a degree of completion at which the owner can conveniently utilize the improvement of the purpose it was intended.’”
The appeals court noted that “Shaw correctly points out that the CDARA does not define ‘substantial completion.’” The court argued that Shaw’s interpretation went against the history and intent of the measure. “Historically, a construction professional who received a complaint responded by ‘cross-nam[ing] or add[ing] everybody and anybody who had a part to play in the construction chain.’” The court concluded that the intent of the act was to prevent unnamed subcontractors from being tolled.
The court further rejected Shaw’s reliance on the date of the architect’s certification as the time of “substantial completion,” instead agreeing with the trial court that “the architect’s letter on which Shaw relies certified total completion.”
The appeals court upheld the trial court’s determination that the statute of limitation began to run no later than March 10, 2004 and that Shaw’s complaint of March 29, 2010 was therefore barred. The summary judgment was upheld.
Read the court’s decision…
Judge Concludes Drywall Manufacturer Sold in Florida
September 13, 2012 — CDJ Staff
A Florida judge has concluded that the Chinese drywall manufacturer Taishan actively sought to sell its products in Florida and cannot now claim that it was not involved. Judge Joseph Farnia also noted that the main distributor of the drywall was, as noted in the Miami Herald, an arm of the company. Lennar Hones has sued the firm after installing drywall manufactured by the company in hundreds of homes.
Taishan’s activities in Florida included not only distributing samples, but also hosting tours of their plants in China for construction executives, and even making customized runs. According to other reports, has lost past cases over defects in their drywall.
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Harmon Towers Duty to Defend Question Must Wait, Says Court
March 1, 2012 — CDJ Staff
The Harmon Towers project in Las Vegas was eventually halted short of the planned forty-seven stories after “it was determined that there was substantial defective construction, including defective installation of reinforcing steel throughout the Harmon.” The American Home Insurance Company and Lexington Insurance Company put forth a claim that they had no duty to defend Perini Construction, the builder of the defective Harmon Towers. Further, American Home seeks to recover the monies American reimbursed Perini. The United States District Court of Nevada ruled in the case of American Home Assurance Co. v. Perini Building on February 3, 2012.
The two insurance companies covered Perini and its subcontractors, Century Steel, Pacific Coast Steel, and Ceco Concrete Construction. Century Steel was the initial subcontractor for the reinforcing steel; they were later acquired by Pacific Coast Steel. In this current case, Perini Construction is the sole defendant.
Perini sought a dismissal of these claims, arguing that without the subcontractors joined to the case, “the Court cannot afford complete relief among existing parties.” The court rejected this claim, noting that the court can determine the duties of the insurance companies to Perini, which the court described as “separate and distinct from those of the subcontractors.” The subcontractors “have not claimed an interest in the subject matter of the action.” The court concluded that it could determine whether Perini was entitled or not to coverage without affecting the subcontractors. The court rejected Perini’s claim.
Perini also asked the court to abstain from the case, arguing that it was better heard in a state court. The court noted that several considerations cover whether a case is heard in state or federal courts. The court noted that if the case weighed heavily on state law, the state courts would be the obvious location. Further, if there were a parallel action in the state courts, “there is a presumption that the whole suit should be heard in state courts.” This is, however, no parallel state suit, although the court noted that Perini has “threatened” to do so.
However, the issue of who is to blame for the problems at Harmon Towers has not been resolved. The court concluded that until the “underlying action” was concluded, it was premature to consider the issues raised in this case while the earlier lawsuit was still in progress. The court denied Perini’s motion to dismiss the case. Given that the outcome of the earlier construction defect case may lead to further litigation in state court, the District Court granted Perini’s motion to abstain, but staying their judgment until the construction defect case is resolved.
Read the court’s decision…
History of Defects Leads to Punitive Damages for Bankrupt Developer
March 1, 2012 — CDJ Staff
The South Carolina Court of Appeals has ruled that evidence of construction defects at a developer’s other projects were admissible in a construction defect lawsuit. They issued their ruling on Magnolia North Property Owners’ Association v. Heritage Communities, Inc. on February 15, 2012.
Magnolia North is a condominium complex in South Carolina. The initial builder, Heritage Communities, had not completed construction when they filed for bankruptcy protection under Chapter 11. The remaining four buildings were completed by another contractor. The Property Owners’ Association subsequently sued Heritage Communities, Inc. (HCI) alleging defects. The POA also sued Heritage Magnolia North, and the general contractor, BuildStar.
The trial court ruled that all three entities were in fact one. On appeal, the defendants claimed that the trial court improperly amalgamated the defendants. The appeals court noted, however, that “all these corporations share officers, directors, office space, and a phone number with HCI.” Until Heritage Communities turned over control of the POA to the actual homeowners, all of the POA’s officers were officers of HCI. The appeals court concluded that “the trial court’s ruling that Appellants’ entities were amalgamated is supported by the law and the evidence.”
Heritage also claimed that the trial court should not have allowed the plaintiffs to produce evidence of construction defects at other Heritage properties. Heritage argued that the evidence was a violation of the South Carolina Rules of Evidence. The court cited a South Carolina Supreme Court case which made an exception for “facts showing the other acts were substantially similar to the event at issue.” The court noted that the defects introduced by the plaintiffs were “virtually identical across all developments.” This included identical use of the same products from project to project. Further, these were used to demonstrate that “HCI was aware of water issues in the other projects as early as 1998, before construction on Magnolia North had begun.”
The trial case ended with a directed verdict. Heritage charged that the jury should have determined whether the alleged defects existed. The appeals court noted that there was “overwhelming evidence” that Heritage failed “to meet the industry standard of care.” Heritage did not dispute the existence of the damages during the trial, they “merely contested the extent.”
Further, Heritage claimed in its appeal that the case should have been rejected due to the three-year statute of limitations. They note that the first meeting of the POA was on March 8, 2000, yet the suit was not filed until May 28, 2003, just over three years. The court noted that here the statute of limitation must be tolled, as Heritage controlled the POA until September 9, 2002. The owner-controlled POA filed suit “approximately eight months after assuming control.”
The court also applied equitable estoppel to the statute of limitations. During the time in which Heritage controlled the board, Heritage “assured the unit owners the construction defects would be repaired, and, as a result, the owners were justified in relying on those assurances.” Since “a reasonable owner could have believed that it would be counter-productive to file suit,” the court found that also prevented Heritage from invoking the statute of limitations. In the end, the appeals court concluded that the even apart from equitable tolling and equitable estoppel, the statute of limitations could not have started until the unit owners took control of the board in September, 2002.
Heritage also contested the jury’s awarding of damages, asserting that “the POA failed to establish its damages as to any of its claims.” Noting that damages are determined “with reasonable certainty or accuracy,” and that “proof with mathematical certainty of the amount of loss or damage is not required,” the appeals court found a “sufficiently reasonable basis of computation of damages to support the trial court’s submission of damages to the jury.” Heritage also claimed that the POA did not show that the damage existed at the time of the transfer of control. The court rejected this claim as well.
Finally, Heritage argued that punitive damages were improperly applied for two reasons: that “the award of punitive damages has no deterrent effect because Appellants went out of business prior to the commencement of the litigation” and that Heritages has “no ability to pay punitive damages.” The punitive damages were upheld, as the relevant earlier decision includes “defendant’s degree of culpability,” “defendants awareness or concealment,” “existence of similar past conduct,” and “likelihood of deterring the defendant or others from similar conduct.”
The appeals court rejected all of the claims made by Heritage, fully upholding the decision of the trial court.
Read the court’s decision…
Seller Cannot Compel Arbitration for Its Role in Construction Defect Case<
March 1, 2012 — CDJ Staff
The buyer of a leaky home in Venice, California cannot be compelled to arbitration with the seller in a construction defect lawsuit, according to a decision in Lindemann v. Hume, which was heard in the California Court of Appeals. Lindemann was the trustee of the Schlei Trust which bought the home and then sued the seller and the builder for construction defects.
The initial owner was the Hancock Park Trust, a real estate trust for Nicholas Cage. Richard Hume was the trustee. In 2002, Cage agreed to buy the home which was being built by the Lee Group. Cage transferred the agreement to the Hancock Park Trust. Hancock had Richard Nazarin, a general contractor, conduct a pre-closing walk through. They also engaged an inspector. Before escrow closed, the Lee Group agreed to provide a ten-year warranty “to remedy and repair any and all damage resulting from water infiltration, intrusion, or flooding due to the fact that the door on the second and third floors of the residence at the Property were not originally installed at least one-half inch (1/2”) to one inch (1”) above the adjacent outside patio tile/floor on each of the second and third floors.”
Cage moved in and experienced water intrusion and flooding. The Lee Group was unable to fix the problems. Hume listed the home for sale. The Kamienowiczs went as far as escrow before backing out of the purchase over concerns about water, after the seller’s agent disclosed “a problem with the drainage system that is currently being addressed by the Lee Group.”
The house was subsequently bought by the Schlei Trust. The purchase agreement included an arbitration clause which included an agreement that “any dispute or claim in Law or equity arising between them out of this Agreement or any resulting transaction, which is not settled through mediation, shall be decided by neutral, binding arbitration.” The warranty the Lee Group had given to Hancock was transferred to the Schlei trust and Mr. Schlei moved into the home in May 2003.
Lindemann enquired as to whether the work done would prevent future flooding. Nazarin sent Schlei a letter that said that measures had been taken “to prevent that situation from recurring.” In February, 2004, there was flooding and water intrusion. Lindemann filed a lawsuit against the Lee Group and then added the Hancock Park defendants.
The Hancock Park defendants invoked the arbitration clause, arguing that Lindemann’s claims “were only tangentially related to her construction defect causes of action against the Lee Group.” On June 9, 2010, the trial court rejected this claim, ruling that there was a possibility of conflicting rulings on common issues of law. “With respect to both the developer defendants and the seller defendants, the threshold issue is whether there was a problem with the construction of the property in the first instance. If there was no problem with the construction of the property, then there was nothing to fail to disclose.” Later in the ruling, the trial court noted that “the jury could find there was no construction defect on the property, while the arbitration finds there was a construction defect, the sellers knew about it, and the sellers failed to disclose it.” The appeals court noted that while Hancock Park had disclosed the drainage problems to the Kamienowiczs, no such disclosure was made to Sclei.
The appeals court described Hancock Park’s argument that there is no risk of inconsistent rulings as “without merit.” The appeals court said that the issue “is not whether inconsistent rulings are inevitable but whether they are possible if arbitration is ordered.” Further, the court noted that “the Hancock Park defendants and the Lee Group have filed cross-complaints for indemnification against each other, further increasing the risk of inconsistent rulings.”
The court found for Lindemann, awarding her costs.
Read the court’s decision…
